Value Of Shares Allotted Under Employees Stock Purchase Scheme Can't Be Treated As Perquisite As Per Sec 17(2)(Iiia): Delhi High Court
Pankaj Bajpai
15 Aug 2024 11:10 AM IST
While emphasizing that no tax can be levied on notional income, the Delhi High Court held that Valuation Report obtained by employer could have no application to a share which was subject to a lock-in stipulation and could not be sold in the open market. Since there was a complete embargo on the sale of those shares, the High Court held that value of shares allotted to the...
While emphasizing that no tax can be levied on notional income, the Delhi High Court held that Valuation Report obtained by employer could have no application to a share which was subject to a lock-in stipulation and could not be sold in the open market.
Since there was a complete embargo on the sale of those shares, the High Court held that value of shares allotted to the appellant under the Employees Stock Purchase Scheme (ESPS) cannot be treated as perquisite in terms of Section 17(2)(iiia).
Section 17(2) of the Income Tax Act provides for the valuation of perquisites for tax purposes, which is equal to the cost which has been incurred by the organization/ employer for/ on behalf of the employee.
The Division Bench of Justice Yashwant Varma and Justice Ravinder Dudeja observed that “in light of the restriction with respect to marketability and tradability of the stock in question, the FMV could not have been recognized to exceed the face value of the shares and thus the determinative being INR 15”. (Para 16)
The Bench therefore explained that the Valuation Report can be a medium adopted by the employer in order to broadly ascertain its obligations for the purposes of withholding tax, however, the same could not be considered for the purposes of FMV.
Facts of the case:
Under the Employees Stock Purchase Scheme (ESPS), the appellant/ assessee was allotted 11,50,500 shares at the rate of Rs.15/- per share, and 25% of that stock was subject to a lock-in period of 12 months while the balance 75% stood locked-in for 18 months. The share certificates with an endorsement of non-transferability were also handed over to the assessee. During relevant year, the assessee had paid only Rs.10.50/- per share against the issue price of Rs.15, and the employer company availed the services of Ernst & Young for obtaining a Valuation Report with respect to those shares and a price of Rs.22.50/- came to be ascribed for each share.
While filing his return, the assessee claimed that since the shares were not marketable in view of the lock-in stipulation, the Fair Market Value (FMV) could not exceed the face value of the shares. The AO held that although the appellant was allotted shares at a concessional rate, the market price as quoted at the relevant time stood at Rs.49.45 per share. The AO accordingly concluded that the difference between the two figures were liable to be taxed as 'perquisite' in terms of Section 17(2)(iiia), which resulted in an addition of Rs.3,96,34,725/- in the hands of assessee.
On appeal, the CIT(A) held that since the shares were subject to a lock-in stipulation and thus not available to be traded or transferred, it would be inappropriate to take the quoted price as appearing on the Stock Exchange for the purposes of determining FMV. However, bearing in mind the Valuation Report which was obtained by the employer itself, the CIT(A) held that the FMV should be taken as Rs.22.50/- per share.
Observations of the High Court:
The Bench referred to the decision of Apex Court in case of Commissioner of Income Tax, Bangalore v. Infosys Technologies [(2008) 2 SCC 272], to reiterate that during the lock-in period, the share would have no realizable value nor would it be possible for the employee to foresee or project a price which those shares may obtain in the future.
The Bench also reiterated that a potential benefit could not be considered as income of the employee and which may be chargeable under the broad head of salaries.
Referring to the Apex Court decision in Commissioner of Income Tax v. Excel Industries Ltd [(2014) 13 SCC 459], the Bench clarified that no real income but only hypothetical income had accrued to the assessee and Section 28(iv) would be inapplicable to the facts and circumstances of the present case.
The High Court therefore concluded that the AO was not justified in taking the market value of the shares into consideration, and allowed Assessee's appeal.
Counsel for Appellant/ Assessee: Senior Advocate Ajay Vohra, and Advocate Udit Naresh
Counsel for Respondent/ Revenue: Advocates Puneet Rai and Rishabh Nangia
Case Title: Ravi Kumar Sinha vs. CIT
Citation: 2024 LiveLaw (Del) 908
Case Number: ITA No. 281 of 2008
