2021 (12) TMI 557 - AT - Income Tax

Additions towards excess share premium u/s.56(2)(viib) - issue of shares over and above fair market value of such shares - share price determined by the assessee by adopting discounted cash flow method - HELD THAT - If at all, the Assessing Officer is not satisfied with price determined by the assessee in any method, then he can verify methodology followed by the assessee for arriving at share price, but he cannot change different method altogether without any valid reasons. In this case, although the assessee has followed discounted free cash flow method, but the AO has changed to net asset method contrary to position of law. At the same time, although, the assessee claims that it has justified issue of shares at ₹ 430/- per equity share, but on perusal of details filed by the assessee before the learned CIT(A), we find that learned CIT(A) has deleted additions made by the Assessing Officer by following his predecessor CIT(A) order for assessment year 2014-15, where the assessee has issued share at premium of ₹ 90/- per equity share.Since there is abnormal increase in premium charged by the assessee when compared to previous assessment year, we are of the considered view that the learned CIT(A) has completely erred by following his predecessor CIT(A) order, without examining share price arrived at by the assessee at ₹ 430/- per equity share. The issue needs to go back to the file of the Assessing Officer to verify share price determined by the assessee by adopting discounted cash flow method. Hence, we set aside the appeal to file of the Assessing Officer and direct him to reconsider the issue de-novo in accordance with law - Appeal filed by the Revenue is treated as allowed for statistical purposes.

Issues:
1. Valuation of shares for assessment year 2015-16.
2. Application of Rule 11UA of the Income Tax Rules, 1962.
3. Interpretation of section 56(2)(viib) of the Income Tax Act, 1961.
4. Assessment of excess premium charged on issue of equity shares.
5. Justification of share price by the assessee.
6. Comparison of actual share price with projected share price.

Issue 1: Valuation of shares for assessment year 2015-16:
The appeal filed by the Revenue challenges the order passed by the Commissioner of Income Tax (Appeals) regarding the valuation of shares by the assessee for assessment year 2015-16. The Assessing Officer questioned the justification of issuing shares at ?430 per share, as the assessee had valued shares at a significantly lower price in the previous financial year. The Assessing Officer rejected the explanation provided by the assessee and adopted the net asset method to determine excess consideration charged for the issue of shares.

Issue 2: Application of Rule 11UA of the Income Tax Rules, 1962:
Rule 11UA of the Income Tax Rules, 1962, provides guidelines for the valuation of equity shares. The rule allows the assessee to choose between the net asset method or the discounted free cash flow method for determining the share price. The Assessing Officer is required to verify the method chosen by the assessee but cannot adopt a different method without valid reasons. In this case, the assessee opted for the discounted free cash flow method, while the Assessing Officer used the net asset method, which was contrary to the law.

Issue 3: Interpretation of section 56(2)(viib) of the Income Tax Act, 1961:
Section 56(2)(viib) of the Income Tax Act, 1961, deals with the consideration received for the issue of shares above the fair market value. If the premium charged by the assessee exceeds the fair market value, the excess premium can be treated as income of the assessee. The section aims to prevent the manipulation of share prices for tax evasion purposes.

Issue 4: Assessment of excess premium charged on issue of equity shares:
The Assessing Officer added back the excess consideration charged for the issue of shares at ?3,36,28,169 under section 56(2)(viib) of the Act. The Commissioner of Income Tax (Appeals) deleted this addition based on the comparison of actual share price with the projected share price, concluding that the Assessing Officer erred in taxing the excess consideration.

Issue 5: Justification of share price by the assessee:
The assessee justified the share price of ?430 per share with a valuation report obtained using the discounted cash flow method, which indicated that the intrinsic value per share was higher than the price charged by the assessee. The assessee argued that the Assessing Officer cannot change the valuation method chosen by the assessee once it is selected.

Issue 6: Comparison of actual share price with projected share price:
The comparison between the actual share price and the projected share price was crucial in determining whether the premium charged by the assessee was justified. The Commissioner of Income Tax (Appeals) relied on the comparison to delete the additions made by the Assessing Officer, emphasizing that the actual share price was higher than the projected price.

In conclusion, the Appellate Tribunal directed the issue to be reconsidered by the Assessing Officer in accordance with law, emphasizing the need to follow the discounted cash flow method chosen by the assessee while examining the projected cash flow method. The appeal filed by the Revenue was treated as allowed for statistical purposes.

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