2021 (7) TMI 775 - AT - Income Tax

Addition u/s 56(2)(viib) - valuation of shares - assessee company has received excess sum of ₹ 110 per share on 254166/- shares issued during the year - HELD THAT - CIT(A) has not found any defect in the valuation report so filed before him. It is also his submission that the fair market value of the equity shares at the time of issue of share was based on the market value of the land as determined by the registered valuer comes to ₹ 137/-, whereas the assessee has issued the shares of ₹ 10/- each at a premium of ₹ 110/- only which is much less than the market value of the shares. As submission of the assessee that the equity shares so issued at a premium were subscribed by the family members of the director and therefore no addition u/s 56(2)(viib) of the Act is called for. We find the assessment in the instant case was completed u/s 144 of the Act due to persistent non-compliance of the assessee to the statutory notices issued by the AO. Although, the assessee has filed certain documents in shape of additional evidences before the learned CIT(A), however, the arguments made before the Tribunal were not made before the learned CIT(A). The argument of the assessee that the shares were subscribed by the family members of the Directors and their relatives was never argued before the learned CIT(A). Since, the full details were not filed before the AO and the powers of the AO during the remand proceedings are limited and the various arguments and case law decisions cited before us were not cited before the lower authorities, therefore, considering the totality of the facts of the case and in the interest of justice, we deem it proper to restore this issue to the file of the AO with a direction to grant one more opportunity to the assessee to substantiate its case. The assessee is also hereby directed to appear before the AO and produce all the relevant details justifying the issue of shares of face value of ₹ 10/- at a premium of ₹ 110/-.AO shall decide the issue as per fact and law after giving due opportunity of being heard to the assessee. We hold and direct accordingly. The grounds raised by the assessee are accordingly allowed for statistical purpose.

Issues Involved:
1. Non-compliance with statutory notices.
2. Addition under Section 56(2)(viib) of the Income Tax Act, 1961.
3. Rejection of share valuation certificate.
4. Procedural defects in assessment.
5. Applicability of judicial precedents.

Issue-wise Detailed Analysis:

1. Non-compliance with statutory notices:
The assessee company failed to respond to multiple statutory notices issued under Sections 143(2) and 142(1) of the Income Tax Act. The notices were returned undelivered, and subsequent notices served through email and the Director also saw no compliance. The Assessing Officer (AO) concluded that the assessee had nothing to submit and proceeded to complete the assessment under Section 144 of the Act due to persistent non-compliance.

2. Addition under Section 56(2)(viib) of the Income Tax Act, 1961:
The AO observed that the assessee had allotted 254,166 shares at a premium of ?110 per share. The AO, invoking Section 56(2)(viib) and Rule 11UA, made an addition of ?2,79,58,260 to the total income of the assessee, as the company could not justify the high premium. The assessee argued that the premium was based on a valuation report by a Chartered Accountant, but the AO found no supporting documents like a merchant banker or accountant's report.

3. Rejection of share valuation certificate:
The CIT(A) upheld the AO's action, rejecting the share valuation certificate provided by the assessee. The CIT(A) noted that the valuation report was based on projected financials, and the company was not conducting any business, showing losses, and incurring only statutory expenses. The CIT(A) agreed with the AO that the valuation report was an afterthought and not credible.

4. Procedural defects in assessment:
The assessee argued that procedural defects pointed out by the AO, such as the non-filing of returns and unaudited financials, were subsequently rectified and should not have led to the rejection of the share valuation report. However, the CIT(A) found that the valuation report was based on projected financials and not on actual business operations.

5. Applicability of judicial precedents:
The CIT(A) relied on the Kerala High Court decision in the case of Sunrise Academy of Medical Specialities (India) Pvt Ltd vs. ITO, which held that excess share premium could be taxed under Section 56(2)(viib) even if the genuineness of the transaction was proved. The assessee contended that this case was not applicable to their situation and cited other judicial precedents supporting their position. However, the CIT(A) dismissed these arguments, maintaining that the addition under Section 56(2)(viib) was justified.

Conclusion:
The Tribunal noted the persistent non-compliance by the assessee and the lack of detailed arguments before the lower authorities. It found merit in the assessee's argument regarding the valuation of shares based on the market value of land and the subscription by family members. Therefore, the Tribunal restored the issue to the AO for a fresh assessment, granting the assessee another opportunity to substantiate its case. The AO was directed to decide the issue as per facts and law after giving due opportunity of being heard to the assessee. The appeal was allowed for statistical purposes.

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