2022 (12) TMI 180 - AT - Income Tax

Addition u/s. 56(2)(viib) - premium on issue of shares of the company - receiving consideration against share issued in excess of fair market value - As per assessee valuation report has been obtained from registered valuer on 14.03.2018 which justifies the share premium charged by the assessee on the issue of equity share capital and preference share capital - Revenue has pointed out the fact that the assessee company was incorporated on 07.11.2012 and the cut off date for the valuation of share was 16.11.2012 - HELD THAT - Since the input needed for preparing the valuation report dated 14.03.2018 were not supplied correctly to the expert (CA), the results arrived at in the said valuation report dated 14.03.2018 cannot be accepted. Under these given facts and circumstances of the case we are of the considered view that since the company was incorporated on 07.11.2012 and cut off date of valuation of share was 16.11.2012 and the said acquisition of wholly owned subsidiary and step down subsidiary companies was after the cut off date of valuation of share, therefore as on 16.11.2012, the fair market value of the equity share capital remains at Rs. 10/- and that of the preference share capital remains at Rs. 100/-. Therefore, share premium of Rs. 2.50 per share on issue of equity share capital totalling to Rs. 5 lakh and share premium of Rs. 8 Cr received on issue of preference share capital at Rs. 25 per share along with face value of each equity share at Rs. 10/- and each preference share at Rs.100/- is in excess of the fair market value of Rs. 10/- per equity share and Rs. 100/- per preference share for preference and therefore, provisions of Section 56(2)(viib) of the Act have rightly been invoked by ld. AO for making the addition of Rs. 8.05 Cr received towards share premium in the hands of the assessee. Thus, the finding of ld. CIT(A) is reversed, addition at Rs.8.05 Cr. made by ld. AO is confirmed and ground of the Revenue s appeal are allowed.

Issues Involved:
1. Deletion of addition made under Section 56(2)(viib) of the Income Tax Act.
2. Valuation of shares and the inclusion of subsidiary companies' values.
3. Compliance with directions under Section 144A of the Income Tax Act.
4. Acceptance of the valuation report by the Assessing Officer (AO).

Issue-wise Detailed Analysis:

1. Deletion of Addition Made Under Section 56(2)(viib) of the Income Tax Act:
The Revenue challenged the deletion of an addition of Rs. 8.05 Cr made by the AO under Section 56(2)(viib) of the Income Tax Act, alleging that the assessee received consideration for issuing shares in excess of the fair market value. The AO observed that the assessee company, incorporated on 07.11.2012, issued shares at a premium on 16.11.2012, collecting a share premium of Rs. 8 Cr on preference shares and Rs. 5 lakh on equity shares. The AO concluded that the share premium received was in excess of the fair market value of the shares, invoking Section 56(2)(viib) of the Act.

2. Valuation of Shares and Inclusion of Subsidiary Companies' Values:
The valuation report obtained by the assessee from a Chartered Accountant was not accepted by the AO, and the matter was referred to the District Valuation Officer, who declined expertise in share valuation. The assessee later obtained a valuation report from a registered valuer dated 14.03.2018, which was accepted by the CIT(A). This report included the net worth of two step-down subsidiaries acquired after the valuation date, which the Revenue argued was incorrect. The Tribunal noted that the valuation report's basis was flawed as the subsidiaries were acquired after the valuation date, thus invalidating the report's conclusions.

3. Compliance with Directions Under Section 144A of the Income Tax Act:
The assessee argued that the assessment order was void ab initio due to non-compliance with directions under Section 144A of the Act. The Addl. CIT had directed the AO to refer the matter to a valuation officer, which the AO attempted but did not follow through after the District Valuation Officer's refusal. The Tribunal acknowledged this procedural irregularity but focused on the substantive issue of the valuation report's accuracy.

4. Acceptance of the Valuation Report by the Assessing Officer (AO):
The CIT(A) had directed the assessee to obtain a fresh valuation report, which the AO accepted without specific remarks in the remand report. The Tribunal, however, found that the valuation report was based on incorrect information regarding the acquisition dates of the subsidiaries, leading to an erroneous valuation. The Tribunal concluded that the fair market value of the shares as on the valuation date was their face value, and the share premium received was in excess of this value, justifying the addition under Section 56(2)(viib).

Conclusion:
The Tribunal reversed the CIT(A)'s decision, confirming the addition of Rs. 8.05 Cr made by the AO under Section 56(2)(viib) of the Income Tax Act, as the share premium received was in excess of the fair market value of the shares. The cross-objection filed by the assessee was dismissed. The appeal of the Revenue was allowed, and the cross-objection by the assessee was dismissed.

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