Income-tax (Second Amendment) Rules, 2008 – Amendment in rule 40C; insertion of rule 40D

NOTIFICATION NO. 11/2008, DATED 18-1-2008

In exercise of the powers conferred by section 295 read with Explanation (i) to clause (ba) of sub-section (1) of section 115WC of the Income-tax Act, 1961 (43 of 1961), read with section 22 of the General Clauses Act, 1897 (10 of 1897), the Central Board of Direct Taxes hereby makes the following rules further to amend the Income-tax Rules, 1962, namely :—

1.         (1)       These rules may be called the Income-tax (Second Amendment) Rules, 2008.

(2)       They Shall come into force with effect from the 1st day of April, 2008.

2.         In the Income-tax Rules, 1962, in Part VIIC, —

(i)        in rule 40C, in sub-rule (4), clause (f) shall be omitted; and

(ii)       after rule 40C, the following rule shall be inserted, namely :—

“40D. Valuation of specified security not being an equity share in the company. — For the purposes of clause (ba) of sub-section (1) of section 115WC, the fair market value of any specified security, not being an equity share in a company, on the date on which the option vests with the employee, shall be such value as determined by a merchant banker on the specified date.

Explanation.— For the purposes of this rule, ‘merchant banker’ and ‘specified date’ shall have the meanings assigned to them in clause (b) and clause (e) respectively of sub-rule (4) of rule 40C.”

[F. No. 142/25/2007-TPL]

EXPLANATORY MEMORANDUM

The Finance Act, 2007 amended the provisions of the Income-tax Act to provide that employers will be liable to pay fringe benefit tax on the value of ESOPs granted to employees as and when the specified security or sweat equity share were allotted or transferred to the employees. The value of ESOPs for the purposes of levy of FBT shall be the fair market value of the specified security or sweat equity share on the date of vesting of the options as reduced by the amount actually paid, or recovered from, the employee.

Explanation (i) to clause (ba) of sub-section (1) of section 115WC of the Income-tax Act defines “fair market value” to mean the value determined in accordance with the method as may be prescribed by the Board. Earlier, rule 40C was inserted in the Income-tax Rules which prescribed guidelines for valuation of specified security or sweat equity shares being an equity sahre in the company. The said rule 40C has been amended to omit the definition of “equity share” as the same was not necessary in view of the term having been used in the charging section of the Income-tax Act without a definition, thereby allowing it to take its natural meaning. Further, a new rule 40D has been inserted in the Income-tax Rules for the purposes of valuation of specified security not being an equity share in the company.

The amended rule 40C and the new rule 40D will take effect from the 1st April, 2008 and will, accordingly, apply in relation to the assessment year 2008-09 and subsequent years.