FMV of Shares Determined by Statutorily Prescribed Methods cannot be Rejected without Recording Contrary Evidence: Karnataka HC [Read Order]
Karnataka High Court rules that Income Tax authorities cannot reject FMV of shares calculated under Rule 11UA(2) without providing contrary evidence
![FMV of Shares Determined by Statutorily Prescribed Methods cannot be Rejected without Recording Contrary Evidence: Karnataka HC [Read Order]](https://www.taxscan.in/wp-content/uploads/2025/03/Fair-Market-Value-Contrary-Evidence-FMV-of-Shares-Determined-taxscan.jpg "FMV of Shares Determined by Statutorily Prescribed Methods cannot be Rejected without Recording Contrary Evidence: Karnataka HC [Read Order]")
In a recent ruling, the Karnataka High Court clarified that income tax authorities cannot reject the Fair Market Value ( FMV ) of shares determined using methods prescribed by Rule 11UA(2) without clearly recording evidence that proves otherwise. The case began when the Income Tax Department added Rs. 33,71,77,500 to the taxable income of Waterline Hotels Pvt Ltd (assessee) under...
In a recent ruling, the Karnataka High Court clarified that income tax authorities cannot reject the Fair Market Value ( FMV ) of shares determined using methods prescribed by Rule 11UA(2) without clearly recording evidence that proves otherwise.
The case began when the Income Tax Department added Rs. 33,71,77,500 to the taxable income of Waterline Hotels Pvt Ltd (assessee) under Section 56(2)(viib) of the Income Tax Act. The addition was made because the department believed the share premium collected by Waterline Hotels from closely held companies was unjustified, particularly given the company’s losses at the time.
CLUB YOUR INCOME - Because Who Said Money Can’t Hang Out Together? - Click Here
The Income Tax Appellate Tribunal ( ITAT ) later deleted this addition, ruling it was unjustified. Challenging this deletion, the Principal Commissioner and Deputy Commissioner of Income Tax argued before the Karnataka High Court that the premium charged on shares was excessively high and not supported by a valid valuation.
Read More: Shocking Incident: Delhi Policeman Beats Advocate with Iron Rod in Public
The department specifically referred to a director's statement during an earlier survey, indicating that no valuation report had been obtained when issuing the shares. In response, the assessee argued that their share valuation was completely valid.
Step by Step Handbook for Filing GST Appeals Click Here
They submitted a valuation report based on the Discounted Cash Flow (DCF) method, a statutory valuation technique explicitly allowed under Rule 11UA(2). They also argued that the tax department had wrongly dismissed their valuation without thoroughly examining the facts or providing solid evidence to contradict it.
Read More: Major TCS Changes from April 1, 2025: Removed on Sales, Foreign Education & More
The bench comprising Justice Krishna S. Dixit and Justice Ramachandra D. Huddar observed that the DCF valuation method used by Waterline Hotels was valid. The court explained that tax officials could not reject a legally recognized valuation method simply based on their subjective dissatisfaction.
CLUB YOUR INCOME - Because Who Said Money Can’t Hang Out Together? - Click Here
They pointed out that the tax authorities failed to conduct a proper factual inquiry or present concrete evidence to justify rejecting the valuation. The Karnataka High Court dismissed the appeal of the Income Tax Department, confirming the deletion of the Rs. 33,71,77,500 addition made against the company.
To Read the full text of the Order CLICK HERE
Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
