MIRA MAHAL PREMISES MANAGEMENT PVT. LTD.,MUMBAI vs. CIT (A)- 4 , MUMBAI

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the value based on book value as per the financials as at 31.03.2011. The relevant observations of the AO in this regard are extracted below:

“6. In this regard it has to noted that as per rule 11UA, the valuation date means the date on which the property or consideration as the case may be is received by the assessee. In the present case as per details submitted the consideration is received in October 2011.. Hence, the last Audited balance sheet available is on 31.03.2011. Accordingly, the fair market value as per 11UA has to be worked out based on audited Balance sheet as on 31.03.2011. 7. Further the assessee company claims that it has revalued the land and building including furniture at Rs.33,58,00,000/- as against the value of Rs. 18,43,55,072/-. The basis for this revaluation is the draft valuation report of CB Richard Elis supported by the Valuation (Equity Shares) report of Sri S.G.Mehta, Chartered Accountant, wherein the value of land and building including furniture was taken at Rs.33,58,00,000/-. Neither the Valuer nor the assessee has submitted any basis for arriving at present market value which is worked out at Rs.33,58,00,000/-. In view of the above, the Fair Market Value of the unquoted shares valued by the assessee is not correct and is not accepted. In this connection, attention is drawn to the provisions of Rule 11UA which reads as under: 11UA(1(c)(b): The fair market value of unquoted equity shares shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner, namely:- The fair market value of unquoted equity shares = (A-L)/(PE)x(PV), 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 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;

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(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 for meeting liabilities, other than ascertained liabilities; (vi) Any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares; (vii) PE = total amount of paid up equity share capital as shown in the balance sheet; (viii) PV= the paid up value of such equity shares. Keeping in view the above formula, the assessee ought to have adopted the book value of the assets as shown in the Balance sheet as on 31.3.2011. During the course of assessment proceedings, the assessee has filed one more valuation report of Mr. James Aroklaswamy, CA which is dated 31.10.2011 wherein he has stated that: "Since the company has recently commenced its operations for its hotel property in Mumbai, the valuation of the shares cannot be determined by Discounted Cash Flow method and hence the Net Asset Value method has been used for determination of the Fair Market Value of each share of the company, Recommended Valuation: Based on the Net Asset Value method, I hereby certify that the Fair Market Value of each of the equity share of face value Rs. 10/- is Rs.250/- per share as on 31 March 2011, details of the workings are given hereunder. Valuation of the Land and Building is taken as per the valuation report issued by B Richard Ellis South Asia Pvt. Ltd and is attached herewith. The valuation has been reduced by 8%, since the date of valuation was mid-year, while we are taking the value as at the end of the last financial year i.e. 31.3.2011. Average valuation has been taken based on the Direct Comparison Method approach and Depreciated Replacement Cost Method." The Valuation report is dated 31.10.2011. When the report is dated 31.10.2011, how can the CA value the shares as on 31.3.2011. This proves

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that the valuation report was prepared after receipt of the consideration for allotment of shares and when the assessee was asked to produce share valuation report by a Chartered Accountant who has not done the auditing of the assessee's accounts u/s.44AB of the Act, the valuation report was obtained from another Chartered Accountant, Sri James Arokiaswamy. Further, it can be seen from the above report that the valuation of the land and building was done as on 31.3.2011 and 8% value has been reduced to arrive at the mid-year FMV of the share. That 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

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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 share. The assessee is a company in which public are not substantially Interested and the company during the previous year has received consideration from a resident towards issue of shares and the consideration exceeds the market value of such shares. Thus the provisions of section 56(2)(viib) are attracted and the difference between the market value and the consideration received requires to be brought to tax. The aggregate value of such shares that exceeds fair market value is Rs.4,44,66,200/- (Rs.111.50 x 3,98,800). Accordingly the sum of Rs.4,44,66,200/- is brought to tax under section 56(2)(viib) of the Income tax Act for A.Y. 2014-15. 3. Aggrieved the assessee appeal before the CIT(A). The assessee submitted before the CIT(A) that the AO has adopted the book value as on 31.03.2011 whereas the assessee has adopted the revalued figure of land and buildings as on 31.10.2011 and therefore, the addition made by the AO is not sustainable. The CIT(A) after considering the submissions of the assessee held that

“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 31.10.2011 as a result of which the value of the share has increased from Rs. 138.5/- to Rs 250/- Further, it is to be noted that the revaluation was carned out on the basis a draft valuation report of CB Richards Elis. It remains rather unsubstantiated as to how the value of land and building could increase by 82% in a matter of just seven months. The assessee's contention of working out the value of shares on the basis of revalued numbers cannot be acceded to in the absence of a valid valuation report on sound-basis Neither before the AO nor before me has the assessee been able to adduce any evidence except for the draft valuation report to substantiate the enhanced value of land and building Further, the timing of revaluation creates serious doubt, which has not been dispelled by the excess over the tax payable with reference to the book profits or accordance with the law applicable thereto;

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(v) any amount representing provisions made for meeting liabilities, other than ascertained 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 31.10.2011 as a result of which the value of the share has increased from Rs. 138.5/- to Rs 250/- Further, it is to be noted that the revaluation was carried out on the basis a draft valuation report of CB Richards Elis: It remains rather unsubstantiated as to how the value of land and building could increase by 82% in a matter of just seven months. The assessee's contention of working out the value of shares on the basis of revalued numbers cannot be acceded to in the absence of a valid valuation report on sound-basis. Neither before the AQ nor before me has the assessee been able to adduce any evidence except for the draft valuation report to substantiate the enhanced value of land and building. Further, the timing of revaluation creates serious doubt, which has not been dispelled by the assessee There is no doubt that Rule 11UA prescribes adoption of book value of the assets as on the date of valuation. But that does not mean that the assessen resorts to revaluation of assets so as to artificially increase the book-value of the assets in order to arrive at a pre-determined value of the share. Provisions of section 56(2)(vib) are anti-tax evasion provisions enacted to avoid introduction of unaccounted or inflated sums without proper explanation of the legitimate source of funds being infused in the garb of share contributions, especially in respect of privately held unquoted shares.

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They must be interpreted strictly and no scope must be left available for artificially manipulating the value of the shares and assets. In the background of the above detailed discussion and facts and circumstances of the case, the AO's action is to be upheld. The assessee's grounds of appeal are therefore dismissed” 4. Aggrieved the assessee is in appeal before the Tribunal. The ld. AR reiterated the submissions made before the lower authority. The ld. AR submitted that the main reason for making the addition under section 56(2)(viib) is that there is a substantial increase in the valuation of land and building between the financial year end 31.03.2011 and the value as at 31.10.2011. The ld. AR in this regard submitted that the assessee is in the business of building and developing hotels and therefore, the valuation as on 31.10.2011 was based on the completed project of the hotel whereas the value as on 31.03.2011 was based on work-in-progress. The ld. 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.

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excessive or unsubstantiated. In the light of these facts and that lower authorities have not examined the facts correctly for the reason that the assessee did not produce the required documentary evidences in support of the claim, we deem it just and proper to remit the issue back to the AO for a de novo examination. The assessee is directed to produce all the relevant documents to substantiate the valuation of land and building and the valuation of shares at Rs. 250/- per share. The AO is directed to examine the facts of the case based on the documentary evidences that may be submitted by the assessee and decide in accordance with law. It is ordered accordingly.

Order pronounced in the open court on 02-02-2024.

Sd/- Sd/- (NARENDER KUMAR CHOUDHRY) (MS. PADMAVATHY S) Judicial Member Accountant Member *SK, Sr. PS Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. DR, ITAT, Mumbai 4. Guard File 5. CIT BY ORDER, (Dy./Asstt. Registrar) ITAT, Mumbai