2025 (1) TMI 1335 - AT - Income Tax

Additions u/s 56(2)(viib) - valuation of shares issued by the assessee company - Onus to prove - CIT(A) directed Ld. AO to obtain FMV of the shares either from IEPL or from IBBI Registered Valuer or from both of them at the option of the assessee - HELD THAT - In terms of the extant provisions of Sec.56(2)(viib) it was the onus of the assessee to justify the valuation of shares. The report furnished by the assessee during regular assessment proceedings has not considered the loan liabilities and therefore the same is clearly flawed. CIT(A) directed Ld. AO to carry out valuation from two valuers at the option of the assessee and restricted the scope of enquiry which cannot be held to be justified. No option was given to Ld. AO to carry out valuation from independent valuers. It is quite clear that the valuation made by two valuers is much higher than the issue price of shares and the impugned addition has practically been deleted giving no option to Ld. AO. As rightly pointed out by Ld. CIT-DR the report of CS Suresh has not considered the outstanding liability and the liabilities have been treated as share capital advance / share application money which is contrary to facts on record. CIT-DR also questioned the valuation of IEPL on the ground that DCF based valuation was erroneous since the assessee had not carried out any business activities in subsequent there years viz. AYs 2017-18 to 2019- 20 whereas this fact was much known to that valuer at the time of valuing the shares. As respectfully following the directions of M/s Vaani Estates Pvt. Ltd. 2019 (5) TMI 952 - MADRAS HIGH COURT we would hold that Ld. AO would be required to undertake the exercise of fact finding by determining the FMV of shares in terms of Explanation to Sec. 56(2)(viib). This exercise not having been done the matter deserves to be remanded back to Ld. AO for undertaking the said fact-finding exercise - Appeal stand allowed for statistical purposes.

Summary

Issues Presented and Considered

The core issue in this appeal was the addition made by the Assessing Officer (AO) under Section 56(2)(viib) of the Income Tax Act, concerning the valuation of shares issued by the assessee company. Specifically, the Tribunal considered whether the valuation of shares, which included a premium, was correctly assessed and whether the AO's addition of the share premium as taxable income was justified. The Tribunal also examined the methodology used in the valuation of shares and whether the liabilities were appropriately considered in the valuation process.

Issue-wise Detailed Analysis

Relevant Legal Framework and Precedents

Section 56(2)(viib) of the Income Tax Act stipulates that if a company receives consideration for the issue of shares that exceeds the face value, the excess amount is deemed to be the income of the company. The fair market value (FMV) of the shares must be determined either by a prescribed method or substantiated to the satisfaction of the AO based on the valuation of the company's assets on the date of issue.

Court's Interpretation and Reasoning

The Tribunal noted that the AO rejected the initial valuation report provided by the assessee because it failed to consider the liabilities, specifically the promoter's loan, when determining the FMV of the shares. The CIT(A) directed the AO to obtain valuations from two independent valuers, which resulted in differing valuations. The Tribunal found that the CIT(A)'s direction limited the AO's ability to independently verify the FMV and did not allow for a comprehensive evaluation of the liabilities involved.

Key Evidence and Findings

The assessee had initially provided a valuation report from M/s Raghu & Gopal, which was based on the asset method but did not account for the promoter's loan as a liability. Subsequent valuations from M/s Integrated Enterprises India Pvt. Ltd. (IEPL) and Mr. CS Suresh also faced scrutiny. IEPL used the discounted cash flow (DCF) method, which was challenged due to the lack of business activities in subsequent years. Mr. Suresh's report was criticized for not considering the promoter's loan as a liability.

Application of Law to Facts

The Tribunal applied the provisions of Section 56(2)(viib) and the related rules to determine that the valuation should consider all liabilities, including the promoter's loan. The Tribunal emphasized the need for a fact-finding exercise to determine the correct FMV of the shares, which was not adequately performed in the initial proceedings.

Treatment of Competing Arguments

The Tribunal acknowledged the CIT-DR's arguments that both valuation reports were flawed due to the exclusion of liabilities and the use of inappropriate valuation methods. The Tribunal also considered the assessee's argument that the conversion of loans to equity should not fall within the scope of Section 56(2)(viib) but found that the valuation process required further scrutiny.

Conclusions

The Tribunal concluded that the AO must undertake a fresh assessment to determine the FMV of the shares, considering all liabilities and using an appropriate valuation method. The case was remanded back to the AO for a de novo assessment, allowing the assessee to substantiate its case fully.

Significant Holdings

The Tribunal held that the valuation process must include all relevant liabilities and be conducted in accordance with the prescribed methods under the Income Tax Act. The Tribunal emphasized the need for a comprehensive fact-finding exercise to ensure the correct application of Section 56(2)(viib).

Core Principles Established

The Tribunal established that the valuation of shares for the purpose of Section 56(2)(viib) must be thorough and consider all financial liabilities. The AO must have the flexibility to conduct an independent valuation to determine the FMV accurately.

Final Determinations on Each Issue

The Tribunal determined that the initial valuation reports were inadequate and directed a remand for a fresh assessment by the AO. The appeal was allowed for statistical purposes, with all issues kept open for further examination.