TaxTMI 
TaxTMI 
2019 (1) TMI 1635
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....eceived by the assessee company. The action of ld. CIT (A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by deleting the said addition of Rs. 42,83,96,680/-. (b) In the facts and circumstances of the case ld. CIT (A) has erred in interpreting and applying the Rules 11 U and 11UA of Income Tax Rules, 1962. The action of ld. CIT (A) is illegal, unjustified, arbitrary and against the f acts of the case. Relief may please be granted by applying the said rules properly and deleting the addition of Rs. 42,83,96,680/-. (c) In the facts and circumstances of the case ld. CIT (A) has erred in not accepting the contention of the assessee Company of it being a Company in which public is substantially interested u/s 2(18) of the Income Tax Act, 1961 and, accordingly, provision of section 56(2)(viib) being applicable. Relief may please be granted by deleting the said addition of Rs. 42,83,96,680/-. (d) In the facts and circumstances of the case ld. CIT (A) has erred in not accepting the FMV of land at Rs. 21,73,21,000/- for the purpose of valuing equity shares of the company for determining excess premium chargeable ....
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....ord. The ld. A/R of the assessee has submitted that the assessee filed the valuation report of the Chartered Accountant as well as valuation report of the approved valuer in support of the claim of fair market price of the shares issued by the assessee at premium. Therefore, the evidence produced by the assessee clearly shows that the assessee claimed the fair market price based on the valuation as prescribed under clause (ii) of Explanation (a) of section 56(2)(viib) of the IT Act. He has further contended that once the assessee has filed the supporting evidence in the shape of the valuation report, then in case the AO was not satisfied with the valuation of the assessee, the matter ought to have been referred to the DVO. The AO has valued the fair market price of the shares as per the method provided under Rule 11UA of the IT Rules whereas as per section 56(2)(viib) of the IT Act the fair market value of the shares shall be the value as may be determined in accordance with such method as may be prescribed or as may be substantiated by the company to the satisfaction of the AO based on the valuation on the date of issue of shares of its assets including intangible assets whichever....
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....e in the impugned order for not considering and adjudication of the issue of valuation in terms of Clause (ii) of Explanation (a) of Section 56(2)(viib) of the Act. We find that the assessee had raised this contention as recorded by the Tribunal in para 3.1 as under: "3.1 Before us, the Id. A/R of the assessee has submitted that as per Explanation (a)(ii) to section 56(2)(viib) the assessee has to substantiate the valuation-of its shares with reference to market value of its assets. Therefore, the valuation determined by the AO on the basis of book value is not as per the provisions of section 56(2)(viib) of the Act read with Explanation (a)(ii). The Id. A/R has submitted that the value as per the said Explanation has to be taken as market value and, therefore, the fair market value of the shares were rightly determined in the valuation report produced by the assessee as per the Certificate of the Registered Valuer. He has further contended that the assessee company has taken the fair market value of its land at Rs. 21,73,21,000/- after giving due deduction on account of encroachments/encumbrances @ 32%. The AO has taken the value of the land at book value of Rs. 23,19,211....
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....Patel India vs. DCIT, 105 Taxman 28. The Id. A/R has submitted that the Mumbai Bench of the Tribunal has observed that the valuation is a highly technical matter and deserves to be referred to the Valuation Cell." Thus, the assessee has contended before the Tribunal that the assessee has substantiated the value of its shares in terms of Clause(ii) of Explanation (a) of Section 56(2)(viib) of the Act. However, the Tribunal while deciding the issue of valuation, has considered the valuation as per the prescribed method under Rule 11UA of the Rules which are prescribed in terms of Clause (i) of Explanation (a) to Section 56(2)(viib) of the Act. The findings of the Tribunal in para 4 is as under: "4. We have considered the rival submissions as well as relevant material on record. The only dispute raised before us is regarding the fair market value of the shares of the assessee and further the value of the land in question which is at variance as taken by the assessee and adopted by the AO on different parameters. The AO has adopted the value of the land for the purpose of computing the net worth of the assessee as per the book value shown in the Balance Sheet whereas ....
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....he method for this purpose is prescribed under Rule 11 UA of IT Rules. Further, if the valuation as adopted by the assessee is substantiated on the basis of the value of its assets to the satisfaction of the AO, then the said value as claimed by the assessee shall be the fair market value of the shares. In case the AO is not satisfied with the value as claimed by the assessee then the only option with the AO to determine the fair market value in accordance with the method prescribed under Rule 11UA of IT Rules. Further, the value so determined as prescribed in rules or as per the value based on the assets of the company whichever is higher has to be taken into consideration. Thus if the value determined as per the prescribed method is higher than the fair market value based on the value of the assets of the company then the value so determined on the basis of prescribed method being the higher one has to be taken into consideration for the purpose of determining the fair market value of the shares and differential consideration, if any, to be taken into account for the purpose of making addition under section 56(2)(viib). In the case in hand, the AO has considered only the net asse....
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.... shares; PE = total amount of paid up equity share capital as shown in the balance-sheet; PV = the paid up value of such equity shares; or (b) the fair market value of the unquoted equity shares determined by a merchant banker or an accountant as per the Discounted Free Cash Flow method.]" Thus sub-rule (2) of Rule 11UA prescribes two methods of computing the fair market value of shares and an option is given to the assessee for adopting the value by applying either of the two methods. The first method is based on the net worth of the company which was though taken by the AO and the second method is based on the fair market value as determined by a Merchandise banker or an Accountant as per the Discount Free Cash Flow Method. Thus as per the first method, the assets are to be taken as per the book value of the assets shown in the Balance Sheet and, therefore, this method does not prescribe the fair market price of the asset. The AO has applied the first method as per the Rule 11UA(2). It appears that even in the valuation report, the valuer has also applied this method and has not chosen the method based on Discount Free Cash Flow Method. Hence, ....
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.... Thus it is clear that the finding on the issue of valuation of the fair market price of the shares in terms of the method prescribed under Rule 11UA of IT Rules has attained the finality and the Tribunal has not disturbed the said finding while passing the order in the Miscellaneous Application. The earlier order was recalled only for the limited purpose of valuation of fair market value of the shares in terms of clause (ii) of Explanation (a) to section 56(2)(viib) of the IT Act which was not adjudicated earlier. Therefore, in the recalled proceedings the scope is limited to consider the valuation of fair market value of the shares by considering the method as prescribed under clause (ii) of Explanation (a) to section 56(2)(viib) of the IT Act. We find that the assessee has filed the valuation report given by the Chartered Accountant Shri Ritesh Gupta as well as the valuation report of the approved valuer Shri Prabir Kumar Chaudhuri in support of the fair market value of the shares. In those valuation reports the assessee has shown the market price of the assets at Rs. 22,89,01,740/-. This value of assets mainly consists of valuation of the property situated at Kolkata bearing no....