2020 (10) TMI 928 - AT - Income Tax

Addition u/s 56(2)(viib) - allegation of Share premium received by assessee was in excess of Fair Market Value of shares - Method of valuation - adopting the prescribed method at the choice of the assessee or revenue - HELD THAT - Once the assessee has produced all the valuation reports based on Discounted Free Cash Flow method as well as the fair market value of the assets as on the date of issue of the shares, then this observation of the ld. CIT (A) that the assessee has failed to exercise an option of adopting the method is contrary to the record. Despite the fact that all the valuations are available on record, the ld. CIT (A) has again failed to give the credit to the extent of the valuation being the fair market value of the shares based on Net Assets Value method at least. Failure on the part of the ld. CIT (A) to allow the credit to the extent of the fair market value even based on the Net Assets Value method, it appears that the ld. CIT (A) was not functioning as an independent appellate authority but reflecting as an authority to collect the maximum revenue. Accordingly, in the facts and circumstances of the case when the assessee has substantiated the value of the shares issued at a price of ₹ 200/- by a fair market value of ₹ 230/- which is more than the issue price, then no addition is called for under section 56(2)(viib) As decided in M/S. RAMESHWARAM STRONG GLASS (P) LTD. VERSUS THE ITO, WARD 2 (1) , AJMER 2018 (9) TMI 403 - ITAT JAIPUR Authorities below wanted to impose upon the method of valuation of their own choice, completely disregarding the legislative intent which has given an option to the assessee to choose any one of the two methods of valuation of his choice. When the law has specifically provided a method of valuation and the assessee exercised an option by choosing a particular method (DCF here), changing the method or adopting a different method would be beyond the powers of the revenue authorities. Permitting the revenue to do so will render the clause (b) of Rule. 11UA(2) as nugatory and purposeless. Thus, to this extent the action of the authorities below is not justified and it is held that the assessee has got all the right to choose a method which, cannot be changed by the AO. AO can scrutinize the valuation report only if some arithmetical mistakes are found, he may make necessary adjustments. It is not open for the AO to challenge or change the method of valuation, once opted by the assessee and to modify the figures as per his own whims and fancies. In any case, the revenue could not ask to prepare the valuation report based on actual which is not contemplated in Rule 11UA(2)(b) - Decided in favour of assessee.

Summary

Issues Involved:
1. Confirmation of addition under section 56(2)(viib) of the Income Tax Act, 1961.
2. Valuation of shares and fair market value determination.
3. Rejection of valuation report and additional evidence by CIT (A).

Issue-wise Detailed Analysis:

1. Confirmation of Addition Under Section 56(2)(viib):
The primary issue revolves around the confirmation of an addition of ?71,25,000/- under section 56(2)(viib) of the Income Tax Act, 1961. The assessee issued 37,500 shares at ?200/- per share, including a premium of ?190/-. The AO added the entire share premium amount, questioning the fair market value of the shares. The CIT (A) concurred with the AO, rejecting the valuation report provided by the assessee.

2. Valuation of Shares and Fair Market Value Determination:
The assessee submitted a valuation report from a Registered Valuer, determining the fair market value of shares at ?230/- per share, based on the market value of assets, particularly land valued at ?2,93,00,000/-. The AO and CIT (A) rejected this valuation, relying on the book value of the land at ?1,30,00,000/-. The assessee argued that the fair market value should be based on the higher of the valuations determined by the methods prescribed under Rule 11UA or substantiated by the company’s assets as on the date of issue of shares. The assessee also provided a valuation based on the Discounted Free Cash Flow (DCF) method, determining the value at ?178/- per share.

3. Rejection of Valuation Report and Additional Evidence by CIT (A):
The CIT (A) rejected the valuation based on the DCF method, stating it was not submitted before the AO and was based on an unaudited balance sheet. The CIT (A) also questioned the correctness of the Registered Valuer's report, which was not substantiated by documentary evidence. The Tribunal noted that the AO did not bring any contrary material or valuation report from the DVO to dispute the Registered Valuer’s assessment. It was emphasized that the AO must consider the highest valuation as per the methods prescribed under Section 56(2)(viib).

Tribunal’s Findings:
The Tribunal observed that the valuation report provided by the assessee was based on the prevailing market rates and was higher than the issue price of shares. The AO and CIT (A) failed to provide any contrary evidence or valuation to reject the assessee’s valuation. The Tribunal highlighted that the fair market value should be determined based on the higher of the valuations as per Rule 11UA or the company’s assets. The Tribunal also criticized the CIT (A) for not functioning as an independent appellate authority and failing to give credit to the fair market value based on the Net Assets Value method.

Conclusion:
The Tribunal set aside the orders of the AO and CIT (A), deleting the addition made under section 56(2)(viib). The assessee’s appeal was allowed, with the Tribunal emphasizing the need to adopt the highest valuation method as per the legislative intent and the assessee’s choice.