2023 (8) TMI 1116 - HC - Income Tax

Determination of fair market value of unquoted shares - Difference in value of the shares purchased by assessee - AO had valued the subject shares at Rs. 45.72 per share, albeit, by taking into account Rule 11UA of 1962 Rules, which was operable on the date when the order was passed - HELD THAT - It is not in dispute that the formula prescribed in Rule 11UA of the 1962 Rules underwent a change, which resulted in the fair market value of unquoted shares being calculated by, inter alia, taking into account, inter alia, the value of assets such as immovable property, which was adopted by any authority of the government for the purposes of payment of stamp duty. If immovable property, such as land, had to be taken into account in arriving at the Fair Market Value of unquoted shares by adopting the formula prescribed in Rule 11UA of 1962 Rules w.e.f. 01.04.2018, i.e., AY 2018-19, AO would have to factor in the value of such land, by taking into account the circle rate prevailing in the area. It is this error which the AO committed, i.e., applying the formula contained in Rule 11UA of 1962 Rules, which was not applicable to the AY in issue, i.e., 2014-15. This error continued upto the stage of CIT(A). The error was corrected by the Tribunal via the impugned order.

Summary

Issues involved: Appeal concerning Assessment Year (AY) 2014-15, challenging order by Income Tax Appellate Tribunal, regarding addition made by Assessing Officer on share value difference.

Issue 1: Addition made on account of share value difference
The Assessing Officer (AO) added Rs. 11,84,46,336/- to the income of the assessee due to the difference in the value of shares purchased by the respondent from three entities. The respondent had purchased 48% equity of a company at Rs. 5/- per share, supported by a valuation report valuing the shares at Rs. 4.96 per share. The AO valued the shares at Rs. 45.72 per share, resulting in the addition to the income of the respondent due to the difference in value.

Issue 2: Application of Rule 11UA of Income Tax Rules
The AO applied Rule 11UA of the Income Tax Rules, 1962, which required calculation of fair market value by considering the book value of assets in the balance sheet. However, the formula under Rule 11UA underwent a change from 01.04.2018, which included the value of immovable property for determining the fair market value of unquoted shares. The AO's error in applying the amended Rule 11UA for AY 2014-15 was corrected by the Tribunal in the impugned order.

Conclusion
The Tribunal set aside the CIT(A)'s order and corrected the error in applying the amended Rule 11UA. The High Court found no reason to interfere with the Tribunal's decision, stating that no substantial question of law arises. The appeal was closed, directing parties to act based on the digitally signed copy of the judgment.