2021 (11) TMI 357 - AT - Income Tax

Income from other sources - treating the amount of share premium as income under the provisions of section 56(2)(viib) - assessee alternatively also contended that the provision of section 56(2)(viib) was brought in the Act with the specific objective as a measure to prevent generation and circulation of unaccounted money, however in its case all the shares were issued to the family members of group i.e. Parekh family and all of them are regularly assessed under the provision of the Act. Thus the question of generation and circulation of unaccounted money does not arises - whether the AO can disturb the valuation of shares determined by the qualified chartered accountant? - HELD THAT - There are series of judgments which says that the valuation of shares is being a technical subject, the AO cannot reject the same. In holding so we draw support and guidance from the judgment in case of Vodafone M-Pesa Ltd 2018 (3) TMI 530 - BOMBAY HIGH COURT . We find that it was the duty of the assessee to furnish the necessary details based on which the fair market value of the shares was prepared. But in the case before us we find that the assessee has not filed the project report based on which the valuation of shares was determined by the qualified chartered accountant. However, the same has been filed before us with the prayer to restore the issue to the file of the AO for fresh adjudication. To our mind, it is necessary for the authorities below to consider the impugned project report for determining the market value of the shares so that the amount of premium could be justified. We also note that the alternate contention raised by the assessee for determining the fair value of shares on the basis of the method as provided under clause (a)(ii) of explanation (a) to section 56(2)(viib) of the Act subject to the satisfaction of the AO, is a legal contention - we admit the same and restore the issue to the file of the AO for making the denovo assessment - Ground of appeal of the assessee is allowed for the statistical purposes.

Issues Involved:
1. Addition under Section 56(2)(viib) of the Income Tax Act.
2. Interpretation of Section 56(2)(viib) read with Rule 11UA.
3. Legislative intent behind the insertion of Section 56(2)(viib).

Detailed Analysis:

Issue 1: Addition under Section 56(2)(viib) of the Income Tax Act

The assessee, a private limited company, issued 1,56,970 equity shares at a premium of ?118 per share, totaling ?1,85,22,460/-. The valuation was based on a certificate from a Chartered Accountant using the Discounted Cash Flow (DCF) method. The Assessing Officer (AO) questioned the projected figures used in the valuation, particularly the projected change in working capital for March 2017, which was significantly higher than previous years. The AO found the valuation certificate unreliable and added the entire premium amount to the assessee's income under Section 56(2)(viib).

Issue 2: Interpretation of Section 56(2)(viib) read with Rule 11UA

The assessee argued that the valuation was done as per Rule 11UA(2)(b) and that the AO should not reject the method prescribed under the law. The AO, however, contended that the responsibility for the accuracy of the valuation could not be shifted entirely to the professional who issued the certificate. The AO found the projections used in the valuation to be hypothetical and without a factual basis, leading to the rejection of the certificate.

Issue 3: Legislative intent behind the insertion of Section 56(2)(viib)

The assessee contended that the provision was introduced to prevent the generation and circulation of unaccounted money. Since the shares were issued to family members who were regularly assessed under the Act, the assessee argued that the provision should not apply. The AO disagreed, stating that the provision does not distinguish between subscribers who are family members and those who are not.

Judgment Analysis:

The CIT(A) provided partial relief by allowing a share premium of ?89 per share, based on the book value of the shares, and confirmed the addition of ?45,52,130/- under Section 56(2)(viib). The CIT(A) agreed with the AO's rejection of the valuation certificate but found that the AO should not have disallowed the entire share premium.

Upon appeal, the Tribunal noted that the valuation of shares is a technical subject and that the AO should not reject the valuation determined by a qualified Chartered Accountant without proper basis. The Tribunal referred to the judgment of the Bombay High Court in the case of Vodafone M-Pesa Ltd., which held that the AO is entitled to scrutinize the valuation report but must base the valuation on the method chosen by the assessee.

The Tribunal found that the assessee had not furnished the project report used in the valuation to the authorities below. The Tribunal admitted the project report and restored the issue to the AO for fresh adjudication, allowing the assessee to satisfy the AO under clause (a)(ii) of the explanation to Section 56(2)(viib).

Conclusion:

The appeal filed by the assessee was allowed for statistical purposes, with the matter being remanded to the AO for a de novo assessment, considering the project report and allowing the assessee to justify the fair market value of the shares as per the provisions of law.

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