The Delhi Bench of Income Tax Appellate Tribunal (ITAT) has held that (ESOP) valuation by merchant bankers under income tax act cannot be overridden by FEMA valuation.

The bench of Satbeer Singh Godara (Judicial Member) and M. Balaganesh (Accountant Member) has observed that once the learned 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.

The A.O. has received information from DCIT Cir-1(2), New Delhi that M/s Acidaes Solutions Pvt. Ltd. (the Company) had issued 465 equity shares to the appellant (as also to one other Director) at a premium of Rs.12,628.20 per share. The premium on these shares amounting to Rs.58,72,113/- was borne by the company (just like in the case of another Director as well). The valuation thereof was done by Fastrack Finsec, Category I, Merchant Banker for the purpose of determining the perquisite value of sweat equity shares on the date on which the option is exercised by the employee.

The Merchant Banker has determined the fair market value for the purpose of determining the value of perquisite as provided in sub-clause (vi) of clause (2) of section 17 & as per Rule 3(8)(i)(iii) of the Income Tax Rules 1961. The valuation arrived by the Merchant Banker is solely based on the audited financials, as given by the Management of Acidaes. The appellant has submitted the copy of the valuation report of Merchant Banker.

The issue raised was whether the valuation of Perquisite in the form of Sweat Equity shares issued by employer to the employee of the company who exercise Employee Stock Option Plan (ESOP) i.e. the Appellant is as per the Provision of Section 17 of the Income-tax Act, 1961 or not. 

The ITAT held that there is no specific default noticed by the Assessing Officer 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. 

Case Details

Case Title: ACIT Versus Bidhan Chandra Choudhary

Case No.: ITA Nos. 2061/Del/2023

Date: 08.01.2025

Counsel For Appellant: Ved Jain

Counsel For Respondent: Subhash Kumar

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