2025 (4) TMI 531 - AT - Income Tax

Revenue appeal dismissed; merchant banker share premium valuation upheld, differential not a perquisite under s.17(2)(vi)

ITAT dismissed the Revenue's appeal, holding that the director's shares issued at the merchant banker-determined premium (Rs.12,628.20 per share) stood ... Income earned as Perquisites u/s 17 (2) - company shares allocated on discounted/subsidised rates - HELD THAT:- Assessee admittedly happens to be one of the director(s) of the company herein 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. 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. 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 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 would not apply as both these provisions deal with altogether different situations. There is no specific default noticed by AO in the assessee’s merchant bankers’ valuation and therefore, the revenue’s endeavour to revive the impugned addition based on discount free cash flow method would not apply in the given facts. We thus reject the Revenue’s instant sole substantive grievance and its main appeal. ISSUES PRESENTED AND CONSIDERED 1. Whether the value of perquisite in the form of sweat equity/specifed security allotted to an employee/director is to be determined by the fair market value (FMV) ascertained by a SEBI-registered Category-I merchant banker in accordance with Rule 3(8)(iii) of the Income-tax Rules (and related sub-rules to s.17(2)(vi)), or whether a subsequently observed higher issue price to a non-resident investor (valued by DCF under RBI/FDI pricing guidelines) can be adopted to enhance the perquisite value in the hands of the employee. 2. Whether the appellate authority erred in admitting or relying on valuation evidence (merchant banker's report) without giving opportunity to the Assessing Officer (AO) - i.e., whether additional evidence was improperly accepted by the CIT(A)/NFAC. 3. (Considered but not pressed) Whether reopening of assessment under sections 147/148 was invalid - cross-objection withdrawn/unpressed before the Tribunal. ISSUE-WISE DETAILED ANALYSIS Issue 1: Proper valuation method for perquisite under s.17(2)(vi) - merchant banker valuation v. later DCF valuation for issue to non-resident Legal framework: Section 17(2)(vi) taxes the value of specified securities or sweat equity shares allotted/transferred by the employer to the employee free of cost or at concessional rate; the value is to be the fair market value (FMV) on the date the option is exercised as reduced by any amount actually paid or recovered. 'Fair market value' is to be determined by the method prescribed in rules. Rule 3(8) (sub-rules (ii) and (iii)) prescribes that for unlisted shares FMV on the date of exercise shall be the value determined by a merchant banker on the specified date. Separately, RBI/FDI Master Circular pricing guidelines prescribe that fresh issues to non-residents should be at not less than fair value determined by a SEBI-registered merchant banker or a chartered accountant using Discounted Free Cash Flow (DCF) in the unlisted context for purposes of foreign investment pricing compliance. Precedent treatment: The Tribunal's reasoning does not rely on any precedent authority to distinguish or overturn; it applies statutory provisions and rules to the facts. No prior judicial overruling or contrary binding authority is invoked in the decision. Interpretation and reasoning: The Tribunal accepted the CIT(A)/NFAC's analysis that the perquisite valuation obligation under s.17(2)(vi) is triggered on the date of exercise of the option and must be determined in accordance with Rule 3(8). The employer obtained a merchant banker valuation and treated the perquisite at the FMV so determined (Net Asset Value basis) for the date of allotment to the employee. A month later the company issued shares to a foreign investor at a much higher price determined under DCF for FDI pricing compliance. The Tribunal reasoned that the RBI/FDI pricing methodology applies to the discrete regulatory context of pricing fresh issues to non-residents and is a separate statutory/regulatory regime addressing crossing-border investment pricing; it does not supplant the statutory Rule 3(8) method for computing FMV for the purpose of s.17(2)(vi) perquisites when the relevant date is the exercise date for the employee allotment. The Tribunal further observed there was no material defect identified in the merchant banker's valuation used by the employer, and that the AO had not pointed to any specific non-compliance or infirmity in that valuation report to justify substituting a later market/issue price for the purpose of perquisite taxation. Ratio vs. Obiter: Ratio - The determination of perquisite value under s.17(2)(vi) for unlisted shares must follow Rule 3(8) (merchant banker valuation on the date of exercise) and cannot be substituted by a later unrelated issue price fixed for FDI/commercial pricing to a non-resident under RBI/FDI pricing guidelines. Obiter - Observations that valuation methods (NAV v. DCF) differ and that RBI guidelines address a different transactional context; these are explanatory but support the binding ratio. Conclusions: The Tribunal concluded that the merchant banker valuation applied at the date of exercise was appropriate and that the addition made by the AO on the basis of the later higher issue price to the non-resident was unwarranted. The perquisite addition was correctly deleted by the CIT(A)/NFAC and the Revenue's appeal on this substantive point was dismissed. Issue 2: Admission of additional evidence by CIT(A) without opportunity to AO Legal framework: Principles of natural justice require opportunity to be heard; appellate authorities should ordinarily provide opportunity to the AO to comment where new evidence is admitted and relied upon such that the AO's right to reply may be affected. The statutory appellate process contemplates exchange of records and opportunity in appropriate situations. Precedent treatment: The Tribunal does not cite or apply specific precedent on admission of additional evidence; rather it records the Revenue's ground alleging lack of opportunity but proceeds on the merits of valuation, implicitly treating evidential admission as non-determinative where the valuation method conformed to statutory rules and no prejudice from non-opportunity was shown. Interpretation and reasoning: The Tribunal did not make a separate formal finding that the CIT(A) correctly or incorrectly admitted additional evidence without giving opportunity to the AO; rather, it focused on the substantive correctness of the merchant banker valuation and the inapplicability of the RBI/FDI pricing to the perquisite valuation. The Tribunal noted that the merchant banker's report was not disputed by the AO in assessment and that Form 16/Form 12BA reflected the employer's valuation and TDS treatment, indicating no procedural surprise affecting AO's position. No specific prejudice to Revenue from alleged non-opportunity was demonstrated such as fresh documents materially altering the assessment beyond what the AO had before him. Ratio vs. Obiter: Obiter - The Tribunal's handling of this ground is ancillary to the principal ratio; the decision to dismiss the appeal rests on the substantive valuation rule and the absence of defect in the merchant banker report rather than a conclusive jurisprudential determination on evidentiary admission procedures. Conclusions: The Tribunal did not sustain the Revenue's contention that admission of additional evidence by the CIT(A) without giving opportunity to the AO vitiated the appellate decision; on the facts, the valuation evidence conformed to statutory prescriptions, was not shown to be defective or prejudicial to the Revenue, and therefore the deletion of the addition was left undisturbed. Issue 3: Validity of reopening under sections 147/148 (cross-objection) - not pressed Legal framework and reasoning: The issue of validity of reopening under sections 147/148 was raised in the assessee's cross-objection but was expressly not pressed before the Tribunal once the substantive valuation issue was decided in favour of the assessee. The Tribunal recorded that the cross-objection was not pressed and treated it as dismissed on that basis. Ratio vs. Obiter: Obiter - No adjudication on the merits of reopening validity; the Tribunal's dismissal reflects procedural abandonment rather than a judicial determination of the reopening's correctness. Conclusions: The cross-objection challenging reopening under sections 147/148 was dismissed as not pressed. Overall Disposition The Tribunal upheld the appellate authority's deletion of the perquisite addition under s.17(2)(vi) based on merchant banker valuation in accordance with Rule 3(8) and rejected the Revenue's attempt to import a later DCF-based FDI pricing valuation for a non-resident allotment as the basis for enhancing the employee's perquisite value. The Revenue's appeal was dismissed; the assessee's challenge to reopening was not pressed and dismissed accordingly.