Income Tax Appellate Tribunal, Bangalore: Allowing the appeal filed by the assessee, the Bench comprising Sandeep Singh Karhail, JM and Balakrishnan S., AM, held that the consideration received by a Flipkart employee on repurchase of vested but unexercised stock options could not be taxed as a “perquisite” under Section 17(2)(vi), Income-tax Act, 1961, since no “specified security” had come into existence.
The Tribunal held that the vested Employee Stock Option Plan (ESOP) represented a capital asset in the nature of a right to subscribe to shares, and its repurchase amounted to a transfer chargeable to tax as long-term capital gains.
Background
The assessee was an employee of Flipkart Internet (P) Ltd. (FIPL), an Indian subsidiary within the Flipkart group. Under the Flipkart Stock Option Scheme, 2012, the assessee was granted 40,536 stock options by Flipkart (P) Ltd., Singapore (FKS), the group’s holding company.
During Assessment Year 2020-2021, FKS repurchased 2,653 vested stock options out of the total 40,536 options granted to the assessee and paid ₹2.33 crore. The assessee treated the receipt as long-term capital gains.
The assessing officer reopened the assessment under Sections 147 and 148 on the ground that Form 16 issued by the employer reflected the amount as a perquisite under Section 17(2)(vi), tax had been deducted under Section 192, and the income ought to have been assessed under the head “Salaries”. The CIT(A) upheld the reassessment and addition. Aggrieved by the order, the assessee preferred present appeal.
Analysis, Law and Decision
The Tribunal analysed the statutory framework governing ESOP taxation and observed that Section 17(2)(vi) taxes only the value of “specified securities” allotted or transferred to employees at concessional rates. Explanation (c) specifically provides that the value of such specified security is to be determined on the date the employee exercises the option.
The Tribunal noted that the lifecycle of an ESOP comprises grant of options, vesting, exercise, allotment of shares and eventual sale. In the present case, the options had merely vested; they were never exercised and no shares were ever allotted. Consequently, no “specified security” came into existence so as to attract Section 17(2)(vi).
The Tribunal held that until exercise, an employee merely possesses a contractual right to subscribe to shares in future. Such right is property and therefore falls within the definition of “capital asset” under Section 2(14).
In reaching this conclusion, the Tribunal relied upon the Supreme Court decision Dhun Dadabhoy Kapadia v. CIT, (1967) 63 ITR 651 : 1966 SCC OnLine SC 259 and the Karnataka High Court judgment in Chittharanjan A. Dasannacharya v. DCIT, (2020) 429 ITR 570: 2020 SCC OnLine Kar 3442, both recognising subscription rights as capital assets. Since FKS repurchased the vested options, the assessee relinquished his valuable right to subscribe to shares. Such relinquishment squarely amounted to a “transfer” under Section 2(47), making the gains chargeable under Section 45 as capital gains.
Rejecting the Revenue’s reliance on Form 16 and deduction of tax under Section 192, the Tribunal observed that TDS is merely a collection mechanism and cannot determine the ultimate taxability of income. Likewise, the tax summary contained in the repurchase offer documents was expressly stated to be only indicative and could not override the provisions of the Act.
The Tribunal also distinguished the Madras High Court’s decision in Nishithkumar Mukeshkumar Mehta v. DCIT, (2025) 475 ITR 614: 2024 SCC OnLine Mad 8414 observing that in that case the employee had received compensation arising out of the “PhonePe” restructuring while continuing to retain all stock options. In contrast, the present case involved an actual repurchase and extinguishment of vested stock options, resulting in transfer of a capital asset.
Accordingly, the Tribunal, allowing the appeal held that the consideration received by the assessee was taxable as long-term “capital gains” and not as “salary perquisite”. Grounds relating to Section 234-B interest were held consequential, the challenge to reassessment was left open in view of relief on merits, and the penalty ground was treated as premature.
[Pramod Kumar Jain v. DCIT, ITA No. 3034/Bang/2025, decided on 30-7-2026 (ITAT Bangalore)]
Judgment authored by Sandeep Singh Karhail, Judicial Member
Advocates who appeared in this case:
For the Appellant: Kishore Kunal and Ankita Prakash, Advocates.
For the Respondent: Rahul Sinha, Addl. CIT.