Citizen’s Choice for Valuation of Shares at Premium Upheld

The Income Tax Appellate Tribunal (ITAT) on account of M/s. Rameshwaram Strong Glass (P) Ltd. v The Income Tax Officer[1] has maintained the privilege of the organization issuing offers to pick the valuation philosophy under the arrangements of the Income Tax Act, 1961 (IT Act) read with the standards surrounded thereunder (Tax Law) for the motivations behind deciding the ‘equitable esteem’ (FMV) of such offers at premium.It held that the assessment experts can’t require the citizen to change the valuation strategy received by it, when the Tax Law concedes a choice to choose either the Net Asset Value (NAV) technique or the Discounted Cash Flow (DCF) strategy. Under area 56(2)(viib) of the IT Act, when a firmly held organization issues shares at premium to inhabitants, if the premium is more than what is advocated by the estimation of offers, according to the valuation rules recommended, at that point the thing that matters is saddled as ‘salary from other sources’ in the hands of such organization.


The citizen in the moment case was a startup private constrained organization (Company), with no business exercises in the significant money related year aside from the buy of an unflinching property worth INR 3.27 lakhs. In the year under question, the Company had issued 140,000 value imparts to a presumptive worth of INR 10 each at a higher cost than expected of INR 60 for every offer getting an aggregate premium of INR 84 lakhs well beyond the offer application cash of INR 14 lakhs. The Assessing Officer (AO) looked for avocation for issuance of offers at premium even with the Company not having any value aside from the fundamental undaunted property.

The AO was of the view that an essential to issuing an offer premium is generous increment in the total assets primarily because of productivity, validity, altruism, and so forth. The Company in its reaction illustrated that receipt of offer premium was a ‘capital receipt’ and business choice not requiring defense under the law. Contradicting the accommodation of the Company, the AO burdened the contrast between the total offer premium and the FMV of offers dependent on the NAV. Wronged by the request gone by the AO, the Company advanced before the Commissioner of Income Tax (Appeals), which chose the issue for the AO, yet coordinated the AO to change calculation to address arithmetical blunders. The Company moved the ITAT against the request of the principal re-appraising expert.

The ITAT held that the assessment experts can’t constrain a citizen to pick any one specific strategy endorsed under segment 56(2)(viib) of the IT Act and Rule 11UA(2) of the Income Tax Rules, 1962 (IT Rules) – i.e. the NAV or DCF technique – when the law has explicitly vested the decision of alternative on the citizens and the citizen has practiced the choice. Allowing the expense experts to do as such will render the statement (b) of Rule 11UA (2) insignificant and purposeless. The ITAT depended looking into it of ITO Vs M/s Universal Polysack (India) Pvt. Ltd.[2] wherein the Coordinate Bench of ITAT Jaipur held that the activity of such an alternative by the citizen isn’t liable to satisfaction of any predefined conditions and it is left to the sole attentiveness of the citizen.

The ITAT likewise seen that the assessment specialists can examine the valuation answer to the degree of finding any arithmetical oversights. The ITAT additionally seen that the duty specialists are qualified for examine the valuation report and decide a new valuation either without anyone else or by requiring a last assurance from a free valuer to stand up to citizens if the assessment experts find that the operations of the valuer or the suppositions made are wrong or conflicting. In such cases, the duty experts may recommend essential adjustments and modifications to the valuation reports gave the equivalent depend on sound thinking and justification. Be that as it may, even in such cases, it isn’t available to the expense specialists to change the technique for valuation, which has been selected by the citizen. Further, the assessment experts can’t request that citizens submit valuation reports dependent on the genuine quantities of resulting years, which were the topic of DCF valuation.

CAM Comments

The above judgment will have an orientation on exchanges including new issuances of offers by firmly held organizations in India. It maintains the privilege of the citizen to pick a strategy that the citizen thinks about suitable and in the meantime alerts that the valuation report must be reasonable as it is available to investigation for propriety and autonomous confirmation if impose specialists discover the submitted report inadmissible.

Note that the said Rule 11UA(2)(b) of the IT Rules has been revised as of late, and the DCF valuation must be embraced by a dealer broker and not by a contracted bookkeeper. In a few cases, the duty specialists had contrasted real execution of organizations and the projections utilized by them for touching base at an incentive under the DCF technique. If there should be an occurrence of deviations in real numbers and projections, charge experts used to dismiss the DCF valuation utilized by the important organization and treat overabundance premium as salary of the organization.

This choice ought to be useful in decreasing vulnerabilities for organizations issuing shares at premium in legitimate circumstances and is along these lines welcome.