Delhi High Court in the Case of Ravi Kumar Sinha v. CIT [IT APPEAL NOS. 281 & 770 OF 2008 dated 14 Aug 2024]

Shares allotted to the taxpayer under an Employee Stock Purchase Scheme (ESPS) were subject to a lock-in period and could not be sold in the open market due to a complete embargo on their sale at a higher price. Accordingly, the addition made on account of the difference between the market value and the concessional price at which the shares were allotted is not taxable under Section 17(2)(iii) of the Income Tax Act, 1961.

Facts of the Case

The taxpayer was allotted shares under an Employee Stock Purchase Scheme (ESPS) at a concessional price of ₹15 per share. As per an independent valuer’s report, the fair market value (FMV) was ₹22.50 per share. Notably, 25% of the shares were locked-in for 12 months and the remaining 75% for 18 months, restricting their immediate sale in the open market.

The Assessing Officer, however, adopted the stock exchange price of ₹49.45 per share and taxed the differential as a perquisite under Section 17(2)(iiia).

On appeal, the Commissioner (Appeals) held that due to the lock-in restrictions, the quoted market price could not be considered for determining FMV. Relying on the employer’s own valuation report, the FMV was accepted at ₹22.50 per share.

The Tribunal affirmed this view and confirmed the order of Commissioner (Appeals).

Subsequently, revenue filed an appeal before Delhi High Court.

High Court Observations

The issue is no longer res integra and stands settled by the judgment of the Karnataka High Court in CIT v.Infosys Technologies Ltd. [2007] 293 ITR 146, affirmed by the Supreme Court in CIT v. Infosys Technologies Ltd. [2008] 297 ITR 167 (SC).

In Infosys, the Supreme Court emphasized that the allotted shares were subject to a lock-in, during which:

i) Custody remained with the Trust

ii) The shares were non-transferable and illiquid

The Court held that during such a lock-in period:

i) The shares had no realizable value

ii) Employees could not predict or derive any immediate monetary benefit

iii) Hence, no taxable perquisite could arise under the head “Salaries”

Importantly, the Court reiterated that the Act does not envisage taxation of notional income.

Importantly, the Court reiterated that the Act does not envisage taxation of notional income.

In this context, the fair market value (FMV) could not be deemed to exceed the face value, given the restriction on marketability. The employer’s Valuation Report, meant for internal tax withholding purposes, could not override this legal principle. Relying on either the quoted market price or the valuation — despite the lock-in and embargo — was held to be untenable.

This decision reaffirms the principle that perquisite taxation under Section 17(2) must be based on real and enforceable benefits, not on notional or illusory gains. Where shares allotted under an ESPS are subject to lock-in restrictions and cannot be freely sold in the open market, the quoted market price or valuation report cannot be treated as fair market value for tax purposes.

The judgment aligns with the Supreme Court’s view in Infosys Technologies Ltd., emphasizing that restrictions on transferability materially affect realizable value. Employers and tax authorities must take into account the economic substance of such schemes, particularly the lack of immediate liquidity for employees, before drawing conclusions on perquisite valuation.

This ruling provides important clarity for employers structuring ESOP/ESPS plans and for employees receiving shares under such schemes — especially where lock-in periods are imposed.