Loading judgment…
Facts
The assessee issued shares at ₹20 per share, claiming the fair market value was determined by a Chartered Accountant's report based on the company's assets. The Assessing Officer (AO) added the difference between the issue price and the fair market value (as per Rule 11UA) to the total income under Section 56(2)(viib) of the Income Tax Act.
Held
The Tribunal noted that the Share Valuation Report was not made available to the AO. In the interest of justice, the Tribunal set aside the orders of the CIT(A) and AO, remitting the matter back to the AO for de novo assessment.
Key Issues
Whether the Assessing Officer was justified in determining the fair market value of shares as per Rule 11UA when the assessee provided a valuation report based on assets? Whether the matter should be remitted for de novo assessment due to non-availability of the valuation report to the AO?
Sections Cited
250, 143(3), 143(2), 142(1), 133(6), 56(2)(viib), 270A, 11UA
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, KOLKATA ‘SMC’ BENCH, KOLKATA
Before: SHRI SONJOY SARMA & SHRI RAKESH MISHRA
PER RAKESH MISHRA, ACCOUNTANT MEMBER:
This appeal filed by the assessee is against the order of the Ld. Addl/JCIT(A)-Mysore [hereinafter referred to as “the Ld. CIT(A)”] passed u/s 250 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) for AY 2017-18 dated 11.12.2024, which has been passed against the assessment order u/s 143(3) of the Act, dated 29.11.2019. 2. The assessee is in appeal before the Bench raising the following grounds of appeal: I.T.A. No.: 332/KOL/2025 Assessment Year: 2017-18 Blackberry Properties Pvt. Ltd. “1. For that the orders passed by the lower authorities are arbitrary, erroneous, without proper reasons, invalid and bad-in-law, to the extent to which they are prejudicial to the interests of the appellant.
For that the Ld. CIT(A) ought to have considered the reply of the appellant to the Show Cause Notice issued by the A.O. and ought to have accepted the value on which shares were acquired as the value as adopted by the appellant was based on the current rates.
For that the adoption of the Auditor's report by the A.O. relating to valuation of shares was not correct which was based upon practical procedure as the buyers did come to acquire the shares as Rs.20/- per share by taking into consideration overall structure of the appellant.
For that the Ld. CIT(A) erred in confirming the addition of Rs.32,80,000/- made by A.O. on alleged grounds.
For that the appellant craves leave to amend, alter, modify, substitute, add to, abridge and/or rescind any or all of the above grounds.”
Brief facts of the case as submitted before the Ld. CIT(A) are that the assessee filed its return of income for the AY 2017-18 on 25.10.2017 disclosing total loss of ₹18,74,807/-. Subsequently, the case was selected for limited scrutiny vide notice u/s 143(2) of the Act dated 10.08.2018 and the Assessing Officer (hereinafter referred to as Ld. 'AO') vide order u/s 143(3) of the Act made addition u/s 56(2)(viib) of the Act while assessing the total income of the assessee. During the year, the assessee had issued equity shares of ₹20 Lakh being 10,00,000 shares @ ₹20 each. The value of the equity share was adopted on the basis of fair value of equity shares as determined in the Share Valuation Report by the Chartered Accountant. As per the Share Valuation Report, the fair value had been derived considering the value of the assets (property, land etc.) of the company in accordance with Explanation (a)(ii) to section 56(2)(viib) of the Act. During the course of assessment proceeding, the assessee was asked to substantiate the fair value adopted for issuance of shares. The Share Valuation Report along with the basis of deriving the fair value was duly furnished to the Ld. AO. I.T.A. No.: 332/KOL/2025 Assessment Year: 2017-18 Blackberry Properties Pvt. Ltd. who considered the fair value of the shares as the value derived as per Rule 11UA of the Income Tax Rules, 1962 and made the addition. Aggrieved with the assessment order, the assessee filed an appeal before the Ld. CIT(A), who has reproduced the assessment order, the reply of the assessee and the valuation report of the Chartered Accountant and has observed as under: “8.2 In the valuation report itself it was clearly mentioned that fair market value of each share is Rs.16.62/- as per Rules 11UA. Thus, fair market value of the share adopted by the AO is correct. Therefore, the grounds of appeals are dismissed.
The appellant has not pleaded any further ground during appellate proceedings. Hence, Ground No. 5 does not require separate adjudication.
In the result, the appeal of the Appellant for AY 2017-18 stands DISMISSED.”
Aggrieved with the order of the Ld. CIT(A), the assessee has filed the appeal before this Tribunal.
Rival submissions were considered and the details filed have been examined. The Ld. AR submitted that there is no report that the same were sold in the open market and the assessee has been a merchant banker from 2018. However, the Ld. AO has noted as under: “i. Share premium Accordingly, notice under section 143(2) of the I.T. Act, 1961 was issued on 10/08/2018 & served through e-proceedings. Subsequently, notices under section 142(1) were issued to the assessee through e-proceedings on 16/01/2019 & 06/08/2019. Thereafter, the assessee company made compliance through E-proceedings and furnished the details and documents, which were perused and placed on record. Reference u/s 133(6) has been made and reply has been perused and placed on records. It is evident from the records (as per Rule 11UA) that Fair Market Value of uncoated(sic) share of the company as on 31/03/2016 was Rs. 16.62/-. But you have said 10,00,000 uncoated(sic) share @Rs.20/- per share during the F.Y. 2016-17. The assessee company had said the share exceeds the I.T.A. No.: 332/KOL/2025 Assessment Year: 2017-18 Blackberry Properties Pvt. Ltd. Fair Market Value of share Rs. 3.28/- (Rs. 20/- Rs.16.62/-) per share.
Accordingly total value exceeds comes to Rs. 32,80,000/- (10,00,000 x Rs.3.28/-). In this regard a show cause notice was issued as to why this amount of Rs. 32,80,000/- should not be treated as income from other sources under section 56(1)(viib) of the Act and the same should not be added to your total income. In this regard the assessee made a response on 22/11/2019. But the assessee company's explanation is not satisfactory. So, amount of Rs. 32,80,000/- is treated as income from other sources under section 56(1)(viib) of the Act and the same is added back to total income of the assessee company. Penalty proceedings under section 270A of the Act has been initiated separately for under-reporting of income in this score. In view of the facts and circumstances of the case, the scrutiny is completed within the ambit of Limited Scrutiny with the total income of the assessee company computed as under: Returned income : (-) Rs. 18,74,807/- Add: As per discussion above : Rs. 32,80,000/- Assessed Income (R/O) : Rs. 14,05,190/-.”
Since the Ld. AO has considered the excess amount based upon the valuation report furnished by the assessee himself, therefore, the excess amount was liable to be added as ‘income from other sources’ which addition has been confirmed by the Ld. CIT(A).
The assessee had filed the written submission before the Ld. CIT(A) as under: “Ground No. 1, 2& 3: A. Brief Facts:
0 During the year under consideration, the appellant had issued equity shares of Rs. 20 Lakhs being 10,00,000 shares @ Rs. 20 each. Value of equity share was adopted on the basis of Fair Value of Equity shares as determined in the Share Valuation Report by the Chartered Accountant. Copy of the Share Valuation Report is being enclosed as Exhibit-1. As per the share Valuation Report, the Fair Value has been derived considering the value of the assets (property, land etc.) of the company in accordance with Explanation (a)(ii) to Sec. 56(2)(viib). I.T.A. No.: 332/KOL/2025 Assessment Year: 2017-18 Blackberry Properties Pvt. Ltd.
0 During the course of assessment, the assessee was asked to substantiate the Fair Value adopted on issuance of shares. The Share Valuation Report along with the basis of deriving the Fair Value was duly furnished to the A.O. B. Order of A.O.:
0 The A.O., without providing any reasons, considered Book Value of the shares as the Fair Value for the purpose of Sec. 56(2)(viib) and made an addition of Rs. 32,80,000/-while computing Total Income. C. Submissions:
0 Before proceeding further, appellant would like to refer to the relevant provision of section 56(2)(vii)(b) which provides that: (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 find]; or (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, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher; (Emphasis supplied)
0 Since in the present case, the shares has been issued by the appellant, which is a private limited company, provisions of Sec. 56(2)(viib) shall apply I.T.A. No.: 332/KOL/2025 Assessment Year: 2017-18 Blackberry Properties Pvt. Ltd. where aggregate consideration received for such shares exceeds the fair market value of the shares.
0 Explanation (a) to Sec. 56(2)(viib) states the methodology for determining Fair Market Value of the shares. The Fair Market Value as stated therein shall be higher of :- (a) Value derived by applying method as prescribed in Rule 11UA(2) (b) Value derived by the company based on the value of its assets on the date of issue of shares
0 In the present case, on perusal of the Share Valuation Report dated 16- 06-2016, it may be noted that the Fair Market Value of the shares has been derived at Rs. 20/- as under :- Higher of (a) Rs. 16.62/share : As per Rule 11UA(2) (b) Rs. 20/ share : On the basis of value of assets on the date of issue of shares. Hence, Rs. 20/- being higher of the 2 methods has been rightly adopted by the appellant as the Fair Market Value of shares and the same is in accordance with the method prescribed in Explanation (a) to Sec. 56(2)(viib)]
0 The A.O. was not correct in adopting the Fair Market Value on the basis of method prescribed in Rule 11UA(2) when the Sec. 56(2)(viib) itself provides to adopt Fair Market Value as the higher of the two methods prescribed. Further, the appellant has computed the Fair Market Value at Rs. 20/- share on the basis of Fair Market Value of the underlying assets (being land and property) of the company which the A.O. has failed to consider.
0 In this regard, reliance is placed on the decision of Hon'ble Chennai Tribunal in the case of Lalithaa Jewellery Mart (P) Ltd, -vs.- ACIT (2019) 201 TTJ 1123 (Chennai) wherein it has been held that :- Now coming to valuation of shares, there are two limbs in s. 56(2)(viib). As per Explanation to s. 56(2)(viib) the first limb is valuation to be made as per the prescribed method. In fact, the method for valuation of shares is prescribed under r. 11UA. The second limb is the valuation of the company based on value on the date of issue including its assets. Assets include intangible assets such as goodwill, know-how, patents, copyrights, trade marks, licences, franchises, etc. The AO has not taken into consideration the I.T.A. No.: 332/KOL/2025 Assessment Year: 2017-18 Blackberry Properties Pvt. Ltd. second limb in Explanation to s. 56(2)(viib). The second limb provides that when valuation was made by the company, if the AO is not satisfied about the valuation, he has to call for material from the assessee how the valuation was made by the assessee-company. Satisfaction of the AO as referred in Explanation to s. 56(2)(viib) would be judicial satisfaction of the AO. Judicial satisfaction means the AO has to take into consideration the well established method of valuation of shares including the assets as explained in Expln. 2 to s. 56(2)(viib). It cannot be arbitrary. The AO has to take note of the judicial and established principles in arriving at his satisfaction. In this case, the AO has not found any specific fault in rejecting the valuation made by the assessee. When the AO has not found any defect or error in the valuation of shares by the assessee-company, it may not be necessary to apply the method of valuation prescribed under r. 11UA. Therefore, the valuation made by the AO under r. 11UA cannot be upheld. 7.0 Further, in the case of Unnati Inorganics (F) Ltd, -vs.- ITO (2019) 202 TTJ 347 (Ahd), it has been held that the second limb of Expln. (a) to s. 56(2)(viib) itself provides for determination of FMV based on value of underlying assets. The value once substantiated on the basis of second limb of Expln. (a) to Sec. 56(2)(viib) would be replaced with the book value for the purposes of FMV regardless of the book entries in this regard.
0 Similar view has been taken by Hon'ble Jaipur Tribunal in NABH Multitrade (P) Ltd. -vs.- ITO (2020) 208 TTJ 787 (JP) wherein it has been held that if the value of shares determined as per the fair market value of the assets of the assessee-company is higher than the value determined as per the method prescribed under r. UUA, the higher value so determined has to be taken into consideration for determination of fair market value of the shares for the purpose of making addition under s. 56(2)(viib).
0 In view of the above, the A.O. was not justified in ignoring the Fair Market Value of Rs. 20/- adopted by the appellant on the basis of value of the underlying assets of the company which is in accordance with the method prescribed in Sec. 56(2)(viib) of the Act.”
A copy of the certificate of S.K. Bothra & Co. (Chartered Accountants) dated 16.06.2016 has also been filed in which they opined that considering the assets (property, land etc.) ₹20 per share would be fair valuation to acquire the same. I.T.A. No.: 332/KOL/2025 Assessment Year: 2017-18 Blackberry Properties Pvt. Ltd.
We have considered the submission made. However, since the certificate of S.K. Bothra & Co. (Chartered Accountants) dated 16.06.2016 relating tovaluation was not made available to the Ld. AO, therefore, in the interest of justice and fair play, we hereby set aside the order of the Ld. CIT(A) as well as the Ld. AO and remit the matter to the Ld. AO for making the assessment de novo after providing an opportunity of being heard to the assessee and after considering the submission of the assessee. Hence, the grounds of appeal filed by the assessee are allowed for statistical purposes.
In the result, the appeal filed by the assessee is allowed for statistical purposes. Order pronounced in the open Court on 4th August, 2025. [Sonjoy Sarma] [Rakesh Mishra] Judicial Member Accountant Member Dated: 04.08.2025 Bidhan (Sr. P.S.) I.T.A. No.: 332/KOL/2025 Assessment Year: 2017-18 Blackberry Properties Pvt. Ltd. Copy of the order forwarded to:
Blackberry Properties Pvt. Ltd., 65A, Satish Mukherjee Road, Kalighat, Kolkata, West Bengal, 700026. 2. ITO, Ward-10(2), Kolkata.
Addl/JCIT(A)-Mysore.
CIT-
CIT(DR), Kolkata Benches, Kolkata.
Guard File. //// By order