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).
FULL TEXT OF THE ITAT JUDGEMENT
This appeal by the assessee is directed against the order dated 28th December, 2017 of ld. CIT (A)-1, Jaipur for the assessment year 2014-15. The assessee has raised the following grounds :-
“ 1. On the facts and in the circumstances of the case and in law, ld. CIT (A) has grossly erred in confirming addition of Rs. 71,25,000/- made by ld. AO u/s 56(2)(viib) of the Income Tax Act, 1961 on the allegation of Share premium received by assessee was in excess of Fair Market Value of shares. Appellant prays addition so made deserves to be deleted.
1.1 That ld. CIT (A) has further erred in confirming the addition made by ld. AO by completely disregarding the submission made and documentary evidences in support of contention that Fair Market Value as determined in accordance with Rule 11U and 11UA was even more than issue price of shares. Appellant prays addition so made deserves to be deleted.
1.2 That the ld. CIT (A) has further erred in confirming addition of Rs 71,25,000/- made by ld. AO u/s 56(2)(viib) of the Income Tax Act 1961 without considering the submission filed and further without considering the additional evidences for the sole reason that the same were not filed alongwith prayer u/r 46 of Income Tax Rules, 1962. It is thus prayed that addition so made deserves to be deleted.
2. That the appellant craves the right to add, delete, amend or abandon the ground of this appeal at the time or before the actual hearing of the case.”
The hearing of the appeal is concluded through Video Conference due to prevailing condition of COVID 19 pandemic.
2. The assessee is a private limited company and engaged in the business of construction of flats and trading in shares. The assessee filed its return of income on 30th September, 2014 declaring Nil income. During the course of assessment proceedings the AO noted that the assessee has issued 37,500 shares of Rs. 10/-each for a price of Rs. 200/- per share which included a premium of Rs. 190/- per share. In order to substantiate the value of its equity shares and premium thereon, the assessee submitted Valuation Report dated 17.02.2014 of Registered Valuer as per Rule 11UA of the IT Rules. The AO noted that the Valuer has estimated the fair market value of vacant piece of land at Rs. 2,93,00,000/- as on 17th February, 2014 whereas as per the Balance Sheet the assessee has shown the value of the said land no. 142, Ram Gali No. 3, Raja Park, Jaipur at Rs. 1,30,00,000/- being the cost of acquisition of the land as on 16.03.2013. The AO was of the view that the Registered Valuer has not substantiated the value of the property on any documentary evidence of any kind and consequently the AO declined to accept the fair market value of the assets of the assessee to substantiate the value of the equity shares issued at premium. The AO though referred the valuation of the assets to Valuation Cell of the Department, however, till the date of assessment order no Valuation Report was received by the AO from the DVO and consequently the AO made the addition of the entire share premium amount of Rs. 17,25,000/-under section 56(2)(viib) of the IT Act. The assessee challenged the action of the AO before the ld. CIT (A) and contended that the value of the shares and issue price has been substantiated by the assessee with the fair market value of the assets of the assessee in terms of section 56(2)(viib) of the IT Act. The assessee has also filed the Valuation Report as per the Discounted Free Cash Flow method provided under Rule 11UA of the IT Rules. The fair market value was determined by the Registered Valuer at Rs. 230/- per share based on market value of the assets of the assessee company which was higher than the issue price whereas the value as per the Discounted Free Cash Flow method was determined at Rs. 178/- per share. The ld. CIT (A) though held that the provisions of section 68 and section 115BBE are not applicable in this case being the addition made under section 56(2)(viib), however, the ld. CIT (A) has not accepted the valuation of the shares as per the Valuation Report of the Registered Valuer whereby the value was determined by adopting the fair market value of the assets of the assessee as per the Discounted Free Cash Flow method prescribed under rule 11UA of the IT Rules. The ld. CIT (A) has concurred with the view of the AO as far as the fair market value of the assets of the assessee and particularly the plot of land which was valued by the Registered Valuer at Rs. 2,93,00,000/- which was considered by the AO as per the book value and cost of acquisition in the hands of the assessee. The ld. CIT (A) has questioned the correctness of the value determined by the Registered Valuer. As regards the valuation determined on the basis of Discounted Free Cash Flow method, the ld. CIT (A) has declined to accept the same on the ground that it was not produced before the AO.
3. Before us, the ld. A/R of the assessee has submitted that in support of the value of the shares allotted during the year under consideration, the assessee has submitted the Valuation Report wherein the Registered Valuer has determined the value of the equity shares at Rs. 230/- per share on the basis of the fair market value of the assets of the assessee. He has referred to the Valuation Report and submitted that the Registered Valuer has applied the prevailing market rates in the area for the purpose of fair market value of the land being asset of the assessee at Rs. 2,93,00,000/- which was not accepted by the AO. However, the AO has not brought on record any contrary fact or material to show that the value determined by the Registered Valuer is not based on correct facts being the prevailing market price of the land. He has further contended that as per the Explanation to Section 56(2)(viib), 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 as may be substantiated by the assessee company based on the value on the date of issue of shares of its assets including intangible assets. It is also provided that whichever valuation is higher is to be taken into consideration. Therefore, the higher of the valuation determined as per the various methods prescribed under section 56(2)(viib) of the Act. The AO cannot adopt the lesser valuation but it is mandate of the provisions that he has to consider the highest valuation arrived on the basis of various methods. The assessee apart from the value based on its assets as on the date of issue of shares also submitted the valuation based on the Discounted Free Cash Flow method provided under Rule 11UA of the IT Rules. Though the AO has referred the valuation to the Valuation Cell of the Department, however, no Valuation Report was received from the DVO. Thus the ld. A/R has submitted that once the valuation of the shares were determined at Rs. 230/- per share which is more than the price at which the assessee has issued the shares, then no addition is called for under section 56(2)(viib) of the IT Act. The AO as well as the ld. CIT (A) has rejected the valuation without pointing out a specific defect in the valuation. The AO has adopted the book value of the assets which is not permissible as per the method provided under sub clause (ii) of Explanation to section 56(2)(viib) as well as Discounted Free Cash Flow method as provided under Rule 11UA of the IT Rules. Hence the view of the AO as well as ld. CIT (A) is contrary to the provisions of law. In support of his contention he has relied upon the following decisions :-
M/s. Rameshwaram Strong Glass (P) Ltd. vs.ITO in ITA No. 884/JP/2016 dated 12.07.2018 (Jaipur).
M/s. Cinestaan Entertainment P. Ltd. vs. ITO in ITA No. 8113/Del/2018 dated 27.05.2019 (Delhi).
DCIT vs. Varsity Education Management Pvt. Ltd. in ITA No. 6991/Mum/2016 dated 24.10.2018 (Mumbai).
4. On the other hand, the ld. D/R has submitted that during the proceedings before the ld. CIT (A), the assessee has changed its stand and submitted the valuation based on Discounted Free Cash Flow method as against the valuation based on fair market value of the assets of the assessee on the date of issue of shares. Since the valuation based on Discounted Free Cash Flow method was not submitted before the AO, therefore, the ld. CIT (A) was justified in refusing to accept such a valuation. Further, the valuation as determined by the Registered Valuer is based on unaudited Balance Sheet and, therefore, the book value as per the Balance Sheet as on 31st March, 2013 was taken for determining the fair market value of the equity shares. The ld. CIT (A) has considered the Net Assets Value method and therefore, rejected the value claimed by the assessee. The ld. CIT (A) has accordingly confirmed the addition made by the AO.
5. We have considered the rival submissions as well as the relevant material on record. 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. For ready reference we reproduce the provisions of section 56(2)(viib) as under :-
56. (1) xxxxx xxxxxx.
(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head “Income from other sources”, namely :—
[(viib) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares:
Provided that this clause shall not apply where the consideration for issue of shares is received—
(i) by a venture capital undertaking from a venture capital company or a venture capital fund; or
(ii) by a company from a class or classes of persons as may be notified67 by the Central Government in this behalf.
Explanation.—For the purposes of this clause,—
(a) the fair market value of the shares shall be the value—
(i) Xxxxxx xxxxxx
(ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher;
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. Further, the ld. CIT (A) has also misconstrued the provisions of section 56(2)(viib) as well as Rule 11UA(2)(a) of the IT Rules. The observations of the ld. CIT (A) in para (vii) at page 20 of the impugned order is as under :-
“ (vii) Thus, fair market value of the shares is to be determined on the basis of book value of its assets and liabilities on the valuation date or on the basis of discounted free cash flow method; and it is the appellant who has to exercise such option. It may be mentioned that the appellant has not chosen any of the above methods for valuation of its unquoted equity shares. In fact, it has valued the equity shares at Rs. 230/- on the basis of the market value of its assets, on the basis of valuation report of the Chartered Accountant dated 28.02.2014 as stated in Explanation to Section 56(2)(viib) of the Act but it was failed to substantiate that valuation. ”
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. This Tribunal in the case of M/s. Ramehwaram Strong Glass (P) Ltd. vs. ITO (supra) has considered this issue of adopting the prescribed method at the choice of the assessee in para 4.5 as under :-
“4.5 We have heard the rival contentions and perused the materials available on record including the written submissions and case laws relied upon during the course of hearing. From the order of the ld. CIT(A) it emerges that the ld.AR and Smt. Dhanwanti Gupta, CA appeared and the matter was discussed with them and they were asked to furnish the actual figures in respect of F.Y. 2013-14, 2014-15 & 2015-16. In compliance of such direction, the ld. AR and the ld. CA attended before the CIT(A) on 29.08.2016 and filed another valuation report wherein the value of the share was worked out @ 65.31 per share. A copy of the said report is placed on Pages 47-50 of the assessee’s paper book. It is clear from the order of the ld. CIT(A) that he made a comparison of the last report submitted to him on 29.08.2016 based on the actual figures with the earlier reports submitted and prepared by the CA as per Rule 11UA(2)(b) on DCF method, and the ld. CIT(A) finding difference between the figure of the two, rejected the report submitted by the assessee as absolutely unreliable and without any basis. Thus, the basic dispute between the parties is whether the authorities below could have applied the Net Asset Value as prescribed u/r 11UA(2)(a) or whether the assessee has got a right to opt for the method of valuation given u/r 11UA(2)(b) and secondly, if the assessee is entitled to the adopt the DCF method to estimate the fair market value, the valuation submitted by the assessee was fair and reasonable in accordance with Rule 11UA(2). Before proceeding further, we would like to reproduce the relevant Provisions contained u/s 56(2)(vii)(b) of the Act and the relevant Rules, which reads as under: –
“S. 56(2) (viia) where a firm or a company not being a company in which the public are substantially interested, receives, in any previous year, from any person or persons, on or after the 1st day of June, 2010 , any property, being shares of a company not being a company in which the public are substantially interested,—
(i) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property;
(ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration :
Provided that this clause shall not apply to any such property received by way of a transaction not regarded as transfer under clause (via) or clause (vic) or clause (vicb) or clause (vid) or clause (vii) of section 47.
Explanation.—For the purposes of this clause, “fair market value” of a property, being shares of a company not being a company in which the public are substantially interested, shall have the meaning assigned to it in the Explanation to clause (vii);
(viib) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares:
Provided that this clause shall not apply where the consideration for issue of shares is received—
(i) by a venture capital undertaking from a venture capital company or a venture capital fund; or
(ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf.
Explanation.—For the purposes of this clause,—
(a) the fair market value of the shares shall be the value—
(i) as may be determined in accordance with such method as may be prescribed9; or
(ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher;
(b) “venture capital company”, “venture capital fund” and “venture capital undertaking” shall have the meanings respectively assigned to them in clause (a), clause (b) and clause (c) of Explanation to clause (23FB) of section 10;
“[Rule 11UA(2) Notwithstanding anything contained in sub-clause (b) of clause (c) of sub-rule (1), the fair market value of unquoted equity shares for the purposes of sub-clause (i) of clause (a) of Explanation to clause (viib) of sub-section (2) of section 56 shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner under clause (a) or clause (b), at the option of the assessee, namely:—
(a) the fair market value of unquoted equity shares (A-L) x (PV)
(PE)
where,
A = book value of the assets in the balance-sheet as reduced by any amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act and any amount shown in the balance-sheet as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset;
L = book value of liabilities shown in the balance-sheet, but not including the following amounts, namely:—
(i) the paid-up capital in respect of equity shares;
(ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company;
(iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation;
(iv) any amount representing provision for taxation, other than amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto;
(v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities;
(vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares;
PE = total amount of paid up equity share capital as shown in the balance-sheet;
PV = the paid up value of such equity shares; or
(b) the fair market value of the unquoted equity shares determined by a merchant banker or an accountant as per the Discounted Free Cash Flow method.]”
However, there is no dispute between the parties that Rule 11UA(1) is not applicable on the facts and circumstances of the present case which is a provision of general nature whereas Rule 11UA(2) is a specific provision providing for the valuation of the unquoted equity shares. After going through the relevant Section and the Rules, in our opinion, the matter of valuation of unquoted equity shares, has been completely left to the discretion of the assessee. It is his option whether to choose NAV Method (Book Value) under clause (a) or to choose DCF Method under clause (b) and the AO cannot adopt a method of his own choice.
The authorities below cannot compel the assessee to choose NAV Method only as against DCF Method. When the legislation has conferred an option upon the assessee to choose a particular method, the valuation of the shares has to be in accordance with such method only i.e. DCF method in the present case u/r 11UA(2)(b) r/w S. 56(2)(viib). In the case of Medplus Health Services (P) Ltd vs ITO (supra), the ITAT, Hyderabad Coordinate Bench, after taking into consideration various decisions, has observed as under:
“11. On a careful reading of the judgments discussed above, it is seen that the Courts have held that where a method has been prescribed by the legislature, that method alone shall be followed for computation of the fair market value. The A.O. and the Ld. CIT(A) have not followed the relevant provisions for adopting or computing the fair market value of the shares, but have adopted the market value at which some of the shares have been purchased by the assessee as FMV. This, in our opinion, is not correct. As held by the Courts in the above judgments, the A.O. has to compute the fair market value in accordance with the prescribed method but cannot adopt the market value as fair market value under Section 56(2)(viia) of the Act. The legislature in its wisdom has also given a formulae for computation of the fair market value which cannot be ignored by the authorities below.”
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 the 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).”
Accordingly in view of the foregoing discussions as well as the decision of the Coordinate Bench, we set aside the orders of the authorities below and consequently the addition made by the AO under section 56(2)(viib) is deleted.
6. In the result, appeal of the assessee is allowed.
Order is pronounced in the open court on 09/10/2020.
