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TMI Blog2024 (11) TMI 1063X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced that shares were allotted on 03.11.2012 and on 26.03.2013 to three persons namely, Daxesh Manharlal Soni, Kunal Manharlal Soni Nirav Manharlal Soni. The AO found that on the face value of share of Rs. 10/- allotted on 03.11.2012 premium of Rs. 90 per share was charged, whereas the shares allotted on 26.03.2013 were issued at a premium of Rs. 31.67 per share only. The AO, therefore, required the assessee to justify the consideration for shares issued on 03.11.2012 in accordance with the provisions of Section 56(2)(viib) of the Income Tax Act, 1961 (in short the Act ). It was explained that the shares allotted on 03.11.2012 were on the basis of fair market value (FMV) of the shares as determined under Discounted Cash Flow (DCF) method, in support of which a report of the Accountant was filed. However, the AO was not satisfied with the working of the FMV of the shares. He, therefore, rejected the DCF method of valuation adopted by the assessee and worked out the value of the shares as per Net Asset Value (NAV) method, which worked out to Rs. 34.55 share only. Accordingly, the AO held that the premium charged to the extent of Rs. 55.45 (90-34.55) per share was excessive and accordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 29.11.2012. Thus, there was no prescribed method for determining the FMV of unquoted equity shares for the purpose of Section 56(2)(viib) of the Act for the period from 01.04.2012 to 28.11.2012. Therefore, any allotment of unquoted shares during this period was outside the purview of Rule 11UA(2) as there was no prescribed method subsisting during this period. He, therefore, submitted that during the period from 01.04.2012 to 28.11.2012, the shares could have been allotted without attracting the provision of Section 56(2)(viib) of the Act as the machinery provision to work out the disallowance fails in the absence of any prescribed method of determining FMV under the Rules. In the alternative, the Ld. AR contended that the allotment of shares was done on the basis of DCF method in support of which certificate of the Accountant was filed by the assessee and the AO was not correct in rejecting the DCF method and adopting NAV method for determining the FMV. He submitted that under Rules, an option was given to the assessee to adopt either NAV or DCF method for determining the FMV of the shares. 7. Per contra, Shri Rignesh Das, the Ld. CIT. DR submitted that the provision of Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO has not discussed this fact neither countered this contention of the appellant. It is a clear fact that the erstwhile partners of the erstwhile Firm (converted into appellant company) had given loans to the said firm which was converted into share capital of those partners becoming the shareholders. The AO has mentioned in the assessment order that the loans outstanding as on 01.04.2017 were converted into share capital. The shares were issued at Rs. 10 per share face value and premium of Rs. 90 per share. After plain reading of S.56(2)(viib), there is no doubt that this provisions is applicable to the considerations received in the previous year under consideration for taxing the excess premium charged over and above fair market value of shares determined as per prescribed method under Rule 11UA. In the current facts of the case, the appellant did not receive any consideration in the current assessment year and the outstanding loans of existing partners of erstwhile firm was converted into the shares of the appellant company. Thus, prima facie, there is no justification for the AO to apply Section 56(2)(viib) of the Act in the appellant's case. The said consideration in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at it would have applied only if consideration was received for such a transaction. 19. Also, both the Tribunal and the CIT(Appeals) have held that the Assessing Officer had no jurisdiction to substitute the NAV method of assessing the valuation of shares, once the assessee had exercised option of a DCF valuation method as per Rule 11UA(2) of the Income Tax Rules. 20. We agree with the reasoning adopted by the CIT(Appeals) confirmed by the ITAT on all aspects and find that no substantial questions of law arise in this appeal for consideration by this Court. 21. Accordingly, the appeal fails and is dismissed. 10. The assessee has contended that the decision of Hon ble Himachal Pradesh High Court in the case of I.A. Hydro Energy Pvt. Ltd. (supra) should be followed to maintain the judicial discipline. While the views expressed by even non-jurisdictional High Court does deserve utmost respect and reverence, that position is still a step below the unquestionable binding force of law. A mere declaration that no substantial question of law was involved, on the basis of findings of the lower authorities, can t be considered as a binding precedent. In that case, the Hon ble High Court had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares. In such a case if the consideration received for issue of shares exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be chargeable to income-tax under the head Income from other sources . However, this provision shall not apply where the consideration for issue of shares is received by a venture capital undertaking from a venture capital company or a venture capital fund. Further, it is also proposed to provide the company an opportunity to substantiate its claim regarding the fair market value. Accordingly, it is proposed that the fair market value of the shares shall be the higher of the value (i) as may be determined in accordance with the method as may be prescribed; or (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value of its assets, including intangible assets, being goodwill, know-how, patents, copyrights, trademarks, licences, franchi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eholders of the assessee making it more investor attractive/lucrative. (vi) The risk of getting into the claim of insolvency resolution from the debt creditors in case of default in servicing their debt obligation is mitigated, so on and so forth 12.4 Further, from the extracts reproduced in para 11 above from the Investment Agreement placed on record, the terms and conditions, warranties and other covenants relating to issuance of CCDs and their subsequent conversion into equity shares evidently records and corroborates few of the considerations listed above relating to discharge of obligation, release of encumbrance, interest obligation, pari passu ranking of rights of equity shareholders, etc. Thus, when looked from these aspects, section 56(2)(viib) of the Act envisages a much wider outlook to the receipt of any consideration which cannot be limited to the receipt of money only. 14. The ITAT, Mumbai in the case of Keep Learning Resources Pvt. Ltd. (supra) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he machinery provision for determining the FMV of the shares was not available on the date of issue of shares by the assessee company. As per the second option prescribed under Explanation, the assessee was required to substantiate the value adopted for issue of share on the basis of value of its assets including intangible assets. Therefore, the machinery provision for working out the FMV of the shares was indeed available on the day when the shares were first allotted by the assessee on 03.11.2012. 17. The contention of the assessee is that it had rightly adopted the value as per DCF method as determined by the Accountant. A copy of this valuation report was filed and the Ld. CIT(A) has given the finding that this valuation was done by the Accountant much later on 07.12.2015, whereas the shares were allotted on 03.11.2012. 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 determ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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