TaxTMI 
TaxTMI 
2024 (8) TMI 939
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....exercising such option and taxing it for the difference in market price had cost paid by the assessee to its employer?" 2. The question itself stands posited in respect of the allotment of shares in favour of the assessee under an Employees Stock Purchase Scheme [ESPS] and which was subject to a lock-in period. Admittedly, under the ESPS, the assessee had been allotted 11,50,500 shares @ INR 15/- per share. Twenty five per cent of that stock was subject to a lock-in period of 12 months while the balance seventy five stood locked-in for 18 months. The share certificates which were handed over to the assessee also carried an appropriate endorsement to the aforesaid effect. 3. It is also undisputed that during the previous Financial Year, the assessee had paid only INR 10.50/- per share against the issue price of INR 15. It is also its case that the employer company out of abundant caution enlisted the services of M/s Ernst and Young and obtained a Valuation Report with respect to the shares in question. The company is also stated to have informed the appellant that the share certificates stood effaced with an endorsement of non-transferability. In terms of the Valuation Report whic....
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....held that it can be interpreted that there exists no market for the shares under lock-in. In other words, no market value can be assigned to such shares. The market value of the shares for the employee is, therefore, defined and remains the price paid by him to be allowed in the case of Wipro Ltd. v. DCIT reported in 80 TTJ 106 holding that where the employee is not in a position to sell the shares during the stipulated time, he cannot meet the conditions of the stock exchange and therefore, it is incorrect to equate the value of the shares so received to the quoted price. 2.7 It is, however, seen that the employer, in order to compute the income under the head "Salary", has obtained a valuation report from experts, M/s Ernst and Young, Chartered Accountant. In their valuation report, the valuer has approached the issue of valuation under different possible methods of valuation. They had determined the value of the equity share allotted by the employer at Rs.22.50 per equity share. The employer had accordingly acted on such determination by an expert and deducted appropriate taxes after treating the difference between the amount by the employee and the value thus determined as a ....
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....t price, discounted cash flow, net asset value method, and thereafter giving proper weightages for lock in period, the value of shares was arrived at s.22.50. The assessee has not pointed out any fault in the method of arriving at the fair market value of share by M/s Ernst & Young. We, therefore do not find any infirmity in the order of Ld. CIT (A) for taking the fair market value share of Rs.22.50 as arrived at by M/s Ernst I & Young and which has also been taken out by the employer company, basing on which tax at source has also been deducted from the income of the assessee. The case laws cited by Id. AR in ITAT Bangalore Bench in Infosys Technologies Ltd., which was confirmed by the Hon'ble Karnataka High Court, basically deals with the provisions of treatment of assessee in default under provisions of section 201 (1) and 201 (1A). In the aforesaid case the lock in period was comparatively longer one and after taking into consideration all the facts and circumstances of the case the Tribunal came to the conclusion that assessee company cannot be said to be in default under section 201 (1) & 201 (1A). However, in the instant case before us the lock in period is very short an....
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.... in seeking to impose a tax based on the prevailing market price or for that matter on the basis of the Valuation Report submitted by M/s Ernst and Young. 9. Insofar as the Valuation Report is concerned, it was Mr. Vohra's submission that the same had been obtained by the employer of the assessee only out of abundant caution and in order to ascertain its liability with respect to withholding tax obligations. According to learned senior counsel, the Valuation Report thus could not have possibly constituted or be liable to be viewed as determinative of FMV. 10. According to Mr. Vohra, the question which stands posited for our consideration is no longer res integra and stands duly settled by virtue of the judgment of the Karnataka High Court in Commissioner of Income Tax v. Infosys Technologies Ltd. (2007)159 Taxman 440 and which ultimately came to be affirmed by the Supreme Court in Commissioner of Income Tax, Bangalore v. Infosys Technologies Ltd (2008) 2 SCC 272. We note that the Supreme Court, while affirming the view expressed by the Karnataka High Court had observed as follows:- "11. Warrant is a right without obligation to buy. Therefore, perquisite cannot be said to accrue....
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....61 Act constituted an integrated code. The mechanism introduced for the first time under the Finance Act, 1999 by which 'cost' was explained in the manner stated above was not there prior to 1.4.2000. The new mechanism stood introduced w.e.f. 1.4.2000 only. With the above definition of the word 'cost' introduced vide clause (iiia), the value of option became ascertainable. There is nothing in the Memorandum to the Finance Act, 1999 to say that this new mechanism would operate retrospectively. Further, a mechanism which explains 'cost' in the manner indicated above cannot be read retrospectively unless the Legislature expressly says so. It was not capable of being implemented retrospectively. Till 1.4.2000, in the absence of the definition of the word 'cost', value of the option was not ascertainable. In our view, clause (iiia) is not clarificatory. Moreover, the meaning of the words 'specified securities' in section (iiia) was defined or explained for the first time vide Finance Act, 1999 w.e.f. 1.4.2000. Moreover, the words allotted or transferred in clause (iiia) made things clear only after 1.4.2000. Lastly, it may be pointed out that even clause (iiia) has been subsequently del....
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....problems, which were genuine problems in cases where the employees stood dismissed, removed or in the case of resignation in which cases they were required to return the allotment." 11. The decision in Infosys Technologies assumes added significance since the allotted shares which formed subject matter of those proceedings were also subject to a lock-in restriction. The Supreme Court took note of the fact that undisputedly during the lock-in period, the custody of the shares remained with the Trust and the shares themselves were non-transferable. It was while dealing with the aforesaid controversy that the Supreme Court was called upon to examine whether the AO was justified in taking the market value of the shares into consideration. The significance of the lock-in period was explained by the Supreme Court to mean that during the said period the share would have no realizable value nor would it be possible for the employee to foresee or project a price which those shares may obtain in the future. It was thus pertinently observed that a potential benefit could not be considered as income of the employee and which may be chargeable under the broad head of salaries. 12. The aforesa....
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....ines issued by the Securities and Exchange Board of India (SEBI), there is a complete bar on transfer, which is enforced by inscribing the words "not transferable" in the relevant share certificates. This position is accepted by the Revenue, which, however, has relied upon a general circular issued by the Securities and Exchange Board of India, wherein it is stated that the shares under the lock-in period can be transferred inter se the promoters. This restricted transfer, in our opinion, would not make the equity shares in the lock-in period into "quoted shares" as defined vide sub-rule (9) to rule 2 of Part A of Schedule III of the Wealth-tax Act, as the lock-in shares are not quoted in any recognised stock exchange with regularity from time to time, and it is not possible to have quotations based upon current transactions made in the ordinary course of business. Possibility of transfer to promoters by private transfer/sale does not satisfy the conditions to be satisfied to regard the shares as quoted shares. xxxx xxxx xxxx 8. Equity shares which are quoted and transferable in the stock exchange are to be valued on the basis of the current transactions and quotations in the o....
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.... date." In order to understand the import of rule 21 of Part H of Schedule III of the Wealth-tax Act, it is necessary to refer to earlier judgments of this court on the valuation of equity shares or property not freely transferable or where transfer is restricted. Reference to these decisions is also relevant as it supports our interpretation in highlighting the difference between "quoted" and "unquoted" shares. 11. In Ahmed G. H. Ariff v. CWT, a three judge Bench of this court, in a matter relating to the Wealth-tax Act, for a period when Schedule III of the Wealth-tax Act, was not applicable, had observed that the expression "property" is a term of the widest import as it signifies every possible interest which a person can clearly hold or enjoy. "Property", as a term, should be given a liberal and wide connotation, and extends to those well-recognised types of interests that have the insignia or characteristics of a proprietary right. Having held so, this court rejected the argument of the assessee therein that his right to receive a specified share of the net income from an estate in respect of a Wakf-Alal-Aulad was not an asset assessable to wealth-tax, on the ground that ....
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....ket in terms of the articles of association, the shares had certain privileges and rights, which form the ingredients in its value. The expression "if sold in the open market" does not alter the nature of the property. What the expression postulates is to permit the assessee or the authorities to assume a sale in the open market, which is to limit the property to be valued at the price that a person would be prepared to pay in the open market with all rights and obligations. The value would not exceed the sum, which a willing purchaser would pay, given the fact that the right to purchase is restricted or barred. This does not imply that the valuation of the shares can be made artificially and by ignoring the restrictions on the property. Valuation cannot ignore the limitations attached to the shares. This judgment in Crossman's case (supra) has been subsequently reiterated by the House of Lords in Lynall v. Inland Revenue Commissioners. Referring to the decision in Crossman's case (supra) and a decision of the High Court of Australia in Abrahams v. Federal Commissioner of Taxation, a Division Bench of the Madras High Court in R. Rathinasabapathy Chettiar v. CWT, in our opin....
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....t year." xxxx xxxx xxxx 15. Read in this manner, rule 21 of Part H of Schedule III of the Wealth-tax Act, is a rule which has been enacted to clarify and remove doubts. It has reiterated and affirmed the dictum in Ahmed G. H. Ariff (supra) and Purshottam N. Amarsay (supra) that notwithstanding the negative covenants prohibiting or restricting transfer, the property should be valued for the purpose of the Wealth-tax Act, and the Gift-tax Act, but the valuation is not by overlooking or ignoring the restrictive conditions. The shares in the lock-in period have market value, which would be the value that they would fetch if sold in the open market. Rule 21 of Part H of Schedule III of the Wealth-tax Act, permits valuation of the property even when the right to transfer the property is forbidden, restricted or contingent. Rights and limitations attached to the property form the ingredients in its value. The purpose is to assume that the property which is being valued is being sold, and not to ignore the limitations for the purpose of valuation. This is clear from the wording of rule 21 of Part H of Schedule III of the Wealth-tax Act, which when read carefully expresses the legislati....
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....of realisation in a realistic manner and dovetailing of these factors together but once the accrual takes place, on the conduct of the parties subsequent to the year of closing an income which has accrued cannot be made "no income". 26. This Court then considered the facts of the case and came to the conclusion (in Godhra Electricity) that no real income had accrued to the assessee in respect of the enhanced charges for a variety of reasons. One of the reasons so considered was a letter addressed by the Under Secretary to the Government of Gujarat, to the assessee whereby the assessee was "advised" to maintain status quo in respect of enhanced charges for at least six months. This Court took the view that though the letter had no legal binding effect but "one has to look at things from a practical point of view." (See R.B. Jodha Mal Kuthiala v. Commissioner of Income Tax, [1971] 82 ITR 570 (SC)). This Court took the view that the probability or improbability of realisation has to be considered in a realistic manner and it was held that there was no real accrual of income to the assessee in respect of the disputed enhanced charges for supply of electricity. The decision of the Hig....