Chartered Accountant valuation under Rule 11UA is valid

Chartered Accountant valuation under Rule 11UA is valid for unquoted preference shares fair market value.

Issue

Whether the Assessing Officer was justified in rejecting a Chartered Accountant’s valuation certificate under Rule 11UA and substituting an arbitrary fair market value based on an isolated third-party transaction to invoke Section 56(2)(viia).

Facts

Transaction Details: The assessee-company acquired unquoted preference shares from a group entity at Rs. 130 per share for AY 2011-12.
Valuation Submitted: The assessee relied on a valuation certificate issued by a Chartered Accountant, prepared as per Rule 11UA based on the audited books of the issuing company, which determined the fair market value at Rs. 101.93 per share.
AO Addition: The Assessing Officer rejected the CA certificate, insisting on a merchant banker/independent valuer report, and adopted a fair market value of Rs. 240 per share based on a prior acquisition of a portion of shares by the seller from an NRI.
Evidentiary Findings: The Tribunal noted that the seller could choose which block of shares to sell. Furthermore, Note 11 of the issuing company’s audited financials provided for redemption between 01.06.2011 and 31.10.2011 at Rs. 140 per share, proving the March 2011 purchase price of Rs. 130 per share was realistic and fair.

Decision

Validity of CA Report: Held that Rule 11UA(1)(c)(c) explicitly permits a valuation report from a Chartered Accountant; the Tax Department cannot demand an independent valuer or merchant banker report when the statutory rule allows a CA certificate.
Rejection of Arbitrary Benchmark: Held that the Assessing Officer erred in ignoring the statutory valuation framework and substituting an arbitrary value based on an isolated third-party NRI purchase.
Relief to Assessee: Held that the Tribunal rightly accepted the assessee’s transaction price and valuation, deciding the issue in favour of the assessee.

Key Takeaways

Statutory Valuation Methods Binding: Where tax rules (Rule 11UA) explicitly authorize a Chartered Accountant to issue a valuation report, revenue authorities cannot arbitrarily insist on alternative valuers.
Isolated Transactions Cannot Override Rules: Third-party historical transaction rates cannot replace the prescribed statutory valuation mechanism for determining the fair market value of unquoted shares.

HIGH COURT OF MADRAS

Principal Commissioner of Income-tax-1

Boppudi Logistics (P.) Ltd.

SUSHRUT ARVIND DHARMADHIKARI, CJ.
and G. Arul Murugan, J.

T.C.A. No. 117 of 2026^†

AUGUST 11, 2026

T.Ravi Kumar, Senior Standing Counsel for the Appellant.

JUDGMENT

Sushrut Arvind Dharmadhikari, CJ.- This appeal by the Income Tax Department challenges the order passed by the Income Tax Appellate Tribunal, Madras “C” Bench, Chennai, in I.T.A. No.1934/Chny/2024, dated 16.4.2025. The dispute relates to Assessment Year 2011-12.

2. The Revenue raised the following three substantial questions of law for our consideration:

(i)

Whether the Tribunal was correct in accepting a valuation certificate issued by a Chartered Accountant rather than an independent valuer or merchant banker under Rule 11UA of the Income-tax Rules, 1962?

(ii)

Whether the Tribunal erred in relying on a valuation certificate produced for the first time before it without giving the Assessing Officer an opportunity to examine it under Rule 46A of the Income-tax Rules, 1962?

(iii)

Whether the Tribunal was justified in accepting the share valuation of Rs.101.93 per share when the Assessing Officer had fixed the fair market value at Rs.240/- per share based on contemporaneous comparable transactions of the same preference shares ?

3. The Revenue contends that the transaction between group companies attracted Section 56(2)(viia) of the Income-tax Act, 1961. According to the Revenue, since the seller company had acquired preference shares from a Non-Resident Indian (NRI) at Rs.240/- per share, selling those shares to the respondent at Rs.130/- per share amounted to a transfer below fair market value.

Substantial Question of Law No.1

4.1. Before adverting to the merits of the first substantial question of law raised for our consideration, it is apposite to refer to Rule 11UA(1)(c)(c) of the Income-tax Rules, 1962, which reads as follows:

“Rule 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) 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.”

[emphasis supplied]

4.2. The aforesaid Rule explicitly allows a valuation report from an accountant. When the statutory rule itself accepts an accountant’s report, the Department cannot insist that only an independent valuer or a merchant banker report is valid.

4.3. The first question of law raised by the Revenue runs directly against the plain text of Rule 11UA(1)(c)(c) of the Rules. It holds no merit and does not require further consideration.

Substantial Question of Law No. 2

5.1. The Revenue argues that the valuation certificate was introduced by the assessee for the first time before the Tribunal. However, the record shows otherwise. Sub-paragraph (5) of the extract in paragraph 4 of the order passed by the Commissioner of Income Tax (Appeals) specifically records as under:

“5. The appellant has furnished a valuation certificate based on audited books of account of Virgo Realtors Private Limited as of 31/3/2010 duly attested by its Managing Director, according to which the value per share is only Rs.101.93 (copy of certificate enclosed), whereas, the appellant has paid a consideration of Rs. 130/-. Hence, 56(viia) is not attracted in this case.”

[emphasis supplied]

5.2. The above extract confirms that the valuation certificate based on audited financial records duly attested by the Managing Director was submitted and considered during the first appellate proceedings. The Revenue’s claim that the document was produced for the first time before the Tribunal is factually incorrect.

5.3. We are, therefore, of the view that the second question of law raised for our consideration is without any basis.

Substantial Question of Law No.3

6.1. The Tribunal evaluated the factual matrix regarding the fair market value of the shares in detail. It noticed that the seller company held a total pool of 16,74,750 preference shares at the start of the year. Of these, only 5,00,250 shares were purchased from the NRI at Rs.240/- per share. The seller sold 11,03,500 shares to the respondent. A seller has the legal freedom to choose which block of shares to sell from its existing holdings. The Revenue cannot force an assumption that the shares sold were exclusively those purchased from the NRI.

6.2. The Tribunal further observed that Note 11 of the audited financial statements of the issuing company (Virgo Realtors Private Limited) provided that shareholders could redeem preference shares between 1.6.2011 and 31.10.2011, at Rs.140/- per share. Paying Rs.130/- per share in March 2011 represented a realistic fair market value.

6.3. The Assessing Officer ignored the statutory valuation rules and substituted an arbitrary figure based on an isolated third-party transaction. The Tribunal correctly set aside this approach and confirmed that the price of Rs.130/- per share paid by the respondent was well within the statutory parameters.

6.4. In view of the categoric finding of the Tribunal, the third substantial question of law raised also does not merit consideration.

7. In our considered opinion, the order passed by the Tribunal is well-reasoned and does not warrant interference. No substantial question of law arises for consideration.

8. In the result, the Tax Case Appeal is dismissed and the order of the Income Tax Appellate Tribunal stands upheld.

There shall be no order as to costs.