2021 (3) TMI 399 - AT - Income Tax

Addition u/s 56(2)(viib) - income from other sources - excess consideration received in the form of share capital over and above fair market value - assessee submitted CIT(A) has erred confirming additions made by the Assessing Officer towards consideration received for allotment of preference shares over and above fair market value of shares as on date of value without appreciating the fact that the provisions of section 56(2)(viib) of the Act will come into operation only in a case where shares has been issued at a premium over and above face value of such shares - HELD THAT - Fixing share price at ₹ 10,000/-per preference share is not based on any scientific method or method prescribed under Rule 11UA of Income Tax Rules, 1962. The assessee has not filed any valuation report or evidence to justify value of shares. The assessee has also not explained basis for fixing different share price for equity shares and preference shares. The assessee has also not filed any evidence to explain how a prudent businessman would invest in a company, where its net worth is negative and book value of shares is far less than the face value of preference shares. Therefore, under these circumstances, it is very difficult to accept the arguments of the assessee that transaction of issue of preference shares is a normal commercial transaction and purpose of raising capital is for genuine business purpose of the company. We, further, are of the considered view that from sequent of events and manner in which preference share capital was raised, including terms of repayment, rate of return and period of shares, it can be easily concluded that transaction of issue of preference share capital is arranged transaction in the nature of sham transaction to overcome the amended provisions of section 56(2)(viib). Assessee has failed to explain and justify issue of preference shares with a face value of ₹ 10,000/- per share when the fair market value of the shares of the company is ₹ -4.73 per share. The reasons given by the Assessing Officer to treat the transaction as a colurable device to circumvent the provisions of section 56(2)(viib) of the Act, appears to be on sound footing. Hence, we are inclined to uphold the order of the learned CIT(A) in upholding additions made towards excess consideration received towards allotment of preference shares over and above the fair market value of shares under section 56(2)(viib) of the Act and dismiss appeal filed by the assessee.

Summary

Issues Involved:
1. Jurisdiction of the Assessing Officer.
2. Validity of the assessment order.
3. Opportunity for personal hearing.
4. Applicability of section 56(2)(viib) of the Income Tax Act, 1961.
5. Determination of face value of shares.
6. Levy of interest under sections 234B and 234C.

Detailed Analysis:

1. Jurisdiction of the Assessing Officer:
The appellant contended that the order of the Assessing Officer (AO) was without jurisdiction. However, the tribunal did not find any substantial argument or evidence from the appellant to support this claim. Therefore, this issue was not considered a significant ground for overturning the assessment order.

2. Validity of the Assessment Order:
The appellant argued that the assessment order was bad in law. The tribunal, after reviewing the case, found that the AO had followed due process in issuing the assessment order. The tribunal upheld the validity of the assessment order, stating that the AO had acted within the legal framework.

3. Opportunity for Personal Hearing:
The appellant claimed that no opportunity for a personal hearing was provided during the assessment proceedings. The tribunal noted that the appellant had been given sufficient opportunities to present their case and submit necessary documents. Therefore, this ground was not accepted as a valid reason to challenge the assessment order.

4. Applicability of Section 56(2)(viib) of the Income Tax Act, 1961:
The core issue was whether section 56(2)(viib) was applicable to the appellant's case. The appellant had issued 17,500 preference shares at a face value of ?10,000 each. The AO contended that the fair market value of the shares was significantly lower than the face value, and thus, the excess consideration received should be taxed under section 56(2)(viib). The appellant argued that since the shares were issued at face value, section 56(2)(viib) should not apply. However, the tribunal found that the transaction was not a simple commercial transaction but an arranged one to circumvent the provisions of section 56(2)(viib). The tribunal upheld the AO’s decision, noting that the appellant failed to justify the high face value of the preference shares.

5. Determination of Face Value of Shares:
The appellant contended that the AO could not determine the face value of the shares. The tribunal observed that the appellant had fixed the face value of preference shares at ?10,000 each, while the fair market value was ?4.73 per share. The tribunal agreed with the AO that the appellant did not provide a valid basis for such a high face value, especially given the negative net worth and poor financial health of the company. The tribunal concluded that the face value was artificially inflated to avoid tax liability under section 56(2)(viib).

6. Levy of Interest under Sections 234B and 234C:
The appellant objected to the levy of interest under sections 234B and 234C. The tribunal upheld the levy of interest, stating that it was a consequential result of the additions made under section 56(2)(viib). Since the primary addition was upheld, the interest levied was also deemed appropriate.

Conclusion:
The tribunal dismissed the appeal filed by the assessee, upholding the order of the learned Commissioner of Income Tax (Appeals). The tribunal concluded that the appellant had failed to justify the high face value of the preference shares and that the transaction was a sham designed to circumvent tax provisions. The tribunal also upheld the levy of interest under sections 234B and 234C. The appeal was dismissed in its entirety.