Disputed ESOP Tax Classification Cannot Be Decided in Condonation Proceedings: Karnataka HC

Ashish Shukla Vs PCIT (Karnataka High Court)

Summary : The Karnataka High Court partly allowed a writ petition filed by Ashish Shukla, an employee of Flipkart India Private Limited, against five orders dated 27 February 2026. The Principal Commissioner of Income Tax had rejected his applications under Section 119(2)(b) of the Income-tax Act, 1961 for condonation of delay in filing revised returns for AYs 2019-20 to 2023-24. Shukla had originally reported the proceeds from the repurchase of his Flipkart stock options as salary, following his employer’s Form 16. He sought to revise the returns to treat the receipts as capital gains and quantified the resulting refund in his applications. The Assessing Officer considered the proceeds a salary perquisite because the options had never been converted into shares and sold independently. The Principal Commissioner relied on that view in concluding that Shukla had failed to establish genuine hardship.

Shukla argued that the authority had examined the merits of the proposed revision without addressing his reasons for the delay, the hardship asserted or the refund computations he had supplied. The Revenue referred to his consistent reporting of the receipts as salary and argued that he could not rely on a subsequent development before the ITAT to seek condonation. Shukla responded that his applications predated the Tribunal’s order of 30 July 2026 by about a year and a half. He also pointed out that the Division Bench had set aside the Single Judge decision in Sharavathy Conductors on which the Principal Commissioner had relied.

Applying the Division Bench’s ruling in Sharavathy Conductors, the High Court held that the power to condone delay under Section 119(2)(b) cannot be used to adjudicate a disputed tax claim. It quashed all five rejection orders and restored the applications for expeditious reconsideration of the reasons for the delay and the asserted genuine hardship. Shukla was permitted to submit further justification with a certified copy of the order by 6 November 2026. The Court left the tax classification of the ESOP receipts and the merits of the proposed revised returns open.

Cases Discussed

• Pramod Kumar Jain v. Deputy Commissioner of Income Tax, Circle 3(3)(1), [2026] 189 taxmann.com 66 (Bang.)(Trib.), 2026 SCC OnLine ITAT 13430, ITA No. 3034/Bang/2025, AY 2020-21, decided on 30 July 2026 (ITAT Bangalore, Bench B). The parties referred to this decision on the tax treatment of Flipkart stock option repurchase proceeds while disputing the timing and bona fides of the condonation applications.
• M/s. Sharavathy Conductors Private Limited v. The Chief Commissioner of Income Tax, Bengaluru-2 and Others, W.A. No. 6752/2017, decided on 10 February 2020 (Karnataka High Court, Division Bench). The Court applied the principle that the authority’s jurisdiction to condone delay does not extend to adjudicating a disputed or contentious claim.
• M/s. Sharavathy Conductors Private Limited v. The Chief Commissioner of Income Tax, Bengaluru-2 and Others, W.P. No. 28376/2017 (T-IT), decided on 24 October 2017 (Karnataka High Court, Single Judge). The Principal Commissioner relied on this decision. The petitioner pointed out that the Division Bench had set it aside in the writ appeal.

FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT

The petitioner is an employee with M/s. Flipkart India Private Limited [FIPL], and the petitioner has called in question the first respondent’s Orders under Section 119[2][b] of the Income Tax Act, 1961 [for short, ‘the Act’] rejecting the petitioner’s application for condonation of delay to file Revised Returns of five assessment years commencing with the assessment year 2019-20. The details of the first respondent’s impugned orders are as follows.

The first respondent, in rejecting the petitioner’s applications by the impugned orders, has essentially reasoned thus while placing reliance upon a decision of a Co-ordinate Bench of this Court dated 24.10.2017 in ‘Sharavathy Conductors Private Limited v The Chief Commissioner of Income Tax, Bengaluru – 2 and Others’ in the writ petition in W.P. No.28376/2017.

“3. In this case, a report was obtained from the JAO, DCIT, C-3[3][1], Bengaluru, who did not recommend condonation of delay in filing the revised return. It was noted that the applicant had filed the original returns for the relevant years admitting salary income, which included consideration received on repurchase of stock options by Flipkart India Pvt. Ltd. [FIPL]. Subsequently, the applicant sought to file revised returns, re-characterizing the said receipts as capital gains, contending that the employer’s classification was a conservative stand. On verification, the AO observed that the employer had correctly treated the repurchase of stock options under the Flipkart Stock Option Scheme, 2012 as a perquisite in terms of Section 17[2][vi] of the Income Tax Act, since the buyback proceeds constituted a monetary benefit arising directly from employment. As the options were never converted into shares and sold independently, the receipt was linked to the employment contract and rightly taxed under the head salaries. The AO concluded that the original assessment was in accordance with law and records, and hence no error or valid refund arises. Consequently, the application does not establish genuine hardship as required under section 119[2][b]. In view of the above, the case is not found fit for condonation. The Range Head concurred with the remarks of the JAO.”

2. Sri Hemant Venkatray Pai, the Learned counsel for the petitioner, submits that this Court must intervene because of the following.

[A] The petitioner’s applications are rejected examining the merits of the request for revision rather than examining the reason offered and the financial hardship.

[B] The petitioner, based on Form-16 issued by FIPL, has filed Returns for all the five Assessment Years, adopting the value for which his employer, M/s Flipkart India Private Limited [FIPL] has purchased these Employee Stock Option Scheme [ESOPs] allotted to the petitioner without realizing that the consideration cannot be treated as ‘salaries’ only because the petitioner had not converted the allotment into shares when it is indisputable that the shares stood vested with the petitioner.

[C] The petitioner has, in the applications filed for condonation of delay, quantified the refund that the petitioner would be admitted to if the petitioner is permitted to revise the Returns to show the receipts not as ‘salary’ but as ‘capital asset’ and that these details have not been considered.

3. Sri. M. Thirumalesh, a learned senior standing counsel for the respondents and who is assisted by Sri Nirmal Mathew, a learned standing counsel for the respondents, are heard for disposal of the petition. The learned Standing Counsel submits that the petitioner has filed these applications the decision of the Income Tax Appellate Tribunal, Bangalore Benches, Bangalore Bench-B, Bengaluru [Tribunal] in the appeal in ITA No.3034/Bang/2025 on whether the receipt in the circumstances relied upon by the petitioner could be adopted as ‘salary’ and that the petitioner, who has filed Returns consistently in terms of Form-16 adopting the receipt as salary cannot take advantage of the turn of events and seek condonation..

4. In response, Sri Hemant V Pai submits that the Tribunal’s order is only on 30.07.2026 and the petitioner’s applications are about one and half years prior to the date of such decision and therefore the bonafides asserted by the petitioner in seeking condonation of delay cannot be disputed on such ground. The learned counsel also submits that the first respondent could not have relied upon the decision in Sharavathy Conductors Private Limited [Supra] because the Division in the writ appeal in W.A. No.6752/2017 has set-aside such order condoning the delay and directing the Assessing Office to process the Revised Returns in accordance with law..

5. The question for consideration is whether this Court must intervene with the first respondent’s impugned orders to restore the proceedings with opportunity to allow the petitioner to file a rejoinder in support of the applications for condonation of delay. This Court must observe that the first respondent has opined that the petitioner has failed to establish genuine hardship as required under Section 119[2][b] of the Act and that the petitioner’s case is not found fit for condonation, but this is in the backdrop of the Assessing Officer’s opinion that the petitioner would not be entitled to adopt the receipts paid by the employer [FIPL] as capital gain because the options were never converted into shares and sold independently and the receipt was linked to the petitioner’s contract and is rightly taxed under the head ‘salaries’.

6. The Division Bench’s Judgment dated 10.02.2020 in the writ appeal in W.A. No.6752/2017 undisputedly underscores the proposition that the jurisdiction to condone the delay cannot be exercised to adjudicate upon disputed or contentious claims. If the first respondent, rather than examining the petitioner’s cause for condonation of delay has decided the matter based on merits and the opinion of the Assessing Officer on merits, this Court is of the view that such orders cannot be sustained and the petitioner’s applications must be restored for due consideration in the backdrop of the petitioner’s cause for filing applications belatedly and the genuine hardship that the petitioner asserts to support the request for condonation of delay. Hence the following:

ORDER

[A] The petition is allowed in-part.

[B] The first respondent’s following Orders are quashed restoring each of the petitioner’s corresponding applications for reconsideration with liberty to the petitioner to file further justification in support of the request for condonation of delay along with a certified copy of this order by 06.11.2026.

[C] The first respondent is called upon to consider the restored applications entirely based on the parameters that would be relevant for the purposes of Section 119[2][b] of the Act. It is needless to observe that this Court has not made any observations on the merits of the petitioner’s case for filing revised Returns and that the first respondent must consider these restored applications expeditiously.