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2021 (11) TMI 261 - AT - Income TaxRevision u/s 263 by CIT - Fair market value of the shares and receipts of consideration on issue of shares over and above the fair market value invoking applicability of section 56(2)(viib) - HELD THAT - The assessee obtained and submitted a report from a merchant banker who is equally qualified to issue such valuation report under Rule 11UA(2) and who has determined the fair market value of the shares at ₹ 219.50 per shares which is still higher the value at which the shares were issued by the assessee company. Thus, even where the report of the merchant banker is considered, the provisions of section 56(2)(viib) continues to remain inapplicable There is no adverse finding recorded by the ld PCIT and no dispute which has been raised regarding the discounted cash flow method of valuation and the methodology adopted in both the valuation reports. Though there is a variation in valuation so determined in two reports on account of certain underlying assumption regarding illiquidity ratio, as highlighted by the ld A/R, there can always be a different of opinion among the technical experts, but the necessary corollary thereof doesn t necessarily mean than the valuation so determined doesn t stand on sound foundation in terms of data and methodology and the fair market value and issue of shares is not supported by the valuation report. We agree with the contention advanced by the ld A/R that even where there is a technical breach in terms of obtaining and submitting the valuation report from an associate member of ICAI as against fellow member of ICAI; and even taking into consideration report of the merchant banker, the position will remain the same and the provisions of section 56(2)(viib) continues to remain inapplicable and thus, the order passed by the Assessing officer cannot be held as prejudicial to the interest of Revenue which is an essential condition for invocation of jurisdiction u/s 263 - Decided in favour of assessee.
Issues Involved:
1. Whether the order of the Assessing Officer (AO) was erroneous and prejudicial to the interest of the Revenue. 2. Whether the Principal Commissioner of Income Tax (Pr. CIT) was correct in setting aside/cancelling the original assessment order under section 263 of the Income Tax Act. Issue-Wise Detailed Analysis: 1. Erroneous and Prejudicial to the Interest of the Revenue: - The assessee filed a return of income for the assessment year 2016-17 declaring a total income of ?49.98 Lakhs. During the year, the assessee issued 59,500 equity shares at a premium, with the Fair Market Value (FMV) determined as ?250/- per share using the Discounted Free Cash Flow method as per Rule 11UA(2)(b) of the Income Tax Rules, 1962. The valuation report was obtained from an Associate Member of ICAI instead of a Fellow Member, which was not questioned by the AO during the assessment. - The Pr. CIT issued a notice under section 263, stating that the valuation report should have been from a Fellow Member of ICAI, and proposed to modify/enhance/cancel the assessment. - The assessee subsequently submitted a valuation report from a certified Merchant Banker, showing an FMV of ?215/- per share. Despite this, the Pr. CIT set aside the assessment, directing the AO to pass a fresh order. - The assessee argued that the technical mistake of obtaining the report from an Associate Member did not cause any prejudice to the revenue, as the valuation was not wrong. 2. Setting Aside/Cancelling the Original Assessment Order: - The Pr. CIT noted variations in the value of shares between the Chartered Accountant’s report and the Merchant Banker’s report, attributing the difference to the illiquidity discount rate. The Chartered Accountant applied a 15% discount, while the Merchant Banker applied a 25% discount, leading to different FMVs. - The assessee contended that the AO’s acceptance of the valuation report did not result in any revenue loss, as the shares were issued at a price lower than the FMVs determined by both the Chartered Accountant and the Merchant Banker. - The assessee cited the Supreme Court’s decision in Malabar Industrial Co. Ltd. Vs. Commissioner of Income Tax, which held that for section 263 to apply, the AO’s order must be both erroneous and prejudicial to the revenue. The assessee argued that the AO’s order was not prejudicial to the revenue, as the share premium was properly verified and no excessive premium was charged. Tribunal’s Decision: - The Tribunal noted that during the assessment, the assessee submitted a report from an accountant determining the FMV at ?250.17 per share, while shares were issued at ?200 per share, lower than the FMV. - During the revisionary proceedings, the Pr. CIT pointed out that the valuation report was from an Associate Member of ICAI, not a Fellow Member. The assessee then submitted a Merchant Banker’s report with an FMV of ?219.50 per share, still higher than the issue price. - The Tribunal observed that the variation in valuation was due to different illiquidity discount rates, which are subjective. The Tribunal agreed that the technical breach of obtaining the report from an Associate Member did not affect the applicability of section 56(2)(viib), as the share issue price was lower than the FMV in both reports. - The Tribunal concluded that the AO’s order was not prejudicial to the revenue, as the share premium was properly verified, and the provisions of section 56(2)(viib) were inapplicable. Therefore, the order passed by the AO was not erroneous or prejudicial to the interest of the revenue. Conclusion: - The Tribunal set aside the Pr. CIT’s order under section 263 and sustained the AO’s original order, allowing the assessee’s appeal. The decision emphasized that technical breaches without revenue prejudice do not justify invoking section 263. Order Pronounced: - The appeal of the assessee was allowed, and the order was pronounced in the open court on 01/11/2021.
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