2021 (2) TMI 175 - AT - Income Tax

Taxability of share premium collected by assessee u/s.56(2)(viib) - fair market value of shares as on the date of issue and such valuation report is based on assets of the company - As per assessee fair market value of shares is more than value of shares issued by assessee, hence, there is no place for invoking provisions of section 56(2)(viib) - AO was not convinced with explanation furnished by the assessee and according to him, valuation certificate obtained from independent Chartered Accountant as well as from statutory auditor of the company is being submitted by the assessee for first time - HELD THAT - It is very clear that assessee has filed necessary evidences including valuation report from independent Chartered Accountant to support fair market value of shares arrived at as on date of issue of shares as per explanation (a)(ii). Assessee has substantiated fair market value of shares as on the date of issue of shares As gone through reasons given by AO for rejection of valuation report and we do not ourselves subscribe to the findings recorded by Assessing Officer, because he cannot reject valuation report merely for the reason such valuation report was not filed at the time of assessment proceedings. Timing of filing valuation report at the time of original assessment proceedings u/s.143(3) or during revision proceedings u/s.263 of the Act is not a relevant criteria to decide whether fair market value of shares issued by assessee is substantiated to the satisfaction of Assessing Officer or not. But, what is relevant is whether valuation report supports share price determined by the assessee or not. In this case, valuation report obtained by the assessee from independent Chartered Accountant supports share price. Therefore, when the assessee has substantiated share price to the satisfaction of the AO with the help of valuation report, even if, such valuation report is obtained subsequent to the date of issue of shares, it does not alter the situation. Assessing Officer as well as learned CIT(A) were erred in rejecting valuation report filed by assessee on this count. CIT(A) observation that relevance of valuation report of Chartered Accountant comes into play only when assessee chooses Explanation (a)(i) to determine fair market value of shares, but not when assessee has resorted to Explanation (a)(ii) to section 56(2)(viib) is contrary to law and absurd, because provisions of explanation (a)(ii) of the Act is very specific, as per which, when share price is determined in accordance with explanation (a)(ii), fair market value of share should be substantiated to the satisfaction of Assessing Officer and such satisfaction may be by way of valuation report or asset value of the company. In this case, there is no dispute of whatsoever with regard to the fact that assessee has filed valuation report to substantiate fair market value of shares to the satisfaction of the Assessing Officer. Therefore, we are of the considered view that learned CIT(A) has erred in holding that when assessee has chosen net asset value method, the relevance of valuation report from Chartered Accountant does not come into play. When assessee has exercised its option given as per Explanation (a)(ii) to Section 56(2)(viib) of the Act, then he should substantiate fair market value of shares to the satisfaction of Assessing Officer based on the value as on date of issue of shares of its assets etc. Since assessee has filed valuation report to substantiate fair market value of shares as on the date of issue and such valuation report is based on assets of the company, we are of the considered view that assessee has satisfied conditions prescribed under Explanation (a)(ii) to Section 56(2)(viib) of the Act and in such situation, there is no scope for the Assessing Officer to invoke provisions of Section 56(2)(viib) of the Act to tax share premium collected on issue of shares. - Decided in favour of assessee.

Summary

Issues Involved:

1. Validity of the valuation method used for determining the fair market value of shares.
2. Applicability of Section 56(2)(viib) of the Income Tax Act, 1961.
3. Admissibility of valuation reports submitted by the assessee.
4. Role of the Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)] in determining the fair market value of shares.

Issue-wise Detailed Analysis:

1. Validity of the Valuation Method Used for Determining the Fair Market Value of Shares:

The assessee argued that the valuation of shares was based on a Chartered Engineer's report, which should be considered valid. The AO rejected this valuation, stating it was not presented during the original assessment or revision proceedings. The AO applied the net asset value method as prescribed under Rule 11UA(2) and found the company's net worth to be negative, thus questioning the premium charged on shares. The Tribunal found that the assessee had substantiated the share price with a valuation report from an independent Chartered Accountant supported by a Chartered Engineer's report, which valued the company's land and assets at a significantly higher market value. The Tribunal concluded that the valuation method chosen by the assessee was valid and supported by substantial evidence.

2. Applicability of Section 56(2)(viib) of the Income Tax Act, 1961:

Section 56(2)(viib) applies when a company receives consideration for shares that exceeds the fair market value, and the excess amount is taxed as income. The assessee chose to determine the fair market value of shares based on the value of its assets as per Explanation (a)(ii) to Section 56(2)(viib), rather than the prescribed method in Rule 11UA. The Tribunal held that the assessee had the option to choose either method and had substantiated the fair market value to the satisfaction of the AO. Therefore, the Tribunal ruled that the provisions of Section 56(2)(viib) could not be invoked to tax the share premium collected by the assessee.

3. Admissibility of Valuation Reports Submitted by the Assessee:

The AO rejected the valuation reports submitted by the assessee, stating they were not presented during the original assessment or revision proceedings. The Tribunal found this reasoning flawed, emphasizing that the timing of the submission of the valuation reports was irrelevant. What mattered was whether the valuation reports supported the share price. The Tribunal noted that the reports from the independent Chartered Accountant and the Chartered Engineer substantiated the fair market value of the shares, making them admissible.

4. Role of the Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)] in Determining the Fair Market Value of Shares:

The CIT(A) upheld the AO's decision, stating that the relevance of the Chartered Accountant's valuation report only applied if the assessee chose Explanation (a)(i) for determining the fair market value. The Tribunal found this interpretation incorrect, stating that Explanation (a)(ii) allows the assessee to substantiate the fair market value based on asset value, which can include a Chartered Accountant's valuation. The Tribunal concluded that both the AO and CIT(A) erred in rejecting the valuation reports and directed the AO to delete the additions made towards the share premium under Section 56(2)(viib).

Conclusion:

The Tribunal ruled in favor of the assessee, allowing the appeal and directing the AO to delete the additions made towards the share premium on the issue of shares under Section 56(2)(viib) of the Income Tax Act, 1961. The Tribunal emphasized the validity of the valuation method chosen by the assessee and the admissibility of the valuation reports submitted, highlighting that the assessee had substantiated the fair market value of the shares to the satisfaction of the AO.