DCIT CENTRAL CIRCLE 7 1 MUMBAI, MUMBAI V. SOYUMM MARKETING PRIVATE LIMITED, MUMBAI

ITA 4306/MUM/2024

AI Insights

The case involves the Deputy Commissioner of Income Tax, Central Circle - 7(1) as the appellant and Spectra Realities Private Limited and Soyumm Marketing Private Limited as respondents, concerning the assessment year 2017-18. The core issue was the application of an illiquidity discount for the valuation of Non-Cumulative Redeemable Preference Shares issued by the respondents, which led to a significant disallowance under section 56(2)(viib) of the Income Tax Act. The Assessing Officer had applied a 15% illiquidity discount based on SEBI guidelines for Mutual Funds and Asset Management Companies, which was contested. The CIT(A) found that the discount was incorrectly applied, leading to the deletion of the disallowance, a decision which the Tribunal upheld.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 790684 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 3 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-12-2025
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Assessment Year: 2017-2018
• Appeal Filed On: 23-08-2024
• Other Referred Cases: Microfirm Capital Pvt. Ltd. vs. DCIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SWAPNIL CHOUDHARY
• Assessee Lawyers: BHUPENDRA SHAH
• Keywords: Fair market value; TDS; Valuation report
• Section: 143(3); 142(1)

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL “G” BENCH, MUMBAI BEFORE SHRI SANDEEP SINGH KARHAIL, JUDICIAL MEMBER SHRI PRABHASH SHANKAR, ACCOUNTANT MEMBER ITA No.4304/MUM/2024 (Assessment Year: 2017-18) Deputy Commissioner of Income Tax, Central Circle - 7(1) Room No.653, Aaykar Bhawan, Churchgate, Mumbai - 400020 ............... Appellant v/s Spectra Realities Private Limited, 9, Floor-I, Plot – 51, Kapadia Chamber, Devji Ratansi Marg, Chinchbunder, Mumbai – 400009 PAN: AALCS7233B ……………… Respondent ITA No.4306/MUM/2024 (Assessment Year: 2017-18) Deputy Commissioner of Income Tax, Central Circle - 7(1) Room No.653, Aaykar Bhawan, Churchgate, Mumbai - 400020 ............... Appellant v/s Soyumm Marketing Private Limited, 9, Floor-I, Plot – 51, Kapadia Chamber, Devji Ratansi Marg, Chinchbunder, Mumbai – 400009 PAN: AAICS7297Q ……………… Respondent Assessee by : Shri Bhupendra Shah Revenue by : Shri Swapnil Choudhary, Sr.AR Date of Hearing – 20/11/2025 Date of Order - 04 /12/2025 Printed from counselvise.com ITAs No.4304 & 4306/Mum/2024 (A.Ys. 2017-18) 2 O R D E R PER SANDEEP SINGH KARHAIL, J.M. The present appeals by the Revenue arises from the separate impugned orders dated 27.06.2024 and 28.06.2024, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals) - 49, Mumbai, [“learned CIT(A)”], for the assessment year 2017- 18. 2. During the hearing, the learned Representatives for both sides fairly agreed that the issue involved in these appeals are similar and arise out of similar factual matrix. Accordingly, with consent of the parties, these appeals were heard together as a matter of convenience and are being decided by way of this consolidated order. The Revenue’s Appeal in ITA No.4304/Mum/2024 is treated as a lead case and the facts and circumstances giving rise to the appeal are discussed elaborately in the present order. 3. As the Revenue has raised similar grounds in both the appeals, the grounds raised in Revenue’s Appeal being ITA No.4304/Mum/2024 are reproduced as follows for ready reference: - \"1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition made by AO of Rs. 8,70,41,565/- under section 56(2)(viib) of the Act disregarding the fact that the assessee has issued Cumulative Redeemable Preference shares which is not traded on the exchange. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition made by AO of Rs. 8,70,41,565/- under section 56(2)(viib) of the Act since the same has been done by AO by following the valuation guidelines of SEBI for Mutual Funds and the Assets Management Companies and Unit Scheme of 2002 of Unit Trust of India Act.\" Printed from counselvise.com ITAs No.4304 & 4306/Mum/2024 (A.Ys. 2017-18) 3 4. The solitary issue that arises for our consideration pertains to the applicability of illiquidity discount for the valuation of Non-Cumulative Redeemable Preference Shares of an unlisted company. 5. The brief facts of the case pertaining to this issue, as emanating from the record, are: For the year under consideration, the assessee filed its return of income on 26.10.2017, declaring a total loss of Rs.8,00,003/-. The return filed by the assessee was selected for scrutiny through CASS, and statutory notices under section 143(2) and section 142(1) were issued and served on the assessee. During the assessment proceedings, from the perusal of the financial statement submitted by the assessee, it was observed that the assessee has received an amount of Rs.36,87,25,500/- towards share premium during the year under consideration. It was further observed that the assessee has issued 22,34,700 Non-Cumulative Redeemable Preference Shares of Rs.100/- each to various parties at a premium of Rs.220/- per share. Since only 75% of the amount was called upon per share, Rs.75/- per share was received by the assessee towards face value and Rs.165/- per share was received by the assessee towards securities premium. The amount received from the various parties against issue of Non-Cumulative Redeemable Preferences Shares at a premium is summarised as follows: - S. No. Name of the party No. of shares Face value Issue Price Premium per share Money Received towards (amount in Rs. crores Share Capital Share Premium Total 1. Vishal Victory Oiltech Pvt. Ltd. 8,47,625 100 320 220 6.36 13.98 20.34 2. Tarulata Trading Pvt. Ltd. 13,87,075 100 320 220 10.40 22.88 33.29 Total Total 16.76 36.87 Printed from counselvise.com ITAs No.4304 & 4306/Mum/2024 (A.Ys. 2017-18) 4 6. Accordingly, during the assessment proceedings, the assessee was asked to justify the amount of premium received by it for the purpose of section 56(2)(viib) of the Act. The Assessing Officer (“AO”), vide order dated 31.12.2019 passed under section 143(3) of the Act, disagreed with the submissions of the assessee and by referring to the provisions of section 56(2)(viib) of the Act and Rule 11UA(1)(c)(c) of the Income Tax Rules, 1962 (“the Rules”) held that no formula has been prescribed for the purpose of valuation of Non-Cumulative Redeemable Preference Shares and the provisions of Rule 11UA only specifies that the assessee may obtain a valuation report from the Merchant Banker or a Chartered Accountant. In this regard, the AO referred to the valuation report from two separate Chartered Accountants furnished by the assessee in support of its claim. The AO, noting that the Discounted Cash Flow (“DCF”) of the assessee company is not available, proceeded to undertake the valuation as per the Net Asset Value (“NAV”) method adopted by the two Chartered Accountants in the valuation report furnished by the assessee. Further, noting certain inconsistencies in the valuation report submitted by the assessee, the AO computed the value of Rs.315.36 per share as against valuation of Rs.315.66 per share and Rs.314.20 per share as per the valuation report of two separate Chartered Accountants furnished by the assessee. Further, by placing reliance upon the decision of the Coordinate Bench of the Tribunal in M/s. Microfirm Capital Pvt. Ltd. vs. DCIT, reported in (2018) 168 ITD 301 (Kolkata-Trib.), the AO considered it reasonable and appropriate to apply an illiquidity discount of 15% on the value of Non-Cumulative Redeemable Preference Shares. Accordingly, the AO arrived at a valuation of Non-Cumulative Redeemable Printed from counselvise.com ITAs No.4304 & 4306/Mum/2024 (A.Ys. 2017-18) 5 Preference Share at Rs.268.06 per share and made a disallowance of Rs.8,70,41,565/- under section 56(2)(viib) of the Act as follows: - Particulars Amount Value per share 268.06 Called up value of the share @75% 201.05 Amount received upon issue of Non Cumulative Redeemable Preference Shares 240.00 Excess amount received per share 38.95 Total number of Non Cumulative Redeemable Preference Shares issued 22,34,700 Amount disallowable u/s.56(2)(viib) 8,70,41,565.00 7. The learned CIT(A), vide impugned order, allowed the ground raised by the assessee on this issue and deleted the disallowance made under section 56(2)(viib) of the Act, by observing as follows: - “10.5 I have considered the facts of the case, assessment order and submissions filed by the appellant. The appellant has issued non-cumulative redeemable preference shares at the face value of Rs. 100 and premium of Rs. 220. For the purpose of determining the fair market value of such shares as per section 56(2)(viia), Rule 11UA of Income Tax rules is applicable. As per clause (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 report from a merchant banker or an accountant in respect of such valuation. 10.6 In the assessment order the A.O. after discussing various decisions of Hon'ble ITAT, concluded that- 1. For the purpose of determining the fair market value of non-cumulative redeemable preference shares to compute the excessive premium rule 11UA of the I.T Rule would be applicable. 2. There is no specific formula prescribed for the purpose of valuation for the same. 3. Rule 11UA specifically provides that for valuation of preference shares, the valuation report from a CA and merchant banker would be needed. Thus, there is no dispute on the issue that for determining the excessive premium for the purpose of section 56(2)(viia), provision of rule 11UA are applicable and as per clause (c) of sub rule (1) of 11UA, no specific formula for the valuation of such shares is prescribed. The assesse has to obtain the valuation report from the CA or merchant banker. 10.7 In this case the appellant has obtained the valuation report from the two valuers, mainly Jain Lukkad and Associates and Charted Accountant Rupali Printed from counselvise.com ITAs No.4304 & 4306/Mum/2024 (A.Ys. 2017-18) 6 Chandak & Company. They have done the valuation as per the NAV method. The A.O also accepted that, the Net Asset Value (NAV) method adopted by the valuer is appropriate in the facts of the case. The A. has discussed the valuation report of Jain Lukkad and Associates in the para 3.15 of the assessment order. He has not accepted the report mainly on two issue – I. Provision for taxation- Rs. 24,47,420 and Self Assessment tax - Rs. 30,79,866 II. Illiquidity Discount @15% These issues are discussed hereunder- 10.8 Provision for Taxation- The A.O noted that, the valuer has incorrectly considered provision of taxation of Rs. 24,47,420/- for computing the total liabilities. The observations of the A.O are as under- \"Comment 5:While undertaking the valuation of the assesse, the valuer has considered provision for taxation of Rs. 24,47,420. However, this is merely provision, and does not represent true liability of the company. Therefore, the same cannot be considered to be the liability of the company for the purpose of valuation.\" The A.O held that provision of taxes does not represent true liability of the company and hence same is excluded for computing the total liabilities. 10.9 Self-Assessment tax – The A.O noted that, the valuer has incorrectly considered self-assessment tax of Rs.30,79,866 for computing the total Assets. The observations of the A.O are as under- \"Comments 2: The assesse has paid Self-assessment tax and tax deducted at source of Rs. 30,79,866/- which is appearing as an asset in the books of the assesse as on 30.06.2016. The valuer has taken these into consideration as an asset while carrying out the valuation. However, these amounts do not represent the true asset of the assessee company, as the self assessment tax and its TDS deducted are not receivable by the company. If any amount is receivable by the assesse, it is only the refund amount. In the absence, of this information, the amount of Self assessment tax and tax deducted cannot be considered to be the asset of the assesse company for the purpose of valuation.\" The A.O held that self-assessment tax paid does not represent true assets of the company and hence same is excluded for computing the total Assets. 10.10 After making the above two adjustments in total assets and liabilities, the value per share is determined at Rs. 315.36 by the A.O. As per the valuation report of Jain Lukkad and associate, the fair value is Rs. 315.28 per share. Thus, even after excluding the provision of Taxes and Self-assessment taxes, there is minor difference of Rs 0.08 per share which is insignificant. Printed from counselvise.com ITAs No.4304 & 4306/Mum/2024 (A.Ys. 2017-18) 7 10.11 Illiquidity Discount @15%- The A.O applied illiquidity discount at the rate of 15% for unlisted shares. After applying the discount rate of 15%, fair value per share of Rs. 268.06 is determined. For applying illiquidity discount of 15%, the A.O relied on the valuation guidelines of SEBI for Mutual Funds and the Assets Management Companies and Unit Scheme of 2002 of Unit Trust of India Act. 10.12 As discussed above, the valuation of preference shares is to be done as per clause (c) of sub rule (1) of 11UA and in this clause no such formula is prescribed. The only requirement is to obtain a valuation report from the CA or merchant banker. I have considered the various methods of valuation of preference shares can be valued by applying the following methods. 1. Dividend Discount Method 2. Price to earning ratio 3. Net asset value NAV 4. Market capitalization 10.13 In this case the valuers have applied NAV method for valuing the preference shares. The A.O has not doubted this method for valuation of the shares. However he further applied illiquidity discount of 15%, In my considered view, no such illiquidity discount can be applied in the facts of the case. The A.O misdirected himself for applying this illiquidity discount @ 15% on the basis of some SEBI guidelines. It is to be noted that these guidelines are not at all applicable and relevant in the facts of the case of the appellant. Hence reliance on the same for applying illiquidity discount @ 15% for determining fair market value as per NAV is incorrect. In view of the above facts, the face value per share determined by the A.O of Rs.268.06 is based on wrong assumptions... 10.14 The appellant has issued a share @ 500 per share (100 face value + 220 Premium) which is justified by the valuation reports of Jain Lukkad and Associates and Rupali Chandakand company. Considering the overall facts of the case, I find that the addition made by the A.O of/Rs.8,70,41.565/- by adopting the valuation per share of 268.06 is incorrect and hence the addition made is disallowed. Accordingly, appeal on this ground is ALLOWED.” Being aggrieved, the Revenue is in appeal before us. 8. We have considered the submissions of both sides and perused the material available on record as per Rule 18(6) of ITAT Rules, 1963. In the present case, the assessee issued 22,34,700 Non-Cumulative Redeemable Printed from counselvise.com ITAs No.4304 & 4306/Mum/2024 (A.Ys. 2017-18) 8 Preference Shares of Rs.100 each at a premium of Rs.220 per share. Since only 75% of the amount was called upon per share, Rs.75 per share was received by the assessee towards the face value, and Rs.165 per share was received towards securities premium. In the present case, there is no dispute regarding the applicability of provisions of section 56(2)(viib) of the Act and the assessee itself furnished the valuation report from two separate valuers to justify charging premium @ Rs.220 per share at a face value of Rs.100 per share. As per the assessee, the said valuation reports are in sufficient compliance with the provisions of Rule 11UA(1)(c)(c) of the Rules, which requires the assessee to obtain a report from a Merchant Banker or an Accountant in respect of such valuation. It is evident from the record that the AO has also undertaken the valuation as per the method adopted by the two Chartered Accountants in the report furnished by the assessee. However, the AO further proceeded to apply an illiquidity discount of 15% to the value of the shares so determined, resulting in a lower valuation of Non-Cumulative Redeemable Preference Shares issued by the assessee and the impugned disallowance under section 56(2)(viib) of the Act. As regards the applicability of illiquidity discount, it is evident from the record that apart from placing reliance upon a decision of the Coordinate Bench of the Tribunal, the AO also referred to the guidelines issued by SEBI in respect of Mutual Funds and the Asset Management Companies. 9. Before proceeding further, we may note the relevant provisions of the Act and the Rules which are pertinent for deciding the issue at hand. Section 56(2)(viib) of the Act reads as follows: - Printed from counselvise.com ITAs No.4304 & 4306/Mum/2024 (A.Ys. 2017-18) 9 “(viib) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares: Provided that this clause shall not apply where the consideration for issue of shares is received— (i) by a venture capital undertaking from a venture capital company or a venture capital fund; or (ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf. Explanation.—For the purposes of this clause,— (a) the fair market value of the shares shall be the value— (i) as may be determined in accordance with such method as may be prescribed; or (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher; (b) \"venture capital company\", \"venture capital fund\" and \"venture capital undertaking\" shall have the meanings respectively assigned to them in clause (a), clause (b) and clause (c) of Explanation to clause (23FB) of section 10;” 10. Thus, from the perusal of the provisions of section 56(2)(viib) of the Act, it is evident that the same is applicable in case of a company in which public are not substantially interested and the said company receives any consideration for the issuance of shares that exceeds the fair value of such shares. In the present case, there is no dispute that the assessee is neither a public company nor a listed entity. Further, the “fair market value of the shares” has been explained under the provisions of the aforesaid section as the value as may be determined in accordance with such method as prescribed, i.e., Rule 11UA of the Rules. From the perusal of the provisions of Printed from counselvise.com ITAs No.4304 & 4306/Mum/2024 (A.Ys. 2017-18) 10 Rule 11UA of the Rules, we find that Rule 11UA(1)(c)(c) of the Rules deals with the fair market value of unquoted shares and securities other than equity shares, and the same reads as follows: - “(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.” 11. From the perusal of the provisions of Rule 11UA of the Rules, it is evident that unlike valuation of unquoted equity shares, for which sub-rule (2) of Rule 11UA of the Rules provides valuation method, i.e., DCF and NAV, no formula or rule has been prescribed insofar as for the purpose of valuation of unquoted shares and securities other than equity shares, which also includes Non- Cumulative Redeemable Preference Shares. Thus, the question arises as to what valuation method should be adopted by the Merchant Banker or Chartered Accountant for the valuation of Non-Cumulative Redeemable Preference Shares in the absence of any formula or method being specifically provided. As is evident from the record, in order to justify the valuation at which Non-Cumulative Redeemable Preference Shares were issued, the assessee placed on record valuation reports by two separate Chartered Accountants, i.e., Jain Lukkad & Associates, and Rupali Chandak & Co., who, by adopting the NAV method, had carried out the valuation at Rs.315.66 per share and Rs.314.20 per share, respectively. From the perusal of the assessment order, it is evident that the AO has also not made any independent valuation by adopting a method separate from the method adopted by the assessee for valuation. From the perusal of the record, we find that on an Printed from counselvise.com ITAs No.4304 & 4306/Mum/2024 (A.Ys. 2017-18) 11 earlier occasion, opportunity was granted to the Revenue to come forth with a valuation method which may be adopted by the Merchant Banker or Chartered Accountant for valuation in a similar case. However, nothing has been brought on record. Thus, it is discernible that the Revenue has also not disputed the NAV method for the valuation of Non-Cumulative Redeemable Preference Shares issued by the assessee. It is further pertinent to note that even after adopting NAV as a method for valuation, the AO arrived at a value of Rs. 315.36 per share. Thus, as noted by the learned CIT(A), even after excluding the provision of taxes and self-assessment taxes, there is a minor difference in the valuation of Rs. 0.08 per share in both valuations. 12. From the perusal of the record, it is evident that for applying an illiquidity discount of 15%, the AO, inter alia, has placed reliance on the valuation guidelines of SEBI for Mutual Funds and the Asset Management Companies and Unit Scheme of 2002 of the Unit Trust of India Act. It is, at the outset, pertinent to note that the impugned addition has been made by the AO under section 56(2)(viib) of the Act, and as noted in the foregoing paragraph the said section is applicable in case of companies in which public are not substantially interested or which are unlisted companies, like the assessee. Therefore, we are of the considered view that the SEBI guidelines are not relevant to the present case. 13. As regards the reliance placed by the AO on the decision of the Coordinate Bench of the Tribunal in Micro Firm Pvt. Ltd. (supra), from the perusal of the said decision, we find that in the facts of the case, the taxpayer adopted DCF method for the valuation of Non-Cumulative Redeemable Printed from counselvise.com ITAs No.4304 & 4306/Mum/2024 (A.Ys. 2017-18) 12 Preference Shares issued, which was accepted by the AO. It is further evident from the said decision that, adopting the DCF method, the valuation report furnished by the taxpayer determined fair market value at Rs. 2000 per share by adopting a 10% discounting factor. However, the AO arrived at a fair market value of Rs. 1285.41 per share after applying a 15% discounting factor. Thus, it is evident that both parties had adopted the discounting factor, however, the discounting factor as adopted by the AO found favour with the Tribunal in the aforesaid decision. On the contrary, in the present case, it is evident that the methodology adopted by the assessee for valuation of Non-Cumulative Redeemable Preference Share is NAV, and the same has not been altered by the Revenue, as the AO also made the valuation as per the NAV method. Such being the facts, we are of the considered view that the extrapolation of illiquidity discount, which was considered as appropriate in the facts of Micro Firm Capital Pvt. Ltd. (supra), wherein both the taxpayer and the Revenue made a valuation on the basis of DCF Method, to the present case, is not proper and completely misplaced. 14. It is pertinent to note that valuation of quoted/unquoted shares and securities, whether equity or preference, is a scientific exercise and therefore should be based on a scientific methodology, and adopting a method does not permit the alteration which is completely alien to that method. Therefore, we are of the considered view that the AO erred in applying an illiquidity discount for the valuation of Non-Cumulative Redeemable Preference Shares in the present case, as it had made a valuation by adopting the NAV method. Accordingly, we do not find any infirmity in the findings of the learned CIT(A) Printed from counselvise.com ITAs No.4304 & 4306/Mum/2024 (A.Ys. 2017-18) 13 on this issue, and the deletion of disallowance made under section 56(2)(viib) of the Act is upheld. As a result, the grounds raised by the Revenue are dismissed. 15. In the result, the appeal of the Revenue, being ITA no.4304/Mum/2024, is dismissed. 16. As Revenue has raised similar grounds in its appeal, being ITA No.4306/Mum/2024, which arises out of a similar factual matrix, we are of the considered view that our findings/conclusions as rendered supra are applicable mutatis mutandis to the present appeal. As a result, the grounds raised by the Revenue in this appeal are also dismissed. 17. In the result, the appeal of the Revenue, being ITA no.4306/Mum/2024, is dismissed. 18. To sum up, both appeals by the Revenue are dismissed. Order pronounced in the open Court on 04/12/2025 Sd/- PRABHASH SHANKAR ACCOUNTANT MEMBER Sd/- SANDEEP SINGH KARHAIL JUDICIAL MEMBER MUMBAI, DATED: 04/12/2025 Prabhat Printed from counselvise.com ITAs No.4304 & 4306/Mum/2024 (A.Ys. 2017-18) 14 Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The PCIT / CIT (Judicial); (4) The DR, ITAT, Mumbai; and (5) Guard file. By Order Assistant Registrar ITAT, Mumbai. Printed from counselvise.com "