TaxTMI 
TaxTMI 
2023 (10) TMI 1058
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.... Income Tax Act 1961,:- (u) the fair market value of the shares shall be the value- (i) as may be determined in accordance with such method as may be prescribed'--': 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: In this regard on perusal of Rule 11U & 11UA prescribed under the Act, it is stated that "Notwithstanding anything contained in subclause (b) of clause (c) of sub-rule (1), the fair market value of unquoted equity shares for the purposes of sub-clause (i) of clause (a) of Explanation to clause (viib) of sub-section (2) of section 56 shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner under clause (a) or clause (b), at the option of the assessee, namely:- (a)the fair market value of unquoted equity shares = (A-L) x (PV), (PE) where, A= bo....
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....iately preceding the valuation date which has been approved and adopted in the annual general meeting of the shareholders of the company" On a joint reading of both the rules prescribed u/s 56(2)(viib), it is amply clear that valuation of the shares shall be done on the valuation date and the method of valuation used shall be at the option of assessee. Further as per the fair market value method, the book value of assets and liabilities on the valuation date shall be used for the purpose of valuing such unquoted equity shares. When such balance sheet on the valuation date is not drawn up, the balance sheet as drawn up immediately before the valuation date which has been approved and adopted in the annual general meeting of the shareholders of the company shall be used for the purpose of valuing such unquoted equity shares. In this regard, we would like to inform you that the assessee has got its accounts audited on the valuation date by the auditor u/s 224 of the Companies Act, 1956 and FMV of the shares was derived accordingly. Since, the balance sheet drawn up on the valuation date is available, the balance sheet drawn up immediately before the....
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.... in law. 4. The appellant reserves the right to add, amend or alter any ground or grounds at the time of hearing." 2. Succinctly stated, the assessee company, which is engaged in the business of running cold storage, had e-filed its return of income for A.Y.2013-14 on 27.03.2015, declaring an income of Rs. Nil. The case of the assessee company, thereafter, was selected for scrutiny assessment u/s. 143(2) of the Act. 3. During the course of the assessment proceedings, it was, inter alia, observed by the A.O. that the assessee company had issued 96000 equity shares of a face value of Rs. 10/- per share at a premium of Rs. 90/- per share. On being queried as regards the huge share premium of Rs. 90/- per share on the basis of which an amount of Rs. 8,64,000/- was received, it was submitted by the assessee company that the said shares were issued only to the directors and their relatives and its book value as on 31.03.2012 was Rs. 91/- per equity share. Considering the aforesaid reply of the assessee, the A.O held a conviction that now, as per Rule 11UA of the Income Tax Rules, 1962, the "Fair market value" (FMV) of the shares of the assessee company based on the book va....
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....ir relatives only and book value of shares as on 31.3.2012 is Rs. 91 per share. The reply of the assessee has been considered, however, it is not acceptable as no such exception has been carved out in Section 56(2)(viib). The onus was on the assessee company to justify that the issue price is not exceeding the fair market value of shares, however, the assessee has failed to justify the premium charged. It is noticed that the fair market value of the shares of assessee company computed based on book value method as provided in Rule 11 UA based on Balance Sheet of assessee company as on 31-03-2012 works out to Rs. 91 per share whereas the shares have been issued at premium .of Rs. 90 per share thus the issue price is totaling to Rs. 100 per share instead of Rs. 91, therefore, the excess premium of Rs. 9 per share over and above the fair market value i.e Rs. 91 per share aggregating to Rs. 8,64,000 (Rs.9*96000) is held as income of the assessee u/s 56(2)(viib). The value of share is Rs 10 which is the face vale and Rs 90 which is the premium. Where as assessee was showing Rs 91 as the value of share. The shares are given directors and its relatives at Rs 100 which includes Rs....
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....he basis of the book value method as provided under Rule 11UA at Rs. 91/- per equity share, he had, thus, made an addition of the excess premium of Rs. 9/- per equity share that was received by the assessee company and made a consequential addition of Rs. 8,64,000/- (supra) in its hands. 7. Before proceeding any further, it would be apt to cull out the provisions of Section 56(2)(viib) of the Act, which reads as follows: "(viib) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such 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 9[or a specified fund]; or (ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf: ^10[Provided further that where the provisions of....
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....de available on the statute vide the IT (fifteenth amendment) rules, 2012 w.e.f. 29.11.2012. Rule 11UA of the Income-Tax Rules, 1962 contemplates the methods for making a valuation of the shares/securities, and the same as was applicable in the case of the assessee for the year under consideration reads as under: "11UA [(1)] For the purposes of Section 56 of the Act, the fair market value of a property, other than immovable property, shall be determined in the following manner, namely - (a) Xxxxxxxx (b) Xxxxxxxx (c) Xxxxxxxx [(b) the fair market value of unquoted equity shares shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner, namely:- (A-L) the fair market value of unquoted equity shares = (PE) X (PV), where, A = book value of the assets in the balance-sheet as reduced by any amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act and any amount shown in the balance-sheet as asset including the unamortized amount of deferred expenditure whi....
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....eceived by the assessee. On the basis of the mandate of law, it becomes clear beyond any scope of doubt that the assessee, by adopting either of the aforesaid methods to determine FMV of the unquoted equity shares, is required to determine the value of the same as on valuation date, i.e., the date on which the property or consideration is received by the assessee company. 9. On a conjoint reading of Section 56(2)(viib) r.w. Rule 11UA, I find that the FMV of the unquoted equity shares would be their value as of the date on which the assessee company receives property or consideration for the same. As against the aforesaid requirement of law, it transpires that on one hand, the A.O had determined the FMV of the unquoted equity shares of the assessee company as per the Net Worth Method on 31.03.2012 at Rs. 91/- per equity share, while the assessee company had determined the same as per the said method as on 29.03.2013 at Rs. 144/- per equity share. In my considered view, both the A.O and the assessee company had wrongly adopted the date of valuation. I, say so, for the reason that as per the meaning of "valuation date" as contemplated under Rule 11UA(j), the FMV of the unquoted ....