2025 (1) TMI 450 - AT - Income Tax

Addition u/s 56(2)(viib) - issue of share at premium - Addition of share premium and share capital treating the value of share value at Rs. Nil u/s 56 - valuation report submitted by the assessee rejected - AR submitted share valuation report which was not as per rule 11UA but valuation of shares was done as per 'Adjusted Net Asset Method and as per 'future earning analysis - AO noted that future earning analysis method not allowed in rule 11UA but that rule allow two methods discounted free cash flow method and 'Book value of net asset method. HELD THAT - As during Assessment Proceedings Appellant-assessee company filed Valuation Report obtained from an Accountants as per requirement of Rule 11UA of the Income Tax Rule. In the said report valuation of Equity Share is carried out on various methods i.e. Fair Market Value, Net Asset Value, Future Earning Method and Discounted Cash Flow method. CIT(A) did not discuss as to why the report of an accountant placed on record which is based on the relevant rule for valuation of shares is not considered and he has simply confirmed the view of the assessing officer. Before us ld. AR supported that valuation done was as prescribed by the rule and that report of the independent accountant submitted by the assessee was not doubted or challenged on any of the aspect. The assessee has discharged his onus by submitting the relevant report in support of the fair market value adopted by the assessee. Assessee-appellant having placed on record the report of the accountant dated 05.01.2015 that the fair market value of the share shall be determined under various methods of valuation including discounted cash flow method. However as per explanation given under provision of section 56(2)(viib) of the Act, the fair market value of the shares shall be the value as may be determined in accordance with rule 11Uand 11UA of I. T. Rules. Therefore it is mandatory that the fair market value of the shares for the purpose of section 56(2)(viib) of the Act is determined as per the method prescribed under rule 11U and 11UA of the I. T. Act only and thus the fair market value of shares determined by any other method is not to be considered. See Idana Pet Industries P. Ltd 2023 (12) TMI 1393 - ITAT JODHPUR . Thus direct the AO to delete the addition so made in the hands of the assessee. Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issue in this judgment is whether the addition of Rs. 51,00,000/- made by the Assessing Officer (AO) and sustained by the Commissioner of Income Tax (Appeals) [CIT(A)] under Section 56(2)(viib) of the Income Tax Act, 1961, is justified. The specific questions considered include:

• Whether the valuation method used by the assessee for determining the fair market value of shares is acceptable under Rule 11UA of the Income Tax Rules.
• Whether the addition of share premium and share capital as income from other sources is valid under Section 56(2)(viib).
• Whether the valuation report submitted by the assessee can be disregarded by the tax authorities.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Valuation Method for Shares

• Relevant Legal Framework and Precedents: Section 56(2)(viib) of the Income Tax Act and Rule 11UA of the Income Tax Rules govern the valuation of unquoted equity shares. The rule allows valuation based on the Net Asset Value (NAV) method or the Discounted Cash Flow (DCF) method.
• Court's Interpretation and Reasoning: The court noted that the assessee had obtained a valuation report using various methods, including the DCF method, which is permissible under Rule 11UA. The AO had disregarded this report, instead calculating the fair market value as nil based on a different interpretation.
• Key Evidence and Findings: The assessee submitted a valuation report prepared by an accountant, which was not challenged for its correctness or methodology by the AO or CIT(A).
• Application of Law to Facts: The court found that the valuation report was in compliance with Rule 11UA, and the AO's rejection of the report was not justified.
• Treatment of Competing Arguments: The court considered the AO's argument that the fair market value should be nil due to negative net worth but found that the DCF method was a valid approach under the rules.
• Conclusions: The court concluded that the valuation report should be accepted, and the addition based on an incorrect valuation method was not justified.

Issue 2: Addition of Share Premium and Share Capital

• Relevant Legal Framework and Precedents: Section 56(2)(viib) addresses the taxation of consideration received for shares that exceeds their fair market value.
• Court's Interpretation and Reasoning: The court interpreted that the section applies only if the shares are issued at a price exceeding their fair market value as determined by accepted methods under Rule 11UA.
• Key Evidence and Findings: The valuation report indicated that the shares were issued at a fair market value determined by the DCF method, which was not contested by the authorities.
• Application of Law to Facts: The court applied the law by determining that the shares were issued at a fair market value, thus Section 56(2)(viib) was not applicable.
• Treatment of Competing Arguments: The court dismissed the AO's argument that the entire consideration should be taxed, emphasizing the validity of the DCF method used by the assessee.
• Conclusions: The court concluded that the addition of Rs. 51,00,000/- was not warranted under the circumstances.

3. SIGNIFICANT HOLDINGS

• Preserve verbatim quotes of crucial legal reasoning: "The assessee has discharged his onus by submitting the relevant report in support of the fair market value adopted by the assessee."
• Core Principles Established: The valuation of unquoted equity shares can be determined using the DCF method as per Rule 11UA, and tax authorities must accept such valuations unless specific defects are identified.
• Final Determinations on Each Issue: The court directed the AO to delete the addition of Rs. 51,00,000/-, as the valuation report complied with the relevant rules and the addition was not justified.

In summary, the court found that the valuation method used by the assessee was valid and the addition of share premium and capital under Section 56(2)(viib) was not justified. The court directed the deletion of the addition, emphasizing adherence to the prescribed valuation methods under the Income Tax Rules.