Additions under section 56(2) (viiib) for issuance of shares at a premium
Held that if the assessee could substantiate that fair market value of its shares was higher than valuation determined in accordance with the Rules framed thereunder, the higher of the above should be considered for working out income under section 56(2).
|
Case Details: |
Abhinav International Pvt. Ltd. Vs. DCIT |
|
Appeal No.: |
ITA No. 489/Del/2017 |
|
Order pronounced by: |
ITAT Delhi |
|
Date of Order: |
02-06-2020 |
|
Assessment Year: |
2013-14 |
Brief Facts:
- The assessee company allotted 90,000 shares of Rs. 10 each to M/s Shoveller Infracon Limited at a premium of Rs. 40 per share. The total shares allotment made by the assessee company amounts to Rs. 45 Lakhs.
- The A.O. asked the assessee to file valuation report in support of the share premium charged by the assessee with reference to its assets and liability as per Rule 11UA of the Income Tax Rules, 1962.
- The assessee submitted that it has invested its funds in equity of listed and unlisted companies. Value of the shares is recorded in the books of the company of all those shares at its cost. It is submitted that if the value of the listed shares is taken at their listed price on that date, the value of the share of the assessee company comes to Rs. 71.04 per share which is below the issue price of Rs. 50 per share at which the fresh allotment has been made. If the value of the listed shares is also taken at the book value of the share i.e. Rs. 10 per share of such listed shares, the book value of the assessee company’s share is at Rs. 11.80 per share.
- The AO rejected the argument of the assessee and held that when the assessee itself is saying that the book value of the shares of the assessee company is at Rs. 11.80 per share, the assessee has accepted Rs. 38.20 per share in excess of its book value and made the addition of Rs. 34,38,000 under section 56(2) of the Income Tax Act.
- Further, the CIT (Appeals) again upheld that addition made by the A.O.
Tribunal observation:
- According to the provisions of the law, the fair market value of the equity shares for the purpose of the taxation according to section 56(2) of the Act is determined as under:
“Explanation—For the purposes of this clause, --
(a) The fair market value of the shares shall be the value—
(i) As may be determined in accordance with such method as may be prescribed; or
(ii) As may be substantiated by the company to the satisfaction of the A.O., based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licenses, franchisees or any other business or commercial rights of similar nature, whichever is higher.”
- Thus, the option is available with the assessee to either determine the fair market value of the shares, being higher of:
(a) According to the valuation rules determined in accordance with the rules provided or
(b) To substantiate to the satisfaction of the A.O. based on the value on the date of issue of shares of its assets.
- We agree with the argument of the learned A/R that if the assessee can substantiate that fair market value of its shares is higher than the valuation determined in accordance with the rules framed thereunder, then, the higher of the above should be considered for working out income under section 56(2) of the Act.
