2025 (4) TMI 541 - AT - Income Tax

Reopening of assessment u/s 147 - addition on account of excess share premium charged by the assessee u/s. 56(2)(viib) - HELD THAT - We find that since material information was not disclosed properly in the regular scrutiny proceedings as well as in the income-tax return AO was very well within his jurisdiction to issue notice u/s. 148 and carry out the re-assessment proceedings u/s. 147 of the Act. Addition made u/s. 56(2)(viib) for the excess share premium charged by the assessee - assessee adopted DCF method and the Valuation Report was to be procured from the Merchant Banker - We find merit in the contention of assessee that if the AO was not satisfied with the DCF method and the Valuation Report being prepared by the auditor of the assessee company then he ought to have given an opportunity to the assessee to furnish another report under DCF method from Merchant Banker. AO rather concluded the FMV on the basis of NAV method and made the impugned addition. On finding given by the ld.CIT(A) we find that the order is cryptic. Ld.CIT(A) has only harped on the technical aspect of the Valuation Report given by the auditor of the assessee company with regard to issue of Equity Shares and merely confirmed the action of the AO. It is the contention of assessee that the assessee company submitted the Valuation Report before ld.CIT(A) as an additional evidence which was obtained from M/s. Pantomath a Class-I Merchant Banker on 24.04.2019 but ld.CIT(A) has ignored the same. There is no discussion on merits on the issue. We therefore considering the facts and circumstances of the case deem it proper to give one more opportunity to the assessee and direct the assessee company to procure the Valuation Report from the merchant banker as contemplated in Rule 11UA of the Income Tax Rules 1962 and provide such report to ld.CIT(A) before whom the issues raised on merit are being restored for necessary re-adjudication. CIT(A) shall sent a copy of the report under DCF method to the AO to get the remand report and thereafter shall carry out the proceedings as per law after allowing reasonable opportunity of hearing to the assessee. Effective grounds of appeal No. 3 to 13 raised on merits are allowed for statistical purposes.

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment were:

1. The validity of the reassessment proceedings initiated under Section 147 of the Income Tax Act, 1961, for the Assessment Year 2014-15.

2. The correctness of the addition made under Section 56(2)(viib) of the Income Tax Act, 1961, concerning the excess share premium charged by the assessee.

3. The appropriateness of the valuation method used for determining the fair market value (FMV) of the shares, whether the Net Asset Value (NAV) method or the Discounted Cash Flow (DCF) method should be applied.

ISSUE-WISE DETAILED ANALYSIS

1. Validity of Reassessment Proceedings

Relevant Legal Framework and Precedents: The reassessment proceedings were initiated under Section 147 of the Income Tax Act, 1961, which allows reopening of assessment if the Assessing Officer (AO) has reason to believe that income has escaped assessment. The assessee contended that the reassessment was based on a mere change of opinion, which is not permissible.

Court's Interpretation and Reasoning: The Tribunal found that the AO had sufficient reason to reopen the assessment as the assessee failed to disclose material facts during the original assessment proceedings. The AO's suspicion was justified due to the lack of disclosure and the use of an unauthorized valuation report.

Conclusions: The Tribunal upheld the validity of the reassessment proceedings, dismissing the assessee's challenge on this ground.

2. Addition under Section 56(2)(viib)

Relevant Legal Framework and Precedents: Section 56(2)(viib) of the Income Tax Act, 1961, deals with the taxation of share premium received by a company in excess of the fair market value of the shares. The valuation methods prescribed under Rule 11UA of the Income Tax Rules, 1962, include the NAV method and the DCF method.

Court's Interpretation and Reasoning: The Tribunal noted that the assessee had opted for the DCF method but failed to procure a valuation report from a Merchant Banker as required by law. The report was instead prepared by the company's auditor, which was not permissible. The AO rejected the DCF method due to exaggerated projections and used the NAV method to determine FMV.

Key Evidence and Findings: The Tribunal found that the projections used in the DCF method were unrealistic and not achieved. The valuation report lacked credibility as it was not prepared by an authorized person.

Application of Law to Facts: The Tribunal held that the assessee should have been given an opportunity to procure a proper valuation report from a Merchant Banker. The AO's reliance on the NAV method was due to the deficiencies in the DCF method used by the assessee.

Treatment of Competing Arguments: The Tribunal acknowledged the assessee's right to choose a valuation method but emphasized the need for compliance with legal requirements, including obtaining a report from a qualified Merchant Banker.

Conclusions: The Tribunal remitted the issue back to the CIT(A) for fresh adjudication, allowing the assessee to obtain a new valuation report from a Merchant Banker.

SIGNIFICANT HOLDINGS

Core Principles Established: The Tribunal reinforced the principle that while the assessee has the option to choose a valuation method under Rule 11UA, compliance with procedural requirements, such as obtaining a valuation report from a Merchant Banker, is mandatory.

Final Determinations on Each Issue: The reassessment proceedings were upheld as valid. The addition under Section 56(2)(viib) was set aside, and the matter was remanded to the CIT(A) to allow the assessee to submit a proper valuation report.

The Tribunal's decision emphasized the importance of adhering to statutory requirements in valuation processes and provided the assessee with an opportunity to rectify procedural lapses in the valuation of share premiums.

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