High Court ruling wherein it was held that the option and choice of method for fair market valuation vests solely with the assessee/tax payer.

Brief Background

• The taxpayer had issued shares at a premium and determined Fair Market Value (FMV) of the shares on the basis of Discounted Cash Flow Method (‘DCF’) drawn by a merchant banker.
• During assessment, the revenue authorities, deprived of any satisfactory explanation from tapayer to substantiate the basis of valuation as adopted in the valuation report rejected the said report.
• While independently evaluating the face value of shares, the revenue authorities chose to depart from DCF method and adopted Net Asset Value Method (‘NAV’) and quantified disallowance based on the value determined under NAV Method.

Relevant Provisions

• Section 56(2)(viiib) – where a company, not being a company in which public is substantially interested, receives any consideration from any person for the issue of shares in excess of fair market value as determined under Rule 11UA(2), such excess amount shall be chargeable to tax under the head ‘Income from Other Sources’.
• Rule 11UA(2) – Taxpayer is enabled to determine the FMV of unquoted equity shares in either of the below mentioned options:
  • FMV determined as per Net Asset Value Method
  • FMV determined by Merchant Banker as per Discounted Cash Flow Method
• Explanation placed in clause (viiib) postulates that the FMV of shares shall be the value determined in accordance with methods prescribed or as may be substantiated by the company to the satisfaction of the tax officer, whichever be higher.

Key Excerpts from Ruling

• The High Court held that from the conjoint reading of section 56(2)(viib) read along with rule 11UA(2), the option and the choice to opt valuation method vests solely in the hands of the assessee.
• It also held that while it would be open for revenue authorities to doubt or reject a valuation that may be submitted for its consideration, the statute clearly does not appear to empower it to independently evaluate the face value of unquoted equity shares by adopting a valuation method other than the one chosen by the assessee.
• Further, the HC granted the tax officer an option to determine the FMV of shares adopting DCF Method by appointing an independent Valuer.