8 Sections 69B and 147 – Reassessment – Undisclosed investment – Where as per rule 11UA, value of shares was less than Rs. 5, but assessee purchased same at Rs. 10 per share and disclosed all facts in return, reassessment notice for valuing these shares at Rs. 35 as per valuation by Government valuer was not justified

In the A. Y. 2010-11, the assessee had purchased 1,10,00,000 shares at the rate of Rs. 10 per share. The Assessing Officer received information that Government valuer has determined fair market value of the said shares at Rs. 33.35/- per share. Therefore, on the basis of the said information, the Assessing Officer issued notice u/s. 148 of the Income-tax Act, 1961 on the reason to believe that 1,10,00,00 shares were purchased at an undervaluation of Rs. 25.69 crores. Objections filed by the assessee were rejected.

The assessee filed writ petition challenging the reassessment proceedings. The Bombay High Court admitted the writ petition and held as under:

“i)    The assessment order itself mentions that the value of shares is less than Rs. 5 per share on application of Rule 11UA of the Income-tax Rules. There was a complete disclosure of all facts during regular assessment proceedings. Prima facie, the order disposing of the objections, while dealing with the objection of no reason to believe that income has escaped assessment on application of section 56(2)(vii), has completely ignored the Explanation thereto. The Explanation to section 56(2)(vii) states that the fair market value is to be determined in accordance with the Income-tax Rules. On application of Rule 11UA of the Income Tax Rules, the value per share came to less than Rs. 5 per share.

ii)    In the circumstances, the impugned notice indicates a change of opinion, as this very issue namely – valuation of share was a subject matter of consideration during the regular assessment proceedings. Besides, on the application of method of valuation as mandated by the Explanation to section 56(2)(vii), prima facie, the Assessing Officer could not have had reason to believe that income chargeable to tax has escaped assessment.

iii)    In the above view, prima facie, the impugned notice is without jurisdiction. Accordingly, there shall be interim relief in terms of prayer clause (d).”