2019 (4) TMI 1646 - AT - Income Tax

Valuation of shares - addition u/s 56(2)(viib) - value of the shares based on NAV method - enhancement of income by adopting the fair market value of the shares issued during the year at ₹ 10/- per share and thereby disallowing the premium of ₹ 20 paid on such shares as during the year after invoking the provision of section 56(2)(viib) - Application of book value as per Rule 11UA - substantiation of satisfaction of the AO by the Ld. CIT(A) - enhancement of ₹ 20 per share Equity shares allotted during the year - as per AO % age of shareholding of assessee company in Mail Today was 64% instead of 67% shown by the assessee - HELD THAT - It would be very pertinent to note that shares were allotted on 8th September, 2012, when neither the provision of section 56 (2) (viib) was there in the statute nor the prescribed method of rule 11U and 11UA was notified, as same was brought in the Rules for the purpose of section 56(2)(viib), w.e.f. 29.11.2012, i.e., after more than two months from the date of the allotment of the shares. There was no prescribed method of Rule 11 U UA for determination the market value on the date of allotment of shares. In such a situation, it would implausible to hold that the Valuation report of the independent Valuer is not correct, since method adopted by him is not in accordance with 11UA. Once the computation mechanism as per new prescribed method was not available at the time of issuance of shares, then it is unfathomable to apply such method so as to reject the assessee s valuation and assessee cannot be expected to comply with the method when it was notified subsequent to the date of allotment of the shares. Accordingly, we hold that it would not be fair to make any kind of enhancement or addition simply based on provision of section 11UA. One of the cardinal principles of interpretation of fiscal statute is that they should be strictly construed and so long as the provision is free from any ambiguity, there should be no need to draw any analogy. A deeming provision on the other hand is intended to enlarge the meaning of a particular word which includes matters which otherwise may or may not fall within the normal provision, therefore, it should be extended to the consequences and incidents which has been intended by the Legislature for a definite purpose and should not be extended beyond the mandate of the statute. Thus, deeming provisions require to be construed strictly. Here in this case the assessee has followed one of the options provided under such deeming provision and when such an option has been exercised, then same cannot be discarded to impose other option. DCF method is a recognised method where future projections of various factors by applying hindsight view and it cannot be matched with actual performance, and what Ld. CIT (A) is trying to do is to evaluate from the actual to show that the Company was running into losses, therefore, DCF is not correct. Valuation under DCF is not exact science and can never be done with arithmetic precision, hence the valuation by a Valuer has to be accepted unless, specific discrepancy in the figures and factors taken are found. Then AO or CIT(A) may refer to the a Valuer to examine the same. In so far as rejecting of Valuation report by the Ld. CIT (A) on the ground that the Chartered Accountant who has given the Valuation report in the case of the assessee was not a competent person in terms of 11U, we are of the opinion the same would only be relevant, when the Valuer has done the valuation in the manner prescribed in 11U and 11UA, because it is in Rule 11 such a condition has been prescribed. If assessee has not opted for 11U 11UA, then all those guidelines and formulas given therein would not apply and Ld. CIT(A) cannot thrust upon the assessee the option should be exercised only under 11U and 11UA, which admittedly at the time of issuance of shares such method was not even prescribed in the statute. Accordingly, in view of the reasoning given above, we do not find any justification for reducing the value of shares to ₹ 10 and disallowing premium ₹ 20, as assessee was able to substantiate that the shares issued at ₹ 30 per share was less than the FMV and consequently the enhancement made the Ld. CIT(A) for making the addition of ₹ 48,16,66,660/- u/s 56 (2)(viib) is set aside and the addition by him is deleted. Assessment year 2014-15 - basis of Valuation report prepared by M/s. Joy Financial Consulting Pvt. Ltd. of Mail Today has made the addition on the ground that he has reported that there were huge financial losses in Mail Today and accordingly, he has taken the value of shares of ₹ 10 - HELD THAT - Ld. CIT (A) in this year also has held that value of the shares based on NAV method has not been prescribed method under 11UA. As held above, the said rule will apply only if option is exercised in sub-clause (i), but if the assessee has been able to substantiate the fair market value in terms of sub-clause (ii), then valuation done by the assessee cannot be rejected simply on the ground that it does not stand the test of method provided in 11U and 11UA. Here the assessee has been able to show that the aggregate consideration received and the shares which were issued does not exceed FMV and has demonstrated the value as contemplated in Explanation (a) and therefore, the working of the assessee as per Explanation (a) sub clause (ii) has to be accepted. Section 56(2)(viib) provides for fair market value to be opted whichever is higher either under sub-clause (i) or sub-clause (ii). Since the working of FMV so substantiated by assessee company as per sub-clause (ii) is higher than value prescribed u/s 11UA, then same should be adopted for the purpose of valuation of the shares of the assessee company. - Decided in favour of assessee.

Summary

Issues Involved:
1. Enhancement of income by CIT(A) under Section 56(2)(viib) of the Income Tax Act.
2. Justification of share valuation and premium received by the assessee.
3. Jurisdiction and power of CIT(A) to enhance income.
4. Applicability of valuation methods prescribed under Rule 11U and 11UA.

Detailed Analysis:

1. Enhancement of Income by CIT(A) under Section 56(2)(viib):
The assessee was aggrieved by the enhancement made by the CIT(A) for ?48,16,66,660 on account of the valuation of shares under Section 56(2)(viib). The CIT(A) issued a show cause notice for enhancement, stating that the addition under Section 56(2)(viib) should be made in the year of issue of shares, irrespective of when the share application money was received. The CIT(A) held that the fair market value (FMV) of the shares of the assessee company should be computed based on the book value method prescribed under Rule 11UA, which resulted in a negative value. Consequently, the CIT(A) proposed to take the face value of ?10 per share and disallow the premium of ?20 per share, leading to an enhancement of ?48,16,66,660.

2. Justification of Share Valuation and Premium Received:
The assessee argued that the valuation of shares was substantiated by an independent Chartered Accountant's report and was based on the Net Asset Value (NAV) method and the Discounted Cash Flow (DCF) method. The valuation report showed the FMV of shares at ?77.06 per share. The assessee contended that the valuation was supported by past transactions, including the sale of shares at ?43.29 per share in an earlier year and the valuation accepted by the Assessing Officer (AO) in the case of Mail Today Newspapers Pvt. Ltd. The CIT(A) rejected the valuation report, stating that it was not in accordance with Rule 11UA and that the FMV of Mail Today shares could not exceed the face value due to the company's financial losses.

3. Jurisdiction and Power of CIT(A) to Enhance Income:
The CIT(A) held that the enhancement was linked to the issue under consideration and was not a new source of income. The assessee argued that the enhancement was beyond the CIT(A)'s jurisdiction, as the issue was not examined by the AO and was not part of the assessment order. The CIT(A) relied on the Supreme Court decision in CIT vs. Nirbheram Deluram, which allowed the Appellate Commissioner to make additions regarding new sources of income not considered by the AO.

4. Applicability of Valuation Methods Prescribed under Rule 11U and 11UA:
The CIT(A) applied the book value method under Rule 11UA, resulting in a negative FMV. The assessee argued that the provisions of Rule 11U and 11UA were not applicable at the time of issuance of shares, as they were notified after the shares were issued. The assessee contended that the valuation should be based on the method substantiated to the satisfaction of the AO, as provided under Section 56(2)(viib).

Decision:
The Tribunal held that the valuation method adopted by the assessee was substantiated and accepted by the AO, and the CIT(A) could not impose the method prescribed under Rule 11U and 11UA retroactively. The Tribunal found that the assessee had substantiated the FMV of shares based on the valuation report and past transactions, and the CIT(A) could not reject the valuation solely based on the financial losses of Mail Today. The Tribunal deleted the enhancement made by the CIT(A) and allowed the appeals of the assessee for both assessment years 2013-14 and 2014-15. The issue of enhancement jurisdiction was treated as academic and kept open.