TaxTMI 
TaxTMI 
2020 (10) TMI 928
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....r Market Value as determined in accordance with Rule 11U and 11UA was even more than issue price of shares. Appellant prays addition so made deserves to be deleted. 1.2 That the ld. CIT (A) has further erred in confirming addition of Rs. 71,25,000/- made by ld. AO u/s 56(2)(viib) of the Income Tax Act 1961 without considering the submission filed and further without considering the additional evidences for the sole reason that the same were not filed alongwith prayer u/r 46 of Income Tax Rules, 1962. It is thus prayed that addition so made deserves to be deleted. 2. That the appellant craves the right to add, delete, amend or abandon the ground of this appeal at the time or before the actual hearing of the case." The hearing of the appeal is concluded through Video Conference due to prevailing condition of COVID 19 pandemic. 2. The assessee is a private limited company and engaged in the business of construction of flats and trading in shares. The assessee filed its return of income on 30th September, 2014 declaring Nil income. During the course of assessment proceedings the AO noted that the assessee has issued 37,500 shares of Rs. 10/- each for a price of ....
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.... has concurred with the view of the AO as far as the fair market value of the assets of the assessee and particularly the plot of land which was valued by the Registered Valuer at Rs. 2,93,00,000/- which was considered by the AO as per the book value and cost of acquisition in the hands of the assessee. The ld. CIT (A) has questioned the correctness of the value determined by the Registered Valuer. As regards the valuation determined on the basis of Discounted Free Cash Flow method, the ld. CIT (A) has declined to accept the same on the ground that it was not produced before the AO. 3. Before us, the ld. A/R of the assessee has submitted that in support of the value of the shares allotted during the year under consideration, the assessee has submitted the Valuation Report wherein the Registered Valuer has determined the value of the equity shares at Rs. 230/- per share on the basis of the fair market value of the assets of the assessee. He has referred to the Valuation Report and submitted that the Registered Valuer has applied the prevailing market rates in the area for the purpose of fair market value of the land being asset of the assessee at Rs. 2,93,00,000/- which was not a....
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....ed 24.10.2018 (Mumbai). 4. On the other hand, the ld. D/R has submitted that during the proceedings before the ld. CIT (A), the assessee has changed its stand and submitted the valuation based on Discounted Free Cash Flow method as against the valuation based on fair market value of the assets of the assessee on the date of issue of shares. Since the valuation based on Discounted Free Cash Flow method was not submitted before the AO, therefore, the ld. CIT (A) was justified in refusing to accept such a valuation. Further, the valuation as determined by the Registered Valuer is based on unaudited Balance Sheet and, therefore, the book value as per the Balance Sheet as on 31st March, 2013 was taken for determining the fair market value of the equity shares. The ld. CIT (A) has considered the Net Assets Value method and therefore, rejected the value claimed by the assessee. The ld. CIT (A) has accordingly confirmed the addition made by the AO. 5. We have considered the rival submissions as well as the relevant material on record. There is no dispute that during previous year relevant to assessment year under consideration the assessee issued 37,500 equity shares of Rs. 10/- each....
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.... 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 being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher; If the issue price received by the assessee is more than the fair market value of the shares as determined on the basis of methods provided under section 56(2)(viib), then the difference between the consideration received and the fair market value of the shares will be added as Income from other sources under the provisions of section 56(2)(viib) of the Act. The Explanation to section 56(2)(viib) contemplates various methods to substantiate the market value of the shares issued by the company and, therefore, as per clause (a) of the Explanation, the fair market value of the shares shall be the value as may be determined in accordance with the method prescribed under rule 11UA of the IT Rules or it may be substantiated by the company to the satisfaction of the AO based on the value of the assets as on the date of issue of shares incl....
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....the IT Rules. Thus when the said method was not giving the higher valuation, then the valuation which gives the higher fair market value of the shares has to be adopted. There is a difference of net assets which is based on the net book value of the assets of the company and the fair market value of the assets as on the date of issue of shares. Land being a non depreciable asset, will carry a fair market value based on the prevailing market price in the area. The Registered Valuer as per the Valuation Report has specifically stated that the fair market value of the land is taken as per the local survey done by him and, therefore, in case, if the AO was not satisfied with the fair market value of the shares based on the value of the assets, then he has to bring on record the specific defect as well as the contrary valuation to be determined by the DVO. Without bringing such contrary material or counter valuation report, the valuation as determined by the Registered Valuer cannot be rejected. We further note that the ld. CIT (A) has rejected the valuation based on Discounted Free Cash Flow method at threshold without verifying the fact that the said Valuation Report was also produced....
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....ee has substantiated the value of the shares issued at a price of Rs. 200/- by a fair market value of Rs. 230/- which is more than the issue price, then no addition is called for under section 56(2)(viib) of the Act. This Tribunal in the case of M/s. Ramehwaram Strong Glass (P) Ltd. vs. ITO (supra) has considered this issue of adopting the prescribed method at the choice of the assessee in para 4.5 as under :- "4.5 We have heard the rival contentions and perused the materials available on record including the written submissions and case laws relied upon during the course of hearing. From the order of the ld. CIT(A) it emerges that the ld.AR and Smt. Dhanwanti Gupta, CA appeared and the matter was discussed with them and they were asked to furnish the actual figures in respect of F.Y. 2013-14, 2014-15 & 2015-16. In compliance of such direction, the ld. AR and the ld. CA attended before the CIT(A) on 29.08.2016 and filed another valuation report wherein the value of the share was worked out @ 65.31 per share. A copy of the said report is placed on Pages 47-50 of the assessee's paper book. It is clear from the order of the ld. CIT(A) that he made a comparison of the....
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....ch shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares: Provided that this clause shall not apply where the consideration for issue of shares is received- (i) by a venture capital undertaking from a venture capital company or a venture capital fund; or (ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf. Explanation.-For the purposes of this clause,- (a) the fair market value of the shares shall be the value- (i) as may be determined in accordance with such method as may be prescribed9; 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 being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher; (b) "venture capital company", "venture capital fund" and "venture capital undertaking" shall have the meanings respectively assigned to them in clause (a), clause (b) ....
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.... by a merchant banker or an accountant as per the Discounted Free Cash Flow method.]" However, there is no dispute between the parties that Rule 11UA(1) is not applicable on the facts and circumstances of the present case which is a provision of general nature whereas Rule 11UA(2) is a specific provision providing for the valuation of the unquoted equity shares. After going through the relevant Section and the Rules, in our opinion, the matter of valuation of unquoted equity shares, has been completely left to the discretion of the assessee. It is his option whether to choose NAV Method (Book Value) under clause (a) or to choose DCF Method under clause (b) and the AO cannot adopt a method of his own choice. The authorities below cannot compel the assessee to choose NAV Method only as against DCF Method. When the legislation has conferred an option upon the assessee to choose a particular method, the valuation of the shares has to be in accordance with such method only i.e. DCF method in the present case u/r 11UA(2)(b) r/w S. 56(2)(viib). In the case of Medplus Health Services (P) Ltd vs ITO (supra), the ITAT, Hyderabad Coordinate Bench, after taking into considera....