Re: Addition u/s 56(2)(viib) on valuation of shares

Assessee submitted valuation report as per Rule 11UA determining valuation of share at Rs.32/- per share. The Assessing Officer calculated Value of share as under: –
Share Capital – A
Reserves & Surplus – B

A + B divided by number of shares (c). The value came to Rs.22. The Assessing Officer made addition of Rs.10 i.e Rs.32- Rs.22 in the hands of the company on the number of shares allotted by the company u/s 56(2)(viib). Please let us know whether the addition is justified. Any case law in support of the assessee. Please guide us how to proceed further.

The assessee can follow  Discounted Free Cash Flow Method or Net Asset Value method . Unless the AO  the Assessing Officer had not pointed out any flaw in the method of calculation of the value of shares  the AO cannot change the method .  CIT v. VVA Hotels  Pvt Ltd (2020)429 ITR 69/( 2021) 276 Taxman.330  (Mad)(HC)

In ITO  v.  Ashoka Industries Ltd.  (2020)  185 ITD 629 (Cuttack)  (Trib.) ), the Tribunal held that , it is prerogative of assessee to estimate fair market value of shares issued by it by adopting one method out of two methods i.e. discounted cash flow method or book value method, and that revenue authorities cannot force assessee to adopt particular method for valuing fair market value of share .

It seems the addition made by the AO is not in accordance with law.

 

 

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