2022 (1) TMI 1316 - AT - Income Tax

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

Electra Paper and Board Pvt. Ltd. Versus Income Tax Officer ACIT Circle-4 (1), Bassi Bilding-1,

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 ... Addition u/s 56(2)(viib) - difference between the FMV of shares at which shares were allotted by the assessee and FMV determined per share thereby making aggregate addition u/s 56(2)(viib) - Whether FMV of shares for the purpose of section 56(2)(viia) r.w.r. 11UA determined on the basis of ‘Balance-Sheet’ drawn on the date of allotment and audited subsequently, can be accepted? - HELD THAT:- Where the Balance Sheet is not drawn on the date of valuation, the Balance Sheet drawn on a date preceding the date of valuation which has been approved and adopted in the Annual General Meeting of the shareholders should be considered. The definition has two limbs: The first limb applies in a situation where the Balance sheet is drawn on the date of valuation and the second limb of definition applies in a situation where no Balance Sheet is drawn on the date of valuation. In the instant case undisputedly on the date of allotment of shares i.e. 31.3.2016, a balance-sheet was drawn by the assessee albeit the said balance sheet was unaudited on that date. The FMV of the shares was determined on the basis of said balance-sheet. The said Balance-sheet was subsequently audited by the Auditors of the company and ostensibly, there was no difference in the financials of tentative balance-sheet drawn on 31.03.2016 after audit by the Auditors. Since, the balance sheet was drawn on the date of valuation the case of assessee is covered by first limb of the definition of ‘Balance Sheet’. In so far as the condition that the Balance Sheet should be audited by the Auditor of the company, the said condition is also satisfied as the Balance sheet drawn on 31.3.2016 was subsequently audited with purportedly no change in financials. We hold that the balance sheet on the basis of which FMV of shares allotted on 31.3.2016 was determined by the assessee falls within the meaning of ‘Balance Sheet’ as envisaged under Rule 11U. Hence, we find no error in the FMV of shares determined by the assessee on the basis of balance sheet drawn on 31.3.2016 - Appeal of the assessee is allowed. 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.