My employer valued my unlisted sweat equity shares through a merchant banker, but the Assessing Officer says the company sold shares to a foreign investor a month later at a far higher price and has taxed me on the difference. Can he do that?
No, on these facts — and this is stage one, the perquisite that arises on exercise under s.17(2)(vi). The Tribunal held that where the shares are unlisted the fair market value is the value determined by the merchant banker under Rule 3(8)(iii), and that a price fixed under the Reserve Bank of India's foreign direct investment pricing guidelines on a discounted free cash flow basis for an issue to a non-resident investor cannot be substituted for it, because the two sets of provisions deal with altogether different situations. The Revenue's appeal against deletion of a perquisite addition of Rs 4,53,18,900 was dismissed.
Decided by the ITAT (Shri Satbeer Singh Godara, Judicial Member and Shri M. Balaganesh, Accountant Member (Income Tax Appellate Tribunal, Delhi Bench 'A')) on 2025-01-08, reported as ITA No. 2061/Del/2023 and C.O. No. 11/Del/2024, assessment year 2014-15 (ITAT Delhi). It bears on section 17(2)(vi), section 17(2), section Rule 3(8), section 192, section 147, section 144 of the Income Tax Act 1961, in Salary & Perquisites, Assessment & Scrutiny, Evidence & Burden of Proof and Reassessment & Reopening matters.
This is the commonest attack on an unlisted-company ESOP or sweat equity valuation: the Assessing Officer finds a real-world price — a funding round, a secondary sale, an FDI valuation — that is higher than the merchant banker's figure and taxes the gap as salary. The Tribunal's answer is that Rule 3(8) prescribes a method and a valuer, and that a valuation done for a different regulatory purpose under a different prescribed method is not evidence of the Rule 3(8) value at all. Two features of the reasoning are worth taking to a hearing. First, the Tribunal recorded that "the clinching date is that of 'exercise of the option' involving unlisted shares" — the enquiry is confined to the exercise date and the merchant banker's specified date, not to what happened a month later. Second, and decisively, the Tribunal noted that the Assessing Officer had found NO SPECIFIC DEFAULT in the merchant banker's valuation; an officer who wants to displace the report must attack the report. Note also what the Commissioner (Appeals) had drawn out and the Tribunal upheld: the two valuations were on different bases altogether — net asset value on the specified date for the perquisite, discounted free cash flow for the FDI issue. The limit of the decision is that it does not license a valuation that breaches the rule: if the report is not by a category I merchant banker registered with SEBI, or is dated outside the 180-day window, the protection goes.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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The assessee was a director of Acidaes Solutions Pvt. Ltd. On 25 February 2014 the company issued him 465 equity shares at a premium of Rs 12,628.20 per share, the premium of Rs 58,72,113 being borne by the company. The perquisite value of those sweat equity shares was determined by Fastrack Finsec, a category I merchant banker, under s.17(2)(vi) read with Rule 3(8), on the basis of the company's audited financials. The employer valued the perquisite at Rs 58,72,113, showed it in the salary head, and issued Form 16 and Form 12BA accordingly; the assessee had failed to fill the perquisite column in his original return. On 27 March 2014, a month later, the same company issued shares to Norwest Venture Partners Mauritius at a premium of Rs 97,460 per share, valued by a chartered accountant on a discounted free cash flow basis as required by the Reserve Bank of India's foreign direct investment pricing guidelines. Acting on information from another circle, the Assessing Officer reopened the assessment under s.147 read with s.144 and added Rs 4,53,18,900 as a perquisite under s.17(2), taking the Mauritius issue price as the fair market value. The National Faceless Appeal Centre deleted the addition on 26 May 2023 and the Revenue appealed; the assessee filed a cross objection challenging the reopening.
The Revenue's appeal was dismissed and the cross objection dismissed as not pressed. The premium of Rs 12,628.20 per share 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" (para 5). Once the Commissioner (Appeals) had upheld that premium on the merchant banker's valuation, the later premium fixed under the Reserve Bank of India Master Circular's discounted free cash flow method for unlisted companies "would not apply" because "both these provisions deal with altogether different situations" (para 5.1). No specific default having been noticed by the Assessing Officer in the merchant banker's valuation, the Revenue's attempt to revive the addition on a discounted free cash flow basis could not succeed (para 5.2).
The Tribunal gave the Revenue's sole substantive grievance thoughtful consideration and found no merit in it (para 5). It proceeded on the undisputed fact that the shares issued to the assessee on 25 February 2014 were valued by a merchant banker under Rule 3(8), the operative date under that rule for unlisted shares being the date of exercise of the option (para 5). The Revenue's case was that the differential between that premium and the premium of Rs 97,465 per share at which the company issued shares to a Mauritius entity a month later was assessable as a perquisite under s.17(2)(vi) (para 5.1). The Tribunal rejected that because the two valuations are made under different provisions serving different purposes: the merchant banker's valuation under Rule 3(8) on the one hand, and the Reserve Bank's Master Circular prescribing the discounted free cash flow method for issues to non-residents by unlisted companies on the other (para 5.1). It reiterated that the Assessing Officer had noticed no specific default in the merchant banker's valuation, so the discounted free cash flow method could not be pressed into service on these facts (para 5.2). The Commissioner (Appeals), whose order the Tribunal upheld, had set out the same distinction in more detail at his paragraphs 7.7 and 7.8, contrasting the net asset value method used on the specified date for the perquisite with the discounted free cash flow method required for the foreign issue, and had verified from Form 16 and Form 12BA that the perquisite of Rs 58,72,113 had in fact been included under the salary head.
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.
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Handle my notice → Ask a CA on WhatsAppNo, on these facts — and this is stage one, the perquisite that arises on exercise under s.17(2)(vi). The Tribunal held that where the shares are unlisted the fair market value is the value determined by the merchant banker under Rule 3(8)(iii), and that a price fixed under the Reserve Bank of India's foreign direct investment pricing guidelines on a discounted free cash flow basis for an issue to a non-resident investor cannot be substituted for it, because the two sets of provisions deal with altogether different situations. The Revenue's appeal against deletion of a perquisite addition of Rs 4,53,18,900 was dismissed. This was decided by the ITAT (Shri Satbeer Singh Godara, Judicial Member and Shri M. Balaganesh, Accountant Member (Income Tax Appellate Tribunal, Delhi Bench 'A')) and bears on section 17(2)(vi), section 17(2), section Rule 3(8), section 192, section 147, section 144 of the Income Tax Act 1961. It is reported as ITA No. 2061/Del/2023 and C.O. No. 11/Del/2024, assessment year 2014-15 (ITAT Delhi). This is the commonest attack on an unlisted-company ESOP or sweat equity valuation: the Assessing Officer finds a real-world price — a funding round, a secondary sale, an FDI valuation — that is higher than the merchant banker's figure and taxes the gap as salary. The Tribunal's answer is that Rule 3(8) prescribes a method and a valuer, and that a valuation done for a different regulatory purpose under a different prescribed method is not evidence of the Rule 3(8) value at all. Two features of the reasoning are worth taking to a hearing. First, the Tribunal recorded that "the clinching date is that of 'exercise of the option' involving unlisted shares" — the enquiry is confined to the exercise date and the merchant banker's specified date, not to what happened a month later. Second, and decisively, the Tribunal noted that the Assessing Officer had found NO SPECIFIC DEFAULT in the merchant banker's valuation; an officer who wants to displace the report must attack the report. Note also what the Commissioner (Appeals) had drawn out and the Tribunal upheld: the two valuations were on different bases altogether — net asset value on the specified date for the perquisite, discounted free cash flow for the FDI issue. The limit of the decision is that it does not license a valuation that breaches the rule: if the report is not by a category I merchant banker registered with SEBI, or is dated outside the 180-day window, the protection goes. If it applies to you, the first step is this: Produce the merchant banker's report and establish on its face that the valuer is a category I merchant banker registered with SEBI and that the valuation date falls within the Rule 3(8)(iv)(e) window — the exercise date or a date not more than 180 days before it.
The assessee was a director of Acidaes Solutions Pvt. Ltd. On 25 February 2014 the company issued him 465 equity shares at a premium of Rs 12,628.20 per share, the premium of Rs 58,72,113 being borne by the company. The perquisite value of those sweat equity shares was determined by Fastrack Finsec, a category I merchant banker, under s.17(2)(vi) read with Rule 3(8), on the basis of the company's audited financials. The employer valued the perquisite at Rs 58,72,113, showed it in the salary head, and issued Form 16 and Form 12BA accordingly; the assessee had failed to fill the perquisite column in his original return. On 27 March 2014, a month later, the same company issued shares to Norwest Venture Partners Mauritius at a premium of Rs 97,460 per share, valued by a chartered accountant on a discounted free cash flow basis as required by the Reserve Bank of India's foreign direct investment pricing guidelines. Acting on information from another circle, the Assessing Officer reopened the assessment under s.147 read with s.144 and added Rs 4,53,18,900 as a perquisite under s.17(2), taking the Mauritius issue price as the fair market value. The National Faceless Appeal Centre deleted the addition on 26 May 2023 and the Revenue appealed; the assessee filed a cross objection challenging the reopening. The matter was decided on 2025-01-08 by the ITAT (Shri Satbeer Singh Godara, Judicial Member and Shri M. Balaganesh, Accountant Member (Income Tax Appellate Tribunal, Delhi Bench 'A')). On those facts the ITAT held as follows. The Revenue's appeal was dismissed and the cross objection dismissed as not pressed. The premium of Rs 12,628.20 per share 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" (para 5). Once the Commissioner (Appeals) had upheld that premium on the merchant banker's valuation, the later premium fixed under the Reserve Bank of India Master Circular's discounted free cash flow method for unlisted companies "would not apply" because "both these provisions deal with altogether different situations" (para 5.1). No specific default having been noticed by the Assessing Officer in the merchant banker's valuation, the Revenue's attempt to revive the addition on a discounted free cash flow basis could not succeed (para 5.2).
The Tribunal gave the Revenue's sole substantive grievance thoughtful consideration and found no merit in it (para 5). It proceeded on the undisputed fact that the shares issued to the assessee on 25 February 2014 were valued by a merchant banker under Rule 3(8), the operative date under that rule for unlisted shares being the date of exercise of the option (para 5). The Revenue's case was that the differential between that premium and the premium of Rs 97,465 per share at which the company issued shares to a Mauritius entity a month later was assessable as a perquisite under s.17(2)(vi) (para 5.1). The Tribunal rejected that because the two valuations are made under different provisions serving different purposes: the merchant banker's valuation under Rule 3(8) on the one hand, and the Reserve Bank's Master Circular prescribing the discounted free cash flow method for issues to non-residents by unlisted companies on the other (para 5.1). It reiterated that the Assessing Officer had noticed no specific default in the merchant banker's valuation, so the discounted free cash flow method could not be pressed into service on these facts (para 5.2). The Commissioner (Appeals), whose order the Tribunal upheld, had set out the same distinction in more detail at his paragraphs 7.7 and 7.8, contrasting the net asset value method used on the specified date for the perquisite with the discounted free cash flow method required for the foreign issue, and had verified from Form 16 and Form 12BA that the perquisite of Rs 58,72,113 had in fact been included under the salary head. In the words reproduced by the source cited on this page: "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."
It was decided by the ITAT on 2025-01-08 and is reported as ITA No. 2061/Del/2023 and C.O. No. 11/Del/2024, assessment year 2014-15 (ITAT Delhi). Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 17(2)(vi), section 17(2), section Rule 3(8), section 192, section 147, section 144, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The Revenue's appeal was dismissed and the cross objection dismissed as not pressed. The premium of Rs 12,628.20 per share 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" (para 5). Once the Commissioner (Appeals) had upheld that premium on the merchant banker's valuation, the later premium fixed under the Reserve Bank of India Master Circular's discounted free cash flow method for unlisted companies "would not apply" because "both these provisions deal with altogether different situations" (para 5.1). No specific default having been noticed by the Assessing Officer in the merchant banker's valuation, the Revenue's attempt to revive the addition on a discounted free cash flow basis could not succeed (para 5.2). It arises in Salary & Perquisites, Assessment & Scrutiny, Evidence & Burden of Proof and Reassessment & Reopening matters, on section 17(2)(vi), section 17(2), section Rule 3(8), section 192, section 147, section 144 of the Income Tax Act 1961, and was decided by Shri Satbeer Singh Godara, Judicial Member and Shri M. Balaganesh, Accountant Member (Income Tax Appellate Tribunal, Delhi Bench 'A'). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Ask the Assessing Officer to identify the specific defect he alleges in the report. The absence of any such finding is what the Tribunal fastened on. Where the officer relies on a share issue to a foreign investor, show the RBI pricing guidelines under which that price was fixed and the different valuation method they require, and argue that a price fixed for exchange-control purposes is not the Rule 3(8) fair market value. Produce Form 16 and Form 12BA to show the perquisite actually offered, as the assessee did here, and reconcile them to the merchant banker's number. Do not rely on this order where the shares are LISTED — the rule for listed shares is the average of the opening and closing price on the exercise date, and the merchant banker route is not open.
Searched for later treatment; none was found. That is not the same as a source affirming it. The citator returns nothing for this order. A case-name search returns nineteen 'Bidhan Chandra Choudhary' matters, but all are criminal and service proceedings of a different person before the Jharkhand, Patna and Allahabad High Courts; the only tax document is the order itself. No appeal to the Delhi High Court and no later Tribunal order on the merchant-banker-valuation-versus-FDI-price point was found. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The order runs to eight numbered paragraph units (1, 2, 3, 4, 5, 5.1, 5.2 and 6) and I transcribed all of them. Nearly all of the detailed discussion is the Commissioner (Appeals)'s order reproduced inside paragraph 3 — the statutory extracts, the merchant banker narrative, the RBI Master Circular analysis and the net asset value versus discounted free cash flow contrast are the Commissioner (Appeals) speaking, not the Tribunal, and I have kept them separate. The Tribunal's own words are paragraphs 4 to 6. TWO DEFECTS IN THE REPORT. First, paragraph 5.1 describes the Reserve Bank Master Circular as "dated 1.7.2023" whereas the Commissioner (Appeals)'s text reproduced in paragraph 3 identifies it as Master Circular No. 15/2013-14 dated 1 July 2013; on the facts (shares issued 27 March 2014) the 2013 circular must be the one meant and "1.7.2023" is a slip. Second, the Commissioner (Appeals)'s reproduction of the Explanation to s.17(2)(vi) numbers its sub-paragraphs 1 to 5 instead of (a) to (e), and misdescribes the Income Tax Rules as "1961" in one line; the wording of the Explanation itself matches the departmental text exactly. A THIRD DEFECT, which affects the quantum. The order gives the Mauritius issue premium as Rs 97,460 per share in the Commissioner (Appeals)'s text reproduced at paragraph 3, and as Rs 97,465 per share in the Tribunal's own paragraph 5.1. I have used Rs 97,460 in the facts because that is the figure that reconciles exactly with the addition of Rs 4,53,18,900 on 465 shares, and Rs 97,465 where the Tribunal's own paragraph is being described. Nothing in the outcome turns on the five-rupee difference, but a reader checking the arithmetic will meet it. The proceedings were under s.147 read with s.144; the assessee's cross objection challenging the reopening was not pressed once he succeeded on the merits, so nothing is decided here about the validity of the reassessment. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Revenue's appeal was dismissed and the cross objection dismissed as not pressed. The premium of Rs 12,628.20 per share 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" (para 5). Once the Commissioner (Appeals) had upheld that premium on the merchant banker's valuation, the later premium fixed under the Reserve Bank of India Master Circular's discounted free cash flow method for unlisted companies "would not apply" because "both these provisions deal with altogether different situations" (para 5.1). No specific default having been noticed by the Assessing Officer in the merchant banker's valuation, the Revenue's attempt to revive the addition on a discounted free cash flow basis could not succeed (para 5.2).
TaxSphere, “ACIT v Bidhan Chandra Choudhary — the merchant banker's Rule 3(8)(iii) value fixes the sweat equity perquisite, and a foreign investor's DCF price paid a month later cannot be substituted”, https://taxnotice.vittsphere.com/caselaw/case/bidhan-chandra-choudhary-sweat-equity-merchant-banker-value-versus-fdi-dcf-price/ (validity last checked 2026-09-09)
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My employer put a large ESOP figure in my Form 16 in the year I exercised my options, even though I have not sold a single share. On what provision is that being taxed, and how is the amount worked out?
The TDS officer says my employer under-deducted on my ESOP perquisite because the company's shares actually changed hands at Rs 850 while the merchant banker valued them at Rs 194. Which figure fixes the perquisite?
My client is paid partly in restricted stock units of a US parent. Everyone tells me RSUs are taxed on vesting rather than on exercise. Is there authority for that in Indian law?
The Assessing Officer says my ESOP perquisite should have been computed on a higher share value than my employer used. What is the prescribed method for fixing the fair market value on the date I exercised?
