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Delhi HC rules on valuation of shares subject to lock-in conditions allotted under Employee Stock Purchase Scheme
The issue before Delhi High Court (HC) in the case of Ravi Kumar Sinha[1] (Taxpayer) was in relation to valuation of shares allotted under Employees Stock Purchase Scheme (ESPS) subject to lock-in period during tax year 1999-2000. During this tax year, while there was a provision for taxing shares allotted or transferred at concessional rate or free of cost to the employees, there were no specific valuation rules for valuing listed or unlisted shares on the lines of the current Rule 3(8) of Income Tax Rules. The perquisite was to be valued at difference between fair market value (FMV) and the cost, for which the definition of FMV was a general definition provided in section 2(22B) of the Income Tax Act viz. the price the capital asset would ordinarily fetch on sale in the open market on the relevant date.
The Taxpayer was allotted shares by the employer under ESPS at an issue price of INR 15 per share which were subject to lock-in period of 12 months for 25% and 18 months for balance 75% of the shares. The employer company, out of abundant caution obtained a valuation report for salary withholding purposes which valued the shares at INR 22 per share. The Taxpayer claimed that perquisite value of the benefit is NIL on the basis that FMV of the shares with lock-in restriction did not exceed INR 15.
Based on the listed price of the shares on stock exchange, the Tax Authority determined the FMV to be INR 49.5 per share and added the difference of INR 34.5 per share as perquisite in the hands of the Taxpayer. On Taxpayer’s appeal, the first appellate authority (FAA) held that the FMV of shares was INR 22.5 as per valuation report and accordingly, reduced the perquisite value to INR 7.5 per share. On further appeal by both Taxpayer and Tax Authority, the Delhi Income Tax Appellate Tribunal upheld the FAA’s ruling and dismissed both appeals.
On further appeal by both Taxpayer and Tax Authority, the Delhi High Court (HC) ruled in favor of the Taxpayer and held that FMV of the shares was INR 15 since the shares allotted under ESPS were subject to lock-in stipulation and could not be sold in the open market owing to a complete embargo on the sale of those shares. Consequently, the Delhi HC held that perquisite value was NIL and deleted the addition of INR 7 per share sustained by FAA.