ITAT Mumbai rules exercise-date FMV is ESOP cost for NRIs

The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has ruled that the fair market value (FMV) of ESOP shares on the exercise date can be treated as the cost of acquisition for computing capital gains, even if the perquisite is not taxed in India. The decision came in the case of Rajesh R. Hemrajani, a UK-based non-resident and former employee of L&T Infotech Ltd.

Hemrajani exercised 1,540 ESOPs at Rs 1 per share and later sold them for about Rs 26 lakh. He used the FMV of about Rs 1,754 per share as the cost, reporting a short-term capital loss of around Rs 1 lakh. The tax department argued the cost should be only the Rs 1 per share paid, as the ESOP benefit was not taxable in India.

The ITAT rejected the department's argument, holding that section 49(2AA) of the Income-tax Act does not require the FMV to have been actually taxed in India. It directed the assessing officer to recompute capital gains using the FMV as the cost of acquisition.