Facts of the Case

The assessee filed his return of income electronically on 28.02.2017 declaring total income of ₹12,68,070. The case was selected for scrutiny assessment and statutory notices were issued.

During assessment proceedings, the Assessing Officer observed that the assessee had sold 12,800 shares of M/s Procon India Private Limited for a total consideration of ₹3,00,03,200.

To verify the Fair Market Value (FMV) of the shares, a notice under Section 133(6) was issued to the company and its directors asking them to furnish the method adopted for valuation of the shares.

Upon examining the details, the Assessing Officer formed the view that the assessee had received ₹1,56,66,432 in excess of the FMV of the shares. The said excess amount was treated as income from other sources, and the long-term capital gains were recomputed accordingly. 

Issues Involved

  1. Whether the Assessing Officer was justified in treating the excess amount received on sale of shares as income from other sources due to alleged excess over the FMV.
  2. Whether the valuation report of a Merchant Banker determining FMV under Rule 11UA should have been considered.
  3. Whether the assessee should be allowed to submit additional evidence relating to valuation of shares. 

Petitioner’s Arguments (Assessee)

The assessee contended that the Assessing Officer passed the assessment order in haste and did not provide sufficient opportunity to furnish a valuation report from a Merchant Banker determining the FMV of shares.

It was submitted that the shares were sold pursuant to an agreement dated 05.02.2015 with the buyers for a consideration of ₹3 crore.

The assessee further stated that the value of shares had been determined using the Discounted Cash Flow (DCF) method, and the FMV was supported by a Merchant Banker’s valuation report, though the same could not be submitted earlier. 

Respondent’s Arguments (Revenue)

The Departmental Representative supported the findings of the Assessing Officer and the CIT(A), contending that the assessee had sufficient opportunity during assessment proceedings to submit the valuation report but failed to do so.

The revenue authorities maintained that the addition made by the Assessing Officer was justified.

Court Findings

The Tribunal observed that there was no dispute regarding the sale of 12,800 shares by the assessee.

However, the Tribunal noted that the Merchant Banker’s valuation report, which the assessee relied upon to support the FMV determined under the DCF method, had never been examined by the lower authorities.

In the interest of justice and fair play, the Tribunal considered it appropriate that the valuation report be examined before deciding the issue. 

Court Order

The ITAT restored the matter to the file of the Assessing Officer with directions to:

  • Examine the valuation report justifying the FMV of shares sold for ₹3 crore, and
  • Decide the issue afresh after giving reasonable opportunity of being heard to the assessee.

Accordingly, the appeal was allowed for statistical purposes. 

Important Clarification

The Tribunal emphasized that where the FMV of shares is disputed, and a valuation report exists, the same must be examined by the authorities before determining tax liability. Failure to examine such evidence may justify remanding the matter for fresh consideration.

Sections Involved

  • Section 133(6) – Power to call for information
  • Section 56 / Income from Other Sources (implication in excess consideration)
  • Rule 11UA of Income Tax Rules – Determination of Fair Market Value of shares

Link to download the order -  https://itat.gov.in/public/files/upload/1703238360-1998%20del%202022.pdf 

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