2022 (6) TMI 1340 - AT - Income Tax

Addition u/s.56(2)(viib) - excess consideration received on allotment of equity shares over and above fair market value as on date of allotment is income of the assessee - price charged for allotment of equity shares including premium - HELD THAT - We ourselves do not subscribe to the reasons given by the AO for simple reason that the assessee has determined value of shares as per discounted cash flow method as per which fair market value of shares as on date of issue was at Rs.109.21 per share. Assessee has determined such valuation on the basis of discounted cash flow of subsequent years by taking into account project under implementation and its relevance including intangibles possessed in the line of business carried out by the assessee. Assessee has also justified fair market value determined as on date of allotment of shares by filing necessary details to establish fair market value of the shares as per net asset value method as at end of the assessment year 2014-15 as per which value per equity share is at Rs.146.3 per share which is higher than issue price at Rs.109.21 per share which means fair market value determined by the assessee at the time of allotment of shares is not hypothetical but intrinsic value of the share based on its future earning capacity. Therefore we are of the considered view that even on merits the assessee has justified price charged for allotment of equity shares including premium. In this case the assessee has filed fair market value of the shares worked out as at end of the impugned assessment year on net asset value method as per which share price has been worked out at Rs.147.36 per share which is much higher than issue price of Rs.109.21 per share. Assessee had also allotted 5 lakhs equity shares to non-resident shareholder M/s.Sojitz Corporation Japan at issue price at Rs.450.10 per share which includes premium of Rs.440.10 per share. If you compare premium charged on resident shareholders when compared to non-resident shareholder premium charged to resident shareholders is much below to premium charged on non-resident shareholders. It is very clear that the assessee has justified premium charged on issue of shares with necessary evidences including fair market value of the shares as on date of issue. We are of the considered view that the AO has completely erred in making additions towards securities premium u/s 56(2)(viib) - CIT(A) after considering relevant facts has rightly deleted additions made by the AO. Hence we are inclined to uphold findings of the CIT(A) and dismiss appeal filed by the Revenue.

Summary

Issues Involved:
1. Delay in filing appeals.
2. Applicability of section 56(2)(viib) of the Income Tax Act, 1961.
3. Justification of share premium valuation.

Detailed Analysis:

1. Delay in Filing Appeals:
The Revenue filed appeals with delays of 2 days and 127 days for the assessment years 2014-15 and 2013-14, respectively. The delay was attributed to non-availability of records and the Covid-19 lockdown. The Supreme Court, in suo motu Writ Petition No.3 of 2020, extended the limitation period for all proceedings due to the pandemic. The Tribunal condoned the delay in the interest of natural justice, acknowledging the exceptional circumstances.

2. Applicability of Section 56(2)(viib) of the Income Tax Act, 1961:
The core issue was whether section 56(2)(viib) could be invoked for share premiums received after its introduction on 01.04.2013, even if the shares were allotted prior to this date. The assessee allotted shares in March 2011, receiving part of the premium then, and the balance during the financial year 2013-14. The Assessing Officer (AO) applied section 56(2)(viib) to the latter premium received, arguing that the section applies to any consideration received in previous years starting from 01.04.2013.

The Tribunal held that section 56(2)(viib) could not be applied retrospectively to shares allotted before its enactment. The shares were allotted in 2011, and thus, the provision, effective from 01.04.2013, did not apply. The Tribunal emphasized that the date of allotment, not the date of receipt of the balance premium, was crucial. Therefore, the AO erred in invoking section 56(2)(viib) for the assessment year 2014-15.

3. Justification of Share Premium Valuation:
The AO questioned the premium valuation, asserting that the fair market value (FMV) of shares, as per the Net Asset Value (NAV) method, was Rs.10 per share, whereas the shares were issued at a premium of Rs.99.21 per share. The assessee justified the premium using the Discounted Cash Flow (DCF) method, which valued shares at Rs.109.21 per share, considering future profitability and intangible assets.

The Tribunal noted that Rule 11UA allows the assessee to choose between DCF and NAV methods for valuation. The AO cannot change the chosen method but can examine its correctness. The assessee's DCF method was valid, and the FMV at the end of the assessment year 2014-15 was Rs.147.36 per share, higher than the issue price. Additionally, shares were issued to a non-resident at a much higher premium, further validating the valuation. The Tribunal concluded that the AO erred in rejecting the DCF method and making additions under section 56(2)(viib).

Conclusion:
The Tribunal upheld the CIT(A)'s decision to delete the additions made by the AO under section 56(2)(viib), affirming that the provision could not be applied retrospectively and that the share premium valuation was justified. The appeals filed by the Revenue for both assessment years were dismissed.