Reporting perquisite as capital gain in ITR by mistake resulted in Rs 6.63 crore penalty for a salaried employee; ITAT Mumbai granted him relief for this reason

Mr Krishnan from Dr. Annie Besant Road, in Worli, Mumbai used to work for a major USA-based company. During AY 2020-21, Krishnan received Rs 6.44 crore as salary and some shares of the company under the employee stock option plan (ESOP). These shares were sold three days later by him for Rs 5.67 crore and he paid 20% tax on them. However, he made one crucial mistake, he declared these shares as short term capital gains (STCG) when in fact these shares should have been declared as perquisite.

Subsequently, Krishnan's case was reopened by the tax department on the ground that he had erred in declaring the ESOP amount of Rs 5.67 crore as capital gains. This ESOP amount was to be taxed as perquisites (perks) under the heads of income salaries and consequently, taxable at normal slab rates as against the tax rate of 20% under STCG which Krishnan offered in his ITR.

Accordingly, a tax notice under Section 148 was issued by the income tax assessing officer (AO) to Krishnan. In response to this tax notice, he admitted the mistake and filed a revised ITR wherein the full amount of ESOP was offered under the head salaries and additional tax payable including refund already granted to him was returned back to the tax department.


The AO accepted the refund but initiated penalty proceedings against him for underreporting as a result of misreporting of income.

Also read: Employee wrongly declared Rs 14 lakh Australian salary in Indian ITR: ITAT grants tax relief but denies Rs 3.4 lakh foreign tax credit

During penalty proceedings, Krishnan said that he had filed the original ITR in good faith thinking that his ESOP is capital gains and not a perquisite salary since he sold the shares off within three days of getting them. He said that this ITR reporting error occurred due to the common man's understanding about capital gain. However, the AO rejected his pleadings and imposed Rs 6.63 crore penalty (200% under Section 270A(9)(a).

The Commissioner of Appeals (CIT(A)) upheld the penalty on the ground that if the tax officer had not scrutinised his ITR, the incorrect head of income as adopted by Krishnan in the original ITR, would not have surfaced.

Moreover, Krishnan's employer had deducted TDS under Section 192 on perquisite value and law clearly provided that ESOP was taxable as perquisites under the heads of income salaries in the year of exercise of option Therefore, Krishnan got no relief from the Rs 6.63 crore penalty. So, he filed an appeal with the Income Tax Appellate Tribunal (ITAT) Mumbai.

Also read: Rs 17.41 lakh penalty for ITR filing mistake: CA firm's owner's affidavit helps taxpayer get relief in ITAT Mumbai; know how

ITAT Mumbai heard his case on June 16, 2026 and passed a judgement in his favour on July 14, 2026. Chartered Accountant Vishwas V. Mehendale represented him in ITAT Mumbai.

Keep reading to understand what error Krishnan made and how he won the case and got relief from the Rs 6.63 crore penalty imposed due to ITR reporting error.

Summary of the judgement

Chartered Accountant Suresh Surana told ET Wealth Online that Mr Krishnan was a salaried employee who during the Assessment Year 2020-21 exercised the employee stock options and received the corresponding shares on November 26, 2019.

The shares were sold three days later, on November 29, 2019. In his original ITR filed on December 17, 2020, Mr Krishnan declared total income of approximately Rs 12.84 crore, including salary income of Rs 6.44 crore and short-term capital gains of Rs 5.67 crore from the sale of the ESOP shares.

Mr Krishnan treated almost the entire sale consideration as short-term capital gains by adopting a nominal acquisition cost of Re 1 and paid tax at the applicable rate of 20% for STCG.

The tax tribunal accepted Mr Krishnan's contention that the original classification arose from a bona fide misunderstanding of the ESOP taxation provisions. The shares received upon exercising the ESOPs were sold within three days, and the entire sale consideration had been disclosed and offered to tax as short-term capital gains.

Also read: Rs 5.26 lakh capital loss carry forward was claimed in original ITR but a lesser claim was denied in revised ITR; Taxpayer fights back and wins in ITAT Bangalore

Surana says that in these circumstances, Mr Krishnan could reasonably have believed that the transaction was taxable entirely under the heads of income "Capital Gains."

The tax tribunal also considered that Mr Krishnan was a salaried employee who might not have been fully conversant with the technical distinction between the taxation of an ESOP perks and the taxation of the subsequent sale of the shares.

Surana says that under the correct treatment, the transaction had to be divided into two components: the value of the shares at the time of exercise was taxable as a salary perquisite, while only the subsequent appreciation between the perquisite value and the sale price was taxable as capital gains.

Significantly, Surana says that once Mr Krishnan became aware of the error through the reassessment proceedings, he accepted the correct position, filed a revised ITR accordingly and paid the entire additional tax liability, including repayment of the refund previously received.

The Assessing Officer accepted the income reported in Mr Krishnan's revised ITR without making any further adjustment. The tax tribunal observed that the higher penalty under Section 270A(9) requires a case of misreporting and should not follow automatically from every error in the classification of income.

In the present case, the underlying transaction and the entire sale consideration had been disclosed. The error related to the head under which the income was offered rather than suppression of the transaction or non-disclosure of income. Further, the correctly reported income in the revised ITR filed during reassessment was accepted by the Assessing Officer.

Why did the taxpayer win the case?

Surana says that Mr Krishnan won the case because the tax tribunal considered the incorrect classification to be a bona fide mistake rather than deliberate misreporting.

Surana says: "The entire ESOP transaction had been disclosed, tax had already been paid on the amount as capital gains, and Mr Krishnan promptly corrected the treatment and discharged the additional liability when the error was identified."

According to Surana, the short interval of three days between the exercise and sale of the shares also supported Mr Krishnan's explanation that he reasonably believed the entire transaction represented a short-term capital gain.

Accordingly, the tax tribunal concluded that the case did not justify the stringent 200% penalty for misreporting under Section 270A(9). Thus ITAT Mumbai deleted the penalty in full and allowed the taxpayer's appeal.

Surana says: "The ruling is fact-specific and should not be interpreted as providing immunity for every incorrect classification of income."