AI Drafter 
TaxTMI 
TaxTMI 
2024 (8) TMI 1014
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....Shri Zia Shiekh and Shri Wasim Shiekh, Directors. The assessee submitted the valuation of shares as on 31.03.2011 under Net Asset Value Method (NAV) as per Rule 11U/UA of the Income Tax Rules, value in the shares at Rs. 250/- per share. The AO noticed that in the valuation report the land and building situated in Andheri, Mumbai has been revalued as on 31.03.2011 at Rs. 33,58,00,000/- and revaluation is based on the draft valuation report of CB Richard Elis for DMI Finance Private Ltd. in the case of Svenska Design Hotel, Mumbai (Group company of the assessee) strengthen by the valuation report dated 31.10.2011 of assessee's Chartered Accountant, Shri S.G. Mehta and Associates. Since the value of the land and building is main contributing factor for the value of shares, the AO called on the assessee to justify and substantiate the value of land and building including furniture adopted at Rs. 33.58 crores as per Rule 11UA of the Income Tax Rules and to show-cause why the provisions of section 56(2)(viib) of the Income Tax Act (the Act) should not be invoked. The assessee submitted before the AO that the assessee has adopted discounted cash flow method as well as fair market valu....
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....t 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 which does not represent the value of any asset; L= book value of liabilities shown in the balance sheet, but not including the following amounts, namely;- (i) The paid up capital in respect of equity shares; (ii) (ii) the amount set apart for payment of dividends of preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company; (iii) Reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation; (iv) Any amount representing provision for taxation, other than 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, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto; (v) Any amount representing provisions made fo....
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....means by 31st October 2011, the assessee was not aware of the correct value of the land and building and only as on 31.3.2011, after valuation, the value of the property was ascertained. This means that the fair market value of the share or share premium was first decided by the assessee company and then to suit that figure, valuation of the property was done. Thus it is crystal clear that the valuation of FMV of unquoted shares have not been done by the assessee as required under Rule 11UA of the I.T Rules Secondly, as per Rule 11UA, the fair market value has to be worked out as under: Hence, the FMV adopted by the assessee is not acceptable since it is not based on any scientific basis or principle or as per the law. Accordingly, the FMV is worked out as above based on balance sheet as on 31.03.2011 under rule 11UA and excess consideration received by the assessee company of Rs. 4,44,66,200/- is treated as Income from Other Sources under section 56(2)(viib) of the Income Tax Act, 1961. 10. Thus it is seen that the company has issued shares at a cost higher than the market value of shares. The difference in share price works out to Rs. 111.50 (250-138.50) per sha....
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....ed liabilities. (vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference 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: Rule 11UA prescribes a formula as per which the fair market value of shares is required to be determined The intention behind introduction of provisions of section 58(2)(vib) and Rule 11UA is precisely to avoid any arbitrariness as it lays down certain parameters and accounting methodology to determine correctness of the share-price which is based on realistic financial indices As per Rule 11UA in determining the FMV of unquoted shares, the book value of the assets as on the date of valuation is required to be adopted. In the instant case, while the assessee has adopted the revalued figure of land and building including furniture as on 31.10.2011, the AO has adopted the book-value as on 31.03.2011 It is observed that the assessee has enhanced the value of the land and building including furniture from Rs. 18,43,55.072/- as on 31.03.2011 to Rs. 33,58,00,000/- as on....
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..... AR argued that once the hotel is completed and furnished there is bound to be increase in the value of the land and building and therefore, the basis on which the addition is made by the AO is not correct. The ld AR also challenged the valuation done by the AO based on financial statement as at 31.03.2011 stating that the as per Rule 11UA the value as on the "valuation date" i.e. the date on which the consideration is received by the assessee should be considered which in this case is FY 2013-14. The ld AR further argued that in the absence of audited financials as on 31.03.2013, the audited financial of the previous financial year i.e. Financial statement as at 31.03.2012 should have been considered for valuation of shares. Accordingly the ld AR prayed that the addition made by the AO is not sustainable. 5. The ld. DR on the other hand relied on the order of the lower authorities. 6. We have heard the parties and perused the material on record. The assessee has issued shares at a value of Rs. 250/- to its Directors at a premium of Rs. 240/- per share. The premium is arrived at by the assessee based on a draft valuation report issued by CB Rechard Elis which was further cer....