18. [2018] 193 TTJ (Jp) 898 ACIT vs. Safe Decore (P.) Ltd ITA No.: 716/Jp/2017 A. Y.: 2014-15 Dated: 12th January, 2018 Section 56(2)(viib) read with Rule 11UA – Fair market value of shares determined by assessee as per discounted cash flow method being higher than the fair market value under net asset method, CIT(A) was justified in deleting addition made by AO u/s. 56(2)(viib)

FACTS

•     During the year under
  consideration the assessee company allotted shares to ‘J’ Ltd. The assesse
  submitted valuation per equity share computed on the discounted cash flow
  method as per the certificate of Chartered Accountants wherein the value per
  shares was arrived at Rs.54.98 per share.

•     The AO did not accept
  said valuation and applied Net Asset Value method as per which value of share
  came to Rs.26.69 per share. Applying the said value, the AO made addition u/s.
  56(2)(viib).

•     Aggrieved by the
  assessment order, the assessee preferred an appeal to the CIT(A). In appellate
  proceedings, the assessee contended that as per Rule 11UA of the Income-tax
  Rules,1962, the Fair Market Value of unquoted equity shares would be the value
  on the allotment date of such unquoted equity shares as determined as per
  method provided or Net Asset Value, whichever was higher.

•     The CIT(A) accepted the
  contention of the assessee and deleted the addition made by the AO.

HELD

•     The Tribunal held that
  there was no dispute that the assessee had issued shares to ‘J’ Ltd., during
  the year under consideration. Further, the fair market value as per the
  provision of section 56(2)(viib) had to be determined in accordance with the
  method prescribed under Rule 11UA of Income-tax Rules,1962 and as per Rule
  11UA(2), discounted cash flow method was one of the prescribed methods. Therefore,
  it was the option of the assessee to adopt any of the prescribed methods under
  Rule 11UA(2).

•     Section 56(2)(viib) read
  with the Explanation had specifically provided that the fair market value of
  the unquoted shares should be determined as per the prescribed methods, and
  should be taken whichever is higher fair market value, by comparing the value
  based on the assets of the company.

Therefore, value as per the Net
Asset Value method as well as any of the other methods prescribed under Rule
11UA of Income-tax Rules,1962, whichever was higher, should be adopted as per
the option of the assessee.

•     In the case of the
  assessee, the fair market value determined as per the discounted cash flow
  method at Rs.54.98 per share which was higher than the valuation adopted by the
  AO as per the Net Asset Value at Rs.26.69 per share.

•     Therefore, the Tribunal
  held that as the AO had not found any serious defect in the facts and details
  used in determining the fair market value under discounted cash flow method, there
  was no error or illegality in the order of the CIT(A).