Fair market value of unquoted shares upheld on rational valuation basis, sustaining deletion of share premium addition.

The article notes that for share premium received by a closely held company, fair market value of unquoted shares under Rule 11UA may be supported by a rational valuation method and evidence, and the assessee is not confined to a rigid book-value approach. It records that the Delhi High Court approved the view that the Assessing Officer's book-value-based method was not applicable for the relevant year. On the facts, the valuation report and supporting material justified the reworked valuation of the subsidiary and the share premium, so the deletion of the addition under Section 56(2)(viib) was upheld.

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Issues: Whether the deletion of addition made under Section 56(2)(viib) of the Income-tax Act, 1961, on the basis that the assessee could determine the fair market value of unquoted shares by adopting a rational valuation method and suitably modifying the net asset value, was justified.

Analysis: The appeal concerned addition on account of share premium received by a closely held company. The Tribunal noted that, in the assessee's own earlier year, it had been held that while fair market value is to be determined under Rule 11UA of the Income-tax Rules, 1962, the assessee is not barred from substantiating a higher value on a rational basis supported by evidence. The Tribunal also noted that the Delhi High Court had approved the view that the book-value-based approach adopted by the Assessing Officer was not applicable to the relevant assessment year. On the facts, the valuation report and supporting material justified the reworked valuation of the subsidiary and, consequently, the share premium.

Conclusion: The deletion of the addition under Section 56(2)(viib) was upheld and the Revenue's challenge failed.

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