2023 (1) TMI 1123 - AT - Income Tax

Addition u/s 56(2)(viib) - application of Rule 11UA of the Income-tax Rules 1962 to the valuation of FMV of redeemable preference shares - valuation of unquoted shares and securities other than equity shares which is based on a report from the merchant banker or an accountant - HELD THAT - AO had called for a valuation report in the course of assessment proceedings which the assessee could not produce leading to adverse view by the ld. Assessing Officer. However the same was produced before the CIT(A) who took cognizance of the same and called for a remand report from the ld. AO who did not deal with it for expression of his views on the same. Before us assessee referred to the valuation report issued by Pallavi Prasad Associates Chartered Accountants dtd. 04/04/2014 wherein valuation of preference shares has been arrived at a value of Rs.60.21. From the perusal of documents placed on record and the applicable provisions of the Act and the relevant Rules we note that sub-Rule (2) of Rule 11UA deals valuation in respect of unquoted equity shares only and does not refer to valuation of preference shares in any manner whatsoever. The sub- Clause (c) of Rule 11UA(1) deals with the valuation of unquoted shares and securities other than equity shares which is based on a report from a merchant banker or an accountant. In compliance to this sub-clause a valuation report has been furnished by the assesse which justifies the premium charged by the assessee on the issue of cumulative redeemable preference shares and accordingly no addition is called for under Section 56(2)(viib) of the Act by treating it as income from other sources. The valuation arrived at by the ld. Assessing Officer is a negative figure of Rs. (-)5.91/- and thereby considering the FMV is at Nil is not in accordance with the relevant provisions of the Act and the Rules stated above. Accordingly we uphold the findings of the ld. CIT(A) and set aside the addition made by the ld. Assessing Officer. Accordingly grounds taken by the revenue in this respect are dismissed.

Issues Involved:
1. Applicability of Rule 11UA of the Income-tax Rules, 1962, to the valuation of market value of redeemable preference shares.
2. Interpretation of Section 56(2)(viib) of the Income-tax Act, 1961, concerning the valuation of preference shares versus equity shares.
3. Validity of the addition made by the Assessing Officer under Section 56(2)(viib) based on the valuation of redeemable preference shares.

Issue-wise Detailed Analysis:

1. Applicability of Rule 11UA to the Valuation of Redeemable Preference Shares:
The primary issue in the appeal was whether Rule 11UA of the Income-tax Rules, 1962, applies to the valuation of the fair market value (FMV) of redeemable preference shares. The Assessing Officer applied Rule 11UA to determine the FMV of the cumulative redeemable preference shares, arriving at a negative value of (-)5.91/- and considering it as nil. This valuation led to an addition of Rs. 3,29,00,000/- as income from other sources under Section 56(2)(viib) of the Act. However, the Commissioner of Income Tax (Appeals) [CIT(A)] ruled that Rule 11UA applies only to the valuation of unquoted equity shares and not to redeemable preference shares, thereby allowing the assessee's appeal.

2. Interpretation of Section 56(2)(viib) Concerning Preference Shares vs. Equity Shares:
Section 56(2)(viib) of the Income-tax Act, 1961, states that if a company receives consideration for the issue of shares exceeding the face value, the excess amount is chargeable as income from other sources. The Assessing Officer interpreted this section to include preference shares under the term "shares." However, the CIT(A) and subsequently the Tribunal found that Rule 11UA(1)(c)(c) specifically deals with the valuation of unquoted shares and securities other than equity shares, which should be based on a report from a merchant banker or an accountant. The assessee had provided such a valuation report, which the Assessing Officer failed to consider appropriately.

3. Validity of the Addition Made by the Assessing Officer:
The Assessing Officer's addition of Rs. 3,29,00,000/- was based on the valuation of the redeemable preference shares as nil, due to the negative FMV calculated. The CIT(A) and the Tribunal found this approach incorrect. The Tribunal noted that the valuation report provided by the assessee, prepared by Pallavi Prasad & Associates, Chartered Accountants, valued the preference shares at Rs. 60.21, justifying the premium charged. The Tribunal concluded that the addition made by the Assessing Officer was not in accordance with the relevant provisions of the Act and the Rules. Therefore, the Tribunal upheld the CIT(A)'s findings and dismissed the revenue's appeal.

Conclusion:
The Tribunal confirmed that Rule 11UA does not apply to the valuation of redeemable preference shares and that the valuation should be based on a report from a merchant banker or an accountant as per Rule 11UA(1)(c)(c). The addition made by the Assessing Officer under Section 56(2)(viib) was set aside, and the appeal by the revenue was dismissed. The judgment emphasized the distinction between equity shares and preference shares in the context of valuation for tax purposes.

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