I got shares under my employer's stock purchase scheme but they were locked in and I could not sell them. Can the department tax me on the difference between the stock exchange price and what I paid?
No. The Delhi High Court held that where the shares carry a lock-in and cannot be traded or sold, the fair market value cannot be taken above the face value, so on these facts the determinative figure was Rs 15 per share. The quoted stock exchange price was irrelevant because the shares could not be sold in the open market. The valuation report the employer had obtained from its accountants, putting the value at Rs 22.50, was at best a means for the employer to gauge its withholding obligations and could not fix fair market value for the employee. The assessee's appeal was allowed and the Tribunal's order set aside.
Decided by the High Court (High Court of Delhi at New Delhi; Yashwant Varma J and Ravinder Dudeja J) on 2024-08-14, reported as ITA 281/2008 and ITA 770/2008, Delhi High Court. It bears on section 17(2)(iiia), section 17(2), section 2(22B) of the Income Tax Act 1961, in Salary & Perquisites matters.
This is the working answer for any employee assessed on a stock benefit he could not realise. The Court refuses both of the values the Revenue offered, the market quotation and the employer's own expert valuation, and it does so on a principle wider than the section: fair market value under section 2(22B) is the price the asset would ordinarily fetch on sale in the open market, and there is no such market for a share stamped non-transferable. It ties that to the settled rule that the Act does not tax notional income, drawing on the Supreme Court in Infosys Technologies, where a potential benefit from locked-in shares was held not to be income of the employee, and on Excel Industries on real as against hypothetical accrual. It is also useful for the point that an employer's valuation report obtained for its own TDS comfort does not bind the employee, a fact pattern that recurs whenever a company deducts on a valuation the employee disputes.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee was allotted 11,50,500 shares at Rs 15 per share under his employer's Employees Stock Purchase Scheme. Twenty-five per cent of the stock was subject to a lock-in of 12 months and the balance seventy-five per cent to a lock-in of 18 months, and the share certificates handed to him carried an endorsement to that effect. In the preceding financial year he had paid only Rs 10.50 per share against the issue price of Rs 15. The employer company, out of abundant caution, engaged M/s Ernst and Young to value the shares; the report, using market price, discounted cash flow and net asset value methods and giving weight to the lock-in, arrived at Rs 22.50 per share. The company informed the assessee that the certificates were endorsed non-transferable, treated the difference between what the employee paid and Rs 22.50 as a perquisite and deducted tax accordingly. In his return the assessee took the position that because the shares were not marketable during the lock-in, fair market value could not exceed the face value. The Assessing Officer took the quoted market price at the relevant time as Rs 49.45 per share, treated the difference of Rs 34.45 per share as a perquisite under section 17(2)(iiia), and made an addition of Rs 3,96,34,725. The Commissioner (Appeals) held that the quoted price could not be used for shares that could not be traded, but adopted Rs 22.50 from the employer's valuation report. Both sides appealed and the Tribunal, by order dated 27 April 2007, dismissed both appeals and upheld Rs 22.50. Both the assessee and the Commissioner appealed to the High Court, which admitted the appeals on 7 October 2009 on two questions.
The assessee's appeal ITA 281/2008 was allowed, the Commissioner's appeal ITA 770/2008 was dismissed, and the Tribunal's order of 27 April 2007 was set aside. The Court held that in the light of the restriction on the marketability and tradeability of the stock, fair market value could not be recognised as exceeding the face value of the shares, the determinative figure being Rs 15. The valuation report was at best a medium adopted by the employer to ascertain broadly its own withholding tax obligations and could not be taken into account for determining fair market value. The position advocated by the Revenue, that either the quoted price or the valuation report should be adopted, was untenable, because neither could apply to a share subject to a lock-in stipulation which could not be sold in the open market owing to a complete embargo on its sale. The first question, whether the Tribunal erred in confirming the addition of Rs 86,28,750 as the perquisite value of shares granted under the scheme, was answered in the affirmative and in favour of the assessee. The second question was answered in the negative, it being held that the face value alone would be conclusive for the purposes of taxation.
The Court worked from the statutory definition outward. Section 2(22B) defines fair market value as the price a capital asset would ordinarily fetch on sale in the open market on the relevant date, and only where that price is not ascertainable does one fall back on the rules. Since it was admitted that the shares could neither be traded nor sold during the lock-in, there was no price they could ordinarily fetch, and any figure attributed to them was at best notional. The Court then relied on the Supreme Court in CIT v Infosys Technologies Ltd, which concerned shares similarly locked in, where the custody of the shares remained with a trust, the exchange was notified of their non-transferability and the certificates were stamped accordingly. The Supreme Court had held that during the lock-in the shares had no realisable value, there was no cash inflow to the employee on the mere exercise of the option, the future market value could not be foreseen, and the benefit was therefore only a notional one of unascertainable value; a potential benefit could not be treated as income chargeable under the head salaries in the absence of a legislative mandate, and the Department had erred in ignoring the lock-in. The Court found the same principle resonating in Deputy Commissioner of Gift-Tax v BPL Ltd, where the Supreme Court held that promoter shares in a lock-in are not quoted shares, since they are not quoted on any recognised exchange with regularity on current transactions in the ordinary course of business, and that market quotations for freely transferable shares do not reflect the true price of shares that are barred from transfer; restrictions must be accounted for, not ignored, in valuation. To that the Court added the settled rule that the Act does not contemplate a tax on notional income, extracting the Supreme Court's discussion in CIT v Excel Industries Ltd on real as against hypothetical accrual, and the direction there that the Assessing Officer must be pragmatic and not pedantic. Applying all of this, both of the Revenue's candidates for value failed: the quoted price because there was no open market for these shares, and the employer's report because it was obtained for the employer's own withholding purposes and not as a determination of the employee's fair market value.
in light of the restriction with respect to marketability and tradeability of the stock in question, the FMV could not have been recognized to exceed the face value of the shares
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Handle my notice → Ask a CA on WhatsAppNo. The Delhi High Court held that where the shares carry a lock-in and cannot be traded or sold, the fair market value cannot be taken above the face value, so on these facts the determinative figure was Rs 15 per share. The quoted stock exchange price was irrelevant because the shares could not be sold in the open market. The valuation report the employer had obtained from its accountants, putting the value at Rs 22.50, was at best a means for the employer to gauge its withholding obligations and could not fix fair market value for the employee. The assessee's appeal was allowed and the Tribunal's order set aside. This was decided by the High Court (High Court of Delhi at New Delhi; Yashwant Varma J and Ravinder Dudeja J) and bears on section 17(2)(iiia), section 17(2), section 2(22B) of the Income Tax Act 1961. It is reported as ITA 281/2008 and ITA 770/2008, Delhi High Court. This is the working answer for any employee assessed on a stock benefit he could not realise. The Court refuses both of the values the Revenue offered, the market quotation and the employer's own expert valuation, and it does so on a principle wider than the section: fair market value under section 2(22B) is the price the asset would ordinarily fetch on sale in the open market, and there is no such market for a share stamped non-transferable. It ties that to the settled rule that the Act does not tax notional income, drawing on the Supreme Court in Infosys Technologies, where a potential benefit from locked-in shares was held not to be income of the employee, and on Excel Industries on real as against hypothetical accrual. It is also useful for the point that an employer's valuation report obtained for its own TDS comfort does not bind the employee, a fact pattern that recurs whenever a company deducts on a valuation the employee disputes. If it applies to you, the first step is this: Establish the restriction on the record: produce the scheme, the lock-in periods and the share certificates carrying the non-transferability endorsement, and any notification of it to the stock exchange.
The assessee was allotted 11,50,500 shares at Rs 15 per share under his employer's Employees Stock Purchase Scheme. Twenty-five per cent of the stock was subject to a lock-in of 12 months and the balance seventy-five per cent to a lock-in of 18 months, and the share certificates handed to him carried an endorsement to that effect. In the preceding financial year he had paid only Rs 10.50 per share against the issue price of Rs 15. The employer company, out of abundant caution, engaged M/s Ernst and Young to value the shares; the report, using market price, discounted cash flow and net asset value methods and giving weight to the lock-in, arrived at Rs 22.50 per share. The company informed the assessee that the certificates were endorsed non-transferable, treated the difference between what the employee paid and Rs 22.50 as a perquisite and deducted tax accordingly. In his return the assessee took the position that because the shares were not marketable during the lock-in, fair market value could not exceed the face value. The Assessing Officer took the quoted market price at the relevant time as Rs 49.45 per share, treated the difference of Rs 34.45 per share as a perquisite under section 17(2)(iiia), and made an addition of Rs 3,96,34,725. The Commissioner (Appeals) held that the quoted price could not be used for shares that could not be traded, but adopted Rs 22.50 from the employer's valuation report. Both sides appealed and the Tribunal, by order dated 27 April 2007, dismissed both appeals and upheld Rs 22.50. Both the assessee and the Commissioner appealed to the High Court, which admitted the appeals on 7 October 2009 on two questions. The matter was decided on 2024-08-14 by the High Court (High Court of Delhi at New Delhi; Yashwant Varma J and Ravinder Dudeja J). On those facts the High Court held as follows. The assessee's appeal ITA 281/2008 was allowed, the Commissioner's appeal ITA 770/2008 was dismissed, and the Tribunal's order of 27 April 2007 was set aside. The Court held that in the light of the restriction on the marketability and tradeability of the stock, fair market value could not be recognised as exceeding the face value of the shares, the determinative figure being Rs 15. The valuation report was at best a medium adopted by the employer to ascertain broadly its own withholding tax obligations and could not be taken into account for determining fair market value. The position advocated by the Revenue, that either the quoted price or the valuation report should be adopted, was untenable, because neither could apply to a share subject to a lock-in stipulation which could not be sold in the open market owing to a complete embargo on its sale. The first question, whether the Tribunal erred in confirming the addition of Rs 86,28,750 as the perquisite value of shares granted under the scheme, was answered in the affirmative and in favour of the assessee. The second question was answered in the negative, it being held that the face value alone would be conclusive for the purposes of taxation.
The Court worked from the statutory definition outward. Section 2(22B) defines fair market value as the price a capital asset would ordinarily fetch on sale in the open market on the relevant date, and only where that price is not ascertainable does one fall back on the rules. Since it was admitted that the shares could neither be traded nor sold during the lock-in, there was no price they could ordinarily fetch, and any figure attributed to them was at best notional. The Court then relied on the Supreme Court in CIT v Infosys Technologies Ltd, which concerned shares similarly locked in, where the custody of the shares remained with a trust, the exchange was notified of their non-transferability and the certificates were stamped accordingly. The Supreme Court had held that during the lock-in the shares had no realisable value, there was no cash inflow to the employee on the mere exercise of the option, the future market value could not be foreseen, and the benefit was therefore only a notional one of unascertainable value; a potential benefit could not be treated as income chargeable under the head salaries in the absence of a legislative mandate, and the Department had erred in ignoring the lock-in. The Court found the same principle resonating in Deputy Commissioner of Gift-Tax v BPL Ltd, where the Supreme Court held that promoter shares in a lock-in are not quoted shares, since they are not quoted on any recognised exchange with regularity on current transactions in the ordinary course of business, and that market quotations for freely transferable shares do not reflect the true price of shares that are barred from transfer; restrictions must be accounted for, not ignored, in valuation. To that the Court added the settled rule that the Act does not contemplate a tax on notional income, extracting the Supreme Court's discussion in CIT v Excel Industries Ltd on real as against hypothetical accrual, and the direction there that the Assessing Officer must be pragmatic and not pedantic. Applying all of this, both of the Revenue's candidates for value failed: the quoted price because there was no open market for these shares, and the employer's report because it was obtained for the employer's own withholding purposes and not as a determination of the employee's fair market value. In the words reproduced by the source cited on this page: "in light of the restriction with respect to marketability and tradeability of the stock in question, the FMV could not have been recognized to exceed the face value of the shares"
It was decided by the High Court on 2024-08-14 and is reported as ITA 281/2008 and ITA 770/2008, Delhi High Court. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 17(2)(iiia), section 17(2), section 2(22B), 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 assessee's appeal ITA 281/2008 was allowed, the Commissioner's appeal ITA 770/2008 was dismissed, and the Tribunal's order of 27 April 2007 was set aside. The Court held that in the light of the restriction on the marketability and tradeability of the stock, fair market value could not be recognised as exceeding the face value of the shares, the determinative figure being Rs 15. The valuation report was at best a medium adopted by the employer to ascertain broadly its own withholding tax obligations and could not be taken into account for determining fair market value. The position advocated by the Revenue, that either the quoted price or the valuation report should be adopted, was untenable, because neither could apply to a share subject to a lock-in stipulation which could not be sold in the open market owing to a complete embargo on its sale. The first question, whether the Tribunal erred in confirming the addition of Rs 86,28,750 as the perquisite value of shares granted under the scheme, was answered in the affirmative and in favour of the assessee. The second question was answered in the negative, it being held that the face value alone would be conclusive for the purposes of taxation. It arises in Salary & Perquisites matters, on section 17(2)(iiia), section 17(2), section 2(22B) of the Income Tax Act 1961, and was decided by High Court of Delhi at New Delhi; Yashwant Varma J and Ravinder Dudeja J. 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. Argue from section 2(22B) that fair market value presupposes a sale in the open market on the relevant date, and that a share barred from sale has no such price. Do not concede the employer's valuation report; show, as here, that it was obtained to fix the company's withholding liability and was never a determination of the employee's fair market value. Check which perquisite provision applied in your year before relying on this, because the clause construed here, section 17(2)(iiia), was on the Supreme Court's own account deleted with effect from 1 April 2001.
Still good law. A Division Bench judgment of 14 August 2024 applying the Supreme Court in CIT v Infosys Technologies Ltd, (2008) 2 SCC 272, Deputy Commissioner of Gift-Tax v BPL Ltd, (2022) 448 ITR 739, and CIT v Excel Industries Ltd, (2014) 13 SCC 459. The source page records no case citing it. Its direct reach is limited by the provision it construes: the Supreme Court passage extracted in the judgment records that clause (iiia) of section 17(2) was inserted with effect from 1 April 2000 and deleted with effect from 1 April 2001. How the present provisions for taxing stock-based perquisites treat a lock-in was not examined in the judgment and has not been checked in this session. Whether the Revenue has appealed was also not checked. 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 judgment does not state the assessment year in issue, and the only date fixing the period is the Tribunal's order of 27 April 2007. It carries three sets of figures that do not reconcile on the face of the record: the market price is given as Rs 49.45 in the Court's narration and Rs 49.95 in the Tribunal's extract; the Assessing Officer's addition is recorded as Rs 3,96,34,725 while the first question framed speaks of an addition of Rs 86,28,750; and the shares are described as allotted at Rs 15 with Rs 10.50 paid in the previous financial year, so the Court's equation of face value with Rs 15 is not separately explained. The judgment does not decide what happens to the tax the employer had already deducted on the Rs 22.50 basis, nor whether any refund follows. It does not address the position under the provisions that replaced clause (iiia), so a reader in a current year cannot apply it directly without checking his own year's charging provision. The batch line gave the section as 17(2); the clause actually in issue is 17(2)(iiia), and section 2(22B) supplies the definition relied on. The Tribunal's order of 27 April 2007 and the valuation report itself were not read in this session. 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 assessee's appeal ITA 281/2008 was allowed, the Commissioner's appeal ITA 770/2008 was dismissed, and the Tribunal's order of 27 April 2007 was set aside. The Court held that in the light of the restriction on the marketability and tradeability of the stock, fair market value could not be recognised as exceeding the face value of the shares, the determinative figure being Rs 15. The valuation report was at best a medium adopted by the employer to ascertain broadly its own withholding tax obligations and could not be taken into account for determining fair market value. The position advocated by the Revenue, that either the quoted price or the valuation report should be adopted, was untenable, because neither could apply to a share subject to a lock-in stipulation which could not be sold in the open market owing to a complete embargo on its sale. The first question, whether the Tribunal erred in confirming the addition of Rs 86,28,750 as the perquisite value of shares granted under the scheme, was answered in the affirmative and in favour of the assessee. The second question was answered in the negative, it being held that the face value alone would be conclusive for the purposes of taxation.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
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