Rule 11UA

Rule 11UA — the law in short

What the courts have decided on section Rule 11UA, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Vodafone M-Pesa Ltd v PCIT High CourtHelps taxpayer
  Can the AO switch my valuation from DCF to NAV because the NAV figure suits him better?
  No. The officer may scrutinise the valuation report and may even call for a fresh valuation from an independent valuer, but he cannot change the method the assessee opted for under Rule 11UA — any fresh valuation must stay on the DCF basis.
• DCIT, Central Circle 8(3), Mumbai v Sanjana Cryogenic Storages Ltd ITATHelps taxpayerNo later treatment found
  The Approving Panel held that my client's arrangement is NOT an impermissible avoidance arrangement, but the Assessing Officer has taxed the same transaction under another section anyway. Can he do that?
  The Mumbai Tribunal did not decide the wide question, but it held that the Assessing Officer could not, while giving effect to the statutory process under section 144BA, proceed on a factual premise diametrically opposed to the findings returned by the Approving Panel on the very arrangement referred to it. It then dismissed the Revenue's appeal on the narrower ground that a company buying back its own shares, which must then be extinguished, does not 'receive' property within section 56(2)(x) at all.
• 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).
• SPL Infrastructure Pvt. Ltd. v ITO — the choice of method is the assessee's, but a DCF report first produced during assessment does not displace the officer's NAV computation, and Rule 11UA(3) does not help ITATHelps departmentNo later treatment found
  The Assessing Officer rejected our DCF valuation and computed fair market value on net asset value under Rule 11UA. Doesn't the Delhi High Court say the choice of method belongs to the company?
  It does, but the choice is not the end of the enquiry. The Chennai Bench read the Delhi High Court in Agra Portfolio as holding both that the option and choice vest solely in the assessee on a conjoint reading of section 56(2)(viib) with Rule 11UA(2), and that it remains open to the Assessing Officer to doubt or reject a DCF valuation submitted for his consideration. On the facts — a premium fixed on a board resolution and a chartered accountant's opinion, with a DCF report unsigned and undated obtained only during the assessment three years after the issue, and no supporting material — the Bench held the officer rightly adopted the Rule 11UA(2) method and dismissed the appeal.
• Minda SM Technocast P Ltd v ACIT ITATHelps taxpayer
  The AO revalued unquoted shares using circle rates for the company's land. Can he do that under Rule 11UA?
  No. The Rule 11UA formula works off the balance sheet — the book values of the investee company's assets and liabilities, its paid-up equity capital and the paid-up value of the shares. There is nothing in the provision permitting the officer to substitute market values or circle rates for the land.
• Sudhir Menon HUF v ACIT ITATCuts both waysSuperseded by amendment
  I took up a rights issue at face value. Is the gap from book value taxable in my hands?
  Not on the proportionate part. Where further shares are offered to existing shareholders pro-rata to their holdings, there is only an apportionment of the value of the existing holding over more shares and nothing is received. Anything allotted beyond the proportionate entitlement is a different matter and can be taxed.
• Statutory position — section 56(2)(viib) was NOT omitted: the Finance (No. 2) Act 2024 inserted a third proviso switching the clause off from 1 April 2025 CBDT Circulars & InstructionsCuts both ways
  I have read that angel tax was abolished. Is section 56(2)(viib) gone from the statute book, and from which year does it stop applying?
  The clause has not been omitted. It remains printed in section 56(2), and the Finance (No. 2) Act 2024 inserted a third proviso reading: 'Provided also that the provisions of this clause shall not apply on or after the 1st day of April, 2025.' A consolidation of 2024 vintage records the insertion as being made by the Finance (No. 2) Act, 2024 with effect from 1 April 2025, and a consolidation of 2025 vintage prints the third proviso as part of the enacted text.
• 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.
• Statutory position — Rule 11UAE and the substituted s.50B(2) and s.2(42C): slump sale from AY 2021-22 CBDT Circulars & InstructionsCuts both ways
  My client is signing a business transfer agreement now. Can I still take the price in the agreement as the full value of consideration for the s.50B computation, the way every reported case does?
  No. From AY 2021-22 s.50B(2)(ii) deems the fair market value of the capital assets on the date of transfer, calculated in the prescribed manner, to be the full value of the consideration, and Rule 11UAE prescribes that manner: the fair market value is the higher of FMV1, an asset-based value of the undertaking, and FMV2, the fair market value of the consideration actually received. The agreed price is now a floor, not the measure. The same Finance Act also widened s.2(42C) to a transfer 'by any means', so an exchange or a scheme is caught.
• Statutory position — rule 11UAE: computation of the fair market value of capital assets for s.50B(2)(ii), FMV1 on the assets transferred and FMV2 on the consideration received, the higher of the two being taken, with effect from 24 May 2021 CBDT Circulars & InstructionsCuts both ways
  We have done a slump sale and the Assessing Officer says the consideration we recorded is not the full value of the consideration. How is the fair market value computed under s.50B, and from when does that apply?
  Under rule 11UAE two figures are computed and the higher is taken. Sub-rule (1) provides: "For the purpose of clause (ii) of sub-section (2) of section 50B, the fair market value of the capital assets shall be the FMV1 determined under sub-rule (2) or FMV2 determined under sub-rule (3), whichever is higher." FMV1 looks at what was transferred and is computed as A+B+C+D-L, where A is the book value of all assets of the undertaking or division other than jewellery, artistic work, shares, securities and immovable property, reduced by income-tax paid less income-tax refund claimed and by any amount shown as an asset, including unamortised deferred expenditure, which does not represent the value of any asset; B is the open market price of jewellery and artistic work on a registered valuer's report; C is the fair market value of shares and securities determined under rule 11UA(1); D is the stamp duty value adopted or assessed or assessable by any Government authority for immovable property; and L is the book value of the liabilities of the undertaking or division, excluding paid-up equity capital, amounts set apart for dividends on preference or equity shares not declared before the date of transfer, reserves and surplus by whatever name called, provisions for taxation, provisions for meeting liabilities other than ascertained liabilities, and contingent liabilities other than arrears of cumulative preference dividend. FMV2 looks at what was received and is computed as E+F+G+H, where E is the monetary consideration received or accruing, F is the fair market value of non-monetary consideration represented by property referred to in rule 11UA(1), determined under rule 11UA(1), G is the open market price on a registered valuer's report of non-monetary consideration being property other than immovable property and not referred to in rule 11UA(1), and H is the stamp duty value where the non-monetary consideration is immovable property. Sub-rule (4) fixes the valuation date: the fair market value under sub-rules (2) and (3) is determined on the date of slump sale, and the valuation date in rule 11UA also means the date of slump sale. The rule was inserted with effect from 24 May 2021, and the clause it serves, s.50B(2)(ii), was substituted with effect from 1 April 2021.

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.