2021 (5) TMI 99 - AT - Income Tax

Addition u/s 56(2)(vii)(b) - valuation of shares - surplus amount received by the assessee on account of premium - HELD THAT - As decided in M/S LALITHAA JEWELLERY MART PVT. LTD. VERSUS THE ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 1 (4) , CHENNAI. 2019 (8) TMI 400 - ITAT CHENNAI AO has not taken into consideration the second limb in explanation to Section 56(2)(viib) of the Act. The second limb provides that when valuation was made by the company, if the Assessing Officer is not satisfied about the valuation, he has to call for material from the assessee how the valuation was made by the assessee-company. Satisfaction of the Assessing Officer as referred in explanation to Section 56(2)(viib) of the Act would be judicial satisfaction of the Assessing Officer. Judicial satisfaction means the Assessing Officer has to take into consideration the well established method of valuation of shares including the assets as explained in Explanation 2 to Section 56(2)(viib) of the Act. It cannot be arbitrary. The Assessing Officer has to take note of the judicial and established principles in arriving at his satisfaction. In this case, the Assessing Officer has not found any specific fault in rejecting or not satisfying with the valuation made by the assessee. When the Assessing Officer has not found any defect or error in the valuation of shares by the assessee company, it may not be necessary to apply the method of valuation prescribed under Rule 11UA of the I.T. Rules. Therefore, this Tribunal is unable to uphold the valuation made by the Assessing Officer under Rule 11UA of the Income-tax Rules, 1962. Thus we delete the addition made by the AO u/s 56(2)(vii)(b) - Decided in favour of assessee.

Summary

Issues:
Addition of ?8,25,000 under section 56(2)(vii)(b) of the Income Tax Act, 1961.

Analysis:

Issue 1: Addition under section 56(2)(vii)(b) of the Income Tax Act, 1961

The case involved an appeal against the addition of ?8,25,000 made by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) under section 56(2)(vii)(b) of the Income Tax Act, 1961. The assessee, a company engaged in manufacturing elevators and hoists, had issued shares at a premium. The AO added the surplus premium amount to the total income of the assessee based on a valuation of shares as of a specific date, which was contested by the assessee.

The Tribunal referred to a similar case where the addition under section 56(2)(vii)(b) was deleted by the Tribunal due to the AO not considering the valuation of the company based on the date of issue including its assets. The Tribunal emphasized the need for judicial satisfaction by the AO regarding the valuation method used by the company and the assets included. In the absence of any specific fault found by the AO in the valuation made by the assessee, the Tribunal concluded that the AO's valuation under Rule 11UA of the Income-tax Rules, 1962 was not justified.

Based on the precedent set by the Division Bench of the Tribunal in the similar case, the Tribunal in the present case allowed the appeal of the assessee and deleted the addition made under section 56(2)(vii)(b) of the Income Tax Act, 1961. The decision was rendered in favor of the assessee, emphasizing the importance of considering the valuation method and assets while making additions under the specified section.

In conclusion, the Tribunal's decision highlighted the significance of following established principles and ensuring judicial satisfaction in matters related to the valuation of shares and assets when making additions under section 56(2)(vii)(b) of the Income Tax Act, 1961. The judgment provided clarity on the approach to be taken by the Assessing Officer in such cases, ultimately resulting in the deletion of the addition in favor of the assessee.

This detailed analysis of the judgment provides a comprehensive understanding of the issues involved and the Tribunal's decision in the case.