9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2025 (4) TMI 1360 - AT - Income TaxAddition u/s 56(2)(viib) - rejecting the valuation report submitted by the assessee - Valuation of unquoted equity shares where in terms of rule 11UA(1)(c)(b) of the Income Tax Rules 1962 whether the book value of the immovable property is to be taken or the circle rate of immovable property is to be considered for the purpose of valuation - HELD THAT - In the instant case the assessee has valued its shares in terms of Net Asset Value method as prescribed u/Rule 11UA(1)(c)(b) of the Act. AO has taken the book value of the assets for the purpose of valuation of the shares however the fair market value of the shares has to be computed by taking the market value of the assets of the company as on the date of issue of shares. As the AO was not agreed with the market value claimed by the assessee therefore the matter must be referred to the DVO for the purpose of determining the value of the assets of the assessee as on the date of issue of shares. Accordingly the matter of determining the fair market value of shares as per method provided under clause (ii) of explanation (a) of section 56(2)(viib) is set aside to the file of AO for fresh adjudication after obtaining the report of the DVO with regard to the fair market value of immovable property as on the date of issue of shares. Ground of appeal taken by the assessee is allowed for statistical purposes.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered in this appeal are: (a) Whether the valuation of unquoted equity shares issued by the assessee company for the assessment year 2017-18, as determined under section 56(2)(viib) of the Income Tax Act, 1961, was correctly computed by the Assessing Officer (AO) and upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. (b) Specifically, whether the valuation of immovable property used in the Net Asset Value (NAV) method for determining the fair market value (FMV) of the shares should be based on the circle rate (market value) or the book value as per the provisions of Rule 11UA(1)(c)(b) of the Income Tax Rules, 1962. (c) Whether the Assessing Officer was justified in rejecting the valuation report submitted by the assessee and substituting his own valuation without referring the matter to a Valuation Officer (DVO) for an independent determination of the FMV of the immovable property. (d) The proper interpretation and application of Explanation (a)(ii) to section 56(2)(viib) regarding the determination of FMV of shares based on the value of assets including intangible assets on the date of issue of shares. 2. ISSUE-WISE DETAILED ANALYSIS Issue (a) and (b): Valuation of unquoted equity shares under section 56(2)(viib) and Rule 11UA(1)(c)(b) The legal framework governing the valuation of unquoted shares for the purpose of section 56(2)(viib) is primarily found in Explanation (a) to section 56(2)(viib) and Rule 11UA of the Income Tax Rules, 1962. Explanation (a) provides two alternatives for determining FMV of shares: - Clause (i): FMV as determined in accordance with a prescribed method. - Clause (ii): FMV substantiated by the company to the satisfaction of the AO, based on the value of its assets including intangible assets on the date of issue of shares. The assessee adopted the Net Asset Value method prescribed under Rule 11UA(1)(c)(b) for valuation, which involves valuing the company's assets and liabilities to arrive at the FMV per share. The assessee's valuer used the circle rate (market value) of immovable property as the asset value, relying on an amendment to Rule 11UA(1)(c)(b) introduced by the Income Tax (Twentieth Amendment) Rules, 2017. The AO, however, rejected this valuation and substituted his own computation based on the book value of immovable property as reflected in the balance sheet, citing Rule 11UA(2) which mandates use of book value for asset valuation for the relevant assessment year. The Court noted that the amendment to Rule 11UA(1)(c)(b) regarding the use of circle rates became effective from 1.4.2018, applicable from AY 2018-19 onwards. Since the assessment year under consideration is 2017-18, the amended rule was not applicable. Therefore, for AY 2017-18, the book value of assets was the relevant benchmark under Rule 11UA(1)(c)(b). However, Explanation (a)(ii) of section 56(2)(viib) allows the company to substantiate FMV based on market value of assets on the date of issue, which can be higher than the value computed under the prescribed method. The Court observed that the assessee had relied on this clause to justify the use of market value (circle rate) for immovable property. The Court held that while the AO was correct in applying the book value for valuation under Rule 11UA(1)(c)(b) for AY 2017-18, the assessee's right to substantiate FMV based on market value under Explanation (a)(ii) must be considered. The AO's unilateral substitution of asset values without independent verification was not justified. Issue (c): Whether the AO should have referred the valuation to the DVO The AO disagreed with the valuation report submitted by the assessee but did not refer the matter to the Departmental Valuation Officer (DVO) for an independent assessment of the FMV of immovable property. The Court emphasized that where the AO has doubts regarding the valuation of assets, the proper course is to refer the matter to the DVO rather than substituting values on his own. The Court found merit in the assessee's submission that the AO ought to have obtained a valuation report from the DVO to determine the fair market value of immovable property as on the date of issue of shares, especially since the valuation was a critical factor in computing the share premium and consequent addition under section 56(2)(viib). Issue (d): Interpretation of Explanation (a)(ii) to section 56(2)(viib) Explanation (a)(ii) states that FMV of shares can be substantiated by the company to the satisfaction of the AO based on the value of its assets including intangible assets on the date of issue of shares, whichever is higher between the prescribed method and substantiated value. The Court interpreted this provision as allowing the assessee to prove FMV by reference to market value of assets, not merely book value or cost. This clause contemplates that the market value of assets as on the date of issue is a legitimate basis for valuation, and the AO must consider such substantiation before making additions under section 56(2)(viib). Accordingly, the Court held that the AO's approach of relying solely on book value without considering the market value substantiated by the assessee was incomplete and contrary to the statutory scheme. 3. SIGNIFICANT HOLDINGS "The amendment referred by the ld.AR has taken place w.e.f. 1.4.2018 and applicable from AY 2018-19 and subsequent assessment years." "The fair market value of the shares shall be the value- (i) as may be determined in accordance with such method as may be prescribed; 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... whichever is higher." "As the AO was not agreed with the market value claimed by the assessee, therefore, the matter must be referred to the DVO for the purpose of determining the value of the assets of the assessee as on the date of issue of shares." "Accordingly, the matter of determining the fair market value of shares as per method provided under clause (ii) of explanation (a) of section 56(2)(viib) of the Act is set aside to the file of AO for fresh adjudication after obtaining the report of the DVO." Core principles established include:
Final determinations: The Tribunal set aside the addition made under section 56(2)(viib) and remanded the matter to the AO for fresh adjudication after obtaining a valuation report from the DVO regarding the fair market value of immovable property as on the date of issue of shares. The appeal was partly allowed for statistical purposes, recognizing the assessee's right to have the valuation reconsidered in accordance with law and proper procedure.
|
