Rule 11U doesn’t mandate that Balance Sheet should be audited on date of valuation of shares: ITAT

Case Details: Electra Paper and Board (P.) Ltd. v. ITO - [2022] 137 taxmann.com 74 (Chandigarh - Trib.)

Judiciary and Counsel Details

• • N. K. Saini, Vice President and Vikas Awasthy, Judicial Member
  • Rohit Goel, CA for the Appellant. 
  • Smt. Priyanka Dhar, JCIT-DR for the Respondent.

Facts of the Case

Assessee-company had allotted certain shares at Rs. 20/- (including premium of Rs. 10) to the family members and related group companies on 31-03-2016. During the assessment, the Assessing Officer (AO) issued show cause notice as to why the Fair Market Value (FMV) of shares based on the audited Balance Sheet as of 31/3/2015 not to be adopted under section 56(2)(viib).

The assessee explained that the shares were allotted on 31-3-2016, and hence, the FMV as of 31-3-2016 would be applicable. The AO rejected the contention and determined the FMV of shares based on the financials of the audited Balance Sheet at Rs. 17.32. Consequently, he added the difference between the FMV of shares to the income of asseessee.
On appeal, the CIT(A) upholds the action of the AO. Aggrieved-assessee filed the instant appeal before the Tribunal.

ITAT Held

The Tribunal held that there are two mandatory requirements of rule 11U(b) First, the Balance Sheet should be drawn on the date of valuation, and second, such Balance Sheet should be duly audited. If the Balance Sheet is not drawn on the date of valuation, the Balance Sheet drawn on a date preceding the date of valuation, which has been approved and adopted in the Annual General Meeting of the shareholders, should be considered.
This definition has two limbs; the first limb applies in a situation where the Balance sheet is drawn on the date of valuation. The second limb of the definition applies in a situation where no Balance Sheet is drawn on the valuation date.

In the instant case, the assessee drew a balance sheet on the date of allotment of shares, albeit the said balance sheet was unaudited. The FMV of the shares was determined based on the said balance sheet. The said Balance sheet was subsequently audited, and ostensibly, there was no difference in the financials of the tentative balance sheet drawn on 31-3-2016 after audit by the Auditors.

Since the balance sheet was drawn on the date of valuation, the assessee’s case is covered by first limb of the definition of ‘Balance Sheet’. In so far as the condition that the Balance Sheet should be audited, the said condition is also satisfied as the Balance sheet drawn on 31-3-2016 was subsequently audited with purportedly no change in financials.

The rule does not mandate that the balance sheet should also be audited on the valuation date. Even if the balance sheet is audited subsequently, it would be sufficient to comply with rule 11U(b). Thus, there was no error in adopting the FMV of shares determined by the assessee based on an unaudited balance sheet.

List of Cases Referred to

• • S. Viji v. CGT [1998] 96 Taxman 474/229 ITR 421 (SC) (para 4.3)
  • Vardhman Entertainment and Hospitality (P.) Ltd. v. ACIT [IT Appeal No. 6940 (Mum.) of 2018, dated 1-7-2021] (para 4)
  • Sadhvi Securities (P.) Ltd. v. Asstt. CIT [2019] 109 taxmann.com 245/179 ITD 197 (Delhi – Trib.) (para 5)
  • Asstt. CIT v. Y. Venkanna Choudary [2019] 112 taxmann.com 71/[2020] 180 ITD 166 (Visakhapatnam – Trib.) (para 5).