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?
The merchant banker's figure — and this is stage one, the perquisite on exercise under s.17(2)(vi). The Tribunal held that on a plain reading of Rule 3(8) the fair market value of an unlisted company's shares is the value determined by a merchant banker, so an actual arm's length sale of the same company's shares at Rs 850 during the same year gave the Revenue no basis for recomputing the perquisite. The Revenue's appeal against deletion of a short-deduction demand of Rs 2,62,34,000 was dismissed.
Decided by the ITAT (Shri Om Prakash Kant, Accountant Member and Shri Sandeep Singh Karhail, Judicial Member (Income Tax Appellate Tribunal, Mumbai Bench 'G')) on 2022-09-16, reported as ITA No. 12/MUM/2022, assessment year 2018-19 (ITAT Mumbai). It bears on section 192, section 17(2)(vi), section Rule 3(8), section 201(1), section 201(1A) of the Income Tax Act 1961, in TDS Defaults, Salary & Perquisites, Assessment & Scrutiny and Evidence & Burden of Proof matters.
This is the strongest form of the Revenue's argument — not a valuation done for some other regulatory purpose, but a real sale between unrelated parties at more than four times the merchant banker's value — and it still failed. The Tribunal's reasons were narrow and practical: Rule 3(8) specifies who determines the value and the Revenue had cited no decision supporting substitution, so there was no basis for adopting the transaction price. Note the boundary the Tribunal itself drew. It recorded that the Revenue had NOWHERE CHALLENGED the correctness of the merchant banker's valuation in its grounds; the protection is against substitution, not against a properly framed attack on the report. The Tribunal also said something a taxpayer should not lean on: the assessee had shown that no addition had been made in the employee director's own assessment on the same perquisite, but the Tribunal held that any omission by the Assessing Officer in the recipient's case gives the deductor no right to take the benefit of that omission. The case also illustrates the sequence in an unlisted company: warrants granted in 2010 at Rs 155, exercised in the assessment year in question, perquisite computed as the merchant banker's Rs 194.15 less the Rs 155 actually paid — a difference of Rs 39.15 a share on 40,000 shares, Rs 15,66,000 in all.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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On 9 February 2010 Sula Vineyards Pvt. Ltd. issued 40,000 warrants to Shri Rajeev Samant, its Managing Director, carrying an option to convert into equity shares at Rs 155 per share. He exercised the option in the assessment year under consideration and the warrants were converted into equity shares. The company's shares were not listed on a recognised stock exchange. Applying s.17(2)(vi) and Rule 3(8), the company adopted the fair market value of Rs 194.15 per share determined by a merchant banker and computed the perquisite at Rs 15,66,000, on which it deducted tax. During the same year shares of the company were sold in an independent transaction between unrelated parties at Rs 850 per share. The Assessing Officer took Rs 850 as the fair market value, computed the perquisite at Rs 2,78,00,000 and treated the company as having failed to deduct tax on the balance of Rs 2,62,34,000, raising liability under s.201(1) with interest under s.201(1A). The Commissioner (Appeals) deleted the liability, following his own finding for assessment year 2012-13 in a case where the merchant banker's value of Rs 104.54 was below the issue price of Rs 155 so that no perquisite arose at all. The Revenue appealed. Before the Tribunal the assessee also produced the assessment order in Shri Rajeev Samant's own case, in which no addition had been made on the perquisite.
The Revenue's appeal was dismissed. On a plain reading of the rules the fair market value of the specified shares was to be taken as determined by the merchant banker; there was no basis for adopting a fair market value based on an independent sale of the company's shares between unrelated parties; and no decision supporting the Revenue's position had been cited (para 6.4). The Tribunal found no error in the Commissioner (Appeals)'s order and upheld it (para 6.5), adding that any omission by the Assessing Officer in the case of the recipient employee could not give the assessee a right to take the benefit of that omission (para 6.4).
The Tribunal identified the issue as whether the fair market value of the company's equity shares on the date the employee exercised his option should be the merchant banker's valuation or a value drawn from real-time sales of the company's shares (para 6.2). It recorded that the assessee had followed the procedure laid down in Rule 3(8), under which the fair market value of the shares of an unlisted company is the value determined by a merchant banker, the rule also defining who a merchant banker is, and set out the rule as extracted by the Assessing Officer (para 6.3). On a plain reading of the rule it was evident that the fair market value was to be taken as determined by the merchant banker; the Departmental Representative had cited no decision supporting the adoption of a transaction price instead, so there was no basis for the Revenue's approach; and the Revenue's grounds nowhere challenged the correctness of the merchant banker's valuation (para 6.4). The Tribunal noted the assessee's point that no addition had been made in the employee director's own assessment but held that an omission in the recipient's case confers no right on the deductor (para 6.4). It therefore found no error in the appellate order (para 6.5).
Once under the Rules it has been clearly specified that fair market value determined by the merchant banker has to be taken as the value of the shares and the assessee followed those rules and computed quantum of perquisite and consequent liability of TDS.
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Handle my notice → Ask a CA on WhatsAppThe merchant banker's figure — and this is stage one, the perquisite on exercise under s.17(2)(vi). The Tribunal held that on a plain reading of Rule 3(8) the fair market value of an unlisted company's shares is the value determined by a merchant banker, so an actual arm's length sale of the same company's shares at Rs 850 during the same year gave the Revenue no basis for recomputing the perquisite. The Revenue's appeal against deletion of a short-deduction demand of Rs 2,62,34,000 was dismissed. This was decided by the ITAT (Shri Om Prakash Kant, Accountant Member and Shri Sandeep Singh Karhail, Judicial Member (Income Tax Appellate Tribunal, Mumbai Bench 'G')) and bears on section 192, section 17(2)(vi), section Rule 3(8), section 201(1), section 201(1A) of the Income Tax Act 1961. It is reported as ITA No. 12/MUM/2022, assessment year 2018-19 (ITAT Mumbai). This is the strongest form of the Revenue's argument — not a valuation done for some other regulatory purpose, but a real sale between unrelated parties at more than four times the merchant banker's value — and it still failed. The Tribunal's reasons were narrow and practical: Rule 3(8) specifies who determines the value and the Revenue had cited no decision supporting substitution, so there was no basis for adopting the transaction price. Note the boundary the Tribunal itself drew. It recorded that the Revenue had NOWHERE CHALLENGED the correctness of the merchant banker's valuation in its grounds; the protection is against substitution, not against a properly framed attack on the report. The Tribunal also said something a taxpayer should not lean on: the assessee had shown that no addition had been made in the employee director's own assessment on the same perquisite, but the Tribunal held that any omission by the Assessing Officer in the recipient's case gives the deductor no right to take the benefit of that omission. The case also illustrates the sequence in an unlisted company: warrants granted in 2010 at Rs 155, exercised in the assessment year in question, perquisite computed as the merchant banker's Rs 194.15 less the Rs 155 actually paid — a difference of Rs 39.15 a share on 40,000 shares, Rs 15,66,000 in all. If it applies to you, the first step is this: Get the merchant banker's report on to the record and check it satisfies Rule 3(8)(iv): a category I merchant banker registered with SEBI, and a valuation date within the 180-day window ending on the exercise date.
On 9 February 2010 Sula Vineyards Pvt. Ltd. issued 40,000 warrants to Shri Rajeev Samant, its Managing Director, carrying an option to convert into equity shares at Rs 155 per share. He exercised the option in the assessment year under consideration and the warrants were converted into equity shares. The company's shares were not listed on a recognised stock exchange. Applying s.17(2)(vi) and Rule 3(8), the company adopted the fair market value of Rs 194.15 per share determined by a merchant banker and computed the perquisite at Rs 15,66,000, on which it deducted tax. During the same year shares of the company were sold in an independent transaction between unrelated parties at Rs 850 per share. The Assessing Officer took Rs 850 as the fair market value, computed the perquisite at Rs 2,78,00,000 and treated the company as having failed to deduct tax on the balance of Rs 2,62,34,000, raising liability under s.201(1) with interest under s.201(1A). The Commissioner (Appeals) deleted the liability, following his own finding for assessment year 2012-13 in a case where the merchant banker's value of Rs 104.54 was below the issue price of Rs 155 so that no perquisite arose at all. The Revenue appealed. Before the Tribunal the assessee also produced the assessment order in Shri Rajeev Samant's own case, in which no addition had been made on the perquisite. The matter was decided on 2022-09-16 by the ITAT (Shri Om Prakash Kant, Accountant Member and Shri Sandeep Singh Karhail, Judicial Member (Income Tax Appellate Tribunal, Mumbai Bench 'G')). On those facts the ITAT held as follows. The Revenue's appeal was dismissed. On a plain reading of the rules the fair market value of the specified shares was to be taken as determined by the merchant banker; there was no basis for adopting a fair market value based on an independent sale of the company's shares between unrelated parties; and no decision supporting the Revenue's position had been cited (para 6.4). The Tribunal found no error in the Commissioner (Appeals)'s order and upheld it (para 6.5), adding that any omission by the Assessing Officer in the case of the recipient employee could not give the assessee a right to take the benefit of that omission (para 6.4).
The Tribunal identified the issue as whether the fair market value of the company's equity shares on the date the employee exercised his option should be the merchant banker's valuation or a value drawn from real-time sales of the company's shares (para 6.2). It recorded that the assessee had followed the procedure laid down in Rule 3(8), under which the fair market value of the shares of an unlisted company is the value determined by a merchant banker, the rule also defining who a merchant banker is, and set out the rule as extracted by the Assessing Officer (para 6.3). On a plain reading of the rule it was evident that the fair market value was to be taken as determined by the merchant banker; the Departmental Representative had cited no decision supporting the adoption of a transaction price instead, so there was no basis for the Revenue's approach; and the Revenue's grounds nowhere challenged the correctness of the merchant banker's valuation (para 6.4). The Tribunal noted the assessee's point that no addition had been made in the employee director's own assessment but held that an omission in the recipient's case confers no right on the deductor (para 6.4). It therefore found no error in the appellate order (para 6.5). In the words reproduced by the source cited on this page: "Once under the Rules it has been clearly specified that fair market value determined by the merchant banker has to be taken as the value of the shares and the assessee followed those rules and computed quantum of perquisite and consequent liability of TDS."
It was decided by the ITAT on 2022-09-16 and is reported as ITA No. 12/MUM/2022, assessment year 2018-19 (ITAT Mumbai). 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 192, section 17(2)(vi), section Rule 3(8), section 201(1), section 201(1A), 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. On a plain reading of the rules the fair market value of the specified shares was to be taken as determined by the merchant banker; there was no basis for adopting a fair market value based on an independent sale of the company's shares between unrelated parties; and no decision supporting the Revenue's position had been cited (para 6.4). The Tribunal found no error in the Commissioner (Appeals)'s order and upheld it (para 6.5), adding that any omission by the Assessing Officer in the case of the recipient employee could not give the assessee a right to take the benefit of that omission (para 6.4). It arises in TDS Defaults, Salary & Perquisites, Assessment & Scrutiny and Evidence & Burden of Proof matters, on section 192, section 17(2)(vi), section Rule 3(8), section 201(1), section 201(1A) of the Income Tax Act 1961, and was decided by Shri Om Prakash Kant, Accountant Member and Shri Sandeep Singh Karhail, Judicial Member (Income Tax Appellate Tribunal, Mumbai Bench 'G'). 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. Read the Revenue's grounds of appeal closely. If they do not in terms challenge the correctness of the merchant banker's valuation, say so — that omission decided this case. Where the officer points to an actual sale of the company's shares, insist that Rule 3(8) prescribes an exclusive method and ask him to cite authority for substituting a transaction price. The Departmental Representative here could cite none. Work the arithmetic through openly: fair market value per share less the amount actually paid, multiplied by the number of shares. Show it in the reply so the officer's alternative figure has to be defended on the same footing. Do not argue that no addition in the employee's own assessment protects the employer. This Tribunal expressly said an omission in the recipient's case gives the deductor no benefit.
Searched for later treatment; none was found. That is not the same as a source affirming it. The citator returns nothing. A name search returns 33 documents, all of them trademark, VAT or commercial litigation involving the company in the Bombay, Delhi and Karnataka High Courts; nothing after September 2022 touches ESOP perquisite, section 192 or Rule 3(8), and no section 260A appeal was traced. The holding that for unlisted shares the merchant banker's valuation under Rule 3(8) governs the perquisite, and is not displaced by an actual arm's-length sale at a much higher price, has neither been followed nor questioned. 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 twelve numbered paragraph units (1, 2, 3, 4, 5, 6, 6.1, 6.2, 6.3, 6.4, 6.5, 7) and ends with the disposal at paragraph 7. Paragraph 6.1 reproduces the Commissioner (Appeals)'s finding for assessment year 2012-13, and paragraph 6.3 reproduces the Assessing Officer's extract of Rule 3(8); those are quoted texts, not the Tribunal speaking, and I have kept them apart. THREE DEFECTS IN THE REPORT. First, the Commissioner (Appeals)'s finding reproduced at paragraph 3 gives the quantum in dispute as Rs 78,70,200; paragraph 4 records in terms that this was inadvertent and that the correct amount in dispute for the year under consideration is Rs 2,62,34,000. Second, the same reproduced passage refers to "the Appellate company, i.e. Reliance Capital", which cannot be right on these facts and appears to be a transcription error in the appellate order; the company throughout is Sula Vineyards Pvt. Ltd. Third, the merchant banker's value is given as Rs 194.1 in the reproduced passage and as Rs 194.15 in the Tribunal's own paragraphs 6 and 6.4; Rs 194.15 is the figure that reconciles with the perquisite of Rs 15,66,000 on 40,000 shares at an exercise price of Rs 155, and is the figure I have used. Paragraph 6 also refers to disallowance under s.40(a)(ia), which sits oddly in an appeal against an order under ss.201(1) and 201(1A); the operative dispute is the short deduction under s.192. The extract of Rule 3(8) at paragraph 6.3 is the Assessing Officer's and is defective — it prints clause (ii) as an opening line with no operative words — so it should not be used as the text of the rule. 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. On a plain reading of the rules the fair market value of the specified shares was to be taken as determined by the merchant banker; there was no basis for adopting a fair market value based on an independent sale of the company's shares between unrelated parties; and no decision supporting the Revenue's position had been cited (para 6.4). The Tribunal found no error in the Commissioner (Appeals)'s order and upheld it (para 6.5), adding that any omission by the Assessing Officer in the case of the recipient employee could not give the assessee a right to take the benefit of that omission (para 6.4).
TaxSphere, “ACIT (TDS) v Sula Vineyards Pvt Ltd — for unlisted shares the Rule 3(8) merchant banker value governs the ESOP perquisite, and a genuine sale at a much higher price to an unrelated party does not displace it”, https://taxnotice.vittsphere.com/caselaw/case/sula-vineyards-esop-perquisite-merchant-banker-fmv-not-a-real-time-sale-price/ (validity last checked 2026-09-09)
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