ITAT Delhi: Assessing Officer Cannot Substitute Rule 11UA Valuation with Arbitrary Asset Appreciation

The Income Tax Appellate Tribunal (ITAT), Delhi Bench, has delivered a significant ruling in the case of ITO Vs Gold Souk Finance Private Limited, clarifying the boundaries of the Assessing Officer's (AO) powers regarding the valuation of shares. The Tribunal held that the Fair Market Value (FMV) of shares must be determined strictly in accordance with the mechanisms prescribed under Rule 11UA of the Income Tax Rules, 1962. Consequently, the Tribunal rejected the Revenue's attempt to inflate the value of shares by applying arbitrary mark-ups to the underlying assets of the investee companies.

The Core Dispute: Valuation Methodology

The central issue in the appeal filed by the Revenue was the addition made under Section 56(2)(iia) of the Income Tax Act, 1961. This section generally taxes the receipt of property (including shares) for inadequate consideration.

During the scrutiny assessment for the Assessment Year 2015-16, the AO challenged the valuation of shares purchased by the assessee. The AO disregarded the valuation methodology submitted by the assessee and proceeded to calculate the value of shares based on his own estimation.