2019 (1) TMI 1635 - AT - Income Tax

Tribunal directs reassessment of share value using prescribed methods, asset values, and market values

M/s. Sahu Minerals and Properties Ltd. Versus The Income Tax Officer, Ward 2 (2), Jaipur.

The Tribunal allowed the appeal for statistical purposes, directing the Assessing Officer to reexamine the fair market value of shares based on the higher ... Addition u/s 56(2)(viib) - valuation of equity shares / FMV - excess share premium amount received by the assessee company - HELD THAT:- The valuation of the property at Kolkata is the major part of the total assets and therefore, the correct and true value of the property at Kolkata is inevitable part of the process of the fair market value of the shares issued by the assessee. AO has taken the value of the said property as per the book value which is shown at the cost price and not at the market value whereas the CIT (A) has conducted some verification at his level and found that the valuation of the property after applying 32% discount on account of encumbrance comes to ₹ 18,23,74,333/-. The fair market value of the shares as per clause (ii) of Explanation (a) to section 56(2)(viib) has to be taken based on the value of the assets including intangible assets of the company as on the date of issue of shares which connotes that the value as on the date of issue and not as per the book value or at cost. Hence we find merit in the submission of the A/R that fair market value of the shares has to be computed by taking the market value of the assets of the assessee company as on the date of issue of shares. We find that the land/property situated at Kolkata is not free from encumbrances as assessee had admitted that there is encroachment in the said land and, therefore, it becomes essential to value the said property after finding out the actual status of the land/property in question. The issue requires a proper verification and enquiry at the level of the AO and in case the AO does not agree with the value claimed by the assessee, the matter is required to be referred to the DVO for the purpose of determining the value of the assets of the assessee as on the date of issue of shares. Since the land in question is situated at Kolkata, therefore, a proper enquiry is required to be conducted to find out the true and correct value of the land at the hand of the assessee. Accordingly, the matter of fair market value of the shares as per the method provided under clause (ii) of Explanation (a) to section 56(2)(viib) is set aside to the record of the AO for fresh adjudication in terms of the above order. Issues Involved:1. Jurisdiction of the Assessing Officer.2. Addition under Section 56(2)(viib) of the Income Tax Act, 1961.3. Interpretation and application of Rules 11U and 11UA of Income Tax Rules, 1962.4. Status of the company as a company in which the public is substantially interested under Section 2(18) of the Income Tax Act, 1961.5. Fair Market Value (FMV) of land for determining excess premium chargeable to tax under Section 56(2)(viib).6. Rejection of the valuation report by Chartered Accountant and Approved Valuer.7. Set-off of current year loss from the addition made under Section 56(2)(viib).Issue-wise Detailed Analysis:1. Jurisdiction of the Assessing Officer:The appellant challenged the jurisdiction of the Assessing Officer (AO) who passed the assessment order. The Tribunal did not specifically address this issue in detail in the judgment, implying that the jurisdiction of the AO was upheld by the CIT(A).2. Addition under Section 56(2)(viib) of the Income Tax Act, 1961:The appellant contested the addition of Rs. 42,83,96,680/- made by the AO under Section 56(2)(viib) on account of alleged excess share premium. The Tribunal had previously decided this issue against the assessee, but upon reconsideration, it was found that the valuation of shares should be based on the higher of the prescribed method or the value of the company's assets on the date of issue.3. Interpretation and Application of Rules 11U and 11UA of Income Tax Rules, 1962:The appellant argued that the CIT(A) erred in interpreting and applying Rules 11U and 11UA. The Tribunal noted that the AO had valued the shares as per Rule 11UA, but the assessee substantiated its claim with valuation reports from a Chartered Accountant and an Approved Valuer. The Tribunal emphasized that if the AO was not satisfied with the valuation, the matter should have been referred to the DVO.4. Status of the Company under Section 2(18) of the Income Tax Act, 1961:The appellant claimed that it was a company in which the public is substantially interested, and hence, Section 56(2)(viib) should not apply. The Tribunal did not provide a detailed analysis on this issue, suggesting that the status of the company was not accepted as claimed by the appellant.5. Fair Market Value (FMV) of Land for Determining Excess Premium:The appellant contended that the FMV of land at Rs. 21,73,21,000/- should be considered for valuing equity shares. The Tribunal found that the AO had valued the property at book value, while the CIT(A) conducted verification and found the value after applying a discount for encumbrances. The Tribunal held that the FMV should be based on the market value of the assets as on the date of issue of shares, necessitating proper verification and possibly a referral to the DVO.6. Rejection of the Valuation Report by Chartered Accountant and Approved Valuer:The appellant argued that the CIT(A) erred in rejecting the valuation reports. The Tribunal noted that the AO should have referred the matter to the DVO if not satisfied with the valuation reports. The Tribunal emphasized the importance of considering the market value of the assets, including the property at Kolkata, which required proper verification.7. Set-off of Current Year Loss from the Addition Made under Section 56(2)(viib):The appellant claimed that the CIT(A) erred in not allowing the set-off of the current year loss of Rs. 3,97,619/- from the addition made under Section 56(2)(viib). The Tribunal did not specifically address this issue in detail, implying that the set-off was not allowed.Conclusion:The Tribunal allowed the appeal for statistical purposes, setting aside the matter of fair market value of the shares to the AO for fresh adjudication. The AO was directed to conduct proper verification and possibly refer the matter to the DVO for determining the value of the assets as on the date of issue of shares. The Tribunal emphasized the necessity of considering the market value of the assets, including the property at Kolkata, for determining the fair market value of the shares.