TMI Blog2020 (10) TMI 928X X X X Extracts X X X X X X X X Extracts X X X X ..... maximum revenue. Accordingly, in the facts and circumstances of the case when the assessee has substantiated the value of the shares issued at a price of ₹ 200/- by a fair market value of ₹ 230/- which is more than the issue price, then no addition is called for under section 56(2)(viib) As decided in M/S. RAMESHWARAM STRONG GLASS (P) LTD. VERSUS THE ITO, WARD 2 (1) , AJMER [ 2018 (9) TMI 403 - ITAT JAIPUR] Authorities below wanted to impose upon the method of valuation of their own choice, completely disregarding the legislative intent which has given an option to the assessee to choose any one of the two methods of valuation of his choice. When the law has specifically provided a method of valuation and the assessee exercised an option by choosing a particular method (DCF here), changing the method or adopting a different method would be beyond the powers of the revenue authorities. Permitting the revenue to do so will render the clause (b) of Rule. 11UA(2) as nugatory and purposeless. Thus, to this extent the action of the authorities below is not justified and it is held that the assessee has got all the right to choose a method which, cannot be changed by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 10/- each for a price of ₹ 200/- per share which included a premium of ₹ 190/- per share. In order to substantiate the value of its equity shares and premium thereon, the assessee submitted Valuation Report dated 17.02.2014 of Registered Valuer as per Rule 11UA of the IT Rules. The AO noted that the Valuer has estimated the fair market value of vacant piece of land at ₹ 2,93,00,000/- as on 17th February, 2014 whereas as per the Balance Sheet the assessee has shown the value of the said land no. 142, Ram Gali No. 3, Raja Park, Jaipur at ₹ 1,30,00,000/- being the cost of acquisition of the land as on 16.03.2013. The AO was of the view that the Registered Valuer has not substantiated the value of the property on any documentary evidence of any kind and consequently the AO declined to accept the fair market value of the assets of the assessee to substantiate the value of the equity shares issued at premium. The AO though referred the valua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rket 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 ₹ 2,93,00,000/- which was not accepted by the AO. However, the AO has not brought on record any contrary fact or material to show that the value determined by the Registered Valuer is not based on correct facts being the prevailing market price of the land. He has further contended that as per the Explanation to Section 56(2)(viib), 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 as may be substantiated by the assessee company based on the value on the date of issue of shares of its assets including intangible assets. It is also provided that whichever valuation is higher is to be taken into consideration. Therefore, the higher of the valuation determined as per the various methods prescribed under section 56(2)(viib) of the Act. The AO cannot adopt the lesser valuation but it is mandate of the provisions that he has to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firmed 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 ₹ 10/- each for a price of ₹ 200/- each which includes the share premium of ₹ 190/- per share. To substantiate the value of equity shares, the assessee filed the Valuation Report whereby the Registered Valuer has determined the value of the shares at ₹ 230/- per share. The sole controversy is around the value of the land being the asset of the assessee company which was acquired by the assessee at ₹ 1,30,00,000/- and shown in the Balance sheet at cost price whereas the Registered Valuer has adopted the fair market value of the said land as on the date of issue of the shares at ₹ 2,93,00,000/-. It is pertinent to note that for the purpose of fair market value of the shares, the value has to be determined in accordance with the methods prescribed under rule 11UA of the IT Rules or the value may be substantiated by the assessee company to the satisfaction of the AO based on the value of it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all 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 including the intangible assets of the assessee company. Therefore, option is with the assessee to adopt a method which is more suitable and giving higher fair market value of the shares. Sub-clause (ii) of clause (a) of the Explanation to Section 56(2)(viib) gives the power to the AO to accept the valuation subject to his satisfaction. Therefore, if the value determined as per the fair market value of the assets of the assessee is higher than the value determined as per the method prescribed under rule 11UA of the IT Rules, then the value so determined based on the fair market value of the assets as on the date of issue of shares has to be taken into consideration for determination of 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) of the Act. There is no dispute in the case in hand that the value determined as per the fair ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aluation 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 before the AO during the assessment proceedings. The only mistake is the reference of the letter given by the assessee i.e. the date whereas the AO has accepted this fact that the A/R of the assessee company submitted his report as per Rule 11UA along with the Valuation Report dated 07.02.2014 of the Registered Valuer. We have also verified from the record that the assessee produced all these Valuation Reports based on different methods before the AO and, therefore, rejection of the same by the ld. CIT (A) is not based on correct facts on record. Further, the ld. CIT (A) has also misconstrued the provisions of section 56(2)(viib) as well as Rule 11UA(2)(a) of the IT Rules. The observations of the ld. CIT (A) in para (vii) at page 20 of the impugned order is as under :- (vii) Thus, fair market value of the shares is to be determined on the basis of book value of its assets and liabilities on the valuation date or on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 last report submitted to him on 29.08.2016 based on the actual figures with the earlier reports submitted and prepared by the CA as per Rule 11UA(2)(b) on DCF method, and the ld. CIT(A) finding difference between the figure of the two, rejected the report submitted by the assessee as absolutely unreliable and without any basis. Thus, the basic dispute between the parties is whether the authorities below could have applied the Net Asset Value as prescribed u/r 11UA(2)(a) or whether the assessee has got a right to opt for the method of valuation given u/r 11UA(2)(b) and secondly, if the assessee is entitled to the adopt the DCF method to estimate the fair market value, the valuation submitted by the assessee was fair and reasonable in accordance with Rule 11UA(2). Before proceeding further, we would like to reproduce the relevant Provisions contained u/s 56(2)(vii)(b) of the Act and the relevant Rules, which reads as under: - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ature, 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) and clause (c) of Explanation to clause (23FB) of section 10; [Rule 11UA (2) Notwithstanding anything contained in sub-clause (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 = 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 unamortised amount of deferred expenditure which does not represent the value of any asset; L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b). In the case of Medplus Health Services (P) Ltd vs ITO (supra), the ITAT, Hyderabad Coordinate Bench, after taking into consideration various decisions, has observed as under: 11. On a careful reading of the judgments discussed above, it is seen that the Courts have held that where a method has been prescribed by the legislature, that method alone shall be followed for computation of the fair market value. The A.O. and the Ld. CIT(A) have not followed the relevant provisions for adopting or computing the fair market value of the shares, but have adopted the market value at which some of the shares have been purchased by the assessee as FMV. This, in our opinion, is not correct. As held by the Courts in the above judgments, the A.O. has to compute the fair market value in accordance with the prescribed method but cannot adopt the market value as fair market value under Section 56(2)(viia) of the Act. The legislature in its wisdom has also given a formulae for computation of the fair market value which cannot be ignored by the authorities below. It is observed that in the instant case, the assessee company had exercised an option to value the share by DCF Method however, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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