ASST. COMMISSIONER OF INCOME TAX, 5(1)(1), , NOIDA V. BIDHAN CHANDRA CHOUDHARY, NOIDA

ITA 2061/DEL/2023

AI Insights

The case involves an appeal by the Revenue against the decision of the CIT(A) which had reversed the AO's addition of Rs.4,53,18,900 as perquisites under section 17(2) of the Income-tax Act, 1961. The addition was based on the valuation of shares issued to the assessee, Bidhan Chandra Choudhary, a director of M/s Acidaes Solutions Pvt. Ltd., at a discounted rate. The CIT(A) found that the valuation was correctly done by a Category-I Merchant Banker and was in accordance with the provisions of the Act and the Income Tax Rules. The Revenue contended that the valuation should be based on a higher premium applied to shares issued to a foreign entity shortly after. However, the Tribunal upheld the CIT(A)'s decision, noting that the methods of valuation applied were appropriate and in compliance with the relevant rules.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 30418 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-01-2025
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2014-2015
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Set aside; Additional evidence; Fair market value; Valuation report
• Section: 147; 144

Judgement Text

"1 ITA 2061/Del/2023 & CO 11/Del/2024 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘A’ NEW DELHI BEFORE SHRI SATBEER SINGH GODARA, JUDICIAL MEMBER AND SHRI M. BALAGANESH, ACCOUNTANT MEMBER ITA Nos. 2061/Del/2023 A. Yr: 2014-15 ACIT, 5(1)(1), Noida. Vs Bidhan Chandra Choudhary, A2/1522, Tower-15, Purvanchal Royal Park, Gautam Buddha Nagar, Noida-201304. PAN: ADNPC 0370 R APPELLANT RESPONDENT C.O. No. 11/Del/2024 ( In ITA Nos. 2061/Del/2023) A. Yr: 2014-15 Bidhan Chandra Choudhary, A2/1522, Tower-15, Purvanchal Royal Park, Gautam Buddha Nagar, Noida-201304. PAN: ADNPC 0370 R Vs ACIT, 5(1)(1), Noida. APPELLANT RESPONDENT Assessee represented by Sh. Ved Jain, Adv.; & Sh. Ayush Garg, CA Department represented by Sh. Subhash Kumar, Sr. DR Date of hearing 31.12.2024 Date of pronouncement 08.01.2025 O R D E R 2 ITA 2061/Del/2023 & CO 11/Del/2024 PER SATBEER SINGH GODARA, J.M: This Revenue’s appeal ITA no. 2061/Del/2023 and assessee’s cross objection CO no. 11/Del/2024 are directed against National Faceless Appeal Centre (NFAC), Delhi’s’ DIN and order no. ITBA/NFAC/S/250/2023- 24/1053211255(1), dated 26.05.2023 in case no. NFAC/2013-14/10151823in proceedings u/s 147 read with section 144 of the Income-tax Act, 1961, hereinafter referred to as the ‘Act’. Heard both the parties at length. Case files perused. 2. The Revenue raises the following revised substantive grounds in the instant appeal: “1. The CIT(Appeals) has erred in law and on facts by deleting the additions of Rs.4,53,18,900/- made by the AO on account of Income earned as Perquisites u/s 17(2) of the I.T. Act, 1961, in the form of company shares allocated on discounted/subsidised rates, without appreciating the facts mentioned by the AO in the assessment order. 2. The Ld. CIT(Appeals) has erred in law and facts is not appreciating the provisions of section 17(2)(vi) of the Act read with Rule 3(8)(iii) where the FMV of the shares should have been taken by the Merchant Banker for valuation of shares. 3. The Ld. CIT(Appeals) has erred in accepting additional evidences without giving opportunity to the AO. 4. That the order of CIT(Appeals) being erroneous in law and on facts deserves to be set aside/ cancelled and the order of the AO to be restored.” 3 ITA 2061/Del/2023 & CO 11/Del/2024 3. We are next taken to the learned CIT(A)/NFAC lower appellate discussion reversing the assessment findings making section 17(2) perquisites addition of Rs. 4,53,18,900/- in assessee’s hands, reading as under: “7.3 I have carefully considered the facts on record and submission of the appellant. The fact of the case is that the A.O. has received information from DCIT Cir-1(2), New Delhi that M/s Acidaes Solutions Pvt. Ltd. (the Company) had issued 465 equity shares to the appellant (as also to one other Director) at a premium of Rs.12,628.20 per share on 25.02.2014. The premium on these shares amounting to Rs.58,72,113/- was borne by the company (just like in the case of another Director as well). The valuation thereof was done by Fastrack Finsec, Category I, Merchant Banker for the purpose of determining the perquisite value of sweat equity shares on the date on which the option is exercised by the employee. The Merchant Banker has determined the fair market value for the purpose of determining the value of perquisite as provided in sub-clause (vi) of clause (2) of section 17 & as per Rule 3(8)(i)(iii) of the Income Tax Rules 1961. The valuation arrived by the Merchant Banker is solely based on the audited financials, as given by the Management of Acidaes. The appellant has submitted the copy of valuation report of Merchant Banker. 7.4 Further, the said company has also issued shares to one entity named M/s Norwest Venture Partners Mauritius on 27.03.2014 i.e. just after one month of issuing shares to its Directors. This time the shares were issued at a hefty premium of Rs.97,460/- to that Mauritius Company. The valuation thereof was done by a chartered Accountant. As per FDI policy, which is effective from 5th April 2013, the issue price of shares to a foreign resident of unlisted company shall not be less than the fair market value determined by SEBI registered Category-I Merchant Banker or a Chartered Accountant as per discounted free-cash flow method. 7.5 In my view, the issue is whether the valuation of Perquisite in the form of Sweat Equity shares issued by employer to the employee of the company who exercise Employee Stock Option Plan (ESOP) i.e. the Appellant is as per the Provision of Section 17 of the Income-tax Act, 1961 or not. For the convenience, Provisions regarding valuation of Perquisite in the form of 4 ITA 2061/Del/2023 & CO 11/Del/2024 Sweat Equity u/s 17(2)(vi) as prevailing on the date of issue of shares are as under: \"17(2)(vi) the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to the assessee. Explanation. For the purposes of this sub-clause, - 1. \"specified security\" means the securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and, where employees' stock option has been granted under any plan or scheme therefor, includes the securities offered under such plan or scheme; 1. \"sweat equity shares\" means equity shares issued by a company to its employees or directors at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called; 1. The value of any specified security or sweat equity shares shall be the fair market value of the specified security or sweat equity shares, as the case may be, on the date on which the option is exercised by the assessee as reduced by the amount actually paid by, or recovered from, the assessee in respect of such security or shares; 1. \"fair market value\" means the value determined in accordance with the method as may be prescribed; 1. \"option\" means a right but not an obligation granted to an employee to apply for the specified security or sweat equity shares at a predetermined price; 7.6 For the purpose incom chargeable under the head \"Salaries\", the value of perquisites in the form of sweat equity shares issued by the employer to its employee, the fair market value of the shares shall be calculated as per provisions of Rule 3(8) of Income Tax Rules, 1962. During assessment proceedings, the appellant has submitted the valuation report of Category-l Merchant Banker. As per the provisions of Section 17(2) (vi), the fair market value of any specified security or sweat equity share, being an equity share in a company, 5 ITA 2061/Del/2023 & CO 11/Del/2024 on the date on which the option is exercised by the employee, shall be determined in accordance with the provisions of clause (ii) or (iii) of Rule 3(8) of the Income-Tax Rules, 1962 which is re-produced hereunder: Valuation of perquisites 3. For the purpose of computing the income chargeable under the head \"Salaries\", the value of perquisites provided by the employer directly or indirectly to the assessee (hereinafter referred to as employee) or to any member of his household by reason of his employment shall be determined in accordance with the following sub- rules, namely: 8) (i) For the purposes of sub-clause (vi) of clause (2) of section 17, the fair market value of any specified security or sweat equity share, being an equity share in a company, on the date on which the option is exercised by the employee, shall be determined in accordance with the provisions of clause (ii) or clause (iii). (ii) In a case where, on the date of the exercising of the option, the share in the company is listed on a recognized stock exchange, the fair market value shall be the average of the opening price and closing price of the share on that date on the said stock exchange : (iii) In a case where, on the date of exercising of the option, the share in the company is not listed on a recognised stock exchange, the fair market value shall be such value of the share in the company as determined by a merchant banker on the specified date. As per the above provisions, it is clear beyond doubt that the employer of the appellant has rightly carried out the valuation of perquisite in the form of sweat equity share issued under employee stock option and deducted tax at source for the year under consideration. Appellant has submitted Salary certificate in Form 16, and on perusal of the same it is verified that the employer has valued the perquisite at Rs.58,72,113/- as per the valuation report of Category-I Merchant Banker, which was not disputed by Assessing Officer. Though the appellant failed in mentioning value of perquisites in the prescribed column of the return of income in the original 6 ITA 2061/Del/2023 & CO 11/Del/2024 ITR, but from verification of Form 16 and Form 12BA, it is found that the value of perquisite has been included in the salary head. 7.7 After exercising the stock option by the appellant, the company has issued shares to Non-Resident Foreign Company namely Norwest Venture Partner, Mauritius at a value of Rs.97,465/- per equity share on 27/03/2014. While issuing the equity shares to Non-Resident Company, the valuation of equity share of employer company is to be done according to Master Circular on Foreign Investment in India No. 15/2013-14 dated July 01, 2013 issued by Reserve Bank of India. As per the Master Circular, the valuation of equity shares of company as per following pricing guidelines: 5. Pricing guidelines • Fresh issue of shares: Price of fresh shares issued to persons resident outside India under the FDI Scheme, shall be: - on the basis of SEBI guidelines in case of listed companies. - not less than fair value of shares determined by a SEBI registered Merchant Banker or a Chartered Accountant as per the Discounted Free Cash Flow Method (DCF) in case of unlisted While issue of equity shares to Non-Resident entity, the employer company of the appellant has obtained valuation report, as per the Master Circular of RBI on FDI Scheme, from a Chartered Accountant as per the Discounted Free Cash Flow (DCF) Method. According to DCF method the fair market value of the shares is determined at Rs.97,465/- per share and therefore, the issue price of shares to Non- Resident entity shall not be less than that. Therefore, the value of equity shares is deferred as compared to the valuation done as per Rule 3(8) (ii) & (iii) of the Income Tax Rules, 1962. The method adopted at the time of valuation of perquisite in the form of sweat equity is Net Asset Value (NAV) on specified date & while issue of shares to Non-Resident Entity the method to be adopted is Discounted Free Cash Flow (DCF). 7.8 From the above discussion, it is clear that the employer company of the appellant has rightly evaluated value of perquisite for the shares issued in the form of sweat equity under employee stock option plan (ESOP) on the basis of valuation report obtained from Category-l Merchant Banker as per the Provisions of Rule 3(8) (ii) & (iii) of the Income Tax Rules, 1962 on specified date i.e. date of issue of sweat equity to its employees. 7 ITA 2061/Del/2023 & CO 11/Del/2024 Consequently, the method of valuation to be followed at the time of issue of shares to Non-Resident entity is different than the method to be followed in case of issue of shares to a Resident entity under ESOP. Hence, the values adopted by the employer company of the appellant is in accordance with the valuation methods prescribed under Section 17(2)(vi) r.w. Rule 3(8) (ii) & (iii) of the Income Tax Act 1961 and Income Tax Rules 1962 respectively. Considering all these facts I am satisfied that the addition made by the A.O. is unwarranted and therefore, to be deleted. Accordingly, the addition of Rs. 4,53,18,900/- on account of perquisite under Section 17(2) is hereby to be deleted. Accordingly, I direct A.O. to delete the addition made in Assessment Order.” 4. It is in this factual backdrop that the Revenue’s vehement contention during the course of hearing before us is that the Assessing Officer herein had rightly made the impugned addition going by the fair market value “FMV” of the very shares issued to M/s Norwest Venture Partners Mauritius on27.03.2014 which was much more than that allotted to the assessee’s director(s); by his company M/s Acidaes Solutions Pvt. Ltd. on 25.02.2014. The Revenue’s case in very terms in nutshell is that learned CIT(A) ought not to have deleted the impugned ‘perquisites’ addition made in the assessee’s hands as the latter market value deserved to be adopted as per shares issued to the “Mauritius” based entity only a month later, in above terms. 5. We have given our thoughtful consideration to the Revenue’s sole substantive grievance herein and find no merit therein. Suffice to say, the assessee admittedly happens to be one of the director(s) of the company herein M/s Acidaes 8 ITA 2061/Del/2023 & CO 11/Del/2024 Solutions Pvt. Ltd., 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. 5.1 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. The 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 the learned 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 (supra), would not apply as both these provisions deal with altogether different situations. 5.2 We further reiterate that there is no specific default noticed by the learned Assessing Officer in the assessee’s merchant bankers’ valuation and therefore, the revenue’s endeavour to revive the impugned addition based on discount free cash 9 ITA 2061/Del/2023 & CO 11/Del/2024 flow method would not apply in the given facts. We thus reject the Revenue’s instant sole substantive grievance and its main appeal ITA 2061/Del/2023. 6. Coming to the assessee’s C.O. no. 11/Del/2024 challenging validity of section 148/147 reopening, Mr. Jain fairly submits that he does not press it anymore once the learned CIT(A)/NFAC’s findings herein stand upheld on merits. Ordered accordingly. This Revenue’s appeal ITA 2061/Del/2023 is dismissed and assessee’s C.O. 11/Del/2024 is dismissed as not pressed, in above terms. A copy of this common order be placed in the respective case files. Order pronounced at the time of hearing in open court on 08.01.2025. Sd/- Sd/- (M. BALAGANESH) (SATBEER SINGH GODARA) ACCOUNTANT MEMBER JUDICIAL MEMBER *MP* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI "