Addition u/s 50C deleted based on FMV in CA report under Rule 11UA(1)(b) as AO applied wrong rule Rule 11UA(2) applicable for the valuation of the shares u/s 56(2)(viib)
In a recent judgment, ITAT Delhi has upheld deletion of addition u/s 50C based on FMV as per CA report where AO had applied wrong rule Rule 11UA(2) which was applicable for the valuation of the shares u/s 56(2)(viib) of Income Tax Act 1961.
ABCAUS Case Law Citation:
5095 (2026) (04) abacus.in ITAT
Important Case Laws relied upon by Parties:
M/s. Suguni Constructions Pvt. Ltd., Hyderabad
CIT V/s. George Henderson (66 ITR 622)-SC
CIT Vs. Gillanders Arbuthnot & Co.(1973 AIR 989) SC
Reliance Communications Infrastructures V/s CIT (34 SOT 245) Mum
Morarjee Textiles Ltd. V/s. ACIT
Nariman Point Building Services & Trading P. Ltd. V/s. CIT
Venus Financial Services Ltd. V/s. ACIT
In the instant case, the Revenue had challenged the order passed by the CIT(A) NFAC In deleting addition made by the Assessing Officer (AO) u/s 50C of the Income Tax Act, 1961 (the Act).
During the year under appeal, assessee has sold shares of a Private Limited Company (related company) wherein the assessee was a promoter Director and shareholder. The case of the assessee was selected under CASS for the reason large capital gain deduction claimed.
The AO observed that assessee had sold shares of the related company to another company (the buyer company) whereas during the year itself, the related company. had issued shares to the buyer company at a premium. Thus, the AO alleged that assessee had received less consideration per share and accordingly, total capital gain was alleged less shown.
The AO after considering the submissions of the assessee, invoked the provisions of section 50CA of the Act and made the addition for the differential amount as LTCG.
Before the Tribunal the assessee submitted that CIT(A) failed to appreciate the fact that assessee had placed reliance on the Valuation Report of a Chartered Accountant (“CA”) whereas after the amendment in Rule 11UA vide 6th Amendment Rules, 2018 w.e.f. 24.05.2018, fair market value of unquoted equity shares of a private limited company should be determined by a merchant banker as per discounted cash flow method and the word “by an Accountant” was omitted vide this amendment.
It was therefore, submits that the Valuation Report furnished by the assessee since based on the fair market value of equity shares of the related company was done by a CA therefore, such report cannot be made basis for deleting the addition.
The ITAT observed that the AO had held that valuation report should be obtained from merchant banker however, here the AO made an error in applying Rule 11UA(2) as against Rule 11UA(1). Rule 11UA(2) is applicable for the valuation of the shares u/s 56(2)(viib) of the Act whereas the provisions of Rule 11UA(1)(b) are applicable where the valuation is done for the purpose of section 50CA of the Act.
The Tribunal further observed that the CIT(A) had duly appreciated the difference between the valuation done of the unquoted shares for the purpose of section 50CA and section 56(2)(viib) of the Act and thus, deleted the addition made.
The Tribunal noted that the assessee had obtained Valuation Report from CA who valued the unquoted equity shares sold by the assessee on the basis of NAV method as prescribed under sub-clause (b) of Rule 11UA(1)(b) of the Rules as per which value per share was computed. Since the assessee had sold the share at the higher price than the fair market value determined as per section 50CA, therefore, no addition was required to be made.
Accordingly, all the grounds of appeal of the Revenue were dismissed.
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