Income Tax, Issue Update

Methodology selected by taxpayer for determining Fair Market Value of shares: Jurisdiction of a Tax Officer to ignore/ reject such selection and valuation methods adopted by taxpayer

Case: Alishan Place Pvt Ltd vs. ITO, Cuttack ITAT

Outcome: Assessee

Facts

  • The Assessee had issued 80,000 shares at a face value of Rs. 10/- and at a premium of Rs. 40/- per share. The valuation method adopted by the Assessee was discounted cash flow method as prescribed under Rule 11UA.
  • During the assessment proceedings, the Assessing Officer asked the Assessee to furnish the detailed calculation of fair market value as per section 56(2)(viib) of the Act of the shares. Before the Assessing Officer, the Assessee furnished the computation of fair market value of shares.
  • However, the Assessing Officer was of the view that the valuation was not in accordance with Rule 11UA of the Income Tax Rules. Therefore, the Assessing Officer calculated the fair market value of shares under Rule 11UA by adopting book value method at Rs.31.96 per share and treated the excess amount as income of the Assessee.

Key points

  • It is the prerogative and privilege of the Assessee to adopt one method and once the Assessee choose discounted cash flow method for valuing its shares then the Assessing Officer or any other revenue authorities cannot compel the Assessee to adopt another method i.e. book value method.
  • However, the Assessing Officer is entitled to scrutinise, verify and examine the valuation report and determine the fresh valuation either by himself or from an independent valuation after confronting the assessee. But at the same time, the basis has to be the discounted cash flow method and it is not open to the revenue to change the method of valuation which has been opted by the assessee.
  • In the present facts of the case, the Assessing Officer proceeded to value the share by adopting book value method whereas the Assessee adopted the value of shares by following discounted cash flow method.
  • Therefore, the Assessing Officer was not correct in rejecting the valuation method adopted by the Assessee and invoking the provisions of section 56(2)(viib) of the Income Tax Act for making addition on differential value of shares and valuation done as per book value method.

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