Rule 3

Rule 3 — the law in short

What the courts have decided on section Rule 3, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

All India Central Bank Officers Federation v Union of India High CourtHelps departmentValidity unconfirmed
My client is a bank officer taxed on a deemed concession in rent for the bank's quarters even though the market rent is lower than the percentage of salary applied. Is the deeming provision open to challenge?

Not on the grounds run so far. A Division Bench of the Bombay High Court dismissed a batch of writ petitions by bank officers' associations challenging Explanations 1 to 4 below s.17(2) inserted by the Finance Act 2007 with limited retrospective effect. It held the legal fiction is not an impermissible legislative override of Arun Kumar v Union of India, that the retrospectivity is valid, and that classifying by city population and measuring the concession as a percentage of salary does not offend Article 14.
Statutory position — Rule 3(8) and Rule 3(9): how the fair market value of an ESOP or sweat equity share is fixed on the date of exercise, including the merchant banker's specified date CBDT Circulars & InstructionsCuts both waysValidity unconfirmed
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?

This is stage one — the fair market value that fixes the perquisite under s.17(2)(vi) on exercise. For an equity share LISTED on a recognised stock exchange, Rule 3(8)(ii) takes the AVERAGE OF THE OPENING PRICE AND THE CLOSING PRICE of the share on the date of exercise on that exchange; where it is listed on more than one exchange, the exchange with the highest volume of trading in the share; and where there is no trading in the share at all on the date of exercise, the closing price on the recognised stock exchange on the date closest to and immediately preceding the exercise date. For an equity share NOT listed, Rule 3(8)(iii) takes such value as is determined by a merchant banker on the "specified date", and Rule 3(9) applies the same merchant-banker method to a specified security that is not an equity share. The "specified date" is the date of exercise, or any earlier date NOT MORE THAN 180 DAYS BEFORE THE DATE OF EXERCISE — this is the point most often got wrong.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.

Rule 3 — 2 entries

Worked examples

Notice situations in which section Rule 3 does the work, taken from the first line to the last. Each step carries the authority that licenses it.

Tax deducted on stock that cannot be sold, for money that never arrived My employer has deducted tax on my stock options at exercise, on a value I never received in cash, the shares cannot be sold, and part of what I got has since been bought back. What do I do now? 8 steps · 15 authorities · s.17(2)(vi), s.192, s.192(1C), s.197

Explained in this library

What rule 3 does, in plain English, before you read what the courts made of it.

ESOPs: the year, the value, and the start-up's right to defer the deduction

When is my ESOP taxed, on what value, and can the company put off deducting the tax?

Salary: HRA, LTA and how perquisites are valued

How much of my HRA and LTA is actually exempt, and how is my company flat valued?

Shares you are not allowed to sell: whether the restriction comes off the perquisite

The shares I received on exercise carry a lock-in and a right of first refusal. Does the restriction reduce the perquisite I am taxed on?

The figure in your Form No. 12BA is a rule figure, and the rule is short

My employer valued my stock options on a valuer's report. What does the valuation rule actually require, and how do I test the number?