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Facts
The assessee issued shares at a premium of Rs. 30, making the total issue price Rs. 40 per share. The AO, observing the Discounted Cash Flow (DCF) valuation of Rs. 33.63 per share to be lower, made an addition of Rs. 2,63,73,189/- under Section 56(2)(viib). The assessee argued for a higher valuation of Rs. 67.71 per share based on the Net Asset Value (NAV) method, which the CIT(A) had not properly considered due to concerns about the independence of the valuation.
Held
The Tribunal noted that the CIT(A) failed to consider the fair market value based on the Net Asset Value (NAV) method despite it being raised. Consequently, the matter is remanded back to the Assessing Officer to re-evaluate the issue, specifically considering the NAV method, after providing the assessee with a proper opportunity to be heard.
Key Issues
The primary issue is the appropriate method for valuing shares under Section 56(2)(viib) of the Income Tax Act, specifically whether the Net Asset Value method should have been considered by the tax authorities, and the implications of a valuation certificate prepared by the assessee's authorized representative.
Sections Cited
143(3), 56(2)(viib)
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Income Tax Appellate Tribunal, DELHI BENCH “F”, NEW DELHI
ORDER
PER MAHAVIR SINGH, VICE PRESIDENT :
This appeal by the Assessee is arising from the order of the Commissioner of Income Tax (Appeals-9), New Delhi in Appeal No. 718/16- 17 dated 04.07.2018. Assessment was framed by the ACIT, Circle 27(1), New Delhi for the assessment year 2014-15 u/s. 143(3) of the Income Tax Act, 1961 (hereinafter called the “Act”) vide his order dated 28.11.2016, on the following ground:- “
The Ld. CIT(A)-9, New Delhi erred in law and on facts in sustaining the addition of Rs. 2,63,73,189/- u/s. 56(2)(vvib) of the I.T. Act, 1961.”
2. Brief facts of the case are that assessee had issued shares of Rs. 10 each at a premium of Rs. 30 each at the total value of Rs. 40 each. It was noticed by the AO that the assessee had received a sum of Rs. 16,56,08,720/- for issue of 4140218 no. of shares @ Rs. 40 each. The assessee was asked by the AO to produce the valuation of shares as per Rule 11UA of the I.T. Rules as the assessee had issued the share more than the face value of share. The assessee replied vide letter dated 03.10.2016 and produced the valuation of share adopting the Discounted Cash Flow Method as per Rule 11UA of the I.T. Rules. The assessee was show caused vide note sheet entry dated 23.11.2016 as to why the disallowance be not made for the share premium u/s. 56(2)(viib). The assessee again submitted its reply vide letter dated 24.11.2016. However, on perusal of the reply of the assessee, AO did not find force in it. As per AO the assessee did not produce any document to the satisfaction of the AO to substantiate the valuation of share at Rs. 40 each. Thus, the AO invoked the provision of Section 56(2)(viib) and added Rs. 2,63,73,189/- to the total income of the assessee. Against the above, assessee preferred the appeal before the Ld. CIT(A), who vide his impugned order dated 04.07.2018 has partly allowed the appeal of the assessee. Aggrieved, assessee is in appeal before the Tribunal.
3. We have heard the rival contentions and perused the records. We find that there is no dispute about the Valuation Report prepared by the assessee in regard to discounted Cash Flow Method valuing per share at Rs. 33.63/-. But now assessee, before us contended that a specific plea was raised that fair 2 | P a g e market value based on net asset value was prepared, which valued the net asset value per share at Rs. 67.71/-. This fact was recorded by the Ld. CIT(A) in para no. 5.14 of his order, which reads as under:- 5.14 The contention of the appellant that share has a net asset value of Rs. 67/- as on date of allotment is not getting any mention in the impugned order. Though the rule specifies that value higher of fair market value based on net asset value or discounted cash flow method be adopted to arrive at the conclusion of applying section 56(2)(viib) of the Act. In its paper book the appellant has annexed a purported valuation certification issued by one Sh. Sanjeev Rai Mehra, partner for Mehra and Sistani, Chartered Accountants (M No. 080402) indicating therein that based on net asset value method, the valuation of equity shares of Uniproducts India Limited is Rs. 67.71/- as per share as at 31.03.2013. It is noticed that the said certificate of valuation has been issued by the Chartered Accountant who happens to be authorized representative of the assessee company also. It is also noticed that the same Mr. Sanjeev Rai Mehra, Chartered Accountant pleaded the case before the Assessing Officer. This raises a question of conflict of interest in as much as a valuation certificate being issued by a person who also pleads and claims to substantiate the same before quasi judicial authority. Even otherwise, the said certificate has been issued with many of the assumptions and limiting conditions. Those conditions implies that the said valuation has not 3 | P a g e been made in an independent manner by the Chartered Accountant and its evidentiary value is therefore, not authenticated. Importantly as has been noted here above, there is no reference whatsoever in the impugned order regarding this valuation certificate. Even at the appellate proceeding stage, the AR of the appellant has not certified that this document was produced before the Assessing Officer and that non consideration of that document has led to adverse finding. Therefore, I am not inclined to recognize the said document for determining the issue. Resultantly, the share value @ 33.67/- under discounted cash flow method is an acceptable valuation in the case of appellant.” 3.1 Ld. AR for the assessee stated that Ld. CIT(A) has not at all considered this. He only made the request that matter be restored back to the file of the AO to consider this fair market based on net asset valuation method, as per law. In any case, he finds any fault in this, he should communicate to the assessee, in terms of the above. On the other hand, Ld. DR has not objected to the aforesaid request of the Ld. AR. However, she contested that this was not placed before the AO and it was first brought to the notice of the Ld. CIT(A). 3.2 In view of the aforesaid discussions, we find considerable potency in the contention of the Ld. AR that a specific plea was raised that fair market value based on net asset value was prepared, which valued the net asset value per share at Rs. 67.71/-, the same has been recorded by the Ld. CIT(A) in his order as reproduced above. However, the Ld. CIT(A) has not at all considered this aspect of fair market based on net asset valuation method, which in our considered view, needs to be considered on each aspect, at the level of the AO 4 | P a g e and thereafter, decide the issue in dispute, afresh, after giving adequate opportunity of being heard to the assessee and in any case, the AO found that there is any fault in the aforesaid method, he should communicate the same to the assessee, in accordance with law. We hold and direct accordingly.
In the result, the Assessee’s appeal is allowed for statistical purposes. Order pronounced on 30.09.2025.