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2019 (9) TMI 553 - AT - Income TaxAddition u/s 56(2)(viib) - assessee has received an excess amount on issue of shares qua the FMV as per Rule 11UA of IT Rules - CIT(A) consequently justified the basis adopted by the AO for rejection of the FMV determined by the assessee and approved the determination of FMV on the basis of book value of assets and liabilities under Rule 11UA of the Rules - HELD THAT - 0ne of the grounds taken for rejecting the basis of determination of FMV is that no accounting entry has been passed in respect of difference between the FMV of the immovable property at the relevant point of time in the books of accounts. No merit in this line of reasoning adopted by the lower authorities. It is well settled that even where the assessee fails to make necessary entries in the books of accounts, it will not operate as a bar for claiming benefits by way of deduction etc. as was held in the case of Kedarnath Jute Manufacturing Co. Ltd. vs. CIT 1971 (8) TMI 10 - SUPREME COURT Secondly, the second limb of Explanation (a) itself provides for determination of FMV based on value of underlying assets. As a corollary, the value once substantiated would be replaced with the book value for the purposes of FMV regardless of the book entries in this regard. This basis adopted by the lower authorities therefore does not hold any water. Another allegation made by the CIT(A) that the action of the assessee company is marred by adhocism and beset with arbitrariness. CIT(A) has observed that project was ultimately set up at Dahej despite acquisition of land at Padra which defies logic and gives an impression of adhocism. We fail to understand the purport of such observation for determination of FMV. The intrinsic valuation of the land as sought to be demonstrated by the assessee was required to be looked into to give effect to Explanation (a) below Section 56(2)(viib). The manner in which the assessee was required to run its business is totally within the domain of the assessee and has no bearing on applicability of Section 56(2)(viib) - unable to see substance in the allegation of arbitrariness in the conduct of the assessee. What the assessee has attempted to demonstrate that the market value of Padra land and 45% of jantri value of Dahej land itself is sufficient to justify the premium collected. The valuation report is not an evidence in itself but merely an opinion of an independent having regard to totality of expert facts and circumstances existing on the date of valuation. So long as the facts and circumstances exist, the presence or otherwise valuation report per se has no effect. Both the lower authorities have failed to controvert the value adopted for land parcels in departure with the book value. No rebuttal of the fact towards the value is on record. The Revenue authorities are clearly guided by irrelevant consideration while holding against the assessee. The AO himself in the subsequent year has disputed the higher valuation of ₹ 46/- and unequivocally adopted ₹ 33/- as fair value. The assessee has also been able to demonstrate the arm s length transaction and unison of two different groups bringing different capabilities and expertise for the furtherance of business. The peripheral evidences in the form of interest shown by giant groups like Tata are significant and underlie the bonafides in the fair valuation for issuance of fresh shares. There is another overwhelming factor subsisting in the case to justify the fair value. The existing promoters have also subscribed at the rate similar to the rate at which shares were allotted to Luhariwala Group which further reinforces the inherent strength in the valuations of the company as represented by the value of equity shares. We thus see no valid reason whatsoever in upholding the adverse conclusion drawn by the Revenue Authorities. - Decided in favour of assessee
Issues Involved:
1. Fair Market Value (FMV) of shares issued by the assessee. 2. Application of Section 56(2)(viib) of the Income Tax Act. 3. Method of valuation as per Rule 11UA of the Income Tax Rules. 4. Justification of premium charged on shares. 5. Rejection of the assessee's valuation by the Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)]. 6. Consideration of intrinsic value of assets. 7. Allegations of adhocism and arbitrariness by the CIT(A). Detailed Analysis: 1. Fair Market Value (FMV) of Shares Issued by the Assessee: The assessee, a private limited company, issued 1,016,000 shares with a face value of ?10 at a premium of ?23 per share. The AO questioned the FMV of these shares under Section 56(2)(viib) of the Income Tax Act, determining the FMV to be ?12.84 per share based on Rule 11UA, leading to an addition of ?2,04,82,560 to the assessee's income. 2. Application of Section 56(2)(viib) of the Income Tax Act: Section 56(2)(viib) was introduced by the Finance Act, 2012, applicable from AY 2013-14, to tax excessive premium collected by companies from resident subscribers. The section allows FMV determination by two methods: prescribed method (Rule 11UA) and intrinsic value of assets. 3. Method of Valuation as per Rule 11UA of the Income Tax Rules: The AO used the book value method as per Rule 11UA to determine the FMV, which the assessee contested, arguing that the intrinsic value of land parcels at Padra and Dahej was substantially higher. 4. Justification of Premium Charged on Shares: The assessee justified the premium based on the intrinsic value of land parcels, which was supported by a valuation report. The assessee argued that the premium was negotiated at ?33 per share, considering the market value of the land, which was higher than the book value. 5. Rejection of the Assessee's Valuation by the AO and CIT(A): The CIT(A) upheld the AO's decision, rejecting the assessee's valuation on grounds of no accounting entry for revaluation of land, arbitrariness in deciding the share price, and alleged adhocism in the assessee's actions. 6. Consideration of Intrinsic Value of Assets: The Tribunal noted that the second limb of Explanation (a) to Section 56(2)(viib) allows FMV determination based on the intrinsic value of assets, which does not require accounting entries. The Tribunal found merit in the assessee's argument that the market value of land should replace the book value for FMV calculation. 7. Allegations of Adhocism and Arbitrariness by the CIT(A): The Tribunal dismissed the CIT(A)'s allegations of adhocism and arbitrariness, stating that the business decisions of the assessee, including land acquisition and share issuance, were within the assessee's domain and had no bearing on FMV determination. The Tribunal emphasized that the valuation report and market value of land were not successfully contested by the Revenue. Conclusion: The Tribunal concluded that the AO and CIT(A) erred in not considering the intrinsic value of the land parcels and misinterpreted the provisions of Section 56(2)(viib). The Tribunal directed the AO to delete the addition made under Section 56(2)(viib), allowing the appeal filed by the assessee.
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