2025 (4) TMI 531 - AT - Income Tax

Income earned as Perquisites u/s 17 (2) - company shares allocated on discounted/subsidised rates - HELD THAT - Assessee admittedly happens to be one of the director(s) of the company herein who had issued shares to him on 25.02.2014 @ 12628.20 each unit. The said premium was undisputedly based as per the prescribed merchant banker going by Rule 3(8)(i) (ii) (iii) wherein the clinching date is that of exercise of the option involving unlisted shares. This case file further reveals that the assessee s company issued shares to Mauritius based entity M/s Norwest Venture Partners Mauritius as well within a month on 27.03.2014 at a premium of Rs. 97, 465/- each. Revenue s endeavour in this factual background is that the assessee is liable to be assessed qua the differential amount of the foregoing share premium as a perquisite u/s 17 (2) (vi) of the Act. We are of the considered view that once CIT(A)/NFAC has upheld the former premium of Rs. 12628.2 per share unit going by the merchant bankers valuation the latter premium rate as per the master circular dated 1.7.2023 issued by the Reserve Bank of India prescribing specific discount free cash flow method in case of unlisted companies would not apply as both these provisions deal with altogether different situations. There is no specific default noticed by AO in the assessee s merchant bankers valuation and therefore the revenue s endeavour to revive the impugned addition based on discount free cash flow method would not apply in the given facts. We thus reject the Revenue s instant sole substantive grievance and its main appeal.

ISSUES PRESENTED and CONSIDERED

The primary issues considered in this judgment are:

1. Whether the Commissioner of Income Tax (Appeals) [CIT(A)] erred in deleting the additions made by the Assessing Officer (AO) regarding the valuation of perquisites under Section 17(2) of the Income-tax Act, 1961, specifically concerning shares allocated at a discounted rate.

2. Whether the CIT(A) erred in accepting additional evidence without providing the Assessing Officer an opportunity to respond.

3. The validity of the valuation method used for determining the fair market value (FMV) of shares issued to the assessee compared to those issued to a non-resident entity, M/s Norwest Venture Partners Mauritius.

4. The validity of the reopening of assessment under Sections 147/148 of the Income-tax Act.

ISSUE-WISE DETAILED ANALYSIS

1. Valuation of Perquisites under Section 17(2)

Relevant Legal Framework and Precedents: Section 17(2) of the Income-tax Act, 1961, addresses the valuation of perquisites, including sweat equity shares issued by an employer to an employee. Rule 3(8) of the Income Tax Rules, 1962, prescribes the method for determining the FMV of such shares.

Court's Interpretation and Reasoning: The Tribunal examined whether the valuation of perquisites in the form of sweat equity shares was conducted correctly as per the prescribed method. The CIT(A) found that the valuation by the Merchant Banker was in accordance with Rule 3(8)(iii) for unlisted shares, which was the correct method for the situation.

Key Evidence and Findings: The valuation report by a Category-I Merchant Banker was submitted, and the FMV was determined based on audited financials provided by the company. The Tribunal noted that the valuation was not disputed by the AO.

Application of Law to Facts: The Tribunal upheld the CIT(A)'s decision, emphasizing that the valuation method for the shares issued to the assessee was appropriate under the given legal framework, and the perquisite value was correctly included in the salary head.

Treatment of Competing Arguments: The Revenue argued that the FMV should be based on the higher valuation of shares issued to the Mauritius entity. However, the Tribunal concluded that different valuation methods apply to different situations, and the method used for the assessee's shares was correct.

Conclusions: The Tribunal found no merit in the Revenue's argument and upheld the deletion of the addition made by the AO.

2. Acceptance of Additional Evidence

Relevant Legal Framework and Precedents: The Tribunal considered whether the CIT(A) erred in accepting additional evidence without allowing the AO to respond.

Court's Interpretation and Reasoning: The Tribunal did not find any procedural error significant enough to warrant a reversal of the CIT(A)'s decision.

Conclusions: The Tribunal did not address this issue in detail, as the primary focus was on the correctness of the valuation method.

3. Valuation Method for Shares Issued to Non-Resident Entity

Relevant Legal Framework and Precedents: The valuation of shares for non-resident entities is guided by the Reserve Bank of India's Master Circular on Foreign Investment in India, which prescribes the Discounted Free Cash Flow (DCF) method.

Court's Interpretation and Reasoning: The Tribunal noted that the valuation method for shares issued to the Mauritius entity was different due to the distinct regulatory requirements for foreign investments.

Key Evidence and Findings: The Tribunal acknowledged the different valuation methods used for the two sets of shares and found them to be appropriate for their respective contexts.

Conclusions: The Tribunal concluded that the valuation methods were correctly applied as per the applicable rules and regulations.

4. Validity of Reopening under Sections 147/148

Court's Interpretation and Reasoning: The assessee's cross-objection regarding the reopening of the assessment was not pressed, as the CIT(A)'s findings were upheld on merits.

Conclusions: The Tribunal dismissed the cross-objection as not pressed.

SIGNIFICANT HOLDINGS

Core Principles Established: The Tribunal reaffirmed the importance of applying the correct valuation method as prescribed by the Income-tax Act and Rules for determining the FMV of shares issued as perquisites. It emphasized that different contexts, such as domestic issuance versus foreign investment, require adherence to specific regulatory guidelines.

Final Determinations on Each Issue: The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the addition made by the AO. The assessee's cross-objection was also dismissed as not pressed.

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