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TMI Blog2024 (8) TMI 939X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - HON'BLE MR. JUSTICE YASHWANT VARMA HON'BLE MR. JUSTICE RAVINDER DUDEJA For the Appellant Through: Mr. Ajay Vohra, Sr. Adv. with Mr. Udit Naresh, Adv. For the Respondent Through: Mr. Puneet Rai, SSC along with Mr. Rishabh Nangia, Advs. JUDGMENT YASHWANT VARMA, J. 1. The assessee as well as the Commissioner of Income Tax assail the order of the Income Tax Appellate Tribunal [Tribunal] dated 27 April 2007 and in terms of which the appeals of both of the Department as well as of the assessee had come to be dismissed. We had by our order of 07 October 2009 admitted these appeals on the following two questio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee. 5. Aggrieved by the aforesaid, an appeal came to be instituted before the Commissioner of Income Tax (Appeals) [CIT (A)]. The CIT (A), however, took the view 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, and bearing in mind the Valuation Report which had been obtained by the employer itself, it held that the FMV should be taken as INR 22.50/- per share. This becomes evident from a reading of Paras 2.6 and 2.7 of the order of the CIT (A) which are extracted hereinbelow:- 2.6. On the basis of law laid down as above by the Hon'ble Gujarat High Court as also followed by the Hon'ble Delhi High Court in the case of Promila Bali it can safely be inferred that the perquisite value of these shares has to be computed by adopting the actual price paid by the appellant i.e. Rs.15/- per share as the fair market value of these shares since there is a total ban on transfer/ sale realization of these shares during the year under consideration. It is my considered view that the fair market ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ares at open market, the employer company itself got it valued from expert valuer who determined the fair market value of share at Rs. 22.50. Therefore, the value of perquisite in the hands of assessee was taken at Rs.7.50 per share by the employer and tax was accordingly deducted at source. On the basis of market quotation of the shares, the Assessing Officer valued it at Rs. 49.95 and accordingly recalculated the perquisite value in the hands of the assessee. There is no dispute to the fact that shares so allocated under the company stock option scheme was with a condition of lock in period. As the shares were not freely transferable at the relevant point of time, there is no any valid reason for taking market value of these shares prevailing at the Bombay and Delhi Stock Exchange. At the very same time, it cannot be said that no benefit has been accrued to the assessee in the form of perquisites, in respect of shares allotted to the assessee in stock option scheme. Even company in which the assessee was Managing Director, also employer of the assessee has taken full precautions to ascertain the value of benefit given to the employees by way of stock option scheme. Thus the emplo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of tax with reference to the value of perquisite arising on exercise of such action of the employee. It is the aforesaid decision which has led to the institution of the present appeals. 7. Mr. Ajay Vohra, learned senior counsel appearing for the assessee, submitted that in light of the lock-in period which operated, the concept of FMV could not have possibly been imputed or adopted. According to learned senior counsel, bearing in mind the fact that the shares could neither be traded nor sold, only a notional value could have at best been ascribed to the stock. Mr. Vohra submitted that the Act itself does not contemplate a tax being imposed on notional income. According to Mr. Vohra, the concept of FMV itself contemplates the price being determined with reference to what a capital asset would ordinarily fetch on sale in the open market and on the relevant date. Our attention was drawn to Section 2 (22B) of the Act which defines FMV in the following terms:- 2 (22B)] fair market value , in relation to a capital asset, means (i) the price that the capital asset would ordinarily fetch on sale in the open market on the relevant date; and (ii) where the price referred to in sub-clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the employees to hypothecate or pledge the said shares during the lock-in period. During the said period, the said shares have no realisable value, hence, there was no cash in flow to the employees on account of mere exercise of options. On the date when the options were exercised, it was not possible for the employees to foresee the future market value of the shares. Therefore, in our view, the benefit, if any, which arose on the date when the option stood exercised was only a notional benefit whose value was unascertainable. Therefore, in our view, the Department had erred in treating Rs. 165 crores as perquisite value being the difference in the market value of shares on the date of exercise of option and the total amount paid by the employees consequent upon exercise of the said options. xxxx xxxx xxxx 14. As stated above, unless a benefit/receipt is made taxable, it cannot be regarded as income . This is an important principle of taxation under the 1961 Act. Applying the above principle to the insertion of clause (iiia) in Section 17(2) one finds that for the first time w.e.f. 1.4.2000 the word cost stood explained to mean the amount actually paid for acquiring specified secur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ck was non-transferable and the stock exchange was also accordingly notified . This is where the weightage ought to have been given by the AO to an important factor, namely, lock in period. This has not been done. It is important to bear in mind that if the shares allotted to the employee had no realizable sale value on the day when he exercised his option then there was no cash inflow to the employee. It was not possible for the employee to know the future value of the shares allotted to him on the day he exercises his option. Even the cost of acquisition as nil came to be introduced in the 1961 Act by the Finance Act, 1999 only with effect from 1.4.2000. In fact, the later deletion of clause (iiia) is an indicator of the Ineffective Charge. 17. For the aforestated reasons, we are of the view that the Department had erred in treating Rs. 165 crores as a perquisite value for the assessment years 1997-98, 1998-99 and 1999-2000. During those years, the fifth anniversary had not taken place and, therefore, it was not possible for the assessee company to estimate the value of the perquisite during that period. It was not open to the Department to ignore the lock in period. Therefore, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to an equity share or a preference share or, as the case may be, a debenture, means a share or debenture quoted on any recognised stock exchange with regularity from time to time, where the quotations of such shares or debentures are based on current transactions made in the ordinary course of business. Explanation . Where any question arises whether a share or debenture is a quoted share or a quoted debenture within the meaning of this clause, a certificate to that effect furnished by the concerned stock exchange in the prescribed form shall be accepted as conclusive; 14. The question which stood raised ultimately came to be answered by the Supreme Court in the following terms:- 5. We are in agreement with the view expressed in the impugned judgment, which observes that the equity shares under the lock-in period were not quoted shares , for the simple reason that the shares in the lock-in period were not quoted in any recognised stock exchange with regularity from time to time. There are no current transactions relating to these shares made in the ordinary course of business. These equity shares being under the lock-in period could not be traded and, therefore, remained unquoted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thod of valuation for quoted shares. Ad hoc depreciation/ reduction from the quoted price of equity shares transferable in the open market is not permitted and allowed vide rule 9 of Part C of Schedule III of the Wealth-tax Act. The shares in question being unquoted shares , therefore, have to be valued in terms of rule 11 as a standalone valuation method. This would be in accord with sub-section (1) to section 6 of the Gift-tax Act, which states that the value of a property, other than cash, transferred by way of gift, shall be valued on the date on which the gift was made and shall be determined in the manner as laid down in Schedule II of the Gift-tax Act, which, as noticed above, makes the provisions of Schedule III of the Wealth-tax Act, applicable. 10. Faced with the aforesaid position, the Revenue has relied upon rule 21 of Part H of Schedule III of the Wealth-tax Act, which reads thus: 21. Restrictive covenants to be ignored in determining market value. For, the removal of doubts, it is hereby declared that the price or other consideration for which any property may be acquired by or transferred to any person under the terms of a deed of trust or through or under any restri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. CWT , which was a case relating to the valuation of the right to property of the assessee in a trust. The argument of the assessee that the right to property in a trust, being a personal estate, is incapable of being sold in the open market and, therefore, it would have nil or no value was rejected. This decision in this context quotes Ahmed G. H. Ariff (supra). At this stage, it would be relevant to refer to the decision of the House of Lords in Commissioners of Inland Revenue v. Crossman which decision was referred to with approval in both Ahmed G.H. Ariff (supra) and Purshottam N. Amarsay (supra). The majority decision of the House of Lords in Crossman's case (supra), acase relating to estate duty, holds that where the right to transfer shares of a limited company is restricted and while its value is not nil or 0 , it should be valued on the basis and accounting for the restriction. The contention that in view of the bar on transfer no property was actually passed on death, and a fresh set of rights in favour of the legatees came into existence was disapproved. At the same time, it was held that the shares cannot be valued ignoring the restrictions on transfer, as contai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the liabilities of the company as the total amount paid up on the shares bore to the total paid up capital of the company. The question arose as to how the shares left by the deceased are to be valued for the purpose of estate duty. The court held that the assessment of value of the shares held by the deceased in the five companies must normally be made principally on the basis of the income yield including the strong probability of distribution of accumulated profits and that the effect of the restrictions on transfer of shares and the right of pre-emption given to the governing directors to purchase the shares must all be taken note of and depreciation on that account had to be allowed for in the primary valuation. The above case laid down the principle that the restrictions contained in the articles of association on the transfer and also on the price for which the shares could be transferred has to be ignored and the transferability in the open market must be assumed, for the purpose of valuation, but that the market value of the shares has to be depreciated to a certain extent having regard to the said restrictions contained in the articles of association, and that if the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osition in law of the Act not contemplating a tax being levied on notional income. We deem it apposite to extract the following passages from the decision of the Supreme Court in Commissioner of Income Tax v. Excel Industries Ltd (2014) 13 SCC 459: 24. This Court did not accept the view taken by the High Court on facts. Reference was made in this context to Commissioner of Income Tax v. Birla Gwalior (P.) Ltd., [1973] 89 ITR 266 (SC) wherein it was held, after referring to Morvi Industries that real accrual of income and not a hypothetical accrual of income ought to be taken into consideration. For a similar conclusion, reference was made to Poona Electric Supply Co. Ltd. v. Commissioner of Income Tax, [1965] 57 ITR 521 (SC) wherein it was held that income tax is a tax on real income. 25. Finally a reference was made to State Bank of Travancore v. Commissioner of Income Tax, [1986] 158 ITR 102 (SC) wherein the majority view was that accrual of income must be real, taking into account the actuality of the situation; whether the accrual had taken place or not must, in appropriate cases, be judged on the principles of real income theory. The majority opinion went on to say: What has r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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