Application of Valuation method of Rule 11UA upon Preferential Shares: ITAT deletes Addition of Rs 72 Lakhs [Read Order]

The Income Tax Appellate Tribunal (ITAT), New Delhi deleted addition of Rupees 72 lakhs as there was application of valuation method of Rule 11UA upon preferential shares.

The assessee company, M/s. Kheer Bhawani Trading P. Ltd. filed its return for the assessment year 2015-16 declaring loss of Rs. 12,44,833/- and the case was taken up for scrutiny through ‘CASS. During the year in course of assessment proceedings, it was submitted that the assessee company was engaged in the business of investment in all Types of Shares, and Securities, Stocks etc. It was observed by AO that the assessee has issued 63940 preference shares for Rs. 344 per share and has received share premium to the tune of Rs. 1,05,88,464 from M/s Alexure Securities Private Limited, out of which Rs. 165.60 per share has been called up.

In appeal before CIT(A) the assessment order was sustained by the Ld. First Appellate Authority while sustaining the valuation done by the AO invoking sub clause (A) of Rule 11UA. The CIT(A) relied Clause (2) of Section 56(2)(viib) of the Act and held that it clearly empowers the AO to examine the correctness of fair market value of the shares. Accordingly, the CIT(A) concluded that the AO has rightly adopted the net asset value method to arrive at the fair market value of the shares and sustained the addition.

On behalf of the assessee it was submitted that assessee had merely issued preferential shares and as for the purpose of Section 56(2)(viib) of the Act, the Rule 11UA (2) is not applicable. It was submitted that assessee has issued preferential shares and the valuation under Rule 11UA (2) is applicable only to unquoted equity shares. It was submitted that in fact Rule 11UA(1) Sub clause (c) was applicable which prescribes method for determination of value of unquoted shares and securities other than equity shares it was submitted that the AO arbitrarily rejected the bonafide method adopted by the assessee.

A Division Bench consisting of Shamim Yahya, Accountant Member and Anubhav Sharma, Judicial Member held that “The Rule 11UA(2), applied by the Ld Tax authority, is specifically applicable for the valuation of shares for the purpose of section 56(2)(viib) but covers only unquoted equity shares within its ambit and there in no reference to the preference shares. Thus, this bench of the considered opinion that on the counts, AO had fallen in error in making the addition and the CIT(A) has fallen in further error in confirming the same while observing that the appellant assessee was not able to lead any argument as to why valuation of shares cannot be done in the manner provided in sub-clause A and Rule 11UA.”

To Read the full text of the Order CLICK HERE

Support our journalism by subscribing to TaxscanPremium. Follow us on Telegram for quick updates.