2022 (8) TMI 786 - AT - Income Tax

Addition u/s.56(2)(viib) - Determination of fair market value of shares - addition made to the income of the assessee on account of share premium received on issue of shares which were not justified to be at fair market value as per the provisions of section 56(2)(viib) - assessee contended that the AO calculated fair market value of the shares as prescribed under Rule 11UA and determined allowable share premium at Rs.5/- and Rs.8/- for two blocks of shares allotted by the assessee on 8.9.2014 and 31.3.2015 respectively as against premium of Rs.6/- and Rs.9/- respectively charged by the assessee - HELD THAT - Though the assessee has submitted valuation of fair market value of its shares, the authorities below have dismissed the same simply for the reason that it was not as per the Rule prescribed under 11UA of IT Rules or not as per any certificate furnished by the Chartered Accountant or Merchant Banker as prescribed under Rule 11U of the IT Rules. Admittedly, provision of section 56(2)(viib) of the Act do not prescribe only one method for valuation of fair market value of share which is evident from the perusal of the section itself, as reproduced above. The assessee can also justify the fair market value of the shares based on the valuation of its asset as on the date of issue of shares including both tangible and intangible assets. Therefore the finding of the Revenue authorities in the present case that valuation of FMV as per the Rule 11UA is not justified, we hold is not in accordance with law - valuation report of FMV of the shares cannot be based on one method only. In view of the above, we consider it fit case to restore the issue back to the AO to consider the valuation report submitted by the assessee in the light of and as prescribed under the provision of the law after giving due opportunity of hearing to the assessee, and thereafter decide the issue afresh in accordance with law. Ground No.1 is allowed for statistical purpose. Book profit adjustment u/s 115JB - Adjustment to the book profit of the assessee under section 115JB of the Act being interlinked, the same is also restored to the AO to adjudicate the issue along with issue of addition to be made under section 56(2)(viib) of the Act.

Summary

Issues:
1. Addition of share premium to income under section 56(2)(viib) of the Income Tax Act, 1961.
2. Computation of book profit under section 115JB based on the addition made.

Issue 1: Addition of Share Premium under Section 56(2)(viib):
The appeal was filed against the addition of Rs.45,48,583 to the income of the assessee on account of share premium received on the issue of shares. The contention was that the valuation report submitted by the assessee was rejected by the Revenue authorities as it did not comply with Rule 11U and 11UA of the IT Rules. The authorities determined the fair market value of shares based on these rules, resulting in an addition to the income of the assessee. However, the assessee argued that Section 56(2)(viib) does not restrict the valuation to the methods prescribed under the rules but also allows substantiation based on the value of assets on the date of share issuance. The Tribunal held that the Revenue authorities erred in dismissing the valuation solely based on non-compliance with Rule 11UA, as the Act provides for multiple methods of valuation. The issue was restored to the Assessing Officer for reconsideration in accordance with the law.

Issue 2: Computation of Book Profit under Section 115JB:
As the determination of fair market value of shares was interlinked with the adjustment to book profit under section 115JB, the Tribunal also restored this issue to the Assessing Officer for adjudication along with the issue of addition under section 56(2)(viib). The decision on the computation of book profit was to be made after reconsideration of the fair market value of shares. The appeal of the assessee was allowed for statistical purposes, and the case was remanded back to the AO for fresh consideration in accordance with the law.

In conclusion, the Tribunal found that the Revenue authorities erred in dismissing the valuation report submitted by the assessee solely based on non-compliance with specific rules, as Section 56(2)(viib) allows for alternative methods of valuation. The issues of addition of share premium under section 56(2)(viib) and computation of book profit under section 115JB were remanded back to the Assessing Officer for fresh consideration, providing the assessee with an opportunity to substantiate the fair market value of shares based on the assets' value on the date of issuance.