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TMI Blog2025 (1) TMI 450X X X X Extracts X X X X X X X X Extracts X X X X ..... ch 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 con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as no active business was carried out. Thus, the claim of expenses of Rs 7,58,076/- was without any income / receipt it should have been capitalized. Assessee was asked to furnish explanation in this regard. AR of the assessee submitted that the same explanation that company was actively looking for various business opportunity and incurred routing expenditure i.e. day to day expenses and same was treated the as revenue expenditure. 3.3 Ld. AO did not find reply of the assessee as satisfactory. Thus, again a final show cause was issued on 05.12.2017 to assessee. In compliance AR of the assessee attended on 07.12.17 and vide order sheet entry dated 07.12.17 stated that he has nothing further to say and case may be decided based on reply already submitted. Ld. AO noted that when business was not even started, then all the expenses should have been capitalized. Therefore, expenses claimed for Rs 7,58,076/- claimed during the year was disallowed and added back to the income of assessee. 3.4 Further ld. AO noted that assessee (a company, not being a company in which public are substantially interested) had issued share on premium during the year. Total 1,70,000/- shares were issued at f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,000/- was received as share premium. During the course of assessment proceedings, the A.O. noted that as per the valuation report for valuation of shares submitted by the appellant, the same is as per 'adjusted net asset method' and as per 'future earning analysis' which methods of valuation of shares is not as per rule 11UA of I. T. Rules. The A.O. therefore computed the fair market value of shares at nil and accordingly made addition of Rs. 51,00,000/- by invoking provision u/s. 56(2)(viib) of the I. T. Act. 5.4.2 During the course of appellate proceedings, the appellant made written submission reproduced above and also filed copy of share valuation report. It is seen from the share valuation report dated 05.01.2015 that the fair market value of the shares has been 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 I. T. Act, the fair market value of the shares shall be the value as may be determined in accordance with rule 11U and 11UA of I. T. Rules. Therefore it is mandatory that the fair market value of the shares for the purpose of section 56(2)( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant i.e. Rs. 51 lakhs (Rs. 17 lakhs plus Rs. 34 lakhs) for share issued since exceeds the fair market value of such shares, is required to be brought to tax as income from other source u/s. 56(2)(viib) of the I. T. Act. I am therefore of the considered view that the addition of Rs. 51,00,000/- made by the A.O. in the assessment order is justified. The same is therefore confirmed. This ground of appeal raised by the appellant is thus dismissed. 6.1 The third ground of appeal raised by the appellant read as under: That learned AO has wrongly levied interest of Rs 5,20,047/- u/s 234B of the Income Tax Act, without following provisions of law, hence interest levied be deleted. 6.2 Decision 6.2.1 This ground of appeal raised by the appellant is consequential in nature, hence need no adjudication. 7. In the result, the appeal filed by the appellant is partly allowed. 5. Feeling dissatisfied from the above order of the ld. CIT(A), the assessee preferred the present appeal on the ground as stated hereinabove. Apropos to the grounds so raised the ld. AR of the assessee relied on the written submission and submitting that the matter may be decided based on the written submission so file ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aised its Equity share capital from Rs 1,00,000/- to Rs 18,00,000/- by issuing 1,70,000 Equity Shares of Rs 10/- each at a premium of Rs 20/-. 4. During Assessment Proceedings Appellant 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. ( The aforesaid fact has been accepted even by Ld CIT Appeal Para 5.4.2 Page No 15 of CIT A Order) . 5. Ld AO has made addition on the basis that Fair Market Value Method and Future Earning Method is not prescribed method under Rule 11UA and in view of negative net worth, entire consideration received by the company i.e. Rs 51,00,000/- including face value and share premium is liable to be addition u/s 56(2)(viib) of the Income Tax Act 1961. 6. Ld CIT A confirmed addition with following observation (Page 15 to 17 of CIT A Order) : 5.4.1 It is seen from the assessment order that the A.O. has made addition by invoking provision u/s. 56(2)(viib) of the I.T. Act r.w.r.11UA of the I.T. Rules. The facts of the case in b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... negative figure/not worth a penny. However the appellant had issued shares with face value of Rs. 10 each with [email protected] per share aggregating the value of per share @ Rs. 30. Therefore the provisions of section 56(2)(viib) of the I.T. Act is clearly applicable to the appellant s case. In the written submission, it is submitted by the appellant that the consideration received of Rs. 17,00,000/- being the face value of equity shares cannot be added u/s. 56(2)(viib) of the I. T. Act. This contention raised by the appellant is not found acceptable. It is clear from provision u/s. 56(2)(viib) of the I.T. Act that where a company receives any consideration for issue of shares that exceeds the face value of the shares, the aggregate consideration received for such shares as exceeds the fair market value of shares is taxable. Thus in view of provision u/s. 56(2)(viib) of the I.T. Act the aggregate consideration received (face value plus premium received) is to be considered. In the instant case, the face value of shares is at Rs. 10 per share and premium charged is @Rs. 20 per share. However as per the method prescribed in rule 11UA for determination of fair market value of the shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Jd held as under : Brief fact of the case is that the assessee-company incorporated under the Companies Act, 1956. In impugned assessment year, the assessee allotted share@ 100 per share (Rs. 10/- + Rs. 90/-) to the director and the son of director. The assessee was assessed u/s 143(3) and addition was confirmed for contravening section 56(2)(viib) r.w. Rule 11 UA of Income Tax Rule 1962 (here in after Rule). The difference of amount of share premium with the NAV, calculated by the ld. AO was added back with the total income of the assessee. During hearing, the assessee submitted the valuation of shares under Discounted Free Cash FlowMethod (DCF Method), and the valuation of equity share was amount to Rs. 158.93 per share which is far above the NAV of the allotted share. For Assessment Year 2015-16, the addition was confirmed for 15 lacs for undisclosed sundry creditors and Rs. 4,72,088/- for payment of expenses made to relative u/s 40A(2)(b) of the Act. Aggrieved assessee filed an appeal before the ld. CIT(A). We heard the rival submission and considered the documents available in the record. The assessee has taken the DCF method for valuation of share which is followed by the Rul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed valuation report and relevant documents alongwith detailed submission regarding selection of option of Discounted Free Cash Flow method for valuation of shares at the time of scrutiny assessment which is available on the record of the A.O. After detailed verification, returned income of the assessee was accepted without making any addition / disallowances. Thereafter, a notice u/s 263 notice was received by the assessee from the ld PCIT, Udaipur stating that the report required for this purpose should be from the FCA i.e. the fellow member of the ICAI whereas the report in question was obtained from an associate member of the ICAI. As this point was ignored by the A.O. at the time of assessment, it was proposed to modify / enhance / cancel the assessment. 4. In response, the assessee submitted another report obtained from a certified Merchant Banker as prescribed in Rule 11UA(2)(b) of the Income Tax Rules, 1962 to the Ld. PCIT during the course of revisionary proceedings and as per the valuation report, fair market value of shares of the company as at 31.03.2016 was Rs. 215/- The ld PCIT however set- aside/ cancelled the assessment and restored the matter back to the file of AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 56(2)(viib) continues to remain inapplicable 12. It is respectfully submitted that Honourable ITAT Jaipur Bench also dealt with similar issue in following cases and held that Ld AO is bound to accept the fair market valuation done by accountant or merchant banker by and large : a) ANNU AGROTECH PRIVATE LIMITED vs. PRINCIPAL COMMISSIONER OF INCOME TAX reported at (2021) 63 CCH 0387 JaipurTrib b) NABH MULTITRADE PVT. LTD. vs. INCOME TAX OFFCIER reported at (2020) 60 CCH 0191 Jaipur Trib c) RAMESHWARAM STRONG GLASS (P) LTD. vs. INCOME TAX OFFICER Reported at (2018) 53 CCH 0407 Jaipur Trib 13. It is respectfully submitted that besides these decision of this Bench we are also relying on following decisions of various judicial authorities : a) PRINCIPAL COMMISSIONER OF INCOME TAX vs. SURANA METACAST (INDIA) (P) LTD. Reported at (2023) 7 NYPCTR 869 (Guj) b) BALGOPAL COLD STORAGES (P) LTD. vs. INCOME TAX OFFICER reported at 2023) 37 NYPTTJ 1395 (Del) c) DEEP JYOTI WAX TRADERS (P) LTD. vs. INCOME TAX OFFICER reported at (2023) 37 NYPTTJ 1462 (Kol) d) PRL DEVELOPERS (P) LTD. vs. ASSISTANT COMMISSIONER OF INCOME TAX reported at (2024) 38 NYPTTJ 932 (Mumbai) e) PRINCIPAL COMMISSIONER ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opted present market value of asset. Ld. AO also noted that no evidence was submitted by assessee to justify PMV(present market value) taken. Therefore, the same was re-calculated as per book value of asset according to rule 11UA, and was considered as Nil. Vide order sheet entry dated 22.11.17 and notice u/s 142(1) dated 05.12.17 assessee was asked to show cause why the a sum of Rs. 51,00,000/- should not be added back to the total income of the assessee as per sec 56(2)(viib) rw rule 11UA. AR replied vide order sheet entry dated 28.11.17 and again on 07.12.17 that he has nothing further to say in this regard and case may be decided based on reply already submitted. Ld. AO based on that observation added Rs 51,00,000/ as Income of assessee company. 8.2 Aggrieved from that observation of the ld. AO, assessee preferred the appeal before the ld. CIT(A) who also held that the aggregate consideration received by the appellant-assessee i.e. Rs. 51 lakhs (Rs. 17 lakhs plus Rs. 34 lakhs) for share issued since exceeds the fair market value of such shares, is required to be brought to tax as income from other source u/s. 56(2)(viib) of the Act, therefore the addition of Rs. 51,00,000/- mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; (ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration : xx xx xx xx Determination of fair market value.[Relevant Rules] 11UA. [(1)] For the purposes of section 56 of the Act, the fair market value of a property, other than immovable property, shall be determined in the following manner, namely, (a) valuation of jewellery, xx xx xx xx (b) valuation of archaeological collections, drawings, paintings, sculptures or any work of art, xx xx xx xx (c) valuation of shares and securities, (a) the fair market value of quoted shares and securities shall be determined in the following manner, namely, 1 [(b) the fair market value of unquoted equity shares shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner, namely: xx xx xx xx (c) the fair market value of unquoted shares and securities other than equity shares in a company which are not listed in any recognized stock exchange shall be estimated to be price it would fetch if sold in the open market on the valuation date and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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. We get strength of our view by the decision of the co-ordinate bench in ITA no. 320/Jodh/2023 Idana Pet Industries P. Ltd. Vs. ITO/ACIT where in the co-ordinate bench held as under: 8. We heard the rival submission and considered the documents available in the record. The assessee has taken the DCF method for valuation of share which is followed by the Rule 11UA the Rule. However, there is no dispute between the parties that Rule 11UA(1) is not applicable on the facts and circumstances of the present case which is a provision of general nature whereas Rule 11UA(2) is a specific provision providing for the valuation of the unquoted equity shares. After going through the relevant Section and the Rules, in our opinion, the matter of valuation of unquoted equity shares, has been completely left to the discretion of the assessee. It is his option whether to choose NAV Method (Book Value) under clause (a) or to choose DCF Method under clause (b) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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