PCIT Vs Boppudi Logistics Private Limited (Madras High Court)
Madras HC: Rule 11UA Permits Valuation of Unquoted Preference Shares by Chartered Accountant – AO Cannot Substitute Statutory FMV With Price From Isolated Comparable Transaction
In PCIT v. Boppudi Logistics Pvt. Ltd., the Madras High Court considered the applicability of section 56(2)(viia) to the purchase of unquoted preference shares by the assessee for AY 2011-12. The Revenue alleged that the assessee had acquired shares from a group company at ₹130 per share, whereas the seller had earlier purchased certain preference shares from an NRI at ₹240 per share, and therefore treated ₹240 as their fair market value.
The first issue was whether a valuation certificate issued by a Chartered Accountant could be accepted for determining FMV. The High Court referred to Rule 11UA(1)(c)(c), which expressly provided that the FMV of unquoted shares and securities other than equity shares could be estimated at the price they would fetch in the open market and that the assessee may obtain a report from a merchant banker or an accountant. The Court therefore held that when the Rule itself permits an accountant’s valuation, the Department cannot insist upon valuation only by an independent valuer or merchant banker.
The Revenue also argued that the valuation certificate showing a value of ₹101.93 per share was produced for the first time before the ITAT. The High Court rejected this contention as factually incorrect, noting that the CIT(A)’s own order recorded that the valuation certificate, based on the audited accounts of Virgo Realtors Pvt. Ltd., had already been furnished during the first appellate proceedings. Since the assessee actually paid ₹130 per share against the valuation of ₹101.93, its case was that section 56(2)(viia) was not attracted.
On the Revenue’s reliance on the earlier transaction at ₹240 per share, the Court noted that the seller held 16,74,750 preference shares, of which only 5,00,250 shares had been acquired from the NRI at ₹240. It subsequently sold 11,03,500 shares to the assessee. The Revenue could not simply presume that the shares sold to the assessee were exclusively those purchased from the NRI; the seller was legally entitled to determine which block of its existing shareholding was being sold.
Significantly, the issuing company’s audited financial statements provided that the preference shares could be redeemed between June and October 2011 at ₹140 per share. Therefore, the purchase price of ₹130 per share in March 2011 was regarded as a realistic FMV. The AO had ignored the statutory valuation mechanism and instead adopted ₹240 based upon an isolated transaction, which the Court regarded as arbitrary.
The Madras High Court consequently held that the ITAT’s order was well reasoned, raised no substantial question of law and required no interference. The Revenue’s appeal was accordingly dismissed.
Key takeaway: For unquoted preference shares, FMV must be determined in accordance with Rule 11UA. Where the Rule expressly permits valuation by an “accountant”, a Chartered Accountant’s valuation cannot be rejected merely because it is not from a merchant banker or independent valuer. Nor can the AO bypass the statutory valuation method and mechanically adopt the price of an isolated comparable transaction as FMV.
FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT
This appeal by the Income Tax Department challenges the order passed by the Income Tax Appellate Tribunal, Madras “C” Bench, Chennai, in I.T.A. No.1934/Chny/2024, dated 16.4.2025. The dispute relates to Assessment Year 2011-12.
2. The Revenue raised the following three substantial questions of law for our consideration:
(i) Whether the Tribunal was correct in accepting a valuation certificate issued by a Chartered Accountant rather than an independent valuer or merchant banker under Rule 11UA of the Income-tax Rules, 1962?
(ii) Whether the Tribunal erred in relying on a valuation certificate produced for the first time before it without giving the Assessing Officer an opportunity to examine it under Rule 46A of the Income-tax Rules, 1962?
(iii) Whether the Tribunal was justified in accepting the share valuation of Rs.101.93 per share when the Assessing Officer had fixed the fair market value at Rs.240/- per share based on contemporaneous comparable transactions of the same preference shares?
3. The Revenue contends that the transaction between group companies attracted Section 56(2)(viia) of the Income-tax Act, 1961. According to the Revenue, since the seller company had acquired preference shares from a Non-Resident Indian (NRI) at Rs.240/- per share, selling those shares to the respondent at Rs.130/- per share amounted to a transfer below fair market value.
Substantial Question of Law No.1
4.1. Before adverting to the merits of the first substantial question of law raised for our consideration, it is apposite to refer to Rule 11UA(1)(c)(c) of the Income-tax Rules, 1962, which reads as follows:
“Rule 11UA(1) For the purposes of section 56 of the Act, the fair market value of a property, other than immovable property, shall be determined in the following manner, namely,—
…
(c) valuation of shares and securities,-
…
(c) The fair market value of unquoted shares and securities other than equity shares in a company which are not listed in any recognized stock exchange shall be estimated to be price it would fetch if sold in the open market on the valuation date and the assessee may obtain a report from a merchant banker or an accountant in
respect of such valuation.”
[emphasis supplied]
4.2. The aforesaid Rule explicitly allows a valuation report from an accountant. When the statutory rule itself accepts an accountant’s report, the Department cannot insist that only an independent valuer or a merchant banker report is valid.
4.3. The first question of law raised by the Revenue runs directly against the plain text of Rule 11UA(1)(c)(c) of the Rules. It holds no merit and does not require further consideration.
Substantial Question of Law No. 2
5.1. The Revenue argues that the valuation certificate was introduced by the assessee for the first time before the Tribunal. However, the record shows otherwise. Sub-paragraph (5) of the extract in paragraph 4 of the order passed by the Commissioner of Income Tax (Appeals) specifically records as under:
“5. The appellant has furnished a valuation certificate based on audited books of account of Virgo Realtors Private Limited as of 31/3/2010 duly attested by its Managing Director, according to which the value per share is only Rs.101.93 (copy of certificate enclosed), whereas, the appellant has paid a consideration of Rs. 130/-. Hence, 56(viia) is not attracted in this case.”
[emphasis supplied]
5.2. The above extract confirms that the valuation certificate based on audited financial records duly attested by the Managing Director was submitted and considered during the first appellate proceedings. The Revenue’s claim that the document was produced for the first time before the Tribunal is factually incorrect.
5.3. We are, therefore, of the view that the second question of law raised for our consideration is without any basis.
Substantial Question of Law No.3
6.1. The Tribunal evaluated the factual matrix regarding the fair market value of the shares in detail. It noticed that the seller company held a total pool of 16,74,750 preference shares at the start of the year. Of these, only 5,00,250 shares were purchased from the NRI at Rs.240/- per share. The seller sold 11,03,500 shares to the respondent. A seller has the legal freedom to choose which block of shares to sell from its existing holdings. The Revenue cannot force an assumption that the shares sold were exclusively those purchased from the NRI.
6.2. The Tribunal further observed that Note 11 of the audited financial statements of the issuing company (Virgo Realtors Private Limited) provided that shareholders could redeem preference shares between 1.6.2011 and 31.10.2011, at Rs.140/- per share. Paying Rs.130/- per share in March 2011 represented a realistic fair market value.
6.3. The Assessing Officer ignored the statutory valuation rules and substituted an arbitrary figure based on an isolated third- party transaction. The Tribunal correctly set aside this approach and confirmed that the price of Rs.130/- per share paid by the respondent was well within the statutory parameters.
6.4. In view of the categoric finding of the Tribunal, the third substantial question of law raised also does not merit consideration.
7. In our considered opinion, the order passed by the Tribunal is well-reasoned and does not warrant interference. No substantial question of law arises for consideration.
8. In the result, the Tax Case Appeal is dismissed and the order of the Income Tax Appellate Tribunal stands upheld.
There shall be no order as to costs.
