2018 (10) TMI 1391 - AT - Income Tax

Addition u/s 56(2)(vii)(c) - receiving shares and securities and the consideration for the same is less than the aggregate Fair Market Value (FMV) of these shares and securities - determination of FMV as per Rule 11UA(1)(c) r.w. Rule 11U - drawing up a balance sheet as on valuation date or previous audited balance sheet is to be taken as the base. - CIT-A held that AO has done the next best thing by adopting a pro rata average of valuation of shares of GEPL as on 31.03.2010 and 31.03.2011 and upheld the order of the AO in taxing the differential amount of ₹ 1.05/- per share totaling to ₹ 31,50,000/- u/s 56(2)(vii)(c). Held that - CIT(A) has rightly observed that there was nothing preventing the appellant from drawing up the balance sheet of GEPL as on that date for the limited purpose . As GEPL is a closely held company, we concur with the above finding of the Ld. CIT(A). The meaning of balance sheet has been given in Rule 11U(b) of the Rules and the same has been substituted by the IT (15th Amendment) Rules, 2012, w.e.f. 29.11.2012 AO has rightly arrived at the FMV per share as on 22.06.2010 at ₹ 31.05/- as worked out by the assessee. Also he has rightly followed Rule 11U as applicable for the FY 2010-11 relevant to the AY 2011-12. To hold otherwise would be to exalt artifice above reality and to deprive the statutory provision in question of all serious purpose. - Decided against assessee.

Summary

Issues Involved:
1. Addition of ?31,50,000/- by the Assessing Officer (AO).
2. Justification of invoking provisions of section 56(2)(vii).
3. Incorrect adoption of the transaction date as 22.06.2010.
4. Incorrect calculation of Fair Market Value (FMV) of shares of M/s Global Energy Pvt. Ltd. (GEPL) as on 22.06.2010 at ?31.05 per share.
5. Applicability of amended Rule 11U(b) retrospectively.

Issue-wise Detailed Analysis:

1. Addition of ?31,50,000/- by the AO:
The appellant purchased 30,00,000 shares of GEPL at ?30/- each from BCPL. The AO added ?31,50,000/- to the appellant's income under section 56(2)(vii) of the Income Tax Act, 1961, by determining the FMV of these shares as ?31.05 per share on the valuation date of 22.06.2010. The AO computed the FMV based on the balance sheet as on 31.03.2011 and worked it backward to June 2010.

2. Justification of invoking provisions of section 56(2)(vii):
The AO invoked section 56(2)(vii) which states that if an individual receives shares and the consideration is less than the aggregate FMV by an amount exceeding ?50,000/-, the difference is chargeable as income. The AO requested the appellant to provide the FMV of shares as on 22.06.2010. The appellant submitted a value of ?28.61 per share as on 31.03.2010, but the AO recalculated it to ?31.05 per share as on 22.06.2010.

3. Incorrect adoption of the transaction date as 22.06.2010:
The appellant argued that the AO incorrectly adopted 22.06.2010 as the date of the transaction. The appellant contended that the balance sheet as on 31.03.2010 should be used for determining the FMV, as the balance sheet as on 22.06.2010 was not available.

4. Incorrect calculation of FMV of shares of GEPL as on 22.06.2010 at ?31.05 per share:
The appellant challenged the AO's method of calculating the FMV by taking the balance sheet as on 31.03.2011 and working it backward. The appellant argued that the correct FMV should be ?28.61 per share based on the balance sheet as on 31.03.2010. The CIT(A) upheld the AO's calculation, stating that the appellant could have drawn up a balance sheet as on 22.06.2010 since GEPL was a closely held company.

5. Applicability of amended Rule 11U(b) retrospectively:
The appellant argued that the amended definition of "balance sheet" in Rule 11U(b), effective from 29.11.2012, should apply retrospectively to the assessment year 2011-12. The CIT(A) and the Tribunal held that the Rules as they stood for the FY 2010-11 were applicable and did not have retrospective effect. The Tribunal referenced the Supreme Court's decision in CIT v. Vatika Township Pvt. Ltd., which emphasized that unless explicitly stated, laws are presumed to be prospective.

Conclusion:
The Tribunal upheld the AO's addition of ?31,50,000/- under section 56(2)(vii), confirming the FMV calculation of ?31.05 per share as on 22.06.2010. The Tribunal agreed with the CIT(A) that the appellant could have drawn up a balance sheet as on the valuation date. The Tribunal also rejected the appellant's argument for the retrospective application of the amended Rule 11U(b), affirming the prospective nature of the amendment. The appeal was dismissed.