Fair market value of unquoted shares must exclude unrealizable assets where distress auction price better reflects economic substance

For valuing unquoted shares under Section 50CA read with Rule 11UA in an NCLT-supervised liquidation auction, unrealizable assets, doubtful receivables and items not conferring beneficial ownership were held to be excluded from fair market value. The adoption of book values without testing recoverability or economic substance was treated as a mechanical approach that distorted value. In the factual setting of a distress auction, the contemporaneous auction price was accepted as the more reliable indicator of fair market value, and the deemed consideration was recomputed accordingly for capital gains purposes.

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Issues: Whether, for the purpose of Section 50CA read with Rule 11UA, unrealizable assets, doubtful receivables and assets not yielding beneficial ownership could be excluded while valuing unquoted shares transferred pursuant to an NCLT-supervised liquidation auction.

Analysis: The disputed shares had been acquired in a distress auction conducted under insolvency proceedings, and the material on record showed that substantial assets reflected in the company's balance sheet were commercially non-recoverable, including receivables from entities under insolvency, doubtful investments and project advances. The Share Purchase Agreement also stipulated that certain realizations would accrue to the liquidator and not to the assessee, showing that those assets did not confer beneficial entitlement on the assessee. The adoption of book values without examining recoverability or economic substance was held to be a mechanical approach that produced an artificial and distorted fair market value. The contemporaneous auction price was treated as the more reliable indicator of value in the given factual setting.

Conclusion: The unrealizable assets were required to be excluded in computing fair market value, and the deemed consideration under Section 50CA could not be based on the mechanically adopted figure of Rs. 104.917 per share. The fair market value was directed to be adopted at Rs. 3.59 per share for recomputation of capital gains, resulting in partial relief to the assessee.

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