The Income Tax Appellate Tribunal (ITAT), New Delhi, deleted the addition of Rs 52 crore which was imposed by the AO based on the claim that the respondent-taxpayer had undervalued the fair market value (FMV) of the shares he sold. The Tribunal opined that the respondent has followed the prescribed procedure for determining the valuation of unlisted shares and declared the corresponding capital gains in the return of income.
The ruling came in favour of the respondent, after finding that the respondent had adopted a recognized method of valuation and the AO has not brought on record any facts which show that the respondent adopted a demonstrably wrong approach, or that the method of valuation was made on a wholly erroneous basis, or that it committed a mistake which goes to the root of the valuation process.
The Division Bench comprising C.N. Prasad (Judicial Member) and M. Balaganesh (Accountant Member) observed that Rule 11UAA gives the option to a taxpayer to follow either NAV method or DCF method for determining fair market value of unlisted shares as on the date on which the shares of an unlisted company are transferred. Further, when the taxpayer follows either of the method for first sale of unlisted shares during a year, the said rule does not restrict him to use the same method for all the subsequent sale of unlisted shares on different dates.
The said rule only requires the taxpayer to obtain a valuation report as on the date on which unlisted shares are transferred. Hence, if the unlisted shares are sold multiple occasions on different dates, the taxpayer has to obtain multiple valuation reports, each as on the date of said transfer. In each occasion, the valuation of unlisted shares in terms of rule 11UA can be determined by taxpayer according to either the NAV or the DCF method and there is no bar on using different methods in same AY on sale of the same company’s unlisted shares, added the Bench.
Once value of shares had been determined by adopting any of two methods, i.e. NAV or DCF, then such value shall be deemed to be FMV of unlisted shares and AO cannot question the same, and he is bound to follow the same unless, the AO shows mistake/errors in the said method adopted by the taxpayer by bringing cogent material on record.
Briefly, the respondent, an individual and investor in start-up company engaged in the business of trading of shares in derivative Segment of capital market, had transferred 801 shares held by him in CGPL to Vun Internet Partners at a sale consideration of Rs. 54,960 per share. The short-term capital gain arising on sale of these shares were duly reflected in the return in accordance with Rule 11UA by adopting Net Asset Value (NAV) method.
The AO observed that within a gap of 11 months, the respondent was able to sell the shares at much higher value and explained the reasons for difference in fair market value of shares. The AO, however, proceeded to make an addition of Rs. 52,68,21,209/- under Section 48 read with Section 50CA on account of alleged notional sale consideration.
Appearances:
CIT Mahesh Kumar, for the Appellant/ Taxpayer
Advocates Salil Aggarwal and Shankar, and CA Shailesh Gupta, for the Respondent/ Taxpayer
