2022 (1) TMI 1448 - AT - Income Tax

Income from other sources u/s 56(2)(viib) - share premium receipts - since the valuation was not as per the prescribed method and did not have scientific analysis, the justification of claim of share premium received was rejected by the A.O. and assessed by invoking the provisions of section 56(2)(viib) - HELD THAT - Section 56(2)(viib) was introduced in the Finance Act, 2012 which requires a company (issuer), not being a company in which the public are substantially interested, to issue shares at Fair Market Value (FMV). Any consideration received by such issuing company in excess of the FMV, to the extent it exceeds the face value of such shall be liable to tax. In the instant case, neither the A.O. nor the CIT(A) has determined the fair market value of the shares issued by the assessee-company to ACT Digital in accordance with Rule 11UA. A.O. has merely taken face value of the shares as the deemed fair market value and the share premium was assessed as income from other sources u/s 56(2)(viib) of the I.T.Act. The provisions of section 56(2)(viib) to be invoked, necessarily the FMV has to be established as per one of the prescribed methods. Therefore, in order to determine the fair market value of the shares, the matter is referred to the CIT(A). CIT(A) shall call for a remand report from the AO, who shall determine the FMV of shares by following any of the prescribed methods. After confronting the remand report with assessee, the CIT(A) may take appropriate decision as per law. Appeal filed by the assessee is partly allowed.

Summary

Issues Involved:
1. CIT(A) order contrary to law, facts, and circumstances.
2. Jurisdiction of Assessing Officer in confirming addition of share premium as income.
3. Applicability of section 56(2)(viib) of the Income-tax Act, 1961.
4. Requirement of share valuation report.
5. Justification of share premium and valuation method.
6. Levy of interest under section 234B of the Act.

Analysis:

Issue 1: CIT(A) order contrary to law, facts, and circumstances
The appeal raised concerns about the CIT(A) order being contrary to law, facts, and prejudicial to the appellant's interest. The grounds for appeal highlighted the perceived injustice and lack of equity in the decision. The appellant contended that the CIT(A) failed to appreciate the Assessing Officer's jurisdiction and the principles of natural justice and fair play.

Issue 2: Jurisdiction of Assessing Officer in confirming addition of share premium as income
The Assessing Officer's decision to treat the share premium received by the company as income from other sources under section 56(2)(viib) of the Act was challenged. The appellant argued that the AO did not follow the required valuation process and rejected the claim based on insufficient documentary evidence. The AO's approach was criticized for lacking a specific valuation method and scientific analysis, leading to the addition of share premium as income.

Issue 3: Applicability of section 56(2)(viib) of the Income-tax Act, 1961
The core issue revolved around the interpretation and application of section 56(2)(viib) of the Income-tax Act, 1961. The appellant contended that the provisions should not apply to shares issued in the assessment year 2011-2012, as they were introduced in AY 2013-14. However, the authorities upheld that the share premium received during the relevant assessment year is taxable under section 56(2)(viib), irrespective of when the shares were issued.

Issue 4: Requirement of share valuation report
The necessity of a share valuation report under the relevant provisions of the Act was debated. The appellant argued that no such report was required at the time of share allotment. However, the authorities emphasized the importance of proper valuation methods and the lack of scientific basis in the valuation provided by the appellant.

Issue 5: Justification of share premium and valuation method
The appellant's attempts to justify the share premium were scrutinized, with the Assessing Officer and CIT(A) questioning the validity of the valuation method used. The authorities highlighted the need for accurate valuation as per prescribed methods to determine the fair market value of shares, especially in cases involving excess consideration received by the issuing company.

Issue 6: Levy of interest under section 234B of the Act
Lastly, the imposition of interest under section 234B of the Act was contested. The appellant challenged the CIT(A)'s decision to uphold the levy of interest, raising concerns about the correctness of the assessment and the application of relevant provisions.

In conclusion, the Tribunal partially allowed the appeal, emphasizing the importance of establishing the fair market value of shares as per prescribed methods before invoking section 56(2)(viib) of the Income-tax Act. The case underscores the significance of proper valuation practices and adherence to legal provisions in determining the tax implications of share premium transactions.