2019 (1) TMI 104 - AT - Income Tax

Valuation of shares - Auditor s acceptance as Accountant for the purposes of Rule 11UA (2) - valuation report given by a Chartered Accountant - FMV determination - Held that - The second report dated 15.11.2013 is not acceptable because the same is not certified by a person who is accepted as Accountant as per Rule 11U(a) of IT Rules, 1962. The AO accepted the fair market value of ₹ 100/- per share as per certificate dated 02.12.2012 and accepted the receipt of ₹ 90/- per share and taxed only the excess receipt of ₹ 300/- per share out of total receipt of ₹ 400/- per share and hence, the order of AO is in line with the earlier valuation report given by a Chartered Accountant who can be accepted as accountant as per Rule 11U(a) because this valuer has not been appointed as auditor of the assessee company. Hence in Assessment Year 2014-15, find no reason to interfere in the order of CIT(A). In Assessment Year 2015-16, there is no report of any Chartered Accountant who can be considered as accountant as per Rule 11U(a) of IT Rules, 1962. AO in this year has worked out the fair market value of assessee company at ₹ 714.38/- on the basis of NAV in the absence of any valuation report of any valuer who can be accepted as an Accountant as per Rule 11U(a) and taxed the excess amount of premium received by assessee over and above the permissible amount at ₹ 714.38/- per share in respect of 36957 shares and taxed the excess amount received of ₹ 1,32,29,088/- u/s. 56(2)(viib) of IT Act. In the facts of the present case, find no reason to interfere in the order of CIT(A) on this issue in this year also. Restriction as per Rule 11U(a) on the auditor s acceptance as Accountant for the purposes of Rule 11UA (2) is well founded. Hence, find no merit in this argument of the learned AR of the assessee that only because the certificate is given by the auditor, it should not be held that the value certified by him is not acceptable. - Decided against assessee.

Summary

Issues Involved:
1. Rejection of share valuation report.
2. Adoption of arbitrary share value.
3. Determination of fair market value of shares.
4. Method of share valuation under Rule 11UA.
5. Disallowance of R&D expenditure.
6. Scope of "limited scrutiny."

Detailed Analysis:

1. Rejection of Share Valuation Report:
The assessee contended that the CIT(A) erred in upholding the AO's rejection of the share valuation report dated 15.11.2013 for AY 2014-15 and 02.05.2014 for AY 2015-16, claiming it was based on suspicion, surmise, and conjecture. The AO rejected the report because it was signed by the company's auditor, which is contrary to Rule 11U(a) of the Income Tax Rules, 1962, defining an "accountant" as someone not appointed as an auditor under Section 44AB of the Act. The Tribunal upheld the AO's rejection, stating that the valuation report must comply with Rule 11UA, which the assessee's report did not.

2. Adoption of Arbitrary Share Value:
The assessee argued that the CIT(A) erred in upholding the AO's arbitrary adoption of a share value of ?100 per share for AY 2014-15 and ?714.38 per share for AY 2015-16, contrary to the assessee's valuation of ?400 and ?1,538.55 per share, respectively. The Tribunal found that the AO's adoption of ?100 per share was based on an earlier valuation report by a qualified accountant, which complied with Rule 11U(a). For AY 2015-16, in the absence of a compliant valuation report, the AO's NAV-based valuation was upheld.

3. Determination of Fair Market Value of Shares:
The assessee claimed that the consideration received for the shares equaled the fair market value, and no excess was received. The Tribunal noted that the AO accepted the fair market value of ?100 per share for AY 2014-15 based on a compliant valuation report and taxed the excess receipt of ?300 per share. For AY 2015-16, the AO determined the fair market value based on NAV in the absence of a compliant report and taxed the excess premium received.

4. Method of Share Valuation under Rule 11UA:
The assessee contended that the Act allowed adopting any method for share valuation, either the prescribed method under sub-clause (i) or any other method under sub-clause (ii) of clause (a) to Explanation under clause (viib) of sub-section 2 to Section 56 of the Act. The Tribunal, however, emphasized compliance with Rule 11UA, which requires the valuation to be certified by an accountant not appointed as an auditor. The Tribunal upheld the AO's valuation methods as the assessee's reports did not meet this requirement.

5. Disallowance of R&D Expenditure:
For AY 2014-15, the assessee argued that the CIT(A) erred in upholding the disallowance of R&D expenditure, which was incurred for new product development. The Tribunal did not find specific details or arguments regarding this issue in the judgment provided, suggesting that the primary focus was on the share valuation disputes.

6. Scope of "Limited Scrutiny":
The assessee argued that the AO exceeded the boundaries of "limited scrutiny" concerning the disallowance of R&D expenditure. The Tribunal did not address this issue in detail, indicating that the main contention revolved around the share valuation and the compliance with Rule 11UA.

Conclusion:
The Tribunal dismissed both appeals filed by the assessee, upholding the AO's and CIT(A)'s decisions regarding the rejection of the share valuation reports, adoption of share values, and the determination of fair market value based on compliant valuation methods under Rule 11UA. The Tribunal emphasized the necessity of compliance with Rule 11U(a) and found no merit in the arguments presented by the assessee regarding the valuation reports signed by the company's auditor.