2024 (8) TMI 939 - HC - Income Tax

Addition as perquisite value of shares granted under Employees Stock Purchase Scheme (ESPS) - assessee took the position 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 - HELD THAT - As in light of the restriction with respect to marketability and trade ability 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/-. The Valuation Report was at best a medium adopted by the employer in order to broadly ascertain its obligations for the purposes of withholding tax. The same could not have consequently been taken into consideration for the purposes of FMV. The position which was advocated by the respondents namely for the quoted price or the Valuation Report being taken into consideration is clearly untenable since the same could have had no application to a share which was subject to a lock-in stipulation and could not be sold in the open market owing to a complete embargo on the sale of those shares. We accordingly answer Question 1 posited in the affirmative and in favour of the assessee. Whether value of stock purchase option exercised by the employee/Assessee is to be reckoned on the date of exercising such option and taxing it for the difference in market price had cost paid by the assessee to its employer? - Question 2 is answered in the negative and it being held that the face value alone would be conclusive for purposes of taxation.

Summary

Issues Involved:
1. Whether the Tribunal erred in law in confirming the addition of Rs. 86,28,750/- as perquisite value of shares granted under the Employees Stock Purchase Scheme (ESPS)Rs.
2. Whether the value of stock purchase options exercised by the employee/assessee should be reckoned on the date of exercising such option and taxed for the difference in market price and cost paid by the assessee to its employerRs.

Issue-wise Detailed Analysis:

Issue 1: Addition of Rs. 86,28,750/- as Perquisite Value
The core issue revolves around the valuation of shares allotted under the ESPS, which were subject to a lock-in period. The assessee was allotted 11,50,500 shares at INR 15/- per share, with a portion subjected to a lock-in period. The shares were not marketable due to this restriction. The Assessing Officer (AO) determined the market price at INR 49.45 per share, resulting in a perquisite value addition of INR 3,96,34,725/-. The Commissioner of Income Tax (Appeals) [CIT (A)] and the Tribunal both concluded that the fair market value (FMV) should be INR 22.50 per share, based on a valuation report by M/s Ernst and Young. However, the High Court found that the FMV could not exceed the face value of INR 15/- due to the lock-in period, rendering the shares non-marketable. The Court held that the valuation report was only for withholding tax obligations and should not determine FMV for taxation purposes.

Issue 2: Valuation Date and Taxation of Stock Purchase Options
The second issue concerns the appropriate date for valuing the stock purchase options and the method of taxation. The AO had used the market price at the time of allotment, while the CIT (A) and Tribunal used the valuation report. The High Court referenced the Supreme Court's decision in Commissioner of Income Tax v. Infosys Technologies Ltd., which emphasized that shares under a lock-in period have no realizable value, and any benefit is notional and unascertainable. The Court ruled that the face value of INR 15/- should be considered for taxation, not the market price or valuation report.

Conclusion:
The High Court concluded that the FMV could not exceed the face value of the shares due to the lock-in period, thus answering Question 1 in favor of the assessee. Question 2 was answered in the negative, establishing that the face value should be the basis for taxation. Consequently, the assessee's appeal was allowed, and the Commissioner's appeal was dismissed, setting aside the Tribunal's order dated 27 April 2007.