2024 (12) TMI 115 - AT - Income Tax

Addition u/s 56(2)(viib) - shares allotted by the assessee to promoters/existing share holders at a premium - difference between the value of the shares adopted by the assessee as against the fair market value as determined by the AO by following Rule 11UA of the IT Rules - HELD THAT - As in the present case, AO considered the DCF method as furnished by the assessee and rejected the same as the assessee failed to produce supporting documents and it was prepared based on the discussion with the management of the company. Before us, no material filed supporting the DCF method, except annexure A B annexed to letter dated 18.03.2021. Therefore, we find the AO rightly adopted the method under Rule 11UA(2) of the IT Rules in determining the FMV of the unquoted shares at ₹. 63.47. Further, we note from the impugned order of the ld. CIT(A) observed that the assessee obtained valuation of shares by DCF method only during the course of assessment proceedings in 2021 and there was no basis for claim of premium of ₹. 140/- at the time of issuance of shares to its promoters/existing shareholders. Therefore, admittedly, there was no valuation by DCF method at the time of issuance of shares as rightly held by the ld. CIT(A) and we hold the same. AR placed on record Income Tax (Twenty First Amendment), Rules, 2023 in respect of Rule 11UA regarding option of assessee to adopt the date of valuation - On plain reading of the sub-rule (3) of Rule 11UA clearly explains the date of valuation report by merchant bankers for the purposes of sub-rule (2) is not more than 90 days prior to the date of issue of shares which are subject matter of valuation of such date may at the option of the assessee be deemed to be the valuation date. As discussed above, the ld. CIT(A) held that there was no valuation report by merchant banker at the time of issuance of shares, since we agreed with the findings of the ld. CIT(A), we reject the arguments of the ld. AR that it is option left to the assessee to adopt any date i.e., the date of valuation report by merchant bankers for the purpose of sub-rule (2) be deemed to be the valuation date. Valuation report by merchant banker under DCF method was already on record before the Assessing Officer during the course of assessment proceedings and held not acceptable in terms of the decision of the Hon ble High Court of Delhi 2024 (4) TMI 318 - DELHI HIGH COURT . Therefore, the finding of the Tribunal in the case of Brio Bliss Life Science Pvt. Ltd. ( 2023 (2) TMI 966 - ITAT CHENNAI is not applicable to the facts of the present case Assessing Officer is fully justified in invoking the provisions of section 56(2)(viib) r.w. Rule 11UA - Decided against assessee.

Summary

Issues Involved:

1. Whether the valuation report issued by the Merchant Banker should be considered for determining the fair market value of shares.
2. Whether the addition made under Section 56(2)(viib) of the Income Tax Act, 1961, by the Assessing Officer was justified.
3. Whether the assessee can furnish the valuation report during the assessment proceedings.

Issue-wise Detailed Analysis:

1. Consideration of Valuation Report by Merchant Banker:

The assessee argued that the valuation report by Sundae Capital Advisors Pvt. Ltd. was submitted during the assessment proceedings but was not considered by the Assessing Officer. The report valued the shares using the Discounted Cash Flow (DCF) method. However, the Tribunal found that the report was prepared after the issuance of shares and during the assessment proceedings, which rendered it an afterthought. The report was not considered reliable as it was based on assumptions and projections discussed with the management rather than concrete evidence. The Tribunal upheld the Assessing Officer's decision to reject the DCF method and instead use the Net Asset Value (NAV) method as per Rule 11UA of the Income Tax Rules, 1962, for determining the fair market value of shares.

2. Justification of Addition under Section 56(2)(viib):

The core issue was the addition made by the Assessing Officer under Section 56(2)(viib) of the Income Tax Act, 1961. The Assessing Officer found that the shares were issued at a premium of Rs. 150 per share, which was not substantiated by a reliable valuation method. The Assessing Officer computed the fair market value at Rs. 63.47 per share using Rule 11UA, leading to an addition of Rs. 2,74,30,010/-. The Tribunal agreed with the Assessing Officer's method, noting that the assessee did not provide a credible valuation report before issuing the shares. The CIT(A) confirmed this addition, emphasizing that the DCF method was not applicable as the valuation report was not obtained prior to the issuance of shares, and there was no substantial evidence to support the valuation claimed by the assessee.

3. Timing of Furnishing the Valuation Report:

The assessee contended that there is no statutory period for furnishing the valuation report and that it can be submitted during the assessment proceedings. However, the Tribunal found that the valuation report should have been obtained at the time of issuance of shares, not retrospectively during the assessment. The Tribunal referred to Rule 11UA, which requires the valuation date to be no more than 90 days prior to the issuance of shares. The Tribunal dismissed the argument that the assessee could choose any date for valuation, reinforcing that the valuation report must be contemporaneous with the issuance of shares.

Conclusion:

The Tribunal concluded that the Assessing Officer and CIT(A) correctly applied the provisions of Section 56(2)(viib) and Rule 11UA of the Income Tax Rules. The appeal filed by the assessee was dismissed, affirming the addition made by the Assessing Officer. The Tribunal held that the valuation report submitted during the assessment proceedings was not credible, and the method adopted by the Assessing Officer was justified.