2023 (5) TMI 164 - AT - Income Tax

Addition u/s. 56(2)(viib) - method of determination of fair market value of unquoted shares - Premium received in respect of the issue of shares - AO valued the share of the company using Net Asset Value Method both under asset approach as well as under liability approach - AO determined the fair market value of the share of the assessee company @Rs.14 as against the issue price of 17.50 per share, hence the excess portion as added by the ld. AO as income u/s. 56(2)(viib) HELD THAT - Rule 11UA of the Income Tax Rules which prescribes the method of determination of fair market value of unquoted shares does not prohibit inclusion of share premium as part of reserves and surplus. Even if the recipient company does not justify receipt of share premium, still the fact of share premium being reflected in the balance sheet cannot be ignored by the ld. AO as the taxation of the same is only by way of deeming fiction. Share premium would be included in the reserves and surplus even as per Rule 11UA of Income Tax Rules. While this is so, it is completely wrong on the part of the ld. AO to ignore the same while valuing the shares of the assessee company both under liability approach and considering the same as a liability under asset approach . Accordingly, the value determined by the ld. AO is totally flawed and since no mistake is found by us in the valuation adopted by the assessee, we hold that addition made by the ld. AO would have no legs to stand. In any case, NAV method adopted by the assessee is one of the recognized methods provided in rule 11UA of the Rules. Addition made by the ld. AO u/s. 56(2)(viib) of the Act, is hereby directed to be deleted. Ground raised by the assessee are allowed.

Summary

Issues involved:
Challenging jurisdictional ground on the issuance of notice u/s. 143(2) of the Act.
Challenging the addition made u/s. 56(2)(viib) of the Act.

Issue 1: Challenging jurisdictional ground on the issuance of notice u/s. 143(2) of the Act:
The ground was dismissed as not pressed as no arguments were advanced by the ld. AR during the hearing.

Issue 2: Challenging the addition made u/s. 56(2)(viib) of the Act:
The assessee challenged the addition of Rs. 1,75,00,000/- made under section 56(2)(viib) of the Act. The ld. AO valued the shares using Net Asset Value Method and determined the fair market value at Rs. 14 per share, as opposed to the issue price of Rs. 17.50 per share. This resulted in an excess portion of Rs. 3.50 per share, amounting to the total addition of Rs. 1,75,00,000/-. The ld. CIT(A) upheld this action.

The ld. AO's valuation method was found flawed as it ignored the share premium reflected in the balance sheet under 'reserves and surplus'. The ld. AO treated the share premium as a liability, which was not in line with the Companies Act 1956 or Rule 11UA of the Income Tax Rules. Rule 11UA does not prohibit the inclusion of share premium in reserves and surplus for the purpose of determining fair market value. The ld. AO erred in considering the share premium as a liability under both 'asset approach' and 'liability approach'. The valuation adopted by the assessee using the Net Asset Value Method was found to be correct and in accordance with the recognized methods provided in Rule 11UA. Therefore, the addition made by the ld. AO under section 56(2)(viib) was deemed unjustified and directed to be deleted. Consequently, the appeal of the assessee was allowed, and the other grounds raised were left open.

This summary provides a detailed analysis of the issues involved in the legal judgment, highlighting the flawed valuation method used by the ld. AO and the correct application of the Net Asset Value Method by the assessee.