Reopening of assessment – Share Valuation?

 

Invalid Reopening of Assessment Based on Share Valuation Derived Solely from Share Premium in Third-Party Transaction

An Integrated Analysis with Statutory Framework and Finality by the Supreme Court

I. Introduction

The controversy surrounding reopening of completed assessments on the issue of share valuation has been a recurring theme in income-tax litigation, particularly where the Revenue seeks to rely on share premium paid in isolated or third-party transactions as a benchmark to allege understatement of income.

The recent decision of the Delhi High Court in Ramesh Chandra & Ajay Chandra v. Deputy Commissioner of Income Tax and its subsequent affirmation by the Supreme Court of India has now conclusively settled this issue, both on jurisdictional validity of reopening and on the substantive law governing share valuation.

This article presents a detailed, integrated, and statute-centric analysis, tracing the legal journey from reassessment proceedings to their final termination by the Supreme Court.

II. Statutory Framework Governing Reopening and Share Valuation

1. Reopening of Assessment – Sections 147 & 148

Section 147 empowers the Assessing Officer (AO) to reopen an assessment only if he has “reason to believe” that income chargeable to tax has escaped assessment.

The expression “reason to believe” is a jurisdictional condition precedent, requiring:

Existence of tangible material;

A live nexus between such material and escapement of income; and

Absence of mere suspicion, conjecture, or borrowed satisfaction.

Section 148 operationalizes this power through issuance of notice, but the notice stands or falls on the validity of reasons recorded under Section 147.

2. Taxation of Shares Received for Inadequate Consideration – Section 56(2)(vii)(c)

For the relevant assessment years, Section 56(2)(vii)(c) provided that:

Where an individual or HUF receives shares for consideration less than their fair market value (FMV), the difference between FMV and consideration is chargeable to tax under “Income from Other Sources”.

FMV is not a matter of discretion.

The statute mandates that FMV must be determined in the prescribed manner.

3. Rule 11UA of the Income-tax Rules, 1962

Rule 11UA prescribes exhaustive methods for valuation of unquoted equity shares:

Net Asset Value (NAV) Method, or

Discounted Cash Flow (DCF) Method (through a merchant banker).

Strategic investment price,

Share premium in unrelated transactions, or

Commercial negotiations with third parties

is permissible under law.

III. Factual Matrix of the Case

The assessees purchased shares of certain Unitech group companies at ₹10 per share.

These companies were:

•Loss-making,

•Having negative net worth, and

•Burdened with accumulated losses.

•The AO initiated reassessment proceedings alleging undervaluation of shares.

A single third-party transaction where Telenor Asia Pte. Ltd. paid a premium of ₹179.73 per share in respect of certain Unitech Wireless companies.

IV. Fundamental Defect in the AO’s Approach

The AO: Ignored Section 56(2)(vii)(c);

•Bypassed Rule 11UA completely; and

•Treated share premium paid by Telenor as a universal benchmark.

•Importing a commercial price into a statutory valuation regime;

•Substituting lawful valuation mechanisms with subjective perception.

V. Findings of the Income Tax Appellate Tribunal

The ITAT categorically held that:

Valuation cannot be based on premium paid in an unrelated transaction, the AO’s reasoning was legally untenable, the FMV of shares, when computed as per Rule 11UA, was negative.

Therefore, no addition could survive, even on merits.

These findings were accepted as pure findings of fact, supported by record.

VI. Delhi High Court Decision

Case: Ramesh Chandra & Ajay Chandra v. DCIT

Key Observations

The Delhi High Court held:

1.The entire reopening was founded on the same solitary transaction involving Telenor.

2.That very transaction had already been examined and rejected in:

•Pr. CIT-7 v. Shri Sanjay Chandra (ITA 249/2024).

3.The AO had no independent tangible material.

4.Reopening amounted to:

Borrowed satisfaction, Change of opinion, and Circumvention of statutory valuation rules.

The assumption of jurisdiction under Section 147 was invalid.

Notice under Section 148 and the reassessment order dated 22 March 2018 were quashed.

VII. Supreme Court – Final Seal on the Controversy

Case: Deputy Commissioner of Income Tax, Circle 27(1) v. Ramesh Chandra

The Supreme Court of India dismissed the Revenue’s appeal, holding:

There was a delay of 141 days, No plausible or bona fide explanation was offered, A coordinate Bench had already dismissed a similar SLP on 17.12.2025.

Result: The SLP was dismissed, and the lis attained finality.

VIII. Legal Effect of Supreme Court Dismissal

The judgment of the Delhi High Court stands affirmed.

Though dismissed on delay, the order:

Confers finality inter partes;

Forecloses any further challenge by the Revenue.

By,