Loading judgment…
Facts
The assessee company issued fresh shares at a premium, valuing them as per Section 56(2)(viib) of the Income Tax Act. The Assessing Officer (AO) recomputed the Fair Market Value (FMV) of the shares, leading to an addition to the taxable income.
Held
The Tribunal held that the assessee's method of valuing shares as per Rule 11UA was correct and that the AO erred in recomputing the valuation. The CIT(A)'s order deleting the addition was sustained.
Key Issues
Whether the assessee's valuation of shares for issue premium, as per Rule 11UA, was valid, and if the AO was justified in recomputing the FMV under Section 56(2)(viib).
Sections Cited
56(2)(viib), 143(3), 11UA, 68
AI-generated summary — verify with the full judgment below
Detected automatically from the text. The count shows how many other judgments on BharatTax rely on the same authority.
Income Tax Appellate Tribunal, DELHI BENCH “E”: NEW DELHI
Before: MS. MADHUMITA ROY
O R D E R PER AMITABH SHUKLA, A.M: This appeal, preferred by the Revenue for assessment year 2016-17, is directed against the order of National Faceless Appeal Centre (NFAC), Delhi dated 28.05.2024 (DIN & Order No. ITBA/NFAC/S/250/2024-25/1065178621(1) against the order dated 30.12.2018 passed by the Income Tax Officer, Ward 18(3), New Delhi, u/s 143(3) of the Income-tax Act (hereinafter referred to as the “Act”). the single point of deletion by the ld. CIT(A) of addition made by the ld. AO of Rs.
17,22,00,492/- u/s 56(2)(vii-b) of the Act. Brief facts of the case as discussed by ld. CIT(A) in his order are as under:
“1. The assessee is Private Limited Company. The company filed return declaring taxable income of Rs. 16,30,372/- on 26.09.2016. Notice u/s 143(2) was issued and the assessment proceedings were carried through ITBA portal of the department.
During the year, the assessee issued fresh share capital of 97200 shares of face value of Rs. 10/- each at premium of Rs. 2562/- each share. The valuation of FMV of shares for issue of the shares were done by the assessee as per provisions of Section 56(2)(viib) Explanation a(ii) of the Income tax Act. The Income tax Act gives option to the assessee to arrive at FMV of its shares for issue of fresh capital as per 3 options given as per provision of Section 56(2)(viib). As per this section two options are prescribed as per provisions of Explanation a(i) read with Section 11UA(2) which are a. As per Book Value arrived at as per formula given in Rule 11UA(2)(a) b. As determined as per discounted free cash flow method And 3rd option is as per provision of Explanation a(ii)which is c. By valuing its assets including intangible assets etc. 2.1 The assessee adopted the 3rd option i.e. as per provisions of Explanation a(ii) of the Section 56(2)(viib) of the Act. The Explanation also gives option to adopt the FMV whichever is higher out of these options.
The assessee owned some tangible assets as per its balance sheet which had more value than balances as per books of accounts. So for arriving at A.Y. 2016-17 value for issue of shares, these assets were valued at F.M.V. as on the last audited balance sheet i.e. 31.03.2015. Two types of assets which were valued at FMV instead of book value are - Immovable property owned by the company and - Unquoted shares owned by the company – - Other assets were valued as per balances in books of accounts. A valuation certificate from auditor of the company was also submitted. 3.1 The Immovable property was valued as per valuation report of the approved valuer which was done at circle rate of the property. The unquoted shares were valued at book value of these shares as per last audited balance sheet of the investee company (company in which shares were held by the assessee company). The supporting valuation certificates from respective investee companies alongwith their respective balance sheets as on 31.03.2015 were filed in support of the book value of the shares of the investee company for the shares held by the assessee company in the investee company. It is to be noted that the book value as the FMV is the most conservative method of the methods prescribed in Rule 11UA also and the same was adopted by the assessee company for valuing its investment in unquoted shares.
The assessing officer issued show cause notice dt. 25.12.2018 asking clarifications regarding valuation of shares for allotment. The assessee replied vide its submission dt. 26.12.2018 and explained the legal approval and facts of the method adopted by the assessee to arrive at FMV of the shares for allotment.
5. The assessing officer did not object in principal to adoption of method as prescribed under section 56(2)(viib) Explanation a(ii) as adopted by the assessee. The assessing officer accepted the valuation of immovable property by the assessee taken as basis for arriving at FMV of the shares. However the assessing officer has not accepted the valuation of the unquoted shares held by the assessee company as its investment as arrived by the assessee company. The assessing officer has raised doubts about the valuation of the shares as per surmises and conjectures which are not as per law and on facts.
A.Y. 2016-17 6. The assessing officer did not accept the valuation of un-quoted shares held by the company and adopted the balances as per the assessee’s books for the arriving at FMV for allotment of shares. By reducing FMV, the assessing officer recomputed the FMV of the assessee company shares at Rs. 800.39 instead of Rs. 2572/- as adopted by the assessee company thus holding Rs. 1771.61 as excess price per share taken by the assessee on allotment of shares. This made addition of Rs. 17,22,00,492/- to the taxable income of the assessee u/s 56(2)(viib).”
3. Ld. Counsel for the assessee further stated that the ld. CIT(A) has rightly accorded relief to the assessee. Our attention was invited to para 4.3 to para 5 of the appellate order which reads as under:
“4.3. In the appeal proceedings, the assessee claimed that the issue price of Rs. 2,572/-, per share, with Face Value of Rs. 10/- and premium of Rs. 2,562/- was arrived after taking a proper certificate under Rule 11UA of the Income Tax Rules, from a Chartered Accountant. In such certificate, dated 02/11/2015, while making the calculation of the valuation of the shares, the same Chartered Accountant valued the equity shares held by the assessee, at a higher value than the value carried by the assessee in those Pvt. Ltd. Company shares in the balance sheet of the assessee. The AO did not allow such valuation and in the assessment order he held that the investments, consisting of Pvt. Ltd. Company shares, should have been taken at the book value of such shares, as carried in the balance sheet, for the purpose of valuation of the shares under Rule 11UA. The assessee claimed that the certificate issued by the employed Chartered Accountant was correct, as in terms of Rule 11UA, while making the valuation of the shares of a company, the valuation is to be made as on the date of valuation and not as per the book value. In clear terms of Rule 11UA(1)(c)(b), it is given that the Fair Market Value of shares and securities, carried in the balance sheet of the company, whose valuation is being made, is again to be valued in the manner provided in the Rule. Therefore, the valuation of the unlisted equity shares, which was carried in the balance sheet of the assessee for a sum of Rs. 60,50,000/- had again to be revalued in each of such share, as per Rule 11UA. The Valuing Chartered Accountant has, therefore, valued the book value of the shares, held by the companies, being PPS Infrastructure Ltd., A.Y. 2016-17 Beldi Jewels Pvt. Ltd., Shivani Build Tech Pvt. Ltd. and Saksham Apparels Pvt. Ltd., afresh in terms of the balance sheet figures of the said companies, as on 31/03/2015. Such revaluation of the Pvt. Ltd. equity shares resulted in the valuation of the shares of the assessee to Rs. 2,572/-, per share. 4.4. It is held that, in terms of the decision of the Hon’ble Bombay High Court in the case of Vodafone M-Pesa Pvt. Ltd.’s case, reported in 256 Taxmann 240, it was held that the assessee has the option of having its valuation of Fair Market Value of the shares to be issued by it, by either adopting Discounted Cash Flow Method or by Net Asset Value Method. In this case, the assessee adopted the valuation of the shares by the Net Asset Value Method and got it valued by the Chartered Accountant, in terms of the prescribed procedure given in Rule 11UA(1)(c)(b).
Under the above circumstances, I do not find merit in the action of the AO in denying to accept the valuation proposed by the assessee and recomputing such valuation in the assessment order, at a lower value. Now, in case where the valuation of the shares certified by a Chartered Accountant as fair Market Value under Rule 11UA, is used by the company issuing share, there cannot be any difference between the issue price and the Fair Market Value of the shares. And if there is no difference between the issue price and the Fair Market Value, as determined under Rule 11UA, the provisions of Sec. 56(2)(viib) is not attracted at all. Therefore, the AO is directed to delete the addition of Rs. 17,22,00,492/-, made in the assessment order and the appeal of the assessee is allowed.”
4. Per contra the ld. DR vehemently argued in favour of the order of the AO. It is the case of the Revenue that the time gap of nine months in the valuation period casts a shadow of doubt on the affairs of the assessee qua the valuation of shares.
It was also argued that no reliance can be placed upon the financials of the other investee companies for determining. The ld. DR, therefore, assailed the order of ld. CIT(A). records. During the course of appellant proceedings ld. AR of the assessee has placed on record a voluminous paper book to support the order of ld. CIT(A). Ld. Counsel for the assessee has argued that the order of ld. CIT(A) is based upon correct understanding and appreciation of the facts of the case and does not warrant any disturbance. At this stage we deem it necessary to reproduce the statutory provisions of Section 56(2)(viib) of the Act:
Sec. 56(2)(viib) Finance Act, 2012 introduced clause (viib) in section 56(2) of the Income-tax Act, 1961 (“the Act”) with effect from 1 April 2012, which deals with ‘Angel tax’. This clause provides that the following income shall be taxable under the head “income from other sources”: “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; or (ii) (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 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, A.Y. 2016-17 copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, Whichever is higher;” Rule 11UA of the Income-tax Rules (”Rules”), as they stand today, provides the following options to the taxpayer for calculating the fair market value of unquoted equity shares: (a) Valuation based on net asset value with certain adjustments (“NAV”); OR (b) Valuation by a merchant banker as per Discounted Free Cash Flow (“DCF”) method 2. Notification issued by Department of Industrial Policy and Promotion (DIPP) in this regard, defines a ‘Start-up’ as an entity shall be considered as a start-up: (a) Up to a period of seven years for non-biotechnology sector and ten years for biotechnology sector; (b) Its turnover should not have exceeded INR 250 million in any of the financial years since incorporation; (c) It is working towards innovation, development or improvement of products or processes or services, or it is a scalable business model with a high potential of employment generation or wealth creation; (d) It is not formed by splitting up or reconstruction of an existing business.
The first argument raised by the ld. Counsel for the assessee is that provisions of Section 56(2)(vii-b) are invokable only when there is an element of any unaccounted income in the transaction. It has been argued that in this case shares have been issued to a sister concern. In support of these contentions reliance was placed upon decision of this Tribunal in the case of IPSAA Holdings Private dated 23.07.2025. Reference was made on para 8 to para 12 of the impugned order which reads as under:
“8. Further he brought to our notice observations of the Assessing Officer at pages 2 & 3 of the assessment order, also brought to our notice pages 6 to 14 of the appellate order for the detailed arguments of the assessee A.Y. 2016-17 submitted before the ld. CIT (A). He also brought to our notice valuation reports placed on record and also brought to our notice share purchase agreement with Sodexo SA which is placed at pages 277 to 370 of the paper book. He further submitted that the objection of section 56(2)(viib) is to curb generation and use of unaccounted income and not to hinder the genuine and bonafide business transactions. In this regard, he relied on the following case laws :- (i) Vaani Estates (P) Ltd. vs. ITO – (2018) 98 taxmann.com 92 / 172 ITD 629 (Chennai-Trib.) (ii) ACIT vs. Subodh Menon (2019) 103 taxmann.com 15 / 175 ITR 449; (iii) Clearview Healthcare Pvt. Ltd. vs. ITO (2020) 114 taxmann.com 167 (Del-Trib.). 8 9. He further submitted that the Assessing Officer cannot substitute NAV method in place of DCF and relied on the following cases :- (i) Cinestaan Entertainment Pvt. Ltd. vs. ITO (2019) 106 taxmann.com 300 (Del.-Trib.); (ii) Rameshwaram Strong Glass Pvt. Ltd. vs. ITO (2018) 96 taxmann.com 542 (Jaipur-Trib.) 10. Finally, he submitted that projections have to be viewed as projections and it cannot be accurate, in this regard, he relied on the following case laws :- (i) Rameshwaram Strong Glass (P.) Ltd. vs. ITO (2018) 96 taxmann.com 542 (Jaipur-Trib.); (ii) DQ (International) Ltd. vs. ACIT (2016) 72 taxmann.com 142; (iii) Vodafone M-Pesa Ltd. vs. DCIT (2020) 114 taxmann.com 323 (Mumbai – Trib.).
On the other hand, ld. DR of the Revenue brought to our notice findings of the Assessing Officer and ld. CIT (A), he submitted that he heavily relies on the findings of the lower authorities.
Considered the rival submissions and material placed on record. We observe that assessee is engaged in the business of running play school and A.Y. 2016-17 day care centres at various locations in India and during the year, assessee has acquired another company, namely ICPL, in that process, assessee has borrowed loan from Bank of Baroda and also decided to issue fresh shares to its promoters. Accordingly, assessee has valued its shares before issue of shares to its promoters. The independent valuer submitted his valuation report dated 15.09.2016 and 25.02.2017. They have valued the shares and determined the premium at Rs.31 per share and Rs.100 per share respectively. The Assessing Officer analysed the valuation report and observed that the basic information for valuation of the report was submitted by the assessee to the valuer and these figures are not matching with the actuals. He observed that the assessee has projected net profit at the value which is contrary to the actual at the time of estimations were provided to the valuer and further observed that actual turn over achieved by the assessee is far less. Based on the above observations, he rejected the DCF method adopted by the valuer and proceeded to determine the value of shares based on the Net Asset Value (NAV). After careful consideration of various informations available on record, we observe that no doubt, the assessee has declared negative profit during the year under consideration. However, assessee has projected positive profits while projecting its revenue for the purpose of valuation of its own shares. It is fact on record that assessee has issued shares to its own promoters and it is business norm that whenever they value the shares with the intent to generate income in the future not on the basis of historical earnings of the business. In this case, assessee has not allotted shares to any other person, rather it was allotted shares only to its own promoters. It is also fact on record that assessee needs further funds for expansion of its own business and in that process, the assessee has acquired another company, namely, ICPL. We observe that the assessee has no doubt supplied the information for valuation of its own shares and independent valuer has valued the shares by adopting the above information and the valuer has adopted one of the accepted method as per Rule 11UA. The Assessing Officer found that the projections adopted by the assessee are not matching with the actual. We observe that Assessing Officer has found discrepancies in adoption of future gross revenue and proceeded to analyse the issue under consideration as per provisions of section 68 of A.Y. 2016-17 the Act. Since the shares were allotted to its own promoters, there is no avenue for the assessee to generate or convert any unaccounted money and bring on record. Further there is no evidence brought on record by the Assessing Officer to question the genuineness of the transaction, rather he analysed only the projections.
In the case of IPSAA Holdings Private Limited (supra) also the principle issue was concerning valuation of shares issued to sister concern and invocation of Section 56(2)(viib). The ld. Counsel further placed reliance upon the decision in the case of Sadhvi Securities Pvt. Ltd. of this Tribunal as in ITA No. 1047/Del/2019. Placing reliance it was argued that in the impugned case also a view could be taken that provisions of Section 56(2)(viib) get attracted only in case when there was any presumption of any unaccounted money. No such invocation has been made by the Revenue in the present case. Reliance was also placed upon the decision in the case of Vaani Estates Pvt. Ltd. of the Chennai on the same principle. Ld. Counsel thus, held the view that Section 56(2)(viib) in this case, as Revenue has failed to make any reference to any unaccounted money transaction. It was submitted that the same Section has been introduced by the Government only to curb Black money and no such presumption has been drawn in the present case. mandated by law to adopt a method of its choice. Ld. Counsel argued that the ld. AO found its valuation excessive whereas the same is based upon credible evidence on records. Ld. Counsel has submitted that it has taken the FMV valuation relying upon data available in audited/ published financials of the respective corporate entities. Ld. Counsel argued that the fair market value of the shares has been valued in accordance with the prescription provided in Rule 11U/11UA. It was contended that the law gives it an option to value the shares at book value or fair market value. To arrive at the fair market value of its shares investments it adopted the book value of those shares on the basis of balance-sheet of respective companies. In support of these contentions the ld. Counsel placed on record the financials of the respective companies, namely, M/s PPS Infrastructure Limited; M/s Beldi Jewels Private Limited; M/s Shivani Buildtech Private Limited; and M/s Saksham Apparels Private Limited. In support of its contention the assessee has placed through its voluminous paper book, balance-sheet, P&L account and certificates of all the four companies. Ld. AR accordingly argued that the addition made by the ld. AO also on the premise that the impugned companies are sister concerns would not survive. It was stated that merely because the said companies are sister concerns would not justify the act of Revenue to make any addition. Ld. Counsel vehemently argued that its method of valuation by adopting figures from the audited financial statements of investee companies aligns with the valuation methodology prescribed under rule 11U/11UA of the I.T. Rules.
We have considered the arguments put-forth by contending parties in the light of judicial precedents relied upon by the assessee as well as documents placed on record through its paper book. We are, therefore, of the considered view that the value of the unquoted equity shares investment held by the assessee has been correctly calculated. We are also of the considered view that the order of the ld. CIT(A) is based upon correct understanding and appreciation of the facts of the case and does not require any disturbance at this stage. Accordingly, we sustain the order of ld. CIT(A) and dismiss all the grounds of appeal raised by the appellant Revenue in this appeal. is dismissed. Order pronounced in open court on 31.07.2025.