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2022 (9) TMI 927 - AT - Income TaxAddition u/s 56(2)(viib) - valuation of preferential shares - Rule 11UA (2) - estoppel against a statute - assessee submitted as had merely issued preferential shares and as for the purpose of Section 56(2)(viib) of the Act, the Rule 11UA (2) is not applicable - HELD THAT - As observed from the assessment order that AO was carried away by the fact that assessee has taken two different pleas with regard to valuation of preferential shares and that the assessee was itself not convinced Rule 11UA should be applicable or not. However, the assessment orders shows that even the Ld. AO was not convinced of applicability of Rule 11UA. As it applies to unquoted equity shares but he applied the valuation method of Rule 11UA upon the preferential shares considering them to be similar. Bench is of firm opinion that AO had fallen in error as it is settled proposition of law that there cannot be any estoppel against a statute. Reliance in this regard can be placed on the judgment of Hon ble Calcutta H.C. in the case of Mayank Poddar (HUF) 2003 (2) TMI 45 - CALCUTTA HIGH COURT as held There cannot be any estoppels against statute. A property which is not otherwise taxable, cannot become taxable because of misunderstanding or wrong understanding of law by the Assessee or because of his admission or on his misapprehension. If in law an item is not taxable, no amount of admission or misapprehension can make it taxable - Department cannot rely upon any such admission or misapprehension if it is not otherwise taxable. Thus, it is jurisdictional error where AO not being convinced himself about applicability of Rule 11UA proceeded to make the valuation according to method of 11UA on the basis that at some stage assessee itself had applied the method. Even if preferential shares and equity shares are considered to be falling within the purview of Section 56(2)(viib) of the Act, they stand on different footing . While the equity shareholders are the real owners of the company, the preference shareholders are not in fact, the owners of the company, they get preference over the equity shareholders on certain aspects. Hence the Net asset value of the company really represents the value of Equity shares and not Preference shares - As held Mumbai Bench in case of ACIT 16(1) Vs. M/s. Golden Line Studio Pvt. Ltd 2018 (10) TMI 1393 - ITAT MUMBAI Now, the Rule 11UA(2), applied by the Ld Tax authority, is specifically applicable for the valuation of shares for the purpose of section 56(2)(viib) but covers only unquoted equity shares within its ambit and there in no reference to the preference shares. Tax authority below had fallen in error in applying method of valuation of unquoted equity on preferential shares and the possible correct method was to apply Rule 11UA(1)(c)(c) only. This bench of the considered opinion that on the counts, AO had fallen in error in making the addition and the Ld. CIT(A) has fallen in further error in confirming the same while observing that the appellant assessee was not able to lead any argument as to why valuation of shares cannot be done in the manner provided in sub-clause A and Rule 11UA. Assessee appeal allowed.
Issues Involved
1. Applicability of Rule 11UA for the valuation of preference shares. 2. Correctness of the addition of Rs. 72,12,432/- under Section 56(2)(viib) of the Income Tax Act. 3. Whether the valuation method adopted by the Assessing Officer (AO) was appropriate. 4. Whether the principles of natural justice were violated due to lack of fair hearing. Issue-wise Detailed Analysis 1. Applicability of Rule 11UA for the Valuation of Preference Shares The primary issue revolved around whether Rule 11UA, which prescribes methods for the valuation of unquoted equity shares, was applicable to preference shares. The AO applied Rule 11UA, treating preference shares similarly to unquoted equity shares, leading to a valuation discrepancy. The Tribunal noted that Rule 11UA specifically applies to unquoted equity shares and not to preference shares. The correct method for valuing preference shares should have been Rule 11UA(1)(c)(c), which deals with unquoted shares and securities other than equity shares. 2. Correctness of the Addition of Rs. 72,12,432/- under Section 56(2)(viib) of the Income Tax Act The AO added Rs. 72,12,432/- to the assessee's income under Section 56(2)(viib) of the Act, based on the valuation discrepancy. The Tribunal found that the AO's valuation method was flawed and that the addition was based on a misapplication of Rule 11UA. The Tribunal held that the addition was unsustainable and set it aside. 3. Whether the Valuation Method Adopted by the Assessing Officer (AO) was Appropriate The AO used the Net Asset Value (NAV) method under Rule 11UA to value the preference shares, arriving at a value of Rs. 213 per share. The Tribunal observed that the AO should not have included preference shares in the NAV calculation, as they represent quasi-debt rather than equity. Excluding preference shares from the NAV calculation would yield a value closer to Rs. 354 per share, as initially claimed by the assessee. The Tribunal concluded that the AO had erred in his valuation approach. 4. Whether the Principles of Natural Justice were Violated Due to Lack of Fair Hearing The assessee argued that the Commissioner of Income Tax (Appeals) [CIT(A)] had made the impugned addition without providing a fair and meaningful opportunity to be heard, thus violating the principles of natural justice. The Tribunal did not find substantial evidence to support this claim but focused on the legal and factual errors in the valuation method and the application of Rule 11UA. Conclusion The Tribunal concluded that the AO had made a jurisdictional error by applying Rule 11UA to preference shares, which should have been valued under Rule 11UA(1)(c)(c). The addition of Rs. 72,12,432/- was based on a flawed valuation method and was set aside. The appeal was allowed, and the impugned addition was reversed. The Tribunal emphasized that there cannot be any estoppel against a statute, reinforcing the principle that taxability must align with the correct legal provisions.
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