s.56(2)(viia): AO must recompute FMV per prescribed method, not treat purchase price as deemed income

ITAT HYDERABAD - AT held that s.56(2)(viia) was not properly applied where the assessee's share valuation under the prescribed method showed negative FMV but AO adopted higher inter-company prices. The Tribunal found the AO should have recomputed FMV per the rules rather than simply treating the purchase price as deeming income; accordingly the assessment and CIT(A) orders were set aside and the matter remitted to the AO for fresh consideration in accordance with law. Result: decision in favour of assessee for statistical purposes.

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Issues Involved:
1. Excessive assessment contrary to facts, law, and principles of natural justice.
2. Validity of assessment order in the name of a non-existent entity.
3. Addition of Rs. 21,22,73,565 as deemed gift under Section 56(2)(viia) of the Income Tax Act.
4. Non-applicability of Section 56(2)(viia) in the appellant's case.
5. Non-compliance with Rule 11UA while computing disallowance under Section 56(2)(viia).
6. Levy of interest under Section 234C.
7. Initiation of penalty proceedings under Section 271(1)(c).

Detailed Analysis:

1. Excessive Assessment:
The appellant contended that the assessment made is highly excessive and contrary to facts, law, and principles of natural justice. This general ground did not require specific adjudication.

2. Validity of Assessment Order:
The appellant argued that the assessment order was issued in the name of a non-existent entity, Medplus Health Care P. Ltd. However, this ground was rejected as it was not pressed by the appellant before the CIT(A) and no arguments were advanced on this issue during the hearing.

3. Addition as Deemed Gift under Section 56(2)(viia):
The appellant challenged the addition of Rs. 21,22,73,565 to its income as a deemed gift under Section 56(2)(viia). The AO observed that the appellant purchased shares at Rs. 1 per share while the market rate was Rs. 75.49 per share, thus attracting provisions of Section 56(2)(viia). The appellant argued that the fair market value (FMV) should be computed as per Rule 11UA, which indicated a negative value, making the provisions of Section 56(2)(viia) inapplicable. The Tribunal agreed that the AO must compute FMV as per Rule 11UA and cannot adopt the market value directly.

4. Non-applicability of Section 56(2)(viia):
The appellant reiterated that Section 56(2)(viia) was not applicable as the FMV computed under Rule 11UA was negative. The Tribunal supported this view, emphasizing that the AO must follow the prescribed method under Rule 11UA and cannot substitute it with the market value.

5. Non-compliance with Rule 11UA:
The appellant argued that the AO did not follow Rule 11UA while computing the disallowance. The Tribunal found that the AO should have computed the FMV using the prescribed method under Rule 11UA and not based on the market value of some shares. The Tribunal remitted the issue back to the AO for reconsideration as per the law.

6. Levy of Interest under Section 234C:
The appellant contended that the levy of interest under Section 234C was consequential. The Tribunal remitted this issue back to the AO to provide consequential relief, if any.

7. Initiation of Penalty Proceedings under Section 271(1)(c):
The appellant challenged the initiation of penalty proceedings under Section 271(1)(c). The Tribunal dismissed this ground as premature at this stage.

Conclusion:
The Tribunal set aside the assessment order and the CIT(A)'s order, remitting the issues back to the AO for reconsideration in accordance with the law, particularly emphasizing the need to compute FMV as per Rule 11UA. The appeal was treated as allowed for statistical purposes.

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