2020 (7) TMI 393 - AT - Income Tax

Addition u/s. 56(2)(viib) - differential value of shares and valuation done as per book value method - calculation of fair market value of shares issued at premium - AO calculated the fair market value of shares under Rule 11UA and as the assessee has received over above the FMV which is treated as income of the assessee u/s.56(2)(viib) - Revenue seek to change method of valuation which has been opted by the assessee - HELD THAT - As relying on M/S. RAMESHWARAM STRONG GLASS (P) LTD. VERSUS THE ITO, WARD 2 (1) , AJMER 2018 (9) TMI 403 - ITAT JAIPUR when the fair market value of the shares issued by the assessee company is more than the consideration received by it from the allotment of the shares particularly when there is no occasion to invoke the provisions of section 56(2)(viib) of the Act for making the addition in the hands of the assessee company. It is the prerogative and privilege of the assessee to adopt one method and once the assessee has chosen discounted cash flow method for valuing its shares then the AO or any other revenue authorities cannot compel the assessee to adopt another method i.e. book value method - exercise of such option cannot be therefore challenged by the revenue authorities with the same has exercised at first place by the assessee but the AO is undisputedly entitled to scrutinise, verify and examine the valuation report and determine the fresh valuation either by himself or from an independent valuation after confronting the assessee. But at the same time, it is ample clear that the basis has to be the DCF method and it is not open to the revenue to change the method of valuation which has been opted by the assessee. In the instant case, the value adopted and computed by the assessee as per Rule 11UA(2)(c)(b) by following DCF method at ₹ 51/85 and the assessee company has received shares and issued/allotted @ ₹ 50 per share including premium and this rate has not been contested or challenged by the AO and during hearing before him by ld D.R. From a careful reading of the assessment order, clearly observe that the AO merely compelled the assessee to change the valuation method from DCF method to another book value method, which is not permissible as per Rule 11UA(2)(c)(b) and other provisions of the Act. As per the Explanation (a) (ii) to Section 56(2)(viib), speaks about the satisfaction of the AO but there is no condition in the explanation (a)(i) that the AO is not permitted to interfere with the valuation once done in accordance with the method prescribed in the Rule 11UA (2)(c)(b) of the Rules. Therefore, the AO as well as ld CIT(A) was not correct in rejecting the adoption of DCFM by the assessee and invoking the provisions of section 56(2)(viib) for making addition on differential value of shares and valuation done as per book value method. Appeal of the assessee is allowed.

Summary

Issues Involved:
1. Justification of the addition of ?14,43,200/- under Section 56(2)(viib) of the Income Tax Act.
2. Validity of the fair market value calculation method used by the assessee.

Issue-wise Detailed Analysis:

1. Justification of the addition of ?14,43,200/- under Section 56(2)(viib) of the Income Tax Act:

The primary issue in this case revolves around whether the addition of ?14,43,200/- made by the Assessing Officer (AO) under Section 56(2)(viib) of the Income Tax Act was justified. The AO observed that the assessee issued 80,000 shares at a face value of ?10/- and a premium of ?40/- per share. The AO calculated the fair market value (FMV) of the shares under Rule 11UA at ?31.96 per share, concluding that the assessee received ?14,43,200/- over and above the FMV, which was treated as income under Section 56(2)(viib).

On appeal, the CIT(A) confirmed the AO's action. However, the assessee argued that the addition was based on conjectures and surmises, emphasizing that the calculation of share value, including the premium, was properly established at more than ?50 per share. The assessee contended that the AO's calculation of ?31.96 per share was incorrect and not justified under Rule 11UA(1)(c)(b).

2. Validity of the fair market value calculation method used by the assessee:

The assessee utilized the discounted cash flow (DCF) method to determine the FMV of the shares, arriving at a value of ?51.85 per share. The assessee argued that under Rule 11UA(1)(c)(b), it had the prerogative to choose between the DCF method and the book value method for valuing its shares. The AO, however, did not accept this calculation and insisted on using the book value method, which resulted in a lower valuation of ?31.96 per share.

The Tribunal emphasized that Rule 11UA(1)(c)(b) grants the assessee the option to choose the valuation method. The revenue authorities cannot compel the assessee to adopt a particular method, especially when the rules provide the assessee with the discretion to choose either the DCF method or the book value method. The Tribunal referred to the ITAT Jaipur Bench's decision in the case of Rameshwaram Strong Glass (P) Ltd., which supported the assessee's position that the chosen method of valuation cannot be challenged without cogent reasons.

The Tribunal concluded that the AO and CIT(A) were incorrect in rejecting the DCF method adopted by the assessee and in making the addition under Section 56(2)(viib). The Tribunal held that the addition was not sustainable because the assessee's valuation method was in accordance with the prescribed rules, and the AO's insistence on using the book value method was not justified.

Conclusion:

In light of the above analysis, the Tribunal allowed the appeal of the assessee, ruling that the addition of ?14,43,200/- under Section 56(2)(viib) was not justified. The Tribunal emphasized that the assessee's choice of the DCF method for valuing shares was valid and could not be arbitrarily overridden by the revenue authorities. The order was pronounced on 16/06/2020.