2019 (10) TMI 191 - AT - Income Tax

Addition u/s 56(2)(viib) - Excess amount of premium over and above the value of the value per share - assessee filed certain additional evidences and submitted that in view of Rule 11UA of the Income Tax rules 1962 the value should be 66.50 per share instead of 6.50 per share computed by the AO - HELD THAT - Assessee that the value of its shares in terms of clause (ii) of Explanation (a) of section 56(2)(viib) on the basis of the value of its land at market value which is 113 crores comes to 658.83 per share. Therefore it is the submission of assessee that instead of taking the book value of the property at 47.81 crore as per the balance sheet the lower authorities should have taken the fair market value of land which was converted from agricultural to institutional at 113, 00, 72, 749/- and other assets of 9, 17, 608/-. Thus according to him the fair market value of the shares comes to 658.83 per share. From the various details furnished by the assessee we find the assessee had obtained permission of the competent authority for change of land use from agricultural to institutional for art culture and convention centre for a total area of 42949 sq. mtrs or 51366.94 sq. yards. A perusal of the circle rate for such institutional area shows that the circle rate has been prescribed at 22, 000/- per sq. yard. Thus as per the circle rate prescribed by the competent authority the value of total assets i.e. the fair market value of the land which was converted from agricultural into institutional comes to 113, 00, 72, 749/-. If the other assets of 9, 17, 608/- is added to such asset and the total liability of 46, 55, 69, 537/- is deducted then the net asset comes to 665, 420, 820/-. If the same is divided by the number of equity shares of 10, 10, 000/- then the value per share comes to 658.83 which is more than the premium of 5/- charged by the assessee on a share of 10/-. We therefore find merit in the argument of assessee that the valuation of the shares should be made on the basis of various factors and not merely on the basis of financials and the substantiation of the fair market value on the basis of the valuation done by the assessee simply cannot be rejected where the assessee has demonstrated with evidence that the fair market value of the asset is much more than the value shown in the balance sheet. Grounds raised by the assessee are allowed.

Summary

Issues Involved:
1. Computation of fair market value (FMV) of equity shares.
2. Inclusion of share application money as liability.
3. Consideration of land value for FMV calculation.
4. Opportunity of being heard by CIT(A).
5. Remanding the matter to Assessing Officer for recalculating FMV.

Detailed Analysis:

1. Computation of Fair Market Value (FMV) of Equity Shares:
The Assessing Officer (AO) determined the FMV of equity shares at ?6.65 per share based on the book value. The AO added ?3.5 crores to the income of the assessee under Section 56(2)(viib) of the IT Act due to the premium received over the FMV. The CIT(A) revised the FMV to ?10.05 per share, reducing the addition to ?3,46,50,000/-.

2. Inclusion of Share Application Money as Liability:
The CIT(A) included share application money as liability while computing FMV, which was contested by the assessee. The CIT(A) stated that share application money is a liability until shares are allotted, which aligns with Rule 11UA of the Income Tax Rules.

3. Consideration of Land Value for FMV Calculation:
The assessee argued that the FMV of shares should consider the market value of land, which was converted from agricultural to institutional use. The assessee provided evidence that the land's FMV was ?113 crores, making the share value ?658.83 each. The Tribunal found merit in this argument, stating that FMV should be based on various factors, including the market value of assets.

4. Opportunity of Being Heard by CIT(A):
The assessee claimed that the CIT(A) passed the order without giving a reasonable opportunity of being heard. The Tribunal did not specifically address this issue in the final judgment.

5. Remanding the Matter to Assessing Officer for Recalculating FMV:
The assessee contended that the CIT(A) should have remanded the matter to the AO for recalculating FMV considering share application money as liability. The Tribunal, however, resolved the issue by accepting the assessee's valuation based on the market value of land.

Conclusion:
The Tribunal concluded that the valuation of shares should consider the market value of assets, not just the book value. It accepted the assessee's valuation of ?658.83 per share, which was higher than the premium charged. Thus, the Tribunal allowed the appeal, setting aside the CIT(A)'s order and granting relief to the assessee. The appeal filed by the assessee was allowed, and the addition of ?3,46,50,000/- was annulled.