2024 (7) TMI 275 - AT - Income Tax

Determination of fair market value of the shares - networth of the company to be negative because of incurring of continuous loss - taxability of premium receipts - CIT(A) deleting the addition relying on the valuation report in respect of the immovable property held by the assessee company - HELD THAT - It is difficult to comprehend as to how valuation can be done on 01/04/2012, when the date of valuation is on 01/10/2012, by registered valuer. We also deem it expedient to reproduce the report of the Government Registered Valuer which is placed to have a clear understanding of the issue. It appears that the Valuer has adopted a rate of valuation of 2,000 per sq.mtrs. as per the market rate. However, there is not absolutely any piece of evidence to substantiate the adoption of such value. No comparable instance has been brought on record to buttress the rate so adopted. It is surprising to note that during the year under consideration on 25/05/2013 31/03/2014, the appellant company had allotted 3,47,980 shares. Out of these shares, 3,12,980 shares of face value ₹ 100, each were issued at par to the promoters and the remaining 35,000 shares of ₹ 100, each were issued at a premium of ₹ 450, (shares were @ ₹ 550 per share) to three investors in lieu of 10% share in the company. The valuation report was obtained much before the date of allotment. We are unable to reconcile the fact as to why the no premium was taken from the promoters of the company when shares were issued within some financial year. Adoption of the FMV as Determined under Rule 11UA - We have numerous decisions of the Co ordinate Bench of the Tribunal, where the valuation in accordance with rule 11UA, has been remanded back to the Assessing Officer for fresh determination. But since in this case, valuation as per rule 11UA has not been adopted, we do not consider it fit to remand the matter for re determination. The facts clearly highlighted that the Registered Valuer s report was made to suit the interest of company and is not based on any corroborative evidence. Accordingly, we deem it fit and proper to hold that no cognizance shall be taken of the valuation report which is full of infirmities. AO has correctly calculated the networth of the company to be negative because of incurring of continuous loss as per the Balance Sheet. Hence, the entire premium is taxable under the head Income From Other Sources . Accordingly, we set aside the impugned order passed by the learned CIT(A) and uphold the order passed by the Assessing Officer. Thus, the grounds of appeal raised by the Revenue are allowed.

Issues Involved:
1. Deletion of addition of Rs. 1,57,50,000/- based on the valuation report.
2. Validity of the certificate under Rule 11UA issued by the Chartered Accountant.
3. Assessing Officer's authority to adopt the FMV as determined under Rule 11UA.
4. Rejection of the company's FMV by the Assessing Officer due to high difference and consistent losses.
5. Issuance of shares at a premium to private investors while issuing at par to promoters.
6. Engagement of valuer for tax avoidance.
7. Non-restatement of asset value in the balance sheet.

Detailed Analysis:

1. Deletion of Addition of Rs. 1,57,50,000/- Based on the Valuation Report:
The Revenue challenged the deletion of Rs. 1,57,50,000/- by the CIT(A), who relied on the valuation report of the immovable property held by the assessee company. The CIT(A) accepted the valuation of Rs. 5,64,00,000/- against the book value of Rs. 90,80,400/-. The Tribunal noted that the valuation report was based on the market value of the land as of 2012, while the shares were issued in 2013. The Tribunal found the valuation report to be antedated and lacking corroborative evidence, thus rejecting it and upholding the Assessing Officer's addition.

2. Validity of the Certificate under Rule 11UA Issued by the Chartered Accountant:
The Revenue contended that the certificate under Rule 11UA was issued by the Chartered Accountant, who was also the statutory auditor of the assessee company, which is not permissible under Rule 11UA(2). The Tribunal agreed with the Revenue, noting that the valuation should have been done by an independent valuer, not the statutory auditor.

3. Assessing Officer's Authority to Adopt the FMV as Determined under Rule 11UA:
The CIT(A) failed to appreciate that the Assessing Officer has the authority to adopt the FMV as determined under Rule 11UA or as substantiated by the company to the satisfaction of the Assessing Officer. The Tribunal highlighted that the FMV should be as of the date of issue of shares and found that the valuation report did not meet this requirement.

4. Rejection of the Company's FMV by the Assessing Officer Due to High Difference and Consistent Losses:
The Assessing Officer rejected the company's FMV due to a significant difference between the computed FMV and the value as per Rule 11UA, and because the company had been incurring losses. The Tribunal supported the Assessing Officer's rejection, noting that the valuation report was not reliable and the company's financial condition justified the officer's decision.

5. Issuance of Shares at a Premium to Private Investors While Issuing at Par to Promoters:
The Tribunal found it surprising that the company issued shares at a premium to private investors while issuing at par to promoters within the same financial year. This discrepancy raised doubts about the fairness of the valuation and supported the Assessing Officer's stance.

6. Engagement of Valuer for Tax Avoidance:
The Revenue argued that the company engaged a valuer to inflate asset values for tax avoidance purposes. The Tribunal agreed, noting that the valuation report seemed tailored to suit the company's interests without substantive evidence to support the adopted rates.

7. Non-Restatement of Asset Value in the Balance Sheet:
The CIT(A) failed to consider that the company did not restate the value of its assets in the balance sheet, which further questioned the reliability of the valuation report. The Tribunal emphasized that the fair market value should reflect the current asset values as per the balance sheet, which was not done in this case.

Conclusion:
The Tribunal upheld the Assessing Officer's addition of Rs. 1,57,50,000/- and rejected the valuation report provided by the assessee. The Tribunal found that the valuation report was not in accordance with Rule 11UA, was antedated, lacked corroborative evidence, and seemed to be aimed at tax avoidance. The Tribunal restored the Assessing Officer's order, confirming the addition under section 56(2)(viib) of the Income Tax Act. The appeal filed by the Revenue was allowed.

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