THE PRINCIPAL COMMISSIONER OF INCOME TAX 1 AHMEDABAD vs M/S MAGNET BUILDTECH PVT. LTD.

C/TAXAP/19/2025 JUDGMENT DATED: 21/10/2026
(GJHC240019602025)
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/TAX APPEAL NO. 19 of 2025

FOR APPROVAL AND SIGNATURE:


HONOURABLE MR. JUSTICE BHARGAV D. KARIA

and
HONOURABLE MR. JUSTICE NIRZAR S. DESAI

==========================================================
Approved for Reporting Yes No
✓
==========================================================
THE PRINCIPAL COMMISSIONER OF INCOME TAX 1 AHMEDABAD
Versus
M/S MAGNET BUILDTECH PVT. LTD.
==========================================================
Appearance:
DEV D PATEL(8264) for the Appellant(s) No. 1
==========================================================
CORAM: HONOURABLE MR. JUSTICE BHARGAV D. KARIA
and
HONOURABLE MR. JUSTICE NIRZAR S. DESAI

Date : 21/10/2026

JUDGMENT
(PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA)
1. Heard learned Senior Standing Counsel Mr.Dev D Patel
for the appellant.
2. This appeal is filed under Section 260A of the Income
Tax Act, 1961 (for short, "the Act") by the appellant -
Revenue, proposing the following substantial questions of law
Page 1 of 15
Uploaded by BHAVINKUMAR DEVENDRABHAI MEHTA(HCW0108) on Fri Oct 23 2026 Downloaded on : Fri Oct 23 16:40:54 IST 2026

C/TAXAP/19/2025 JUDGMENT DATED: 21/10/2026
(GJHC240019602025)
arising out of the order dated 25.07.2024 passed by the
Income Tax Appellate Tribunal (for short, "Tribunal") in ITA
No. 489/AHD/2020 for A.Y. 2016-17;
“(a) Whether in the facts and circumstances of the case
and in law, the learned ITAT has erred in deleting the
addition on account of disallowance u/s 56(2)(viib) of the
Act without duly considering the findings of the Assessing
Officer that the assessee had received excess premium in
contravention to the provisions of section 56(2) (viib) of
the Act?
(b) Whether in the facts and circumstances of the case
and in law, the learned ITAT has erred in holding the
valuation valid, without duly considering that the valuer
has failed to verify the financial projections from
independent sources and has simply issued certificate
with the disclaimer that all the details were provided by
the management?”
3. The brief facts of the case are as under;
3.1. The assessee filed a return of income for A.Y. 2016-17
declaring nil income on 26.09.2016. The case of the assessee
was selected for limited scrutiny through CASS with respect to
two issues, namely, (i) whether the tax aspects to
Page 2 of 15
Uploaded by BHAVINKUMAR DEVENDRABHAI MEHTA(HCW0108) on Fri Oct 23 2026 Downloaded on : Fri Oct 23 16:40:54 IST 2026

C/TAXAP/19/2025 JUDGMENT DATED: 21/10/2026
(GJHC240019602025)
investments/advances/loans have been considered in the return
of income; and (ii) whether the funds received in the form of
share premium are from disclosed sources and have been
correctly offered to tax.
3.2. The Assessing Officer proceeded to make inquiries about
the justification of the amount of share premium received on
allotment of 7,99,900 Compulsorily Convertible Preference
Shares (CCPS). The Assessing Officer, after considering the
submissions made by the assessee, made addition of excess
premium of Rs. 79,19,01,000/- under Section 56(2)(viib) of the
Act, alleging that the same to be in excess of the fair market
value of CCPS by relying on provisions of Rule 11UA(2) of the
Income-tax Rules, 1962 (for short, "the Rules").
4. Being aggrieved by the order of the Assessing Officer, the
assessee preferred an appeal before the CIT(Appeals) who, after
considering the submissions made on behalf of the assessee as
well as considering the provisions of Rule 11UA of the Rules,
allowed the appeal by observing as under;
“5.4 Ground No.s 2 to 6: Since only a single issue is
involved, therefore, for the sake of convenience, all these
Page 3 of 15
Uploaded by BHAVINKUMAR DEVENDRABHAI MEHTA(HCW0108) on Fri Oct 23 2026 Downloaded on : Fri Oct 23 16:40:54 IST 2026

C/TAXAP/19/2025 JUDGMENT DATED: 21/10/2026
(GJHC240019602025)
grounds of appeal have been taken together for
adjudication.
i From the Assessment order it is noticed that the A.O.
had allowed the Appellant final opportunity through
Show-Cause Notice dated 03.12.2018 to explain as to why
the Valuation Report of the C.A. valuing the F.M.V. of
CCPS at Rs.1,000/- per CCPS should not be rejected, but,
since the Appellant failed to reply the Show-Cause
Notice, A.O. rejected the Valuation Report. (Para 9 of the
assessment order).
ii. Having rejected the Valuation Report determining the
F.M.V. of the CCPS at Rs.1000/- per CCPS, the A.O.,
after referring to the scope and ambit of the provisions of
Section 56(2)(viib) of Income Tax Act, 1961 and Rule
11UA(1)(c)(c), considered the Premium on CCPS as
taxable income being in contravention of the provisions
of Section 56(2)(viib) of Income Tax Act, 1961.
5.4.1 It is therefore, evident that the Premium on CCPS
was added solely, because, according to A.O. the
Appellant had failed to reply the Show-Cause Notice
which led the rejection of the Valuation Report
determining F.M.V. of the CCPS and the addition under
appeal.
5.4.2 During the course of hearing of the appeal on
Page 4 of 15
Uploaded by BHAVINKUMAR DEVENDRABHAI MEHTA(HCW0108) on Fri Oct 23 2026 Downloaded on : Fri Oct 23 16:40:54 IST 2026

C/TAXAP/19/2025 JUDGMENT DATED: 21/10/2026
(GJHC240019602025)
19.03.2020 the Ld Advocate Mr. I.S.Verma, while
explaining the grievance expressed in Ground No. 6 of
the Appeal that the A.O. rejected the F.M.V determined
by the Appellant in accordance with the prescribed
provisions of law, arbitrarily and on conjectures and
surmises, submitted that it is not correct to say that the
Appellant had not complied the Final Show Cause notice
dated 03.1.2018, as is evident from the Appellant's letter
dated 05.12.2018 requesting for personal hearing on
14.12.2018 instead of 07.12.2018 fixed as per show cause
notice, to explain the matter under reference. On the
other hand, it is miscarriage of justice by violating the
'Principles of Natural Justice' by not allowing the
personal hearing and, therefore, allegation for not filing
reply to the show cause notice is false and cannot be
used against the Appellant.
5.4.3 On merits Mr Verma submitted that the Valuation,
having been done in accordance the provisions of Law
and the Rules prescribed by the CBDT/Legislatures, is the
correct one and therefore, FMV is neither against the so
called correct parameters nor is exaggerated in value and
as submitted hereinbefore, Assessing Officer having no
power to reject the valuation and substitute his own
method/valuation, this reason is not relevant at all so as
to reject the valuation.
5.4.4 On the point of justification of the method adopted
for valuing the 'CCPS' and disclaimer given by the C.A.
Page 5 of 15
Uploaded by BHAVINKUMAR DEVENDRABHAI MEHTA(HCW0108) on Fri Oct 23 2026 Downloaded on : Fri Oct 23 16:40:54 IST 2026

C/TAXAP/19/2025 JUDGMENT DATED: 21/10/2026
(GJHC240019602025)
reference was made to the Para 5.4 of the Appellate
Order in case of Appellant's group Company M/s First
Class Infrabuild Pvt. Ltd. wherein both these issues had
been discussed and decided by the CIT(A)-3 in Appellant's
favour by observing that "……. The valuer is bound to
give disclaimers as the valuer cannot be expected to
determine the exact value as the same is not feasible. As
already discussed above, the valuer has adopted
reasonable projections than the optimum figures for
generation of revenue and the valuation of shares done
by the valuer has got reasonable basis......".
5.4.5. Further, Commenting on the conclusion
arrived at by the A.O. in Para 12 & 13 of the Assessment
Order the Ld AR submitted that the same being based on
misplaced understanding of the provisions of section 56(2)
(viib) and Rule 11 UA, specially the Rule 11UA(1)(c)(c)
and Rule 11UA(2)(a), just speaks of the ignorance or the
pre-determined state of mind of the Officer to make
addition. Referring to the provisions of Explanation to
section 56(2)(viib) of the Act and the provisions of Rule
11UA(1)(c)(c) and Rule 11UA(2) it was submitted that the
Legislature has provided different methods for computing
'fair market value' of 'unquoted equity shares' and
'unquoted shares other than the equity shares' and so far
Appellant's case is concerned, the 'fair market value' of
'CCPS' having been estimated in accordance with the
provisions of Rule 11UA(1)(c)(c), A.O. had no
jurisdiction/power to object to the same and substitute
his valuation. It was further submitted that as far as Rule
Page 6 of 15
Uploaded by BHAVINKUMAR DEVENDRABHAI MEHTA(HCW0108) on Fri Oct 23 2026 Downloaded on : Fri Oct 23 16:40:54 IST 2026

C/TAXAP/19/2025 JUDGMENT DATED: 21/10/2026
(GJHC240019602025)
llUA (2) is concerned, firstly, this Rule is for computing
the 'fair market value' of 'unquoted equity shares' and
secondly, Rule has given option to the Assessee to
compute the value in accordance with Rule 11UA(2)(a) or
Rule 11UA(2)(b) and for that purpose the assessee has to
be allowed an opportunity to select its option, which was
missing in this case. According to him A.O. did not have
jurisdiction/power either to reject the Valuation Report or
to substitute his own value computed under RulellUA(2)
(a) or 11UA(2)(b) and therefore the addition under
dispute/appeal may kindly be deleted.
5.4.6. In the interest of substantial interest, the Appellant
was directed to submit its reply to the show cause notice
issued by the AO on 03.12.2018 and some other issues.
On 9.07.2020 Appellant's counsel Advocate Sh. I.S. Verma
along with Sh. D.R. Rajan, C.A. cum General Manager of
the appellant group of company attended the hearing and
submitted written reply which has been reproduced in
this order supra in para 4.2 pages 24 to 31 of this order.
5.4.7. Case was discussed with the ARs and written
replies have also been perused. In view of the provisions
of 250(4), which provide that before disposing of the
appeal, the CIT(A) may make such further inquiry as he
thinks fit or may direct the A.O. to make further inquiry,
and the unprecedented Covid-19 restrictions it was
thought fit to verify the Appellant's reply to show cause
notice vis-à-vis to the allegations/shortcomings/defects etc
Page 7 of 15
Uploaded by BHAVINKUMAR DEVENDRABHAI MEHTA(HCW0108) on Fri Oct 23 2026 Downloaded on : Fri Oct 23 16:40:54 IST 2026

C/TAXAP/19/2025 JUDGMENT DATED: 21/10/2026
(GJHC240019602025)
pointed and relied upon by the A.O. to reject the
valuation report and consequently the F.M.V. of the
CCPS.
5.4.8. After having considered the facts on records,
contents of show cause notice, AO's case, Appellant's
reply, provisions of section 56(2)(viib) read with
Explanation thereto and the Rule 11UA (1)(c)(c) and Rule
11UA(2)(a)/11UA(2)(b), I find force in the submissions of
the appellant. Had the A.O. considered the appellant's
various replies and the C.A's reply, which were filed
before issuing show cause notice, in right perspective,
there could have been no reason for issuing the Show-
Cause Notice, what to say of the rejection of the
Valuation Report/F.M.V. A.O's approach to the whole
issue seems to be the provisions of section 56(2)(viib) and
the quantum of premium, which itself cannot be
sustained.
5.4.9. I have also found that the Appellant's reply against
show cause notice and the C.A's reply filed in response to
notice u/s133(6) satisfy all the objections, on the basis of
which the A.O. rejected the Valuation report and made
the addition. In the totality of the facts and
circumstances and the provisions of Law addition of the
premium received on issuance of the CCPS, which
otherwise was from well explained sources, was not
justified and the same deserves to be deleted.
Page 8 of 15
Uploaded by BHAVINKUMAR DEVENDRABHAI MEHTA(HCW0108) on Fri Oct 23 2026 Downloaded on : Fri Oct 23 16:40:54 IST 2026

C/TAXAP/19/2025 JUDGMENT DATED: 21/10/2026
(GJHC240019602025)
5.4.10. Even otherwise also, since each CCPS was to be
converted after a period of 18 yrs, compulsorily, in 100
shares of face value of Rs. 10/- each, the value of Rs.
1000/- of each CCPS as on the date of allotment could
not be said to be unreasonable or in excess of the F.M.V.
on that date. Therefore, appellant's case is out of the
provisions of section 56(2)(viib). The addition under
appeal is therefore, directed to be deleted on this count
also. Therefore, the addition of Rs.79,19,01,000/- u/s
56(2)(viib) is hereby deleted. Accordingly, grounds of
appeals no. 2 to 6 on this addition are allowed.”
5. Being aggrieved by the order passed by the CIT(Appeals),
Revenue preferred an appeal before the Tribunal. The Tribunal,
in the impugned order, dismissed the appeal of the Revenue,
upholding the order passed by the CIT(Appeals), by observing
as under;
“ 6.1. Relating to Ground Nos.1 to 3, we noted that the
Ld.CIT(A) has dealt with the same in detail. The
Ld.CIT(A) supported the valuation process, asserting that
it was conducted in accordance with the legal provisions
and CBDT/Legislature rules. The Ld.CIT(A) has criticized
the AO for not having the power to reject the valuation
or substitute his own method. The fair market value
(FMV) determined by the Valuer is defended by the
Ld.CIT(A) as neither exaggerated nor incorrect. The
Ld.CIT(A) emphasized that the AO cannot arbitrarily
Page 9 of 15
Uploaded by BHAVINKUMAR DEVENDRABHAI MEHTA(HCW0108) on Fri Oct 23 2026 Downloaded on : Fri Oct 23 16:40:54 IST 2026

C/TAXAP/19/2025 JUDGMENT DATED: 21/10/2026
(GJHC240019602025)
reject a Valuation Report that complies with established
legal guidelines. The FMV determined by the Valuer is
upheld, provided it follows the prescribed rules. The
Ld.CIT(A) has also justified the method adopted for
valuing CCPS and the disclaimers by the Valuer. The
Ld.CIT(A) has made a reference to a previous appellate
order in favour of the assessee, supporting the Valuer's
methodology and disclaimers. The Ld.CIT(A) has cited the
ITAT Bangalore Bench's decision in the case of Innovit
Payment Solutions Pvt. Ltd. to reinforce the process and
principles for scrutinizing valuation reports. The Ld.CIT(A)
reinforced that Valuers must provide disclaimers due to
the inherent uncertainties in valuations. The decision
cited by the Ld.CIT(A) underscores that the AO can
scrutinize, but not arbitrarily reject a valuation without
proper reasons and adherence to the DCF method, which
cannot be changed by the AO. The CIT(A) found fault
with the AO's interpretation of Section 56(2)(viib) and
Rule 11UA. The Ld.CIT(A) deemed that the AO's rejection
of the valuation report beyond his jurisdiction, especially
when the valuation is done as per Rule 11UA(1)(c)(c).
Thus, the Ld.CIT(A)'s decision systematically dissects the
AO's actions, emphasizing adherence to legal procedures
and the importance of a fair valuation process.
6.2. We have reviewed the judicial pronouncements relied
on by the Ld.DR. The decision of Delhi Bench of ITAT in
the case of Agro Portfolio (P.) Ltd. (supra) is not
applicable in the present case as shares were allotted to
third party and the merchant banker solely relied upon
Page 10 of 15
Uploaded by BHAVINKUMAR DEVENDRABHAI MEHTA(HCW0108) on Fri Oct 23 2026 Downloaded on : Fri Oct 23 16:40:54 IST 2026

C/TAXAP/19/2025 JUDGMENT DATED: 21/10/2026
(GJHC240019602025)
the information and financial data provided by the
company without independent verification. As against in
the present case the shares are allotted to the holding
company by wholly owned subsidiary and the financial
projections were prepared and validated by independent
technical expert.
6.3. The judicial precedents relied on by the Ld.AR are
also reviewed. In case of Dhruv Milkose Pvt. Ltd.(supra),
the Tribunal decided that the AO cannot change the
method of valuation chosen by the assessee if it complies
with the prescribed law and rules. In case of Solitaire
BTN Solar Pvt. Ltd.(supra), the Tribunal emphasized that
transactions between holding and subsidiary companies at
a premium do not attract Section 56(2) (viib) of the Act
as the legislative intent is not to tax such transactions. In
case of Rugby Regency (P.) Ltd.(supra), the Tribunal
confirmed that the AO must scrutinize the valuation
based on the facts available at the time of valuation and
cannot rely on subsequent financial performance.
6.4. Based on the facts and judicial pronouncements, we
conclude that the DCF method adopted by the assessee
for valuing the CCPS is legitimate and in accordance with
Rule 11UA. The AO cannot reject the method chosen by
the assessee if it is prescribed by law.
6.5. The AO's reliance on the company's subsequent
financial losses to question the valuation is misplaced.
Page 11 of 15
Uploaded by BHAVINKUMAR DEVENDRABHAI MEHTA(HCW0108) on Fri Oct 23 2026 Downloaded on : Fri Oct 23 16:40:54 IST 2026

C/TAXAP/19/2025 JUDGMENT DATED: 21/10/2026
(GJHC240019602025)
The projections must be assessed based on the facts and
data available at the time of valuation, not on future
outcomes, as held in various judicial pronouncements.
The issuance of CCPS to the holding company does not
align with the legislative intent of Section 56(2)(viib) of
the Act to prevent the generation and use of unaccounted
money. The transaction between a wholly owned
subsidiary and its holding company does not create any
unaccounted income or inflated share value for tax
evasion purposes unless it is specifically proved. The
Ld.CIT(A) correctly applied the provisions of law and
judicial precedents in deleting the addition made by the
AO. The valuation of shares based on the DCF method is
valid, and the AO's objections lack merit. The order of
the Ld.CIT(A) is upheld. The addition of
Rs.79,19,01,000/- under Section 56(2) (viib) of the Act is
hereby deleted.”
6. Considering the above concurrent findings of fact
recorded by the CIT(Appeals) and the Tribunal, it is not in
dispute that the Assessing Officer has doubted the valuation
report issued by the Chartered Accountant as per the Rule
11UA while valuing the fair market value of the CCPS along
with the disclaimers made in such report.
7. Both the Tribunal as well as the CIT(Appeals) have
referred to and relied upon the similar orders passed in favor
Page 12 of 15
Uploaded by BHAVINKUMAR DEVENDRABHAI MEHTA(HCW0108) on Fri Oct 23 2026 Downloaded on : Fri Oct 23 16:40:54 IST 2026

C/TAXAP/19/2025 JUDGMENT DATED: 21/10/2026
(GJHC240019602025)
of the assessee supporting the methodology and disclaimers in
the valuation report to arrive at a fair market value of the
CCPS. The Assessing Officer has misinterpreted the provisions
of Section 56(2)(viib) read with Rule 11UA by rejecting the
valuation report, as the same could not have been done by the
Assessing Officer, as per the provision of Rule 11UA(1)(c). The
provisions of Rule 11UA(1)(c), which reads as under;
“Determination of fair market value.
11UA. (1) For the purposes of section 56 of the Act, the
fair market value of a property, other than immovable
property, shall be determined in the following manner,
namely,
(c) valuation of shares and securities,—
(c) the fair market value of unquoted shares and
securities other than equity shares in a company which
are not listed in any recognized stock exchange shall be
estimated to be price it would fetch if sold in the open
market on the valuation date and the assessee may obtain
a report from a merchant banker or an accountant in
respect of such valuation.
(2) Notwithstanding anything contained in sub-clause (b)
or sub-clause (c), of sub-rule (1), the fair market value of
unquoted equity shares for the purposes of sub-clause (i)
of clause (a) of the Explanation to clause (viib) of sub-
section (2) of section 56 shall be the value, on the
valuation date, of such unquoted equity shares as
determined in the following manner under clause (a) or
Page 13 of 15
Uploaded by BHAVINKUMAR DEVENDRABHAI MEHTA(HCW0108) on Fri Oct 23 2026 Downloaded on : Fri Oct 23 16:40:54 IST 2026

C/TAXAP/19/2025 JUDGMENT DATED: 21/10/2026
(GJHC240019602025)
clause (b), at the option of the assessee, namely:-
8. On perusal of the above rule applicable to the facts of
the case, when the valuation is done as per Rule 11UA(1)(c) as
per the valuation report submitted by the Chartered
Accountant, the Assessing Officer could not have rejected the
same, as it would have been beyond his jurisdiction. The
Tribunal has therefore rightly held that the CIT(Appeals) has
systematically dissected the reasoning of the Assessing Officer
to highlight as to how Rule 11UA(1)(c) is misinterpreted to
apply Rule 11UA(2) for invoking Section 56(2)(viib) of the Act.
9. It is also pertinent to note that the subsequent financial
loss of the assessee-company for the purpose of valuation could
not have been referred to and relied upon as the basis by the
Assessing Officer to reject the valuation report, which is based
on the facts and data available at the time of valuation and
such valuation report could not have been rejected on the
basis of the subsequent financial losses. The Tribunal was
therefore justified in holding that the issuance of CCPS to
holding company would not align with the legislative intent of
Section 56(2)(viib) of the Act to prevent the generation and use
of unaccounted money, as the transaction was between a
Page 14 of 15
Uploaded by BHAVINKUMAR DEVENDRABHAI MEHTA(HCW0108) on Fri Oct 23 2026 Downloaded on : Fri Oct 23 16:40:54 IST 2026

C/TAXAP/19/2025 JUDGMENT DATED: 21/10/2026
(GJHC240019602025)
wholly owned subsidiary and its holding company, which
would not create any unaccounted money or inflated share
value for tax evasion purpose unless the same is specifically
proved. Therefore, in view of the concurrent findings of facts
recorded by both the CIT(Appeals) and the Tribunal, no
question of law, much less any substantial question of law,
arises from the impugned order of the Tribunal. Therefore, the
appeal is accordingly dismissed.
(BHARGAV D. KARIA, J)
(NIRZAR S. DESAI,J)
BHAVIN MEHTA
Page 15 of 15
Uploaded by BHAVINKUMAR DEVENDRABHAI MEHTA(HCW0108) on Fri Oct 23 2026 Downloaded on : Fri Oct 23 16:40:54 IST 2026