2019 (7) TMI 1074 - AT - Income Tax

Taxability of shares premiums u/s 56(2)(viib) r.w. Rule 11UA - Income from other sources - computing fair market value of the shares - valuation not in accordance with the Rule11UA(2) - valuation based on balance sheet of which period is relevant - whether provisions of section 56(2)(viib) should be applicable only when there is investment of unaccounted money? - HELD THAT - We do not find any merit in the argument of the ld. counsel for the assessee. A perusal of the Rule 11U(b) as reproduced by CIT(A) makes it clear that the balance sheet means the balance sheet as drawn up on the balance sheet date which has been audited by the auditor of the company and where the balance sheet on the valuation date has not been drawn up the balance sheet drawn up as on a date immediately preceding the valuation date which has been approved and adopted in the AGM of the shareholders of the company. We find in the instant case, on the date of receipt of the consideration the balance sheet of the assessee company was not drawn up as the same was drawn up only on 31st July, 2014 which is evident from the audited balance sheet filed. Clause (b) and clause (j) of Rule 11UA makes it clear that for computing fair market value of the shares the value of the assets and liabilities as stated in the audited balance sheet immediately prior to the receipt of consideration should be adopted. If, on the date of receipt of the consideration, the balance sheet was not drawn up, then, the balance sheet drawn up as on a date immediately preceding the valuation date should be adopted i.e., the balance sheet of the immediately preceding year should be adopted. We find, in the instant case, on the valuation date i.e., on 31.03.2004, the balance sheet was not drawn up by the auditor as audited financials were drawn up only on 31st July, 2014 and, therefore, we concur with the observation of the CIT(A) that the valuation of assets and liabilities in the balance sheet of the immediately preceding year i.e., 31.03.2013 should have been adopted. Since the valuation done by the assessee was not in accordance with the Rule framed for valuation of unquoted shares i.e., the assessee has not taken the value of assets before introduction of share capital received through fresh allotment and since the AO has correctly determined the valuation of the unquoted equity shares which has been upheld by the CIT(A), therefore, we do not find any infirmity in the order of the CIT(A). Accordingly, the same is upheld and the grounds raised by the assessee are dismissed.

Summary

Issues Involved:
1. Validity of the addition of ?2,83,68,000/- under Section 56(2)(viib) of the Income Tax Act.
2. Correctness of the valuation method used for unquoted shares under Rule 11UA(2).

Issue-wise Detailed Analysis:

1. Validity of the Addition under Section 56(2)(viib):
The primary issue in this case concerns the addition of ?2,83,68,000/- made by the Assessing Officer (AO) under Section 56(2)(viib) of the Income Tax Act. The assessee company issued 18,00,000 equity shares at a premium of ?90 per share, aggregating to ?18 crores. The AO noted that the assessee did not follow the prescribed valuation method under Rule 11UA(2) and included fresh capital in the valuation, inflating the value of the shares. Consequently, the AO calculated the fair market value (FMV) of the shares at ?84.24 per share and treated the excess consideration of ?15.76 per share as taxable income under Section 56(2)(viib).

The CIT(A) upheld this addition, stating that the assessee's approach was incorrect and not in accordance with the statutory provisions. The CIT(A) emphasized that the term "any consideration" in Section 56(2)(viib) includes both money and other forms of consideration. Therefore, the shares received by the assessee from the allottee companies constituted consideration. The CIT(A) also rejected the assessee's argument that no unaccounted money was involved, noting that the statutory provision does not distinguish between accounted and unaccounted money.

2. Correctness of the Valuation Method:
The second issue revolves around the correctness of the valuation method used by the assessee for its unquoted shares. The AO rejected the assessee's valuation, which was based on the balance sheet figures as of 31.03.2014, including the fresh capital. Instead, the AO adopted the figures from the balance sheet immediately preceding the valuation date, i.e., 31.03.2013, in accordance with Rule 11UA(2).

The CIT(A) supported this approach, citing Rule 11U(b) and Rule 11U(j), which specify that the balance sheet for valuation purposes should be the one drawn up immediately prior to the receipt of consideration. Since the balance sheet on 31.03.2014 was not drawn up on the valuation date but only on 31.07.2014, the value of assets and liabilities as of 31.03.2013 was correctly adopted by the AO.

The Tribunal upheld the CIT(A)'s decision, agreeing that the valuation method used by the assessee was not in accordance with the prescribed rules. The Tribunal found that the AO's computation of the FMV at ?84.24 per share was correct and justified the addition made under Section 56(2)(viib).

Conclusion:
The Tribunal dismissed the appeal filed by the assessee, confirming the addition of ?2,83,68,000/- made by the AO under Section 56(2)(viib) and upheld by the CIT(A). The Tribunal concurred with the lower authorities that the assessee's valuation method was incorrect and not in line with Rule 11UA(2). The decision emphasized the importance of adhering to statutory provisions and rules for the valuation of unquoted shares.