Restriction that Auditor can not value FMV u/s 56 rwr 11UA is well founded – ITAT

Restriction that Auditor can not be an accountant to value FMV u/s 56 as provided in Rule 11UA is well founded – ITAT

ABCAUS Case Law Citation:
ABCAUS 2708 (2019) (01) ITAT

Important Case Laws Cited/relied upon:
M/s. Vaani Estates Pvt. Ltd. Vs. ITO (2018) 172 ITD 629
Rameshwaram Strong Glass (P) Ltd. Vs. ITO (2018) 172 ITD 571

Two  Income Tax Appeal were filed by the assessee against orders of CIT(A) upholding the rejection of the report of valuation of the shares.

The Assessing Officer (AO), noted that person who is said to have valued the share of the assessee company was none other than the person who has signed the Audit report u/s. 44AB of Income Tax Act, 1961 (the Act).

It was also noted by the AO that Rule 11U(a) of Income Tax Rules, 1962, defines “accountant” as “for the purposes of sub-rule (2) of Rule 11UA means a fellow of the Institute of Chartered Accountants of India within the meaning of the Chartered Accountants Act, 1949 (38 of 1949) who is not appointed by the company as an auditor under section 44AB of the Act or under section 224 of the Companies Act, 1956 (Companies Act)”

Therefore, the AO ignored the valuation report submitted by the assessee because the same was not as per Rule 11UA.

Accordingly the AO determined the fair market value (FMV) of the shares on the basis of NAV.

CIT(A) upheld the action of the Assessing Officer (AO).

Before the Tribunal, the assessee submitted that for one assessment year, the valuation report relating to value of the shares was signed by a different Chartered Accountant (CA) and the audited accounts of the assessee including Tax Audit Report was signed by a different Chartered Accountant.

Therefore, it was contended that it was not proper on the part of the AO to say that the valuation report was signed by the auditor.

Regarding the second year, it was submitted that though both the valuation report and the audited accounts including tax audit report were signed by same CA firm but only for this reason, it can be said that the valuation was not proper.

The Tribunal observed that for the purposes of sub-rule (2) of rule 11UA, the auditor cannot be an accountant for the purposes of Rule 11UA (2).

The Tribunal further observed that as noted in the assessment order, for first assessment year, the assessee had submitted two valuation reports and the second one was signed by the auditor which was not acceptable because the same is not certified by a person who is accepted as Accountant as per Rule 11U(a) of IT Rules, 1962. The AO had rightly accepted the fair market value as per dirst certificate.

For the second year, the Tribunal observed that there was no report of any Chartered Accountant who could be considered as accountant as per Rule 11U(a) of IT Rules, 1962. The AO had worked out the fair market value of assessee company on the basis of NAV in the absence of any valuation report of any valuer who could be accepted as an Accountant as per Rule 11U(a).

The Tribunal took in to account the 400% rise in value per share when the auditor certified it just after 21 months approx and opined that this also suggest that such restriction as per Rule 11U(a) on the auditor’s acceptance as Accountant for the purposes of Rule 11UA (2) is well founded.

Accordingly, the Tribunal dismissed the appeal(s)

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