Assessing Officer Cannot Reject Valid CCPS Valuation Report or Invoke Section 56(2)(viib) Against Holding Company

By | November 13, 2026
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Assessing Officer Cannot Reject Valid CCPS Valuation Report or Invoke Section 56(2)(viib) Against Holding Company

Issue

Whether the Assessing Officer can reject a Chartered Accountant’s valuation report prepared under Rule 11UA(1)(c) based on subsequent financial losses and invoke Section 56(2)(viib) of the Income-tax Act, 1961 (Section 92 of the Income-tax Act, 2025) on Compulsorily Convertible Preference Shares (CCPS) issued by a wholly owned subsidiary to its holding company.

Facts

  • For Assessment Year 2016-17, the assessee-company filed a nil return of income and was selected for limited scrutiny regarding share premium receipts.
  • The assessee, a wholly owned subsidiary, issued 7,99,900 Compulsorily Convertible Preference Shares (CCPS) to its holding company.
  • Fair market value of the CCPS was determined through a Chartered Accountant’s valuation report under Rule 11UA(1)(c) of the Income-tax Rules, 1962 (Rule 57 of the Income-tax Rules, 2026).
  • The Assessing Officer questioned the valuation report’s disclaimers, cited the assessee’s subsequent financial losses, applied Rule 11UA(2), and made an addition of approximately Rs. 79.19 crores under Section 56(2)(viib).
  • Both the Commissioner (Appeals) and the Income Tax Appellate Tribunal deleted the addition in favor of the assessee, prompting the Revenue to appeal before the High Court.

Decision

  • Jurisdictional Limit on Valuation Rejection: When fair market valuation is duly determined under Rule 11UA(1)(c) via a Chartered Accountant’s report, the Assessing Officer acts beyond jurisdiction in rejecting that valuation method.
  • Subsequent Losses Irrelevant: A valuation report must be evaluated based on facts and projections available at the time of valuation; subsequent financial losses incurred by the company cannot be relied upon retrospectively to invalidate the report.
  • Legislative Intent of Section 56(2)(viib): Issuing CCPS between a wholly owned subsidiary and its holding company does not generate unaccounted money or constitute tax evasion unless specifically proven otherwise, falling outside the mischief targeted by Section 56(2)(viib).
  • No Substantial Question of Law: Given the concurrent factual findings of both the CIT(A) and the Tribunal, no substantial question of law arose, and the ruling was upheld in favor of the assessee.

KeyTakeways

  • Point-in-Time Valuation Principle: Tax authorities cannot use hindsight or post-issuance business losses to discredit a contemporary valuation report prepared under prescribed rules.
  • Respect for Prescribed Valuation Methods: Once an assessee adopts a legally permitted valuation methodology supported by an authorized expert report under Rule 11UA, the Assessing Officer cannot arbitrarily substitute a different sub-rule.
  • Intra-Group Holding-Subsidiary Shield: Capital infusions via share premium between a holding company and its wholly owned subsidiary generally do not trigger anti-abuse provisions under Section 56(2)(viib) absent concrete evidence of unaccounted funds.
HIGH COURT OF GUJARAT
Principal Commissioner of Income-tax
v.
Magnet Buildtech (P.) Ltd.
Nirzar S. Desai and Bhargav D. Karia, JJ.
R/TAX APPEAL NO. 19 of 2025†
OCTOBER  21, 2026
Dev D. Patel for the Appellant.
JUDGMENT
Bhargav D. Karia, J. – Heard learned Senior Standing Counsel Mr. Dev D Patel for the appellant.
2. This appeal is filed under Section 260A of the Income Tax Act, 1961 (for short, “the Act”) by the appellant – Revenue, proposing the following substantial questions of law arising out of the order dated 25.07.2024 passed by the Income Tax Appellate Tribunal (for short, “Tribunal”) in JCIT v. Magnet Buildtech (P.) Ltd. [ITA No. 489/AHD/2020 , dated dated 25-07-2024] for A.Y. 2016-17;
“(a) Whether in the facts and circumstances of the case and in law, the learned ITAT has erred in deleting the addition on account of disallowance u/s 56(2)(viib) of the Act without duly considering the findings of the Assessing Officer that the assessee had received excess premium in contravention to the provisions of section 56(2) (viib) of the Act?
(b) Whether in the facts and circumstances of the case and in law, the learned ITAT has erred in holding the valuation valid, without duly considering that the valuer has failed to verify the financial projections from independent sources and has simply issued certificate with the disclaimer that all the details were provided by the management?”
3. The brief facts of the case are as under;
3.1. The assessee filed a return of income for A.Y. 2016-17 declaring nil income on 26.09.2016. The case of the assessee was selected for limited scrutiny through CASS with respect to two issues, namely, (i) whether the tax aspects to investments/advances/loans have been considered in the return of income; and (ii) whether the funds received in the form of share premium are from disclosed sources and have been correctly offered to tax.
3.2. The Assessing Officer proceeded to make inquiries about the justification of the amount of share premium received on allotment of 7,99,900 Compulsorily Convertible Preference Shares (CCPS). The Assessing Officer, after considering the submissions made by the assessee, made addition of excess premium of Rs. 79,19,01,000/- under Section 56(2)(viib) of the Act, alleging that the same to be in excess of the fair market value of CCPS by relying on provisions of Rule 11UA(2) of the Income-tax Rules, 1962 (for short, “the Rules”).
4. Being aggrieved by the order of the Assessing Officer, the assessee preferred an appeal before the CIT(Appeals) who, after considering the submissions made on behalf of the assessee as well as considering the provisions of Rule 11UA of the Rules, allowed the appeal by observing as under;
“5.4 Ground Nos. 2 to 6: Since only a single issue is involved, therefore, for the sake of convenience, all these grounds of appeal have been taken together for adjudication.
i From the Assessment order it is noticed that the A.O. had allowed the Appellant final opportunity through Show-Cause Notice dated 03.12.2018 to explain as to why the Valuation Report of the C.A. valuing the F.M.V. of CCPS at Rs.1,000/- per CCPS should not be rejected, but, since the Appellant failed to reply the Show-Cause Notice, A.O. rejected the Valuation Report. (Para 9 of the assessment order).
ii. Having rejected the Valuation Report determining the F.M.V. of the CCPS at Rs.1000/- per CCPS, the A.O., after referring to the scope and ambit of the provisions of Section 56(2)(viib) of Income Tax Act, 1961 and Rule 11UA(1)(c)(c), considered the Premium on CCPS as taxable income being in contravention of the provisions of Section 56(2)(viib) of Income Tax Act, 1961.
5.4.1 It is therefore, evident that the Premium on CCPS was added solely, because, according to A.O. the Appellant had failed to reply the Show-Cause Notice which led the rejection of the Valuation Report determining F.M.V. of the CCPS and the addition under appeal.
5.4.2 During the course of hearing of the appeal on 19.03.2020 the Ld Advocate Mr. I.S.Verma, while explaining the grievance expressed in Ground No. 6 of the Appeal that the A.O. rejected the F.M.V determined by the Appellant in accordance with the prescribed provisions of law, arbitrarily and on conjectures and surmises, submitted that it is not correct to say that the Appellant had not complied the Final Show Cause notice dated 03.1.2018, as is evident from the Appellant’s letter dated 05.12.2018 requesting for personal hearing on 14.12.2018 instead of 07.12.2018 fixed as per show cause notice, to explain the matter under reference. On the other hand, it is miscarriage of justice by violating the ‘Principles of Natural Justice’ by not allowing the personal hearing and, therefore, allegation for not filing reply to the show cause notice is false and cannot be used against the Appellant.
5.4.3 On merits Mr Verma submitted that the Valuation, having been done in accordance the provisions of Law and the Rules prescribed by the CBDT/Legislatures, is the correct one and therefore, FMV is neither against the so called correct parameters nor is exaggerated in value and as submitted hereinbefore, Assessing Officer having no power to reject the valuation and substitute his own method/valuation, this reason is not relevant at all so as to reject the valuation.
5.4.4 On the point of justification of the method adopted for valuing the ‘CCPS’ and disclaimer given by the C.A. reference was made to the Para 5.4 of the Appellate Order in case of Appellant’s group Company M/s First Class Infrabuild Pvt. Ltd. wherein both these issues had been discussed and decided by the CIT(A)-3 in Appellant’s favour by observing that “….. The valuer is bound to give disclaimers as the valuer cannot be expected to determine the exact value as the same is not feasible. As already discussed above, the valuer has adopted reasonable projections than the optimum figures for generation of revenue and the valuation of shares done by the valuer has got reasonable basis ….. . …..”
5.4.5. Further, Commenting on the conclusion arrived at by the A.O. in Para 12 & 13 of the Assessment Order the Ld AR submitted that the same being based on misplaced understanding of the provisions of section 56(2)(viib) and Rule 11 UA, specially the Rule 11UA(1)(c)(c) and Rule 11UA(2)(a), just speaks of the ignorance or the pre-determined state of mind of the Officer to make addition. Referring to the provisions of Explanation to section 56(2)(viib) of the Act and the provisions of Rule 11UA(1)(c)(c) and Rule 11UA(2) it was submitted that the Legislature has provided different methods for computing ‘fair market value’ of ‘unquoted equity shares’ and ‘unquoted shares other than the equity shares’ and so far Appellant’s case is concerned, the ‘fair market value’ of ‘CCPS’ having been estimated in accordance with the provisions of Rule 11UA(1)(c)(c), A.O. had no jurisdiction/power to object to the same and substitute his valuation. It was further submitted that as far as Rule 11UA (2) is concerned, firstly, this Rule is for computing the ‘fair market value’ of ‘unquoted equity shares’ and secondly, Rule has given option to the Assessee to compute the value in accordance with Rule 11UA(2)(a) or Rule 11UA(2)(b) and for that purpose the assessee has to be allowed an opportunity to select its option, which was missing in this case. According to him A.O. did not have jurisdiction/power either to reject the Valuation Report or to substitute his own value computed under Rule 11UA(2)(a) or 11UA(2)(b) and therefore the addition under dispute/appeal may kindly be deleted.
5.4.6. In the interest of substantial interest, the Appellant was directed to submit its reply to the show cause notice issued by the AO on 03.12.2018 and some other issues. On 9.07.2020 Appellant’s counsel Advocate Sh. I.S. Verma along with Sh. D.R. Rajan, C.A. cum General Manager of the appellant group of company attended the hearing and submitted written reply which has been reproduced in this order supra in para 4.2 pages 24 to 31 of this order.
5.4.7. Case was discussed with the ARs and written replies have also been perused. In view of the provisions of 250(4), which provide that before disposing of the appeal, the CIT(A) may make such further inquiry as he thinks fit or may direct the A.O. to make further inquiry, and the unprecedented Covid-19 restrictions it was thought fit to verify the Appellant’s reply to show cause notice vis-à-vis to the allegations/shortcomings/defects etc pointed and relied upon by the A.O. to reject the valuation report and consequently the F.M.V. of the CCPS.
5.4.8. After having considered the facts on records, contents of show cause notice, AO’s case, Appellant’s reply, provisions of section 56(2)(viib) read with Explanation thereto and the Rule 11UA (1)(c)(c) and Rule 11UA(2)(a)/11UA(2)(b), I find force in the submissions of the appellant. Had the A.O. considered the appellant’s various replies and the C.A’s reply, which were filed before issuing show cause notice, in right perspective, there could have been no reason for issuing the Show- Cause Notice, what to say of the rejection of the Valuation Report/F.M.V. A.O’s approach to the whole issue seems to be the provisions of section 56(2)(viib) and the quantum of premium, which itself cannot be sustained.
5.4.9. I have also found that the Appellant’s reply against show cause notice and the C.A’s reply filed in response to notice u/s133(6) satisfy all the objections, on the basis of which the A.O. rejected the Valuation report and made the addition. In the totality of the facts and circumstances and the provisions of Law addition of the premium received on issuance of the CCPS, which otherwise was from well explained sources, was not justified and the same deserves to be deleted.
5.4.10. Even otherwise also, since each CCPS was to be converted after a period of 18 yrs, compulsorily, in 100 shares of face value of Rs. 10/- each, the value of Rs. 1000/- of each CCPS as on the date of allotment could not be said to be unreasonable or in excess of the F.M.V. on that date. Therefore, appellant’s case is out of the provisions of section 56(2)(viib). The addition under appeal is therefore, directed to be deleted on this count also. Therefore, the addition of Rs.79,19,01,000/- u/s 56(2)(viib) is hereby deleted. Accordingly, grounds of appeals no. 2 to 6 on this addition are allowed. “
5. Being aggrieved by the order passed by the CIT(Appeals), Revenue preferred an appeal before the Tribunal. The Tribunal, in the impugned order, dismissed the appeal of the Revenue, upholding the order passed by the CIT(Appeals), by observing as under;
” 6.1. Relating to Ground Nos.1 to 3, we noted that the Ld.CIT(A) has dealt with the same in detail. The Ld.CIT(A) supported the valuation process, asserting that it was conducted in accordance with the legal provisions and CBDT/Legislature rules. The Ld.CIT(A) has criticized the AO for not having the power to reject the valuation or substitute his own method. The fair market value (FMV) determined by the Valuer is defended by the Ld.CIT(A) as neither exaggerated nor incorrect. The Ld.CIT(A) emphasized that the AO cannot arbitrarily reject a Valuation Report that complies with established legal guidelines. The FMV determined by the Valuer is upheld, provided it follows the prescribed rules. The Ld.CIT(A) has also justified the method adopted for valuing CCPS and the disclaimers by the Valuer. The Ld.CIT(A) has made a reference to a previous appellate order in favour of the assessee, supporting the Valuer’s methodology and disclaimers. The Ld.CIT(A) has cited the ITAT Bangalore Bench’s decision in the case of Innovit Payment Solutions Pvt. Ltd. to reinforce the process and principles for scrutinizing valuation reports. The Ld.CIT(A) reinforced that Valuers must provide disclaimers due to the inherent uncertainties in valuations. The decision cited by the Ld.CIT(A) underscores that the AO can scrutinize, but not arbitrarily reject a valuation without proper reasons and adherence to the DCF method, which cannot be changed by the AO. The CIT(A) found fault with the AO’s interpretation of Section 56(2)(viib) and Rule 11UA. The Ld.CIT(A) deemed that the AO’s rejection of the valuation report beyond his jurisdiction, especially when the valuation is done as per Rule 11UA(1)(c)(c). Thus, the Ld.CIT(A)’s decision systematically dissects the AO’s actions, emphasizing adherence to legal procedures and the importance of a fair valuation process.
6.2. We have reviewed the judicial pronouncements relied on by the Ld.DR. The decision of Delhi Bench of ITAT in the case of Agro Portfolio (P.) Ltd. (supra) is not applicable in the present case as shares were allotted to third party and the merchant banker solely relied upon the information and financial data provided by the company without independent verification. As against in the present case the shares are allotted to the holding company by wholly owned subsidiary and the financial projections were prepared and validated by independent technical expert.
6.3. The judicial precedents relied on by the Ld.AR are also reviewed. In case of Dhruv Milkose Pvt. Ltd. (supra), the Tribunal decided that the AO cannot change the method of valuation chosen by the assessee if it complies with the prescribed law and rules. In case of Solitaire BTN Solar Pvt. Ltd. (supra), the Tribunal emphasized that transactions between holding and subsidiary companies at a premium do not attract Section 56(2) (viib) of the Act as the legislative intent is not to tax such transactions. In case of Rugby Regency (P.) Ltd. (supra), the Tribunal confirmed that the AO must scrutinize the valuation based on the facts available at the time of valuation and cannot rely on subsequent financial performance.
6.4. Based on the facts and judicial pronouncements, we conclude that the DCF method adopted by the assessee for valuing the CCPS is legitimate and in accordance with Rule 11UA. The AO cannot reject the method chosen by the assessee if it is prescribed by law.
6.5. The AO’s reliance on the company’s subsequent financial losses to question the valuation is misplaced. The projections must be assessed based on the facts and data available at the time of valuation, not on future outcomes, as held in various judicial pronouncements. The issuance of CCPS to the holding company does not align with the legislative intent of Section 56(2)(viib) of the Act to prevent the generation and use of unaccounted money. The transaction between a wholly owned subsidiary and its holding company does not create any unaccounted income or inflated share value for tax evasion purposes unless it is specifically proved. The Ld.CIT(A) correctly applied the provisions of law and judicial precedents in deleting the addition made by the AO. The valuation of shares based on the DCF method is valid, and the AO’s objections lack merit. The order of the Ld.CIT(A) is upheld. The addition of Rs.79,19,01,000/- under Section 56(2) (viib) of the Act is hereby deleted.
6. Considering the above concurrent findings of fact recorded by the CIT(Appeals) and the Tribunal, it is not in dispute that the Assessing Officer has doubted the valuation report issued by the Chartered Accountant as per the Rule 11UA while valuing the fair market value of the CCPS along with the disclaimers made in such report.
7. Both the Tribunal as well as the CIT(Appeals) have referred to and relied upon the similar orders passed in favor of the assessee supporting the methodology and disclaimers in the valuation report to arrive at a fair market value of the CCPS. The Assessing Officer has misinterpreted the provisions of Section 56(2)(viib) read with Rule 11UA by rejecting the valuation report, as the same could not have been done by the Assessing Officer, as per the provision of Rule 11UA(1)(c). The provisions of Rule 11UA(1)(c), which reads as under;
“Determination of fair market value.
11UA. (1) For the purposes of section 56 of the Act, the fair market value of a property, other than immovable property, shall be determined in the following manner, namely,
(c) valuation of shares and securities,—
(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.
(2) Notwithstanding anything contained in sub-clause (b) or sub-clause (c), of sub-rule (1), the fair market value of unquoted equity shares for the purposes of sub-clause (i) of clause (a) of the Explanation to clause (viib) of sub- section (2) of section 56 shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner under clause (a) or clause (b), at the option of the assessee, namely:-
8. On perusal of the above rule applicable to the facts of the case, when the valuation is done as per Rule 11UA(1)(c) as per the valuation report submitted by the Chartered Accountant, the Assessing Officer could not have rejected the same, as it would have been beyond his jurisdiction. The Tribunal has therefore rightly held that the CIT(Appeals) has systematically dissected the reasoning of the Assessing Officer to highlight as to how Rule 11UA(1)(c) is misinterpreted to apply Rule 11UA(2) for invoking Section 56(2)(viib) of the Act.
9. It is also pertinent to note that the subsequent financial loss of the assessee-company for the purpose of valuation could not have been referred to and relied upon as the basis by the Assessing Officer to reject the valuation report, which is based on the facts and data available at the time of valuation and such valuation report could not have been rejected on the basis of the subsequent financial losses. The Tribunal was therefore justified in holding that the issuance of CCPS to holding company would not align with the legislative intent of Section 56(2)(viib) of the Act to prevent the generation and use of unaccounted money, as the transaction was between a wholly owned subsidiary and its holding company, which would not create any unaccounted money or inflated share value for tax evasion purpose unless the same is specifically proved. Therefore, in view of the concurrent findings of facts recorded by both the CIT(Appeals) and the Tribunal, no question of law, much less any substantial question of law, arises from the impugned order of the Tribunal. Therefore, the appeal is accordingly dismissed.