Tribunal rules on Fair Market Value determination based on balance sheet date, rejecting Department's argument

The Tribunal allowed the appeal of the assessee, ruling in favor of the appellant regarding the determination of the Fair Market Value of shares based on the balance sheet drawn on the date of allotment. The Tribunal held that the balance sheet drawn on the date of valuation, even if audited subsequently, should be accepted for determining the FMV of shares, rejecting the Department's argument to consider the audited balance sheet available on the date of allotment.

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Issues:
1. Addition of Rs.8,55,590 under section 56(2)(viib) of the Income Tax Act, 1961.

Analysis:
The case involved an appeal against the addition of Rs.8,55,590 under section 56(2)(viib) of the Income Tax Act, 1961 for the Assessment Year 2016-17. The assessee, a private limited company, had allotted shares at a premium to family members and related group companies on 31.03.2016. The Assessing Officer (AO) determined the Fair Market Value (FMV) of shares based on the audited Balance Sheet as on 31/3/2015, resulting in the addition. The assessee contended that the FMV should be based on the tentative balance sheet drawn on 31.03.2016, as the audited balance sheet for the financial year 2015-16 was available later. The appellant argued that the FMV should be considered on the date of allotment and not necessarily audited on the same date.

The first contention raised by the appellant was that the FMV of shares should be determined based on the unaudited balance sheet drawn on the date of allotment, as it was not feasible to have the balance sheet audited on the same date. The appellant emphasized that there was no requirement in the rules for the audit to be completed on the same date. The second contention was that the FMV should be based on the balance sheet drawn on the date of allotment, as per Rule 11U(b)(i). The appellant argued that the value on the date of issue of shares should be considered, irrespective of the audit of such figures. The third contention was regarding the calculation of FMV under Rule 11UA, where the appellant claimed that the FMV of shares on 31.03.2015 and 31.03.2016 was incorrectly determined during assessment proceedings, resulting in an erroneous valuation.

The Department, represented by Ms. Priyanka Dhar, defended the assessment order, stating that the FMV should be determined based on the audited balance sheet available on the date of allotment. The Department relied on specific decisions to support their stance and argued against considering the unaudited balance sheet for valuation purposes. The Tribunal analyzed the provisions of Rule 11U(b) and concluded that the balance sheet drawn on the date of valuation, even if audited subsequently, should be accepted for determining the FMV of shares. The Tribunal emphasized the importance of drawing the balance sheet on the date of valuation and found no error in the FMV determined by the assessee based on the balance sheet drawn on 31.3.2016.

In conclusion, the Tribunal allowed the appeal of the assessee, ruling in favor of the appellant regarding the determination of the Fair Market Value of shares based on the balance sheet drawn on the date of allotment.

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