2024 (11) TMI 1063 - AT - Income Tax

Addition u/s 56(2)(viib) - assessee had introduced funds by way of issue of share capital - first contention of the assessee is that that there was no fresh inflow of funds in respect of allotment of shares and that it was only an accounting entry for conversion of loans into share capital and provision to Section 56(2)(viib) of the Act was not at all attracted - HELD THAT - The provision of the Act as well as the Memorandum for introduction of this provision made it explicit that if the consideration was received for issue of shares that exceeded the fair value of such shares, then the consideration received for such shares, as exceeding the fair market value of the shares, shall be chargeable to tax under the head income from other sources. There is no stipulation in the section that it will be applicable only in the case of receipt of any amount or money on account of share application money. Rather the word used in the section is any consideration for issue of shares which has a very wide implication. ITAT, Mumbai in the case of Keep Learning Resources Pvt. Ltd. 2023 (8) TMI 1480 - ITAT MUMBAI had categorically held that the conversion of loan amount into equity shares will not exonerate the assessee from application of provision of section 56(2)(viib) of the Act. Keeping in view, the language of section which uses the term consideration which is of wider import when compared with word amounts , we are inclined to agree with the decision of ITAT, Mumbai and ITAT, Kolkata on the issue. Therefore, the contention of the assessee that provision of section 56(2)(viib) of the Act will not be attracted in the case of conversion of loan amount into share capital is rejected. In our considered opinion the provisions of Section 56(2)(viib) of the Act do apply in the present case of conversion of loan into share capital and the view adopted by the ITAT Chandigarh Bench 2023 (12) TMI 702 - ITAT CHANDIGARH will make the provisions of section 56(2)(viib) otiose for all such transactions of conversion of securities. Second contention of the assessee is that there was no prescribed method of valuation of shares during the year from 01.04.2012 to 28.11.2012 and, therefore, the machinery provision had failed - Since, the assessee had filed the valuation report of a much later date, the Revenue had rightly concluded that this valuation did not reflect the real and correct value but was only an afterthought to justify the valuation as adopted at the time of issue of first tranche of shares. It is true that the assessee has an option to adopt DCF or NAV method to determine the FMV of the shares. Whatever method is chosen by the assessee the same is required to be consistently applied. The basic question raised by the Revenue is that if the valuation of the share was so high to justify premium of Rs. 90/- on 03.11.2012, why premium of Rs. 31.67 per share only was charged in the subsequent allotment of shares on 26.03.2013 and this aspect has not been explained by the assessee. There cannot be such a wide fluctuation in the value of shares within a period of less than 5 months and that too within the same financial year. In the absence of any explanation for charging premium of Rs. 31.67 per share only in the subsequent allotment of shares on 26.03.2013, we are of the considered opinion that the Revenue had rightly made the disallowance u/s. 56(2)(viib) of the Act in respect of excess premium over and above FMV of the shares allotted on 03.11.2012. We are of the view that the Ld. CIT(A) was justified in confirming the addition made u/s. 56(2)(viib) of the Act in respect of excess share premium. We, therefore, uphold the order passed by the Ld. CIT(A). Appeal filed by the assessee is dismissed.

Summary

Issues Involved:

1. Applicability of Section 56(2)(viib) of the Income Tax Act, 1961 on conversion of loans into share capital.
2. Validity of the method used for determining the Fair Market Value (FMV) of shares.
3. Justification for the difference in share premium charged on two different allotments within the same financial year.
4. Levy of interest under Sections 234A, 234B, and 234C of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Applicability of Section 56(2)(viib) on Conversion of Loans into Share Capital:

The assessee contended that the conversion of loans into share capital did not involve any fresh inflow of funds and thus Section 56(2)(viib) was not applicable. The provision applies where a company receives consideration for issuing shares that exceeds the FMV of the shares. The Tribunal examined the decision of the ITAT Chandigarh in the case of I.A. Hydro Energy Pvt. Ltd., which held that no consideration was received in the relevant assessment year, thereby invalidating the applicability of Section 56(2)(viib). However, the Tribunal noted that the Himachal Pradesh High Court did not independently examine the applicability of Section 56(2)(viib) in the case of conversion of loans into share capital. The Tribunal concluded that the term "consideration" in Section 56(2)(viib) has a wide implication, encompassing various forms of consideration beyond mere receipt of money. Thus, the conversion of loans into share capital falls within the ambit of Section 56(2)(viib).

2. Validity of the Method Used for Determining FMV of Shares:

The assessee argued that there was no prescribed method for determining FMV of shares during the period from 01.04.2012 to 28.11.2012, as Rule 11UA was notified only on 29.11.2012. The Tribunal observed that the Explanation to Section 56(2)(viib) provided two alternatives for determining FMV: a prescribed method or a substantiated value based on the company's assets. Therefore, the machinery provision for determining FMV was available, and the assessee could have substantiated the FMV based on its assets. The Tribunal found that the assessee's valuation using the DCF method was prepared much later, on 07.12.2015, and was not contemporaneous with the share allotment on 03.11.2012. The Tribunal upheld the Revenue's rejection of the DCF method in favor of the NAV method.

3. Justification for the Difference in Share Premium Charged:

The Tribunal addressed the issue of differing premiums charged on two share allotments within the same financial year. The first allotment on 03.11.2012 was at a premium of Rs. 90 per share, while the second on 26.03.2013 was at Rs. 31.67 per share. The assessee failed to provide a satisfactory explanation for this discrepancy. The Tribunal concluded that such a wide fluctuation in share value within a short period was unjustified, and the Revenue rightly disallowed Rs. 27,72,500/- under Section 56(2)(viib) for excess premium charged on the first allotment.

4. Levy of Interest under Sections 234A, 234B, and 234C:

The Tribunal did not provide a detailed analysis on the levy of interest under Sections 234A, 234B, and 234C, as the primary focus was on the applicability of Section 56(2)(viib) and the valuation method for shares. However, the Tribunal's dismissal of the appeal implies that the interest levied by the Revenue was upheld.

Conclusion:

The Tribunal dismissed the appeal, upholding the Revenue's application of Section 56(2)(viib) on the conversion of loans into share capital, the use of the NAV method for determining FMV, and the disallowance of excess share premium. The Tribunal found no merit in the assessee's contentions regarding the valuation method and the difference in share premiums.