Perquisite and TDS will be computed based on fair market value determined by merchant banker

ACIT (TDS)-2(2) Vs Sula Vineyards Pvt. Ltd. (ITAT Mumbai)

ITAT Mumbai held that as per rule 3(8)(iii) fair market value of any equity shares on the date of exercising option by the employee shall be determined by a merchant banker. Accordingly, quantum of perquisite and TDS liability will be worked on the said basis.

Facts-

The issue raised in present appeal by the Revenue relates to short-deduction of tax on perquisites to Mr. Rajeev Samant, the then director of the assessee company. According to AO, the assessee company had allotted 40,000 warrants to Sh. Rajjeev Samant during the Board of Directors meetings held on 09/02/2010 at the option of conversion into shares at the rate of ₹155 per share. Out of the 40,000 warrants, 20,000 warrants were converted to shares in the month of June 2017 and balance 20,000 warrants were converted into shares in the month of February 2018. Mr Rajeev Sawant paid ₹ 62 lakh to the company for the 40,000 shares.

As per the section 17(2)(vi) of the Act the value of any specified security allotted or transferred, directly or indirectly by the employer, free of cost or at concessional rate, is to be treated as perquisites in the hands of the employee and the company is required to deduct tax at source on the same in terms of section 192 of the Act.

The company got fair market value of shares determined through a merchant banker, who worked out the fair market value of the shares at ₹194.15 per share. The assessee company accordingly worked out the perquisites in the hands of Mr . Rajeev Samant. But according to the Assessing Officer, during relevant assessment year M/s Reliance capital had sold shares of the assessee company at the rate of ₹ 850 per share and therefore fair market value of the specified security ( equity share of assessee company) should have been computed taking the market value at the rate of ₹850 per share.

CIT(A) deleted the addition. Being aggrieved, revenue has preferred the present appeal.

Conclusion-

We do not find any basis for adopting the fair market value as suggested by the Ld. Departmental Representative based on an independent transaction of sale of shares of the assessee company between unrelated party. 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.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal by the Revenue is directed against order dated 28/10/2021 passed by the Ld. Commissioner of Income-tax (Appeals)-53, Mumbai [in short the Ld. CIT(A)] in relation to in order dated 22/03/2019 passed under section 201(1)/201(1A) of the Income-tax Act, 1961 (in short ‘the Act’) by the Assessing Officer for  assessment year 2018 -19. The Ld. CIT(A) has passed a consolidated order for assessment year 2012 -13; 2013 -14; 2014-15; 2015-16; 2016-17; 2017 -18 and 2018-19. The present appeal preferred is against the order for assessment year 2018 -19. The grounds raised by the Revenue are reproduced as under:

 i. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating the fact that the Fair Market Value of the shares of the assessee company had been established by means of the trade between unrelated parties leading to establishment of a definitive value.

ii. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in completely placing reliance on the value of per share of the assessee company determined by the Merchant Banker and not taking cognizance of a determinative value established by trade between unrelated parties during the year under consideration itself.

iii. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating that even though the trade between unrelated parties took place after the exercise of option under ESOP scheme by the employee, the said trade had taken place during the same financial year whereby the value of perquisite based on the fair market value so established could have been added to the salary income of the employee and appropriate TDS done by the assessee company.

iv. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in rejecting the Fair Market Value (FMV) of Rs.850/- per share adopted by the Assessing Officer while upholding the value of Rs.194.15 per share computed by the Merchant Banker without appreciating that section 17(2)(vi) r.w. Rule 3(8) provides for adopting FMV of the shares which could not have been less than the actual trade @ Rs.850/- per share executed between the unrelated parties during the year itself.

2. Briefly stated facts of the case are that the assessee is engaged in manufacturing and sales of wines in India. A survey action under section 133A of the Act was carried out in the case of the assessee on 10/10/2018, wherein according to the Assessing Office, r the assessee violated provisions related to deduction of tax at source including section 192 of the Act. The issue raised in present appeal by the Revenue relates to short-deduction of tax on perquisites to Mr. Rajeev Samant, the then director of the assessee company. According to the Assessing Officer, the assessee company had allotted 40,000 warrants to Sh. Rajjeev Samant during the Board of Directors meetings held on 09/02/2010 at the option of conversion into shares at the rate of ₹155 per share. Out of the 40,000 warrants, 20,000 warrants were converted to shares in the month of June 2017 and balance 20,000 warrants were converted into shares in the month of February 2018. Mr Rajeev Sawant paid ₹ 62 lakh to the company for the 40,00 0 shares.

2.1 As per the section 17(2)(vi) of the Act the value of any specified security allotted or transferred, directly or indirectly by the employer, free of cost or at concessional rate, is to be treated as perquisites in the hands of the employee and the company is required to deduct tax at source on the same in terms of section 192 of the Act. The value of the specified security has been defined in section 17(2)(vi) of the Act as the fair market value of the specified security on the date of which the option is exercised by the employee as reduced by the amount actually paid by the employee in respect of security or shares. The Rule 3(8) of the Income-tax Rules, 1962 prescribe for determination of market value of any equity shares on the date of exercising option by the employee. The Rule 3(8)(iii) prescribe determination of fair market value in case of the shares in the company, which is not listed on recognized stock exchange. According to the rule, in such cases fair market value of shares in the company shall be as determined by a merchant banker on the specified date i.e. the date of exercising the option or any date earlier than the date of exercising this option not being a date which is more than 180 days earlier than the date of exercising the option.

2.2 As required by the above sections and the Rules, the company got fair market value of shares determined through a merchant banker, who worked out the fair market value of the shares at ₹194.15 per share. The assessee company accordingly worked out the perquisites in the hands of Mr . Rajeev Samant as under: