Case Law Details
Nabh Multitrade Pvt. Ltd. Vs ITO (ITAT Jaipur)
There is no dispute that during previous year relevant to assessment year under consideration the assessee issued 37,500 equity shares of Rs. 10/- each for a price of Rs. 200/- each which includes the share premium of Rs. 190/- per share. To substantiate the value of equity shares, the assessee filed the Valuation Report whereby the Registered Valuer has determined the value of the shares at Rs. 230/-per share. The sole controversy is around the value of the land being the asset of the assessee company which was acquired by the assessee at Rs. 1,30,00,000/- and shown in the Balance sheet at cost price whereas the Registered Valuer has adopted the fair market value of the said land as on the date of issue of the shares at Rs. 2,93,00,000/-. It is pertinent to note that for the purpose of fair market value of the shares, the value has to be determined in accordance with the methods prescribed under rule 11UA of the IT Rules or the value may be substantiated by the assessee company to the satisfaction of the AO based on the value of its assets including intangible assets as on the date of issue of shares whichever is higher. Thus the fair market value determined by adopting different methods is relevant only for the purpose of choosing the highest value and option is definitely given in favour of the assessee for taking the highest value.
If the issue price received by the assessee is more than the fair market value of the shares as determined on the basis of methods provided under section 56(2)(viib), then the difference between the consideration received and the fair market value of the shares will be added as Income from other sources under the provisions of section 56(2)(viib) of the Act. The Explanation to section 56(2)(viib) contemplates various methods to substantiate the market value of the shares issued by the company and, therefore, as per clause (a) of the Explanation, the fair market value of the shares shall be the value as may be determined in accordance with the method prescribed under rule 11UA of the IT Rules or it may be substantiated by the company to the satisfaction of the AO based on the value of the assets as on the date of issue of shares including the intangible assets of the assessee company. Therefore, option is with the assessee to adopt a method which is more suitable and giving higher fair market value of the shares. Sub-clause (ii) of clause (a) of the Explanation to Section 56(2)(viib) gives the power to the AO to accept the valuation subject to his satisfaction. Therefore, if the value determined as per the fair market value of the assets of the assessee is higher than the value determined as per the method prescribed under rule 11UA of the IT Rules, then the value so determined based on the fair market value of the assets as on the date of issue of shares has to be taken into consideration for determination of fair market value of the shares and differential consideration, if any, to be taken into account for the purpose of making addition under section 56(2)(viib) of the Act. There is no dispute in the case in hand that the value determined as per the fair market value of the assets of the assessee company as on the date of issue of shares is Rs. 230/- per share which is higher than the value determined as per the Discounted Free Cash Flow method at Rs. 178/- per share. The AO as well as the ld. CIT (A) has questioned the value determined as per the fair market value of the assets and particularly on the point of fair market value of the land bearing no. 142, Ram Gali No. 3, Raja Park, Jaipur. The AO referred the valuation to the DVO but not brought on record any valuation determined by the DVO to controvert the valuation determined by the Registered Valuer. Thus in the absence of any contrary material or facts brought on record, the valuation determined by the Registered Valuer based on the fair market value of the assets of the assessee company cannot be rejected. The AO as well as the ld. CIT (A) was of the view that the value of the land has to be taken as per the book value and cost of acquisition in the hands of the assessee. But as per the Explanation, the fair market value of the shares is required to be substantiated by the company on the basis of the value of the assets including the intangible assets on the date of issue of shares which means that the fair market value of the assets as on the date of issue of shares. The views of the AO as well as the ld. CIT (A) are relevant only for the purposes of valuation based on the Net Assets Method provided under Rule 11UA of the IT Rules. Thus when the said method was not giving the higher valuation, then the valuation which gives the higher fair market value of the shares has to be adopted. There is a difference of net assets which is based on the net book value of the assets of the company and the fair market value of the assets as on the date of issue of shares. Land being a non depreciable asset, will carry a fair market value based on the prevailing market price in the area. The Registered Valuer as per the Valuation Report has specifically stated that the fair market value of the land is taken as per the local survey done by him and, therefore, in case, if the AO was not satisfied with the fair market value of the shares based on the value of the assets, then he has to bring on record the specific defect as well as the contrary valuation to be determined by the DVO. Without bringing such contrary material or counter valuation report, the valuation as determined by the Registered Valuer cannot be rejected. We further note that the ld. CIT (A) has rejected the valuation based on Discounted Free Cash Flow method at threshold without verifying the fact that the said Valuation Report was also produced before the AO during the assessment proceedings. The only mistake is the reference of the letter given by the assessee i.e. the date whereas the AO has accepted this fact that the A/R of the assessee company submitted his report as per Rule 11UA along with the Valuation Report dated 07.02.2014 of the Registered Valuer. We have also verified from the record that the assessee produced all these Valuation Reports based on different methods before the AO and, therefore, rejection of the same by the ld. CIT (A) is not based on correct facts on record.
Once the assessee has produced all the valuation reports based on Discounted Free Cash Flow method as well as the fair market value of the assets as on the date of issue of the shares, then this observation of the ld. CIT (A) that the assessee has failed to exercise an option of adopting the method is contrary to the record. Further, despite the fact that all the valuations are available on record, the ld. CIT (A) has again failed to give the credit to the extent of the valuation being the fair market value of the shares based on Net Assets Value method at least. Failure on the part of the ld. CIT (A) to allow the credit to the extent of the fair market value even based on the Net Assets Value method, it appears that the ld. CIT (A) was not functioning as an independent appellate authority but reflecting as an authority to collect the maximum revenue. Accordingly, in the facts and circumstances of the case when the assessee has substantiated the value of the shares issued at a price of Rs. 200/- by a fair market value of Rs. 230/- which is more than the issue price, then no addition is called for under section 56(2)(viib) of the Act.
It is observed that in the instant case, the assessee company had exercised an option to value the share by DCF Method however, we find that the AO has worked out the value based on NAV Method though in tJhe body of assessment order he has referred to Rule 11UA(2)(b) but in substance, he has valued the share based on the book value figures only by considering the value of the assets shown in the Balance Sheet as on 31.03.2013 being the land valuing Rs. 3,27,690/- and the liabilities. The ld. CIT(A) also, though considered the case in context of Rule 11UA(2)(b) yet however, his act of asking the assessee & his CA to prepare and submit a valuation report only on actual figures, is nothing but a valuation done on the basis of NAV Method u/r 11UA(2)(a) only. From the facts thus, it is clear that the authorities below wanted to impose upon the method of valuation of their own choice, completely disregarding the legislative intent which has given an option to the assessee to choose any one of the two methods of valuation of his choice. When the law has specifically provided a method of valuation and the assessee exercised an option by choosing a particular method (DCF here), changing the method or adopting a different method would be beyond the powers of the revenue authorities. Permitting the revenue to do so will render the clause (b) of Rule. 11UA(2) as nugatory and purposeless. Thus, to this extent the action of the authorities below is not justified and it is held that the assessee has got all the right to choose a method which, cannot be changed by the AO. Further, though the AO can scrutinize the valuation report only if some arithmetical mistakes are found, he may make necessary adjustments. But if he finds the working of the C.A. or the assumptions made as erroneous or contradictory, he may suggest the necessary modification and alterations therein provided the same are based on sound reasoning and rational basis and for this purpose the AO may call for independent expert valuer’s report or may also invite comment on the report furnished by the assessee’s valuer as the AO is not an expert. It is not open for the AO to challenge or change the method of valuation, once opted by the assessee and to modify the figures as per his own whims and fancies. In any case, the revenue could not ask to prepare the valuation report based on actuals which is not contemplated in Rule 11UA(2)(b).
Please become a Premium member. If you are already a Premium member, login here to access the full content.
