2018 (8) TMI 649 - AT - Income Tax

Rectification of order - recalling of earlier order - Additions u/s 56(2)(viib) - valuation of fair market value of the shares - Held that - there is an error apparent on record for not adjudicating the issue of valuation in terms of Clause(ii) of Explanation (a) to Section 56(2)(viib) of the Act. Accordingly we recall the impugned order for the limited purpose of considering and adjudication of issue of valuation in terms of Clause (ii) of Explanation (a) to Section 56(2)(viib) of the Act. The appeal of the assessee is directed to be listed for hearing and adjudication of the particular issue on 10/09/2018. The parties be informed. Misc. application of the assessee is allowed.

Summary

Issues Involved:
1. Valuation of fair market value of shares issued at a premium under Section 56(2)(viib) of the Income Tax Act, 1961.
2. Application of the valuation methods prescribed under Rule 11UA of the Income Tax Rules, 1962.
3. Consideration of the valuation based on Clause (i) vs. Clause (ii) of Explanation (a) to Section 56(2)(viib) of the Act.
4. Error apparent on record for not adjudicating the issue of valuation in terms of Clause (ii) of Explanation (a) to Section 56(2)(viib) of the Act.

Detailed Analysis:

1. Valuation of Fair Market Value of Shares Issued at a Premium:
The primary issue in the appeal was the valuation of the fair market value of shares issued by the assessee at a premium under Section 56(2)(viib) of the Income Tax Act, 1961. The assessee contended that the valuation should be based on the market value of its assets, as per Clause (ii) of Explanation (a) to Section 56(2)(viib) of the Act. The Tribunal, however, adjudicated the issue based on the methods prescribed under Rule 11UA of the Income Tax Rules, 1962, which align with Clause (i) of Explanation (a) to Section 56(2)(viib).

2. Application of Valuation Methods Prescribed Under Rule 11UA:
The Tribunal considered the valuation methods prescribed under Rule 11UA of the Income Tax Rules. The methods include the net asset method and the Discounted Free Cash Flow (DCF) method. The assessee and the AO both opted for the net asset method. The Tribunal noted that this method requires taking the book value of the assets as shown in the balance sheet, reduced by liabilities and other prescribed deductions, without considering the market price of the assets.

3. Consideration of Valuation Based on Clause (i) vs. Clause (ii) of Explanation (a) to Section 56(2)(viib):
The Tribunal's findings were based on Clause (i) of Explanation (a) to Section 56(2)(viib), which involves valuation as per the methods prescribed under Rule 11UA. The assessee argued that the valuation should be based on Clause (ii) of Explanation (a), which allows for substantiating the value of shares based on the market value of its assets. The Tribunal did not adjudicate this aspect, leading to the contention that there was an error in the order.

4. Error Apparent on Record:
The Tribunal acknowledged that there was an error apparent on record for not considering and adjudicating the issue of valuation in terms of Clause (ii) of Explanation (a) to Section 56(2)(viib). The Tribunal found that the assessee had substantiated the value of its shares based on the market value of its assets, as per Clause (ii). However, this contention was not addressed in the Tribunal's original order, which focused on Clause (i) and Rule 11UA.

Conclusion:
The Tribunal concluded that there was an error in the original order for not adjudicating the issue of valuation under Clause (ii) of Explanation (a) to Section 56(2)(viib). Consequently, the impugned order was recalled for the limited purpose of considering and adjudicating this specific issue. The appeal was directed to be listed for hearing on 10/09/2018, and the parties were informed accordingly. The Misc. application of the assessee was allowed, and the order was pronounced in the open court on 03/08/2018.