2022 (8) TMI 1416 - AT - Income Tax

Computation of capital gain - FMV determination of shares - Determination of intrinsic value of shares, particularly in the case of the closely held private limited companies - Whether fair market value of the 225 equity shares held by the assessee in Somani Co Pvt Ltd as on 1.4.1981, should have been taken at face value (i.e. Rs 100 each) or at the break-up value (i.e. Rs 3,833)- as certified by the approved valuer ?- HELD THAT - The shares were acquired before 1st April 1981 and that the assessee had the option to substitute its cost of acquisition by the fair market value as on 1st April 1981. The assessee has filed a Government Approved Valuer report evidencing its fair market value of the land held by the SCPL, and, taking into account the same, computation of the fair market value as on 1st April 1981 on the basis of the intrinsic value of the SCPL shares. The intrinsic value of shares, particularly in the case of the closely held private limited companies, is, in our considered view, a reasonable method of ascertaining the fair market value of the shares. The mere fact that the shares were issued after 1st April 1981 also at face value cannot negate its fair market value. When shares are issued by a company at face value, it does essentially imply that the market value of shares already issued does not exceed the face value of these shares; the reasoning adopted by the Assessing Officer is simply fallacious and proceeds on the unrealistic assumption that the issue price of the shares reflects their fair market value. In any event, if the Assessing Officer had any doubts on the correctness of valuation, it was open for him to refer the matter to the Departmental Valuation Officer, but that exercise has not been done, and the relevant financial period is more than a decade old. No other issues are raised by the authorities below with respect to the method adopted for the valuation of shares in question. We uphold the plea of the assessee, and direct the Assessing Officer to adopt the valuation of Rs 3,833 computed by the assessee on the basis of the fair market value of the net assets. The assessee gets the relief accordingly.

Summary

Issues:
Computation of capital gains based on fair market value of shares acquired before 1st April 1981.

Detailed Analysis:

Issue 1: Computation of Capital Gains
The appellant challenged the correctness of the order passed by the CIT(A) regarding the assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2012-13. The primary issue was whether the fair market value of 225 equity shares held by the assessee in a company as on 1.4.1981 should be taken at face value or at the break-up value certified by the approved valuer. The appellant contended that the fair market value should be Rs 3,833 per share, while the CIT(A) determined it at Rs 100 per share. The appellant's valuation was supported by a report from Government Approved Valuers. The Assessing Officer rejected the claim, citing discrepancies in the valuation method and historical share transactions. The CIT(A) upheld the Assessing Officer's decision. However, the ITAT Mumbai ruled in favor of the appellant, emphasizing that the intrinsic value of shares in a closely held private company, especially when land is the most valuable asset, is a reasonable method for fair market valuation. The ITAT held that the Assessing Officer's reasoning was fallacious and that the valuation method adopted by the appellant was appropriate. The ITAT directed the Assessing Officer to adopt the valuation of Rs 3,833 per share as computed by the appellant, granting relief to the assessee.

Issue 2: Reference to Valuation Officer
The appellant also raised a ground regarding the non-reference to the Departmental Valuation Officer for valuing the shares under section 55A. The CIT(A) did not make a reference despite the appellant's claim for the same. However, the ITAT did not delve into this issue in detail as the main plea of the appellant regarding the fair market value computation was upheld. Consequently, the issue of non-reference to the Valuation Officer was dismissed as infructuous.

In conclusion, the ITAT Mumbai allowed the appeal in favor of the assessee, directing the Assessing Officer to adopt the fair market value of shares as computed by the appellant. The judgment emphasized the importance of considering intrinsic value in closely held private companies for fair market valuation, overruling the Assessing Officer's decision and the CIT(A)'s confirmation.