|CORAM:||Bhavnesh Saini (JM), Waseem Ahmed (AM)|
|SECTION(S):||56(2)(viia), Rule 11UA|
|CATCH WORDS:||gifts from relatives, undervaluation, valuation of property|
|DATE:||March 7, 2018 (Date of pronouncement)|
|DATE:||April 21, 2018 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|S. 56(2)(viia)/ Rule 11UA: The "fair market value" of shares acquired has to be determined by the taking the book values of the underlying assets and not their market values|
6. In the present case, the assessee has acquired shares of TEPL at Rs.5 per shares. The shares were acquired by the assessee from three companies as discussed in the preceding paragraphs. The assessee claimed to have valued the shares of TEPL as per the provisions of Rule 11UA of the Rules and filed a copy of the report prepared by the Chartered Accountants in support his claim to justify the price of shares at which these were acquired. However, the Assessing Officer was of the view that the assets declared by the TEPL in its balance sheet should have been valued as per the circle rate while determining the value of the shares acquired by the assessee. Accordingly, the Assessing Officer determined the value of the shares at Rs. 45.72 per shares of TEPL. Thus, the difference of Rs. 40.72 was treated as income from other sources of the assessee under the provisions of Section 56(2)(viia) of the Act. The view taken by the Assessing Officer was subsequently confirmed by the learned CIT(A).
6.1 Now, the issue before us arises for our adjudication so as to whether the land shown by the TEPL should be taken as per the book value or as per the market value while valuing its shares. At this juncture, we find important to refer the provisions of Section 56(2)(viia) of the Act, which reads as under:
“56. (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head “Income from other sources”, if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E.
(2) In particular, and without prejudice to the generality of the provisions of subsection
(1), the following incomes, shall be chargeable to income-tax under the head “Income from other sources”, namely :—
(viia) where a firm or a company not being a company in which the public are substantially interested, receives, in any previous year, from any person or persons, on or after the 1st day of June, 2010, any property, being shares of a company not being a company in which the public are substantially interested,—
(ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration :
Provided that this clause shall not apply to any such property received by way of a transaction not regarded as transfer under clause (via) or clause (vic) or clause (vicb) or clause (vid) or clause (vii) ofsection 47.
Explanation.—For the purposes of this clause, “fair market value” of a property, being shares of a company not being a company in which the public are substantially interested, shall have the meaning assigned to it in the Explanation to clause (vii);]”
6.2 The fair market value as per the Explanation of Section 56(2)(vii) of the Act, reads as under:
(b) “fair market value” of a property, other than an immovable property, means the value determined in accordance with the method as may be prescribed”
6.3 Similarly, the provisions of 11UA of the Rules are summarized as under:
“(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:—
t h e fair market value of unquoted equity shares =
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 unamortised 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) the amount set apart for payment of dividends on 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;
(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;
PE = total amount of paid up equity share capital as shown in the balance-sheet; PV = the paid up value of such equity shares;”
6.4 On the plain reading of above Rule, it is revealed that while valuing the shares the book value of the assets and liabilities declared by the TEPL should be taken into consideration. There is no whisper under the provision of 11UA of the Rules to refer the fair market value of the land as taken by the Assessing Officer as applicable to the year under consideration. Therefore, we are of the view that the share price calculated by the assessee of TEPL for Rs. 5 per shares has been determined in accordance with the provision of Rule 11UA. In holding so, we find support and guidance from the judgment relied by the learned Authorized Representative in Sharukh Khan Vs. DCIT reported in 90 taxmann.com 284 (Bom) which has been discussed in the preceding paragraphs. Therefore, we have no hesitation in reversing the order of the lower authorities. Hence, the grounds of appeal of the assessee are allowed.
On going through the statutory definition of fair market value of shares as provided in explanation to clause (viib) of sub section (2) of section 56, one found that value determined as per Rule 11UA(2) is not conclusive but only one of the value on the basis of which invocation of provision depend. In case Assessee Company substantiates the value of shares issued on the date of issue of shares, same ought to be considered for determination of fair market value of the shares issued.
Definition of fair market value of shares as provided under explanation to clause (viib) of sub section (2) of section 56, which reads as under:
“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.”
The case is about viia and not viib. viia provided a very straightforward valuation approach and there is no possibility of having any other approach.