Prescribed share valuation method choice limits tax authorities from substituting an alternative basis for right-share premium taxation.

Rule 11UA(2) permits an assessee to choose between prescribed valuation methods for determining the fair market value of shares. Where the Net Asset Value method is chosen and its computation from audited financial statements contains no irregularity, tax authorities may scrutinise or revalue only within that method; they cannot reject it as unrealistic or substitute another basis. Alleged circumvention of foreign-exchange requirements falls outside the Income-tax Act and Rules where the overseas investment was authorised and no competent authority alleged a breach. In the absence of established tax benefit or unaccounted-money introduction, taxing excess premium on right shares under Section 56(2)(viib) was considered unsustainable.

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Issues: Whether share premium received on issue of right shares could be taxed under Section 56(2)(viib) after the assessee determined the fair market value under the Net Asset Value method prescribed by Rule 11UA(2)(a).

Analysis: The assessee adopted the Net Asset Value method on audited financial statements and determined the value at Rs. 3,656 per share. The computation under that prescribed method was neither found to contain any irregularity nor independently disputed. Rule 11UA(2) confers upon the assessee the choice between the prescribed valuation methods. Tax authorities may scrutinise the valuation and undertake a fresh valuation only within the method chosen by the assessee; they cannot reject that method as unrealistic or substitute a different basis. Allegations concerning circumvention of foreign-exchange requirements were also outside the jurisdiction exercisable under the Income-tax Act and the Income-tax Rules, particularly when the overseas investment had been approved by the authorised dealer and no competent authority had alleged a violation. Further, no tax benefit or introduction of unaccounted money through the right-share issue was established.

Conclusion: The addition of excess share premium under Section 56(2)(viib) was unsustainable and was directed to be deleted, in favour of the assessee.

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