DCIT CENTRAL CIRCLE 7 1 MUMBAI, MUMBAI vs. SPECTRA REALTIES PRIVATE LIMITED,, MUMBAI

The solitary issue that arises for our consideration pertains to the applicability of illiquidity discount for the valuation of Non-Cumulative Redeemable Preference Shares of an unlisted company.

The brief facts of the case pertaining to this issue, as emanating from the record, are: For the year under consideration, the assessee filed its return of income on 26.10.2017, declaring a total loss of Rs.8,00,003/-. The return filed by the assessee was selected for scrutiny through CASS, and statutory notices under section 143(2) and section 142(1) were issued and served on the assessee. During the assessment proceedings, from the perusal of the financial statement submitted by the assessee, it was observed that the assessee has received an amount of Rs.36,87,25,500/- towards share premium during the year under consideration. It was further observed that the assessee has issued 22,34,700 Non-Cumulative Redeemable Preference Shares of Rs.100/- each to various parties at a premium of Rs.220/- per share. Since only 75% of the amount was called upon per share, Rs.75/- per share was received by the assessee towards face value and Rs.165/- per share was received by the assessee towards securities premium. The amount received from the various parties against issue of Non-Cumulative Redeemable Preferences Shares at a premium is summarised as follows: - S. Name of No. of Face Issue Premium Money Received towards No. the party shares value Price per share (amount in Rs. crores Share Share Total Capital Premium 1. Vishal 8,47,625 100 320 220 6.36 13.98 20.34 Victory Oiltech Pvt. Ltd. 2. Tarulata 13,87,075 100 320 220 10.40 22.88 33.29 Trading Pvt. Ltd. Total Total 16.76 36.87

Accordingly, during the assessment proceedings, the assessee was asked to justify the amount of premium received by it for the purpose of section 56(2)(viib) of the Act. The Assessing Officer (“AO”), vide order dated 31.12.2019 passed under section 143(3) of the Act, disagreed with the submissions of the assessee and by referring to the provisions of section 56(2)(viib) of the Act and Rule 11UA(1)(c)(c) of the Income Tax Rules, 1962 (“the Rules”) held that no formula has been prescribed for the purpose of valuation of Non-Cumulative Redeemable Preference Shares and the provisions of Rule 11UA only specifies that the assessee may obtain a valuation report from the Merchant Banker or a Chartered Accountant. In this regard, the AO referred to the valuation report from two separate Chartered Accountants furnished by the assessee in support of its claim. The AO, noting that the Discounted Cash Flow (“DCF”) of the assessee company is not available, proceeded to undertake the valuation as per the Net Asset Value (“NAV”) method adopted by the two Chartered Accountants in the valuation report furnished by the assessee. Further, noting certain inconsistencies in the valuation report submitted by the assessee, the AO computed the value of Rs.315.36 per share as against valuation of Rs.315.66 per share and Rs.314.20 per share as per the valuation report of two separate Chartered Accountants furnished by the assessee. Further, by placing reliance upon the decision of the Coordinate Bench of the Tribunal in M/s. Microfirm Capital Pvt. Ltd. vs. DCIT, reported in (2018) 168 ITD 301 (Kolkata-Trib.), the AO considered it reasonable and appropriate to apply an illiquidity discount of 15% on the value of Non-Cumulative Redeemable Preference Shares. Accordingly, the AO arrived at a valuation of Non-Cumulative Redeemable

The learned CIT(A), vide impugned order, allowed the ground raised by the assessee on this issue and deleted the disallowance made under section 56(2)(viib) of the Act, by observing as follows: - “10.5 I have considered the facts of the case, assessment order and submissions filed by the appellant. The appellant has issued non-cumulative redeemable preference shares at the face value of Rs. 100 and premium of Rs.

For the purpose of determining the fair market value of such shares as per section 56(2)(viia), Rule 11UA of Income Tax rules is applicable. As per clause (c), the fair market value of unquoted shares and securities other than equity shares in a company which are not listed in any recognized stock exchange shall be estimated to be price it would fetch if sold in the open market on the valuation date and the assessee may obtain report from a merchant banker or an accountant in respect of such valuation. 10.6 In the assessment order the A.O. after discussing various decisions of Hon'ble ITAT, concluded that-

Dividend Discount Method 2. Price to earning ratio 3. Net asset value NAV 4. Market capitalization 10.13 In this case the valuers have applied NAV method for valuing the preference shares. The A.O has not doubted this method for valuation of the shares. However he further applied illiquidity discount of 15%, In my considered view, no such illiquidity discount can be applied in the facts of the case. The A.O misdirected himself for applying this illiquidity discount @ 15% on the basis of some SEBI guidelines. It is to be noted that these guidelines are not at all applicable and relevant in the facts of the case of the appellant. Hence reliance on the same for applying illiquidity discount @ 15% for determining fair market value as per NAV is incorrect. In view of the above facts, the face value per share determined by the A.O of Rs.268.06 is based on wrong assumptions... 10.14 The appellant has issued a share @ 500 per share (100 face value + 220 Premium) which is justified by the valuation reports of Jain Lukkad and Associates and Rupali Chandakand company. Considering the overall facts of the case, I find that the addition made by the A.O of/Rs.8,70,41.565/- by adopting the valuation per share of 268.06 is incorrect and hence the addition made is disallowed. Accordingly, appeal on this ground is ALLOWED.”

We have considered the submissions of both sides and perused the material available on record as per Rule 18(6) of ITAT Rules, 1963. In the present case, the assessee issued 22,34,700 Non-Cumulative Redeemable

Before proceeding further, we may note the relevant provisions of the Act and the Rules which are pertinent for deciding the issue at hand. Section 56(2)(viib) of the Act reads as follows: -

Thus, from the perusal of the provisions of section 56(2)(viib) of the Act, it is evident that the same is applicable in case of a company in which public are not substantially interested and the said company receives any consideration for the issuance of shares that exceeds the fair value of such shares. In the present case, there is no dispute that the assessee is neither a public company nor a listed entity. Further, the “fair market value of the shares” has been explained under the provisions of the aforesaid section as the value as may be determined in accordance with such method as prescribed, i.e., Rule 11UA of the Rules. From the perusal of the provisions of ITAs No.4304 & 4306/Mum/2024 (A.Ys. 2017-18) 10 Rule 11UA of the Rules, we find that Rule 11UA(1)(c)(c) of the Rules deals with the fair market value of unquoted shares and securities other than equity shares, and the same reads as follows: - “(c) the fair market value of unquoted shares and securities other than equity shares in a company which are not listed in any recognized stock exchange shall be estimated to be price it would fetch if sold in the open market on the valuation date and the assessee may obtain a report from a merchant banker or an accountant in respect of such valuation.”

From the perusal of the provisions of Rule 11UA of the Rules, it is evident that unlike valuation of unquoted equity shares, for which sub-rule (2) of Rule 11UA of the Rules provides valuation method, i.e., DCF and NAV, no formula or rule has been prescribed insofar as for the purpose of valuation of unquoted shares and securities other than equity shares, which also includes Non- Cumulative Redeemable Preference Shares. Thus, the question arises as to what valuation method should be adopted by the Merchant Banker or Chartered Accountant for the valuation of Non-Cumulative Redeemable Preference Shares in the absence of any formula or method being specifically provided. As is evident from the record, in order to justify the valuation at which Non-Cumulative Redeemable Preference Shares were issued, the assessee placed on record valuation reports by two separate Chartered Accountants, i.e., Jain Lukkad & Associates, and Rupali Chandak & Co., who, by adopting the NAV method, had carried out the valuation at Rs.315.66 per share and Rs.314.20 per share, respectively. From the perusal of the assessment order, it is evident that the AO has also not made any independent valuation by adopting a method separate from the method adopted by the assessee for valuation. From the perusal of the record, we find that on an ITAs No.4304 & 4306/Mum/2024 (A.Ys. 2017-18) 11 earlier occasion, opportunity was granted to the Revenue to come forth with a valuation method which may be adopted by the Merchant Banker or Chartered Accountant for valuation in a similar case. However, nothing has been brought on record. Thus, it is discernible that the Revenue has also not disputed the NAV method for the valuation of Non-Cumulative Redeemable Preference Shares issued by the assessee. It is further pertinent to note that even after adopting NAV as a method for valuation, the AO arrived at a value of Rs. 315.36 per share. Thus, as noted by the learned CIT(A), even after excluding the provision of taxes and self-assessment taxes, there is a minor difference in the valuation of Rs. 0.08 per share in both valuations.

From the perusal of the record, it is evident that for applying an illiquidity discount of 15%, the AO, inter alia, has placed reliance on the valuation guidelines of SEBI for Mutual Funds and the Asset Management Companies and Unit Scheme of 2002 of the Unit Trust of India Act. It is, at the outset, pertinent to note that the impugned addition has been made by the AO under section 56(2)(viib) of the Act, and as noted in the foregoing paragraph the said section is applicable in case of companies in which public are not substantially interested or which are unlisted companies, like the assessee. Therefore, we are of the considered view that the SEBI guidelines are not relevant to the present case.

As regards the reliance placed by the AO on the decision of the Coordinate Bench of the Tribunal in Micro Firm Pvt. Ltd. (supra), from the perusal of the said decision, we find that in the facts of the case, the taxpayer adopted DCF method for the valuation of Non-Cumulative Redeemable

It is pertinent to note that valuation of quoted/unquoted shares and securities, whether equity or preference, is a scientific exercise and therefore should be based on a scientific methodology, and adopting a method does not permit the alteration which is completely alien to that method. Therefore, we are of the considered view that the AO erred in applying an illiquidity discount for the valuation of Non-Cumulative Redeemable Preference Shares in the present case, as it had made a valuation by adopting the NAV method. Accordingly, we do not find any infirmity in the findings of the learned CIT(A)

As Revenue has raised similar grounds in its appeal, being which arises out of a similar factual matrix, we are of the considered view that our findings/conclusions as rendered supra are applicable mutatis mutandis to the present appeal. As a result, the grounds raised by the Revenue in this appeal are also dismissed.

In the result, the appeal of the Revenue, being is dismissed.

To sum up, both appeals by the Revenue are dismissed.