2022 (8) TMI 25 - AT - Income Tax

Revision u/s 263 - issue of shares at a premium - valuation report placed on record by the assessee has not been examined and consequently whether valuation of share is in accordance with provisions of Section 56 (2)(viib) - HELD THAT - There is no communication between 28/11/2016 to 19/12/2016 made by the AO or by the assessee with respect to the above issue. Further, the valuation of the share was not at all discussed. It is also important to note that all the proceedings noted by the AO are mentioned in paragraph number 2 and 3 of the assessment order the AO mentioned that the details were furnished by the authorised representative per order sheet noting dated 20/10/2016. The cumulative reading of the above two paragraphs of the assessment order clearly shows that the learned assessing officer has not at all applied his mind that there is an issue of shares during the year at a premium. It is a complete lack of enquiry. Therefore, we do not find any infirmity in the order of the learned PCIT in assuming the jurisdiction u/s 263 of the act when they learned assessing officer has not looked into a critical aspect of the assessment that assessee has issued shares at a premium and whether such premium is in accordance with the law or not. Share application money is also required to be considered in the net worth of the assessee - Valuation of shares would not be Rs 402.86 as at 31/12/2013. Thus, there is basic fallacy in the argument of the assessee as well as valuation report prepared by M/s A K Anand co CAs the ld valuer . Even in the valuation working also LD Valuer has put a footnote that the net book value included share application money. Thus valuation made by the CA by Net assets method is flawed. As in present case, the valuation made by the assessee is not in accordance with Rule 11UA , as assessee tried to increase the valuation by inclusion of share application money in net worth or consequently not increasing the total issued capital. Thus, it did not satisfy Clause (i) of above explanation. Further clause (ii) was not at all looked by AO with respect to other valuation, so there is no question of reaching at any satisfaction by LD AO. Nothing was shown to us that on the issue of inclusion of share application money in net worth of the assessee and not increasing the number of shares or equity share capital by that amount while preparing valuation of shares can have two opinions. Therefore, even on that count argument of Assessee fails. The argument of the assessee that in subsequent years assessment proceedings , the ld AO has accepted the valuation of Rs 400/- per share, cannot hold water as , assessment order of this year is required to be tested on the parameters of ingredients of section 263 of the Act i.e. Whether order is erroneous so far as prejudicial to the interest of revenue or not. The ld PCIT has merely set aside the issue to the file of ld AO to verify determination of FMV of shares. It may possibly happen that LD AO may accept the valuation by the assessee in fresh assessment proceedings, but this does not mean that the impugned assessment order, which is passed without inquiry, is not erroneous and prejudicial to the interest of revenue. Therefore, we find the ld PCIT has correctly held that order passed u/s 143 (3) of The Act by the ld AO is erroneous so far as prejudicial to the interest of revenue in 1 not at all examining the issue of share premium , 2 even otherwise, accepting share valuation report as it is without examining it 3 even otherwise, accepting flawed valuation of share by net asset method by allowing inclusion of share application money pending allotment in net worth . Thus, we up hold the order of LD PCIT passed u/s 263 of the Act dismissing all grounds of appeal of assessee.

Issues Involved:
1. Whether the order passed by the Assessing Officer (AO) was erroneous and prejudicial to the interest of the Revenue.
2. Whether the share application money should be included in the net worth calculation for share valuation.
3. Whether the AO adequately examined the share valuation report in accordance with Section 56(2)(viib) of the Income Tax Act, 1961.
4. Whether the valuation method employed by the Chartered Accountant was correct and in compliance with Rule 11UA.

Issue-wise Detailed Analysis:

1. Erroneous and Prejudicial Order:
The Principal Commissioner of Income Tax (PCIT) found the assessment order dated 19th December 2016, which determined the total loss of ?30,25,58,061/-, to be erroneous and prejudicial to the interest of the Revenue. This was because the AO failed to determine the correct fair market value of shares issued and did not assess any sum under Section 56(2)(viib) of the Act. The PCIT held that the AO did not apply his mind to the fair market value of the shares issued, making the order erroneous and prejudicial to the Revenue.

2. Inclusion of Share Application Money in Net Worth:
The assessee argued that the share application money should be included in the net worth calculation. The valuation report considered the share application money as part of the net worth, which increased the value per share from ?288.70 to ?402.86. The PCIT disagreed, stating that share application money is neither covered in paid-up share capital nor as a reserve, and thus should not be included in the net worth calculation. The correct valuation, excluding share application money, should have been ?312.88 per share.

3. Examination of Share Valuation Report:
The AO did not adequately examine the share valuation report. The report was submitted by the assessee, but there was no further examination or discussion by the AO. The PCIT noted that merely furnishing documents without any discussion or verification does not indicate that the AO was satisfied with the share valuation report. The AO's lack of inquiry into the fair market value of the shares issued was a significant oversight.

4. Valuation Method Compliance:
The valuation report employed three methods: discounted free cash flow method, relative approach, and net asset value method, averaging the value to ?400.11 per share. The PCIT found the valuation flawed as it included share application money in the net worth without increasing the number of shares. This inflated the valuation of existing shares. The correct method, as per Rule 11UA, should exclude share application money from net worth unless the number of shares is adjusted accordingly. The flawed valuation did not satisfy Clause (i) of the explanation to Section 56(2)(viib).

Conclusion:
The Tribunal upheld the PCIT's order under Section 263, agreeing that the AO's order was erroneous and prejudicial to the interest of the Revenue. The AO failed to examine the share valuation report properly and accepted a flawed valuation method. The inclusion of share application money in the net worth without adjusting the number of shares was incorrect. The Tribunal dismissed the appeal, affirming the need for a fresh assessment to verify the fair market value of the shares.

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