2022 (11) TMI 1362 - AT - Income Tax

Addition u/s 56(2)(viib) - determination of FMV of the shares - allotment of shares at premium - HELD THAT - On a reading of Explanation to section 56(2)(viib) it is very much clear that the FMV of shares shall be either the value determined u/r 11UA or based on the value of its assets, including, intangible assets on the date of issue of shares, whichever is higher. Assessee can determine the FMV by adopting either of the two methods as provided under the Statute. The expression substantiated by the company to the satisfaction of the AO as used in clause (a)(ii) of Explanation to section 52(b)(viib) does not speak of any subjective satisfaction but has to be considered objectively, keeping in view the value of the assets on the date of issue of shares. Assessee has proved that the value of the asset, i.e., the land at Delhi as per circle rate is more than Rs. 26.75 crores determined by the registered valuer. That being the factual position emerging on record, allotment of shares at Rs. 1,500/- per share must be considered to be the FMV on the date of sale and not high and excessive compared to the FMV. Assessee had entered into similar transaction with its holding company in assessment year 2014-15 wherein, shares having face value of Rs. 100 per share were allotted to the holding company for a premium of Rs. 1799 per share. While considering the issue relating to similar addition made by the AO u/s 56(2)(viib) first appellate authority has deleted the addition taking note of the fact that the value of land held by the assessee as per the circle rate is Rs. 42 crores. - No reason to sustain the addition - Appeal of assessee allowed.

Summary

Issues:
Addition under section 56(2)(viib) of the Income-tax Act, 1961 based on valuation of share premium.

Analysis:
The judgment involves an appeal by the assessee against the order of the Commissioner of Income Tax (Appeals) regarding the addition of Rs. 41,70,000 under section 56(2)(viib) of the Income-tax Act, 1961 for the assessment year 2016-17. The dispute revolves around the valuation of share premium received by the assessee. The Assessing Officer rejected the assessee's valuation of shares and determined the fair market value (FMV) using the Net Asset Value (NAV) method, resulting in the addition of Rs. 41,70,000 under section 56(2)(viib). The assessee contended that the provision is an anti-abuse measure and should not apply in their case as the shares were allotted to the holding company, not an outsider for tax avoidance purposes.

The Tribunal analyzed the purpose of section 56(2)(viib) as an anti-abuse provision to prevent the conversion of unaccounted money into accounted money. In this case, the transaction was between a holding company and its wholly owned subsidiary, ensuring no third party benefited from the share allotment. Therefore, logically, no addition should be made under section 56(2)(viib). The Tribunal cited relevant case laws to support this interpretation.

Regarding the valuation of shares, the Tribunal considered the FMV determination by the registered valuer based on the Net Asset Value method using the value of land owned by the assessee. The Tribunal disagreed with the Assessing Officer and the Commissioner (Appeals) in rejecting the valuation, emphasizing that the circle rate declared by the State Government was a valid basis for determining the FMV. The Tribunal concluded that the addition of Rs. 41,70,000 was not justified, as the FMV of the shares was correctly determined by the assessee based on the land value and circle rate, leading to the deletion of the addition.

In conclusion, the Tribunal allowed the appeal, ruling in favor of the assessee and deleting the addition of Rs. 41,70,000 under section 56(2)(viib) for the assessment year 2016-17.