2022 (4) TMI 483 - AT - Income Tax

Addition u/s. 56(2)(viib) - shares issued at premium - Valuation under rule 11UA - AO and the CIT (A) were not satisfied with the valuation figures adopted by assessee - no valuation certificate issued by the Chartered Accountant to substantiate the valuation of shares - HELD THAT - The assessee itself adopted NAV method for valuation of shares issued on premium, this method has been accepted in Toto by the AO and CIT (A). There is no challenge to the method of valuation adopted by assessee, although the ld. CIT (A) corrected the figures of NAV calculation as against adopted by the assessee. Which is permissible by law, although method of valuation chosen by assessee can t be changed. As per rule11UA, the assessee only has 2 options for working out FMV of unquoted shares viz., NAV method or discounted cash flow method. Since the assessee did not furnish any valuation report as per DCF method, it can be reasonably inferred that assessee had adopted NAV method. Valuation under rule 11UA is prescribed to ascertain worth of the share issuing entity and simultaneously to justify share premium charged by it. In this case Assessee Company issued the shares on premium first and then invested the same in the shares of M/s Spotless Laundry Services Ltd. to justify its net worth or in other words NAV. The event which is to take place first, occurred second and vice-versa. In the present appeal AO has not challenged the method of valuation adopted by the assessee. He simply tried to rectify the figures wrongly adopted by the assessee as discussed in detail with the help of tables demonstrating funds movement of the assessee.In our considered opinion looking at the records before us and facts of the case, we find no defect in the order of the authorities below and the order passed by the CIT (A) is confirmed. Application of Valuation of unquoted shares under Rule 11UA of Income Tax Rules, 1962 - The grounds of appeal taken by assessee has been considered and found to be baseless as Rule 11UA of Income Tax Rules, 1962 falls under chapter- H-determination of Fair Market Value of the property other than immovable property. Chapter-H inserted by the I.T. (Second Amdt.) Rules, 2010, w.e.f. 01.10.2009. Rule 11UA (1) was simply renumbered as Sub-Rule-1 by the I.T. (fifteenth Amdt.) Rules, 2012 w.e.f. 29.11.2012. So the argument of the assessee that Rule 11UA of Income Tax Rules, 1962 which determines the valuation of unquoted shares and being a provision which purports to determine the income which is chargeable to tax was introduced by Income Tax (Fifteenth Amdt.) Rules, 2012 came into effect on 29.11.2012 and said valuation rules cannot be applied and addition under section 56 of the Income Tax Act, 1961 ought to be restricted to the amount received by the appellant on or after 29.11.2012 and not for amounts received in earlier years and also for amount received prior to 29.11.2012, is not acceptable because rules are applicable to year under assessment. As the shares were allotted during the year under consideration, i.e. 2013-14 itself, Rule 11UA become applicable from 2013- 14 itself.

Summary

Issues Involved:
1. Addition of share premium under Section 56(2)(viib) of the Income Tax Act, 1961.
2. Valuation method of shares under Rule 11UA of the Income Tax Rules, 1962.
3. Timing and applicability of Rule 11UA for valuation of unquoted shares.
4. Procedural fairness and opportunity of hearing in the CIT(A)'s order.

Detailed Analysis:

1. Addition of Share Premium under Section 56(2)(viib):
The assessee issued 12,600 shares at a premium of ?900 each, totaling ?1,000 per share. The assessee used the Net Asset Valuation (NAV) method, which was claimed to be in line with Rule 11UA. The Assessing Officer (AO) and CIT(A) disagreed with the valuation, arguing that the valuation should be calculated before the issuance of shares to determine if the premium exceeded the fair market value (FMV). The AO recalculated the FMV at ?27.09 per share, significantly lower than the assessee's valuation. The AO and CIT(A) rejected the assessee's valuation due to incorrect figures and lack of a Chartered Accountant's certificate.

2. Valuation Method of Shares under Rule 11UA:
The AO and CIT(A) upheld the NAV method but corrected the figures used by the assessee. The assessee's valuation was based on post-issue figures, which was deemed inappropriate. The CIT(A) recalculated the FMV using pre-issue figures, resulting in a lower valuation. The assessee's reliance on various case laws was found inapplicable as those cases dealt with disputes over the valuation method itself, not the figures used.

3. Timing and Applicability of Rule 11UA:
The assessee argued that Rule 11UA, introduced by the Income Tax (Fifteenth Amendment) Rules, 2012, effective from November 29, 2012, should not apply to amounts received before this date. The Tribunal found this argument baseless, stating that Rule 11UA falls under Chapter H, which was effective from October 1, 2009. The rule's renumbering in 2012 did not affect its applicability for the assessment year 2013-14.

4. Procedural Fairness and Opportunity of Hearing:
The assessee claimed the CIT(A)'s order was void ab initio due to lack of opportunity for hearing. The Tribunal found no merit in this claim, noting that the assessee was given ample opportunity to present evidence and arguments. The CIT(A)'s order was upheld as it was based on correcting the valuation figures and not altering the valuation method.

Conclusion:
The Tribunal dismissed the appeal, confirming the CIT(A)'s order. The valuation method (NAV) was accepted, but the figures were corrected to reflect the pre-issue FMV. The applicability of Rule 11UA was upheld for the assessment year 2013-14, and the procedural fairness claim was rejected. The addition under Section 56(2)(viib) was deemed appropriate based on the corrected valuation.