2021 (12) TMI 706 - AT - Income Tax

Revision u/s 263 by CIT - Addition u/s 56(2) - assessee issued/allotted 560000 Equity shares at premium of ₹ 50/- each and as per CIT value of shares as per NAV method was ₹ 42.60/- as per CIT action of the AO in accepting the method of valuation contrary to Rule 11UA of the Rules was erroneous and prejudicial to the interest of the Revenue and Assessee did not give any valuation report as required under Rule 11UA of the Rule.- Whether AO called upon the assessee to show cause as to why the provisions of Sec.56(2)(viib) of the Act should not be applied? - HELD THAT - It is no doubt true that as per explanation to section 56(2)(viib) of the Act apart from the determination of FMV of shares under Rule 11UA of the Rules, intrinsic value is also one of the methods prescribed method as per Sec.56(2)(viib) (a)(ii) of the Act, but the higher of the valuation as per Sec.56(2)(viib)(a) (i) or (ii) has to be considered by the AO before applying those provisions. The admitted position in the present case is that the assessee did not file any valuation report to substantiate the fair market value of shares issued in terms of Sec.56(2)(viib) (a)(i) of the Act and Rule 11UA of the Rules. In such circumstances, we are of the view that the AO could not have accepted the intrinsic value without calling for a value in terms of Rule 11UA of the Rules to find out whether class (i) or class (ii) of explanation (a) to Sec.56(2)(viib) of the Act would be applicable - Thus the order of the AO was erroneous. With regard to the argument that the money was received in the previous year relevant to Assessment Year 2014-15 and therefore the provisions of section 26(2)(viib) of the Act were not application to Assessment Year 2015-16, the admitted position is that the shares were issued in Assessment Year 2015-16 and this would be the appropriate year in which the applicability of provisions of section 56(2)(vii) of the Act should be considered. In this regard, we place reliance on the decision of M/S. Taaq Music Private Limited 2020 (10) TMI 28 - ITAT BANGALORE in which the view as stated above was laid down by the Tribunal. We, therefore, find no merit in the appeal by the assessee.

Summary

Issues Involved:
1. Application of Section 56(2)(viib) of the Income Tax Act, 1961.
2. Valuation of shares and adherence to Rule 11UA.
3. Adequacy of the Assessing Officer’s (AO) enquiry and application of mind.
4. Timing of receipt of consideration for share issuance.

Issue-wise Detailed Analysis:

1. Application of Section 56(2)(viib) of the Income Tax Act, 1961:
The case revolves around whether the provisions of Section 56(2)(viib) of the Income Tax Act were applicable to the assessee for the assessment year 2015-16. The AO initially questioned the assessee on why the income should not be assessed under this section, which deals with the taxation of share premium received in excess of the fair market value (FMV) of shares. The Principal CIT later found that the AO failed to properly assess this issue and deemed the AO's order as erroneous and prejudicial to the interest of the Revenue.

2. Valuation of Shares and Adherence to Rule 11UA:
The Principal CIT noted that the assessee did not submit a valuation report as required under Rule 11UA, which prescribes the methods for determining the FMV of unquoted shares. The assessee argued that it had followed the intrinsic value method as per IFRS 13 and SEBI guidelines, but the Principal CIT insisted that only the Net Asset Value (NAV) method or the Discounted Cash Flow (DCF) method under Rule 11UA could be used. The Tribunal upheld the CIT's view that the AO should have insisted on a valuation report as per Rule 11UA to determine the correct FMV.

3. Adequacy of the Assessing Officer’s (AO) Enquiry and Application of Mind:
The Principal CIT criticized the AO for not conducting adequate enquiries and for mechanically accepting the assessee's claims without proper verification. The Tribunal agreed, stating that the AO's failure to call for a valuation report under Rule 11UA made the order erroneous. The Tribunal emphasized that the AO must verify the FMV using both the prescribed methods and choose the higher value as per Section 56(2)(viib).

4. Timing of Receipt of Consideration for Share Issuance:
The assessee contended that the consideration for the shares was received in the financial year ending March 31, 2014, relevant to AY 2014-15, and not AY 2015-16. However, the Tribunal noted that the shares were issued in AY 2015-16, making it the appropriate year to apply Section 56(2)(viib). The Tribunal referenced a previous decision (M/S. Taaq Music Private Limited) to support this view, dismissing the assessee's appeal on this ground.

Conclusion:
The Tribunal upheld the Principal CIT's decision to set aside the AO's order, directing the AO to re-examine the issue of share valuation and the applicability of Section 56(2)(viib) afresh, ensuring compliance with Rule 11UA. The appeal by the assessee was dismissed, and the AO was instructed to conduct a thorough enquiry and verification in accordance with the law.