Section 50CA

Section 50CA — the law in short

What the courts have decided on section 50CA, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Rajasehar Buvaneswari v ITO ITATCuts both ways
  I bought shares of a distressed company in an NCLT auction at Rs 3.59 and sold some months later at Rs 2.40. The officer used the balance sheet to value them at Rs 104 under rule 11UA. Can he?
  Not on that basis. The Chennai Tribunal held that fair market value postulates a realistic and commercially viable valuation, and that rule 11UA cannot be applied mechanically to book figures where about Rs 125 crore of the assets were irrecoverable, belonged beneficially to the company in liquidation under clause 3.2.1 of the share purchase agreement, and had been treated as unrealisable by the resolution professional. Section 50CA is a deeming provision but cannot produce absurd or commercially impossible results. The Tribunal rejected the officer's Rs 104.917 per share, and also declined to accept the declared Rs 2.40, fixing fair market value at the auction price of Rs 3.59 per share.
• Madhur Coal Mining Pvt Ltd v DCIT (ITAT Kolkata) — s.50D used to substitute fair market value where shares were sold to group companies below value ITATHelps departmentUnder appeal
  My company sold unquoted shares of group companies below their Rule 11UA value in a year before section 50CA existed. The Assessing Officer has invoked section 50D and substituted fair market value. Can he do that when I have disclosed an actual sale price?
  On these facts the Tribunal held he could. It upheld the section 50D addition for AY 2015-16 — a year before section 50CA was on the statute book — because the assessee produced no share purchase agreement, no sale deed and no valuation report to show that the price stated in the return had actually been received from the related-party buyers, so the consideration was treated as not ascertainable within section 50D.
• JCIT v Manish Vij ITATHelps taxpayerNo later treatment found
  I sold the same company's unquoted shares twice in one year at very different prices. Can the AO apply s.50CA using the later valuation?
  No - but read the order before citing it, because almost everything it is quoted for is the Commissioner (Appeals) speaking, not the Tribunal. The Tribunal dismissed the Revenue's appeal in a single paragraph: the Revenue had controverted none of the Commissioner (Appeals)'s findings, that order was elaborate, and there was no infirmity in it. The findings themselves - that a certified valuation cannot be displaced without the officer showing a mistake in it, and that Rule 11UAA read with Rule 11UA lets the assessee choose NAV or DCF for each transfer date - are the Commissioner (Appeals)'s, reproduced in the Tribunal's order. The method-choice proposition does not follow from the rules as printed: Rule 11UAA sends a s.50CA valuation to sub-clause (b) or (c) of clause (c) of Rule 11UA(1), and the discounted cash flow method appears only in Rule 11UA(2), which is expressed to serve clause (viib) of s.56(2).
• DCIT v Ashish Jugalkishor Bhala ITATCuts both ways
  I bought unquoted shares from family members at Rs 540 when the officer's rule 11UA working says Rs 661. Can a discount for lack of marketability and the company's real position be brought into the valuation?
  On these facts, yes. The Pune Tribunal upheld the Commissioner (Appeals), who had accepted the assessee's second valuation report and deleted the addition of Rs 1,44,42,560 under section 56(2)(x). The first appellate order accepted the valuer's figures for two parcels of land, worked out on stamp duty and IGR rates, allowed the provision for gratuity as a liability because most employees had crossed five years of service, and allowed a discount of fifteen per cent for lack of marketability given the difficulty of realising an industrial site with a working plant on it. The Tribunal found the order detailed and speaking, noted that the Departmental Representative brought no contrary material, and followed its own earlier order in a companion case.
• Statutory position — Rule 11UA(2) to (4) as substituted with effect from 25 September 2023: five further methods for non-resident subscriptions, price matching, and a ten per cent safe harbour CBDT Circulars & InstructionsCuts both waysNo later treatment found
  My client's start-up took money from an overseas investor. Which valuation methods are open under Rule 11UA, and is there any tolerance if the issue price is a little above the valuation?
  Sub-rules (2) to (4) of Rule 11UA were substituted for the old sub-rule (2) by the Income-tax (Twenty-first Amendment) Rules, 2023, with effect from 25 September 2023. For consideration received from a resident, the fair market value of unquoted equity shares may be taken at the assessee's option under sub-clause (a) (the adjusted book-value formula), (b) (merchant banker's Discounted Free Cash Flow), (c) (venture-capital price matching) or (e) (price matching against a notified entity); where the consideration is from a non-resident, sub-clauses (a) to (e) are all available, and sub-clause (d) opens five further merchant-banker methods — Comparable Company Multiple, Probability Weighted Expected Return, Option Pricing, Milestone Analysis and Replacement Cost. Sub-rule (4) is a safe harbour: where the issue price exceeds the value so determined by not more than ten per cent of the valuation price, the issue price is deemed to be the fair market value.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.