Gujarat HC Upholds Deletion Of ₹79.19-Crore Premium Addition On CCPS Issued By Wholly Owned Subsidiary To Parent, Says AO Could Not Reject Rule 11UA Valuation

For A.Y. 2016–17, the assessee issued 7,99,900 compulsorily convertible preference shares (CCPS) and received a premium.

The Assessing Officer treated ₹79,19,01,000 of the premium as exceeding fair market value and added it under Section 56(2)(viib) of the Income-tax Act, 1961, rejecting the assessee’s valuation report under Rule 11UA.

The CIT(A) deleted the addition, finding that the valuation report and the assessee’s explanation addressed the Assessing Officer’s objections.

The Tribunal upheld that decision, and the Revenue appealed under Section 260A.

1. Whether the Tribunal erred in deleting the addition under Section 56(2)(viib), despite the Assessing Officer’s finding that the premium exceeded fair market value.

2. Whether the Tribunal erred in upholding the valuation despite the valuer’s reliance on management-provided projections and the disclaimer in the valuation report.

Section 56(2)(viib) of the Income-tax Act applies to consideration received for shares to the extent it exceeds their fair market value.

Under Rule 11UA(1)(c), the fair market value of unquoted shares and securities other than equity shares is estimated at the price they would fetch in the open market, and the assessee may obtain a valuation report from a merchant banker or accountant.

Rule 11UA(2), by contrast, prescribes valuation methods for unquoted equity shares.

A valuation must be assessed by reference to the information available on its valuation date, rather than subsequent financial results.

The Court accepted the concurrent findings that the CCPS valuation had been prepared under Rule 11UA(1)(c), and held that the Assessing Officer had misapplied Rule 11UA(2) in rejecting it.

It also held that subsequent losses could not, by themselves, undermine a valuation based on information available at the relevant time.

The shares were issued by a wholly owned subsidiary to its holding company; absent specific proof of tax evasion or unaccounted money, the Court agreed that the transaction did not support the Revenue’s challenge on that basis.

It dismissed the Revenue’s appeal, leaving in place the deletion of the ₹79,19,01,000 addition under Section 56(2)(viib).