2024 (9) TMI 362 - AT - Income Tax

Additions made u/s 56(2)(viib) - consideration received by way of allegedly excess share premium on issue of equity shares by the assessee-company - HELD THAT - The modification in the value of shares in subsidiary company appears rational in the context of the case. The law provides for an alternative option to the assessee to substantiate the FMV in the manner as may be considered expedient. Both AO and the CIT(A) thus have proceeded on misconception that while determining the FMV as per NAV, the book value cannot at all be substituted even on some rational basis. As noted, in view of Explanation to Section 56(2)(viib), the assessee is entitled to suitably modify the NAV as long as the NAV is capable of being substituted by some proof or competent evidence. Assessee has produced the valuation report as well as the market valuation of Hotel Residence AG Switzerland in German currency. The valuation of shares of subsidiary company to determine the FMV of the holding company, i.e., the assessee company for the purposes of issuance of shares at premium thus is in accord with the deeming provision. CIT(A), as noted earlier, has proceeded on misconception of law and facts and erroneously proceeded on the assumption that while determining the FMV as per NAV method, the component of different assets held by the assessee company cannot be modified. This approach is contrary to the Explanation (a)(ii) of Section 56(2)(viib) of the Act. The method adopted for reworking of the subsidiary company by applying the DCF method or any known method is permissible as long as the assessee is able to establish the correctness of the valuation in the light of the valuation report furnished. Assessee, is free to adopt the FMV of the asset held by the subsidiary company and rework the value of investments held in the subsidiary company. Such approach do not run contrary to the object and purpose of Section 56(2)(viib). Appeal of the assessee is allowed.

Summary

Issues:
Valuation of shares under Section 56(2)(viib) of the Income Tax Act, 1961 concerning A.Y. 2016-17.

Detailed Analysis:

Issue 1: Valuation of Shares
The assessee issued equity shares based on valuation rules, which the Assessing Officer (AO) disputed, leading to the addition of Rs. 6,10,00,000 to the income under Section 56(2)(viib). The AO rejected the valuation based on the property in the subsidiary valued by a foreign valuer. The assessee argued that the valuation method adopted was appropriate under Rule 11UA(1)(c)(b) and Section 56(2)(viib). The AO recalculated the Fair Market Value (FMV) resulting in excess premium charged. The CIT(A) upheld the AO's decision, stating that the valuation method was not supported by prescribed rules.

Issue 2: Application of Section 56(2)(viib)
The AO treated the excess premium as deemed income under Section 56(2)(viib) due to the discrepancy in the FMV of the shares issued by the assessee. The CIT(A) supported the AO's decision, emphasizing that the valuation method used was not in line with Rule 11UA. The Tribunal, however, found that the assessee had the right to modify the Net Asset Value (NAV) based on competent evidence, contrary to the AO and CIT(A)'s understanding. The Tribunal held that the assessee's approach to reworking the subsidiary company's value was permissible under Section 56(2)(viib).

Conclusion:
The Tribunal overturned the decisions of the AO and CIT(A), allowing the assessee's appeal. The Tribunal ruled that the assessee could adopt the FMV of the asset held by the subsidiary company to rework the value of investments, which was not contrary to the purpose of Section 56(2)(viib). The Tribunal emphasized the importance of substantiating the FMV to the satisfaction of the AO and held that the assessee's valuation approach was valid.