2023 (10) TMI 1197 - AT - Income Tax

Addition u/s 56 (2)(viib) - difference of issue price and fair market value of shares - rounding off of share prices - HELD THAT - We find that the assessee has not cited any decision of any court where rounding off has been accepted in the matter of section 56(2)(viib). On the other hand, DR from revenue side has relied upon two decisions of ITAT where it is clearly held that rounding off of even one rupee is not allowed. DR is also very justified in pleading that if the rounding off is allowed in present case on seeing the low quantum of addition, one day it may lead to a huge tax loss to department in a big sized issue of shares. We also take note that the assessee has himself filed a valuation certificate before AO and accepted fair market value at Rs. 19.23 per share, hence the assessee does not have any dispute, quarrel or grievance qua the fair market value. Therefore, AO has rightly arrived at the difference by finding difference of issue price and fair market value and thereby made addition. We have no reason to upset the addition made by AO which is in terms of section 56(2)(viib) the same is hereby upheld. The assessee fails in this appeal.

Summary

Issues Involved:
1. Interpretation of provisions of Section 56(2)(viib) of the Income-tax Act, 1961 regarding the issuance of shares and treatment of excess amount received.
2. Consideration of materiality and rounding off in the valuation of shares under Section 56(2)(viib) of the Act.

Summary of Judgment:

Issue 1: The case involved a company that issued equity shares at Rs. 20 per share, while the fair market value was Rs. 19.23 per share. The Assessing Officer (AO) treated the excess amount received as income of the company under Section 56(2)(viib). The company contended that the rounding off of Rs. 0.77 per share was nominal and immaterial, citing practicality and accounting practices. However, the Commissioner of Income-Tax (Appeals) upheld the AO's addition, stating that Section 56(2)(viib) does not allow for rounding off. The company appealed to the Appellate Tribunal, arguing for the acceptance of rounding off based on materiality and previous court decisions.

Issue 2: The company's argument before the Tribunal emphasized that the nominal difference in valuation should not lead to adverse tax implications, especially when other sections of the Act recognize materiality and rounding off. The company referred to a Supreme Court decision regarding significant undervaluation in tax matters and urged for a similar approach in their case. The Revenue, however, supported the lower authorities' decisions, emphasizing the clear and unambiguous nature of Section 56(2)(viib) without provisions for rounding off. The Revenue cited ITAT decisions rejecting rounding off claims under similar circumstances.

The Tribunal analyzed the arguments and precedents presented by both sides. It noted that the company failed to provide any court decision supporting rounding off in Section 56(2)(viib) matters. The Tribunal agreed with the Revenue that allowing rounding off could set a precedent leading to potential tax losses in larger share issuances. Since the company had accepted the fair market value in its valuation certificate, the Tribunal upheld the AO's addition as per Section 56(2)(viib). Consequently, the company's appeal was dismissed, and the addition made by the AO was upheld.