2023 (5) TMI 1412 - AT - Income Tax

Addition of excessive share premium u/s 56(2)(viib) - CIT(A) deleted addition holding that the assessee company received the consideration for issue of shares in F.Y. 2010-11 and the shares were allotted in F.Y. 2014-15 and hence the provisions of Section 56(2)(viib) which have come into force from 01.04.2013 cannot be applicable - whether provisions of Section 57(2)(viib) are applicable in the year in which are allotted at a premium and not in the year in which the share application money was received? - HELD THAT - In the case of the assessee the share application money was received in A.Y. 2011-12 and allotted in the A.Y. 2015-16. During the intervening period the assessee had every right to get their monies refunded and opt out of the share allotment process. Hence it would be only logical when the share allotment has been finalized the subscriber gets allotted the shares the provisions of Section 56(2)(viib) needs to be invoked. A taxing provision cannot be invoked even before the completion of a transaction fully and finally. We are in agreement with the judgment of ITAT in case of 2019 (2) TMI 1470 - ITAT DELHI had held that share allotment date not share application is relevant date to trigger provisions of Section 56(2)(viib). Whether the AO can change the method of valuation of unquoted shares under Rule 11UA of I.T. Rules 1962? - FMV of the unquoted share be the value as determined by the prescribed method or as substantiated by the assessee whichever is higher. The appellant has chosen to the first option i.e. value as per the prescribed method. The method of determining the FMV is given in Rule 11UA(2) of IT Rules 1962. Rule 11UA(2) prescribes two methods - Book Value method and DCF method. However the said rule also provides that the method to be adopted is left to the choice of the assessee. The AO can refuse the method of valuation after proving that the methodology resorted by the assessee is incorrect or not as per the standards laid down. The courts have held this view as is evident from the following observations in M/s Cinestaan Entertainment Pvt. Ltd. 2021 (3) TMI 239 - DELHI HIGH COURT The option to choose the method to be adopted to determine the FMV of unquoted shares is not with the AO but with the assessee. Decided against revenue.

Summary

Issues:
1. Whether the deletion of addition of excessive share premium by the CIT(A) under section 56(2)(viib) was correct.
2. Whether the AO was justified in rejecting the valuation report filed by the assessee and resorting to his own valuation method.

Analysis:
1. The appeal involved the question of whether the addition of Rs. 1,63,35,000/- made by the AO on account of excessive share premium under section 56(2)(viib) was correctly deleted by the CIT(A). The assessee, a construction company, had received share application money in F.Y. 2010-11 but allotted shares in F.Y. 2014-15. The AO treated the premium amount on allotment of preference shares as income of the company under section 56(2)(viib). However, the CIT(A) held that since the shares were allotted in a different year from when the money was received, the provisions of section 56(2)(viib) were not applicable. The Tribunal agreed, citing that the provisions cannot be invoked before the completion of the transaction, and the share allotment date is crucial for triggering section 56(2)(viib).

2. The second issue revolved around the rejection of the valuation report by the AO. The assessee had submitted a valuation report valuing the shares at Rs. 1000/- per share. The AO rejected this valuation, citing the negative net worth of the company. However, the Tribunal noted that the assessee had followed Rule 11UA for valuation and had the right to choose the method. The Tribunal emphasized that the AO cannot change the valuation method unless it is proven incorrect, as confirmed by previous court judgments. Therefore, in this case, the AO's rejection of the valuation report was unwarranted, and the appeal of the revenue was dismissed.

In conclusion, the Tribunal upheld the CIT(A)'s decision to delete the addition of excessive share premium under section 56(2)(viib) and rejected the AO's rejection of the valuation report. The Tribunal emphasized that the provisions of section 56(2)(viib) should be applied based on the share allotment date and that the assessee had the right to choose the valuation method as per Rule 11UA. The appeal of the Revenue was dismissed, and the order was pronounced in open court on 23/05/2023.