Pramod Kumar Jain Vs DCIT (ITAT Bangalore)
Bangalore ITAT: Buyback of Unexercised ESOPs Taxable as Capital Gains, Not Salary Perquisite
The Bangalore ITAT held that the consideration received by an employee on the repurchase of vested but unexercised stock options (ESOPs) is taxable as capital gains and not as a salary perquisite under section 17(2)(vi). The Tribunal observed that section 17(2)(vi) is attracted only when the employee exercises the option and the underlying shares are allotted or transferred. Since the assessee’s stock options were never exercised and no shares were allotted, no “specified security” came into existence and, therefore, the provisions relating to perquisites were inapplicable.
The Tribunal further held that a vested stock option is a capital asset, being a right to subscribe to shares in the future. The repurchase of such vested options by the issuing company amounted to a transfer of a capital asset within the meaning of section 2(47), and the resultant gain was rightly offered by the assessee as long-term capital gains. The Tribunal relied on the decisions of the Karnataka High Court in Chittharanjan A. Dasannacharya and the Supreme Court in Dhun Dadabhoy Kapadia while distinguishing the Madras High Court ruling in Nishithkumar Mukeshkumar Mehta on facts.
The Tribunal also clarified that the tax treatment mentioned in the repurchase offer document and the deduction of tax under section 192 reflected in Form 16 are not conclusive of the correct head of income. Tax liability must be determined strictly in accordance with the provisions of the Income-tax Act. Accordingly, the addition made by treating the receipt as salary was deleted and the assessee’s appeal was allowed.
Cases Discussed
- Nishithkumar Mukeshkumar Mehta vs. DCIT, TDS (Madras HC), [2024] 165 taxmann.com 386 (Madras)
- Akash Poddar vs. ACIT (Delhi HC), (2024) 165 taxmann.com 271 (Delhi)
- Sanjay Baweja vs. DCIT (Delhi HC), (2024) 163 taxmann.com 116 (Delhi)
- Chittharanjan A. Dasannacharya vs. CIT, Bangalore (Karnataka HC), [2020] 429 ITR 570 (Karn.)
- CIT vs. B.C. Srinivasa Setty (SC), [1981] 128 ITR 294 (SC)
- Miss Dhun Dadabhoy Kapadia v. CIT (SC), [1967] 63 ITR 651 (SC)
FULL TEXT OF THE ORDER OF ITAT BANGALORE
The assessee has filed the present appeal against the impugned order dated 15.12.2025, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [“learned CIT(A)”], for the assessment year 2020-21.
