2023 (7) TMI 728 - AT - Income Tax

Addition u/s 56(2)(viib) - Value of share premium received on allotment of 31248 shares - valuation done by the valuer cannot be accepted both on the reasonable and technical ground - entire value of share premium received on allotment of 31248 shares is considered in excess of fair market value of shares of ₹. 10 per share - HELD THAT - By considering the disclaimer made in the report the AO came to the conclusion that the valuer has merely obtained the values from the assessee and carried out the valuation as per the requirement of the assessee and accordingly he rejected the valuation report with the above observation as well as the valuation report should have been obtained from the merchant banker rather than the Chartered Accountant firm. Even Ld.CIT(A) has sustained the additions as well as findings of the AO. We observe that in the first year of operation assessee has issued 31248 shares with a premium and valued by adopting one of the method approved in the Rule 11UA of the I.T. Rules. As per the facts on record we observe that assessee has selected one of the method approved in the Rule 11UA of I.T. Rules and it is supposed to get report from merchant bankers but assessee has taken the report from Chartered Accountant Firm. Except the report obtained from the Chartered Accountant Firm assessee has followed the due process of law. Since the assessee has submitted report from merchant banker which is more or less similar to the valuation report submitted by the Chartered Accountant Firm and Ld. DR made a submission that it may remit back to the file of the AO so that it can be properly verified. Even valuation report obtained from the merchant bankers even they have issued a limitations and warrantees to the valuation report. Therefore, the disclaimer of a valuer cannot be a basis for disallowing the proper allotment of shares. It is not a bar on the assessee to issue shares with a premium as per companies Act. Thus we are inclined to delete the additions proposed by the Assessing Officer. Decided in favour of assessee.

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Validity of share premium valuation under Section 56(2)(viib) of the Income Tax Act, 1961.
3. Rejection of valuation report by Chartered Accountant.
4. Non-referral of valuation to an independent valuer.

Issue-wise Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:
The appeal was filed with a delay of 730 days due to the lockdown enforced by the Government of India owing to the Covid-19 pandemic. The assessee provided a detailed affidavit explaining the delay. The tribunal considered the submissions and found that the delay was caused due to proper reasoning, thus condoning the delay.

2. Validity of Share Premium Valuation under Section 56(2)(viib) of the Income Tax Act, 1961:
The assessee issued shares at a face value of Rs. 10 with a premium of Rs. 1240 per share, based on a valuation report from a Chartered Accountant using the Discounted Cash Flow (DCF) method. The Assessing Officer (AO) rejected the valuation, questioning the reliability of the projections and the disclaimer in the report. The AO added the entire value of the share premium received as income under Section 56(2)(viib) of the Act, considering it in excess of the fair market value.

3. Rejection of Valuation Report by Chartered Accountant:
The AO rejected the valuation report prepared by the Chartered Accountant, stating that it was tailored to suit the assessee's objectives and included disclaimers that undermined its reliability. The AO noted that the projections were based on the management's estimates and the valuer had not independently verified the information. Additionally, the AO observed that the valuation report should have been obtained from a Merchant Banker as per the rules.

4. Non-referral of Valuation to an Independent Valuer:
The assessee argued that the valuation report provided detailed scientific reasoning for the share premium and was based on a unique business model. The Ld. CIT(A) upheld the AO's decision, stating that the valuation report was doubtful and that the premium charged was excessively high without justification. The tribunal noted that the assessee had subsequently obtained a valuation report from a Merchant Banker, which supported the original valuation by the Chartered Accountant.

Tribunal's Observations and Decision:
The tribunal observed that the assessee had followed the due process of law by adopting one of the approved methods under Rule 11UA of the I.T. Rules, even though the report was obtained from a Chartered Accountant instead of a Merchant Banker. The tribunal noted that disclaimers are standard practice in valuation reports and should not be the sole basis for rejection. The tribunal also considered additional evidence, including a new valuation report from a Merchant Banker, which corroborated the original valuation.

The tribunal cited various judicial precedents supporting the assessee's position, emphasizing that valuation is not an exact science and projections may not always match actual performance. The tribunal concluded that the AO's approach was flawed and that the valuation method adopted by the assessee was appropriate. Consequently, the tribunal allowed the appeal, deleting the additions proposed by the AO under Section 56(2)(viib) of the Act.

Conclusion:
The tribunal condoned the delay in filing the appeal, upheld the validity of the share premium valuation, rejected the AO's dismissal of the Chartered Accountant's valuation report, and found no fault in the non-referral to an independent valuer. The appeal was allowed, and the additions made by the AO were deleted.

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