2020 (6) TMI 745 - AT - Income Tax

Income from other sources - addition made of share premium received by the assessee u/s 56(2)(viib) on account of the same being excess consideration received over and above the Fair Market Value of shares issued - HELD THAT - As on the issue or allotment of shares by a company when consideration arises all deposits or share application money received earlier take the colour of consideration and this conversion is to be treated as receipt of consideration on the issue of shares. It is at this point that all the conditions of section 56(2)(viib) can be said to be fulfilled so as to invoke the same. Thus the trigger for invoking section 56(2)(viib) of the Act is the issue of shares. As evident from the explanation(a) to Section 56(2)(viib) which explains the term Fair Market Value for determining the excess consideration received over and above it which is subjected to tax under the section. The explanation states the FMV of the shares to be the value determined as per method prescribed(sub clause(i) or the value substantiated by the company to the satisfaction of the AO based on the value on the date of issue o f s ha r e s of its assets including intangible assets goodwill know-how patent copy right trade mark franchise or other business or commercial rights of similar nature. Thus as per clause (ii) of the explanation to the section the FMV of the shares is the value on the date of issue of shares. Therefore the section can be triggered or invoked only in the year of issue of shares . The Rules prescribed for determining the Fair Market Value of the shares also makes sense and are workable only on applying this interpretation .The Rules prescribed are Rule 11U and 11UA both of which are reproduced above. Rule 11UA(2) specifically deals with the valuation of fair market value of unquoted shares for the purposes of section 56(2)(viib) of the Act which is relevant for the present case. The said Rule speaks of the Fair Market Value of the shares as being the value determined in the manner prescribed therein on the valuation date (emphasis supplied by us). Valuation date in turn has been defined in Rule 11U(j) as the date on which the consideration is received. A comparison of the fair market value of shares and the consideration received both relating to the issue of shares is made and the surplus if any is subjected to tax. This is a reasonably sound and logical interpretation since the section subjects to tax the excess consideration received by over pricing the value of shares issued. Overpricing or excess consideration can be determined when the actual price and the market price relating to issue of shares is compared. If the trigger for the invocation of the section is in the year of receipt of amounts relating to shares prior to their being issued the excess consideration received above the FMV of shares cannot be determined because since the shares have not been issued there cannot be FMV of anything which is not even in existence. We therefore agree with the contention of the ld. DR that the provisions of Section 56(2)(viib) are triggered in the year the shares are issued. Arguments of assessee are all based on laying emphasis solely on the word received used in the section which hold no ground since as we have held above the words used in the section are not to be read in isolation and the correct interpretation lies in the meaning of the phrase consideration received on is sue of shares which we have held relates to the year of issue of shares and not before. Thus reading the provisions of the Section and the Rules prescribed for determining the Fair Market Value of shares what is arrived is that the provisions of Section 56(2)(viib) are triggered in the year of issue/allotment of shares. In the present case since the shares were issued in the impugned year the provisions of Section we hold have been rightly applied by the AO in the impugned year and the order of the AO to that extent is upheld. Appeal of the Revenue is allowed.

Summary

Issues Involved:
1. Applicability of Section 56(2)(viib) of the Income Tax Act, 1961.
2. Determination of the Fair Market Value (FMV) of shares.

Issue-wise Detailed Analysis:

1. Applicability of Section 56(2)(viib) of the Income Tax Act, 1961:
The core issue in the appeal was whether the addition of share premium received by the assessee amounting to Rs. 13,90,45,530/- under Section 56(2)(viib) of the Income Tax Act, 1961, was justified. The assessee contended that the share application money had not been received in the relevant previous year, thus Section 56(2)(viib) was not applicable. The Assessing Officer (AO) argued that the issue of shares took place in the financial year relevant to the assessment year under consideration, making the provisions applicable. The AO rejected the assessee's valuation and added the excess consideration as income from other sources.

The CIT(A) held that the section was invoked in the year of receipt of consideration, and since no consideration was received in the impugned year, the addition was not sustainable. The CIT(A) directed the deletion of the addition, emphasizing that the primary requisite for invoking Section 56(2)(viib) is the receipt of consideration against the issuance of shares in the relevant previous year.

The Revenue appealed, arguing that the trigger for the applicability of Section 56(2)(viib) is the issue of shares, not the receipt of consideration. The Revenue contended that the Fair Market Value (FMV) is to be determined on the date of issue of shares, and the addition should be made if the premium exceeds the FMV. The Revenue further argued that treating share application money as a deposit until the issue of shares aligns with the Companies Act.

The Tribunal agreed with the Revenue, stating that the trigger for invoking Section 56(2)(viib) is the issue of shares. The Tribunal emphasized that the consideration arises when the contract for the issue of shares is entered into, which is at the point of allotment. The Tribunal held that the section is invoked in the year of issue of shares, not on the receipt of share application money. The Tribunal concluded that the provisions of Section 56(2)(viib) were rightly applied by the AO in the impugned year.

2. Determination of the Fair Market Value (FMV) of shares:
The Tribunal noted that the FMV of shares is determined as per Rule 11U and 11UA of the Income Tax Rules, 1962, on the valuation date, which is the date of issue of shares. The Tribunal stated that the FMV should be compared with the actual premium received to determine the excess consideration. The Tribunal directed the CIT(A) to adjudicate the issue of determination of FMV of the shares issued, as this aspect was not addressed in the initial order.

Conclusion:
The Tribunal allowed the Revenue's appeal, holding that the provisions of Section 56(2)(viib) are triggered in the year of issue of shares. The CIT(A) was directed to adjudicate the issue of determination of FMV of the shares. The order of the AO was upheld to the extent of applying Section 56(2)(viib) in the impugned year.