2023 (12) TMI 410 - AT - Income Tax

Addition u/s 56(2)(viib) - assessee had issued shares at a value far exceeding its Fair Market Value - difference in the fair market value of the shares, as estimated by the AO and the premium at which the shares were issued to the assessee, was added to the income of the assessee - primary objection to the valuation report submitted by the assessee was the unusually enhanced value given to the asset of the assessee i.e. the land, which was noted to be valued at 10 times more than its purchase price. HELD THAT - The assessee submitted a valuation report of the valuer for the valuation of piece of land at Rs. 87,62,200/- as against its purchase price of Rs. 8,74,460/-, but we have noted that the ld. CIT(A) found that while the asset was purchased in the same year at a fair lesser price and its jantri value was also fair less, the valuer had given no basis at all for valuing it at 10 times its actual cost at which it was acquired. The assessee has not been able to controvert this finding of the ld. CIT(A); therefore, the contention of the assessee that there was no basis given for rejecting the valuation report is found to be incorrect on facts and is accordingly rejected. No other arguments having been made by the assessee opposing or against the invocation of Section 56(2)(viib) of the Act in the present case, Ground raised by the assessee challenging the invocation of Section 56(2)(viib) of the Act in the present case is, therefore, dismissed. Addition enhanced by CIT(A) treating the difference in FMV of shares and their consideration as a whole, including face value of shares and premium , as liable to tax u/s 56(2)(viib) - While the section specifies that it would be invoked only when the consideration received exceeds the face value of shares, i.e. the assessee receives premium on issue of shares, the addition is to be made of the difference between fair market value of shares and the aggregate consideration received. Therefore, a plain reading of the section would reveal that the premium on issue of shares is relevant only for the purpose of invocation of section; while for the purpose of making addition to the income of the assessee, the difference between the consideration and the fair market value is to be taken. We are, therefore, in complete agreement with the ld. CIT(A) that the entire amount of consideration received falls within the scope of consideration of Section 56(2)(viib) of the Act. The contention of the assessee is accordingly rejected. Ground No.4 of the appeal is rejected.

Summary

Issues Involved:
1. Legality of the assessment order under Section 143(3) of the Income-tax Act.
2. Legality of the order passed by the Commissioner of Income Tax (Appeals).
3. Addition of Rs. 1,00,50,000/- under Section 56(2)(viib) of the Income-tax Act.
4. Enhancement of the addition by Rs. 33,50,000/- by the Commissioner of Income Tax (Appeals).
5. Charging of interest under Sections 234A, 234B, and 234C of the Income-tax Act.

Summary:

Issue 1 & 2: Legality of the Assessment Order and CIT(A)'s Order
The assessee challenged the assessment order under Section 143(3) and the order of the Commissioner of Income Tax (Appeals) as being "bad in law as well as facts." However, the Tribunal did not find merit in these contentions, as the primary issue revolved around the addition made under Section 56(2)(viib).

Issue 3: Addition of Rs. 1,00,50,000/- under Section 56(2)(viib)
The assessee issued 3,35,000 shares at a face value of Rs. 10/- each with a premium of Rs. 30/- per share. The Fair Market Value (FMV) per share was calculated by the assessee to be Rs. 782.86, primarily due to the market value of land being considered at Rs. 87,62,000/-. The Assessing Officer (AO) rejected this valuation, noting that the land's purchase value was only Rs. 8,74,460/-. The AO recalculated the FMV to be Rs. (-) 5.89 per share and added Rs. 1,00,50,000/- to the income under Section 56(2)(viib). The Tribunal upheld the AO's rejection of the assessee's valuation, noting the disproportionate increase in land value without a reasonable basis.

Issue 4: Enhancement of Addition by Rs. 33,50,000/-
The Commissioner of Income Tax (Appeals) enhanced the addition to Rs. 1,34,00,000/- by including the face value of the shares, interpreting Section 56(2)(viib) to mean that the entire consideration received, including face value and premium, should be treated as income if it exceeds the FMV. The Tribunal agreed with this interpretation, stating that the section's plain language supports the inclusion of the entire consideration received.

Issue 5: Charging of Interest under Sections 234A, 234B, and 234C
The Tribunal did not specifically address the charging of interest under Sections 234A, 234B, and 234C, as the primary issue of the addition under Section 56(2)(viib) was upheld.

Conclusion:
The appeal of the assessee was dismissed, upholding the addition of Rs. 1,34,00,000/- under Section 56(2)(viib) of the Income-tax Act. The Tribunal agreed with the lower authorities' interpretation and application of the law. The order was pronounced in the open Court on 07/12/2023 at Ahmedabad.