2022 (12) TMI 672 - AT - Income Tax

TDS u/s 192 on the perquisite - underreporting of value of perquisite - FMV of shares to determine the value of perquisites in respect of exercising of option under ESOP granted to the employee of the company - M/s Reliance capital had sold shares of the assessee company at the rate of ₹ 850 per share and therefore fair market value of the specified security (equity share of assessee company) should have been computed taking the market value at the rate of ₹850 per share - AO computed the quantum of perquisite and liability in terms of section 201(1) and interest under section 201(1A) - whether the fair market value of equity shares of the assessee as on the date of exercising of the option by the employee for converting the warrant into shares, as determined by the merchant banker should be adopted or fair market of equity shares should be adopted on the basis of a real-time transactions of sale of equity shares of the company? - HELD THAT - We find that for the purpose of computing fair market value of the equity shares allotted to the employee Sh. Rajeev Samant, the assessee has followed the procedure laid down in Rule 3(8) of the Rules. Under the rules, in case of shares of unlisted company the fair market value shall be the value determined by a merchant banker. The merchant banker has also been defined in the Rules. The said rule has been reproduced by the Ld. Assessing Officer in the impugned order. It is evident that fair market value of the specified shares was to be taken as determined by the merchant banker. The assessee following above Rules, has adopted the fair market value of ₹194.15 as determined by the merchant banker. But the contention of the revenue in the grounds raised is that value as per the actual trade at the rate of ₹850 per share executed between the unrelated parties should have been adopted. No decision has been cited by DR, which could support the case of the Revenue and therefore we do not find any basis for adopting the fair market value as suggested by the DR based on an independent transaction of sale of shares of the assessee company between unrelated party. In the grounds raised before us, the Revenue has nowhere challenged correctness of fair market value determined by the merchant banker. Further, during the course of hearing, the Ld. counsel of the assessee filed a copy of the assessment order in the case of Sh. Rajeev Samant i.e. the employee director who received the said equity shares of the assessee company and submitted that no addition has been made on the issue of underreporting of value of perquisite in his hands, and thus department has accepted the quantum of perquisite in his hands. DR could not controvert this factual aspect pointed out by the Ld. counsel of the assessee, though in our opinion, any omission on the part of the Assessing Officer in the case of the recipient cannot give right to the assessee to take benefit of the said omission. - Decided against revenue.

Issues Involved:
1. Fair Market Value (FMV) determination of shares for tax deduction purposes.
2. Applicability of section 17(2)(vi) and Rule 3(8) of the Income-tax Act.
3. Short-deduction of tax on perquisites.
4. Validity of the merchant banker's valuation versus market transactions.

Issue-wise Detailed Analysis:

1. Fair Market Value (FMV) Determination of Shares for Tax Deduction Purposes:
The primary issue revolves around the determination of the FMV of shares allotted under an Employee Stock Option Plan (ESOP) for tax deduction purposes. The Revenue contended that the FMV should be based on an actual transaction where shares were sold at Rs. 850 per share. However, the assessee company determined the FMV at Rs. 194.15 per share as per the valuation by a merchant banker.

2. Applicability of Section 17(2)(vi) and Rule 3(8) of the Income-tax Act:
Section 17(2)(vi) of the Act stipulates that the value of specified securities allotted by an employer at a concessional rate should be treated as perquisites. Rule 3(8) prescribes that for unlisted companies, the FMV should be determined by a merchant banker. The assessee followed this rule, obtaining a valuation of Rs. 194.15 per share from a merchant banker.

3. Short-deduction of Tax on Perquisites:
The Assessing Officer (AO) argued that the assessee underreported the perquisite value by not considering the higher market transaction value of Rs. 850 per share, leading to a short-deduction of tax. The AO recalculated the perquisite value, resulting in a significant tax liability and interest under sections 201(1) and 201(1A) of the Act.

4. Validity of the Merchant Banker's Valuation versus Market Transactions:
The CIT(A) upheld the assessee's valuation based on the merchant banker's report, rejecting the AO's contention to use the market transaction value. The CIT(A) emphasized that the rules explicitly require the FMV to be determined by a merchant banker for unlisted companies, and the assessee complied with this requirement.

Detailed Judgment Analysis:

Background:
The case involves an appeal by the Revenue against the order of the CIT(A) concerning the short-deduction of tax on perquisites for the assessment year 2018-19. The dispute arose from the valuation of shares allotted under an ESOP to Mr. Rajeev Samant, the then director of the assessee company.

Assessing Officer's Stand:
The AO contended that the FMV of the shares should be Rs. 850 per share, based on a transaction where M/s Reliance Capital sold shares at this rate. Consequently, the AO recalculated the perquisite value and determined a higher tax liability.

CIT(A)'s Decision:
The CIT(A) deleted the liability raised by the AO, stating that the FMV should be as determined by a merchant banker, as per Rule 3(8). The CIT(A) noted that the AO did not challenge the merchant banker's valuation and that the assessee followed the prescribed rules.

Tribunal's Analysis:
The Tribunal upheld the CIT(A)'s decision, emphasizing that the rules clearly mandate the use of a merchant banker's valuation for unlisted companies. The Tribunal found no basis for adopting the market transaction value suggested by the Revenue. It also noted that the Revenue did not challenge the correctness of the merchant banker's valuation and accepted the perquisite value in the hands of the employee, Mr. Rajeev Samant.

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming that the assessee correctly followed the rules by using the merchant banker's valuation. The grounds raised by the Revenue were found to be without merit, and the CIT(A)'s order was upheld.

Final Order:
The appeal of the Revenue was dismissed, and the order was pronounced in the open Court on 16/09/2022.

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