2020 (1) TMI 1012 - AT - Income Tax

Tax Tribunal: Shares Valuation & Exemptions Ruling

ACIT, Circle-4 (1), Visakhapatnam Versus Y. Venkanna Choudary (Vice-Versa)

The Tribunal partly allowed the appeal filed by the Revenue and the cross-objection filed by the assessee. The valuation of shares should consider the ... Valuation of shares invoking Rule 11UA of the Income Tax Rules, 1962 and resultant addition made u/sec. 56(2)(vii)(c)(ii) - difference in FMV of the shares and the consideration paid by the assessee - DR argued that the shares were not only allotted to the assessee but also allotted to others - HELD THAT:- There is no dispute that the assessee and other shareholders are close relatives, therefore the consideration received rather excess consideration passed on from the share of his brother is exempt from taxation u/sec. 56(2)(viii)(c)(ii) of the Act. Thus, we hold that the difference in FMV of the shares and the consideration paid by the assessee is squarely covered by the exemption clause provided u/sec. 56(2)(vii) of the Act and case law relied on by the assessee in the case of Sri Kumar Pappu Singh [2018 (12) TMI 525 - ITAT VISAKHAPATNAM] is squarely applicable in the assessee‘s case. DR argued that the shares were not only allotted to the assessee but also allotted to others and submitted that the case law of Kumar Pappu Singh has no application in this case. We are unable to accept the argument of the Ld.DR, since, prior to the allotment of shares on 05/04/2013 the share holders are only the assessee and his brother. In the fresh allotment apart from the assessee some applicants were allotted the shares. Therefore whatever the shares allotted to the assessee was from the interest of his brother who is a close relative. Hence, to the extent of shares allotted to the assessee the same is covered by the decision of this tribunal. Thus, we hold that there is no case for making any addition for allotment of shares allotted on 05/04 2013. Accordingly, we set aside the orders of the authorities below on this issue and delete the addition made by the Assessing Officer. FMV of the shares allotted to the assessee on 26/03/2014 - contention of the assessee is that for arriving at the FMV of the shares, the book value of the shares required to be adopted for determination of FMV of the share. Accordingly, the Assessing Officer arrived at the value of the share at ₹ 14.48 and the ld. CIT(A) arrived at ₹ 12.02. Though, the valuation means the date of property or consideration received as per Rule 11UA. This issue is considered by the coordinate bench in Sadhvi Securities Ltd [2019 (7) TMI 1074 - ITAT DELHI] and held that in case the balance sheet was not drawn up on the date of allotment, the previous balance sheet which was approved in the AGM has to be considered for valuation of FMV of the shares. For arriving the FMV of shares previous Balance sheet which is audited and approved in the AGM has to be taken in to consideration, before the allotment of shares. Accordingly, we set aside the order of ld. CIT(A) on the shares allotted on 26/03/2014 and confirm the addition. Thus, this ground of appeal raised by the Revenue is allowed partly. Issues Involved:1. Valuation of shares invoking Rule 11UA of the Income Tax Rules, 1962.2. Addition made under Section 56(2)(vii)(c)(ii) of the Income Tax Act.Issue-wise Detailed Analysis:1. Valuation of shares invoking Rule 11UA of the Income Tax Rules, 1962:The primary issue revolves around the valuation of shares acquired by the assessee in M/s. Sardar Projects Pvt. Ltd. The assessee acquired shares on 05/04/2013 and 26/03/2014. The Assessing Officer (AO) estimated the Fair Market Value (FMV) of these shares based on the previous year's balance sheets and invoked Rule 11UA of the Income Tax Rules, 1962. The AO computed the FMV as Rs. 676.55 per share for the shares allotted on 05/04/2013 and Rs. 14.48 per share for the shares allotted on 26/03/2014. This resulted in a significant addition to the taxable income of the assessee.The assessee contested this valuation, arguing that the FMV should be computed considering the fresh allotment of shares and that the balance sheet should reflect the post-allotment scenario. The assessee's valuation showed Rs. 13.26 per share on 05/04/2013 and Rs. 12.64 per share on 26/03/2014.The Commissioner of Income Tax (Appeals) [CIT(A)] agreed with the assessee, stating that the valuation date means the date on which the shares were allotted, and thus, the fresh allotment of shares should be considered. The CIT(A) worked out the FMV as Rs. 13.46 per share on 05/04/2013 and Rs. 12.02 per share on 26/03/2014.The Tribunal upheld the CIT(A)'s approach, emphasizing that the valuation should be based on the post-allotment scenario to avoid absurdity, such as overvaluation of assets. The Tribunal also referenced the decision in Sudhir Menon (HUF) Vs. ACIT, which supports considering the capital base after the allotment of shares.2. Addition made under Section 56(2)(vii)(c)(ii) of the Income Tax Act:The AO made additions under Section 56(2)(vii)(c)(ii) of the Act, treating the difference between the FMV and the purchase price of shares as taxable income. The CIT(A) reduced these additions based on the revised FMV.The Tribunal further analyzed whether Section 56(2)(vii)(c)(ii) applies to transactions between close relatives. It was found that the shares were allotted to the assessee and his brother, who are close relatives. The Tribunal referenced the decision in Sri Kumar Pappu Singh Vs. DCIT, which exempts transactions between close relatives from being taxed under Section 56(2)(vii)(c)(ii).The Tribunal concluded that the excess consideration passed from the brother to the assessee is exempt from taxation under Section 56(2)(vii)(c)(ii). Consequently, the addition made by the AO for shares allotted on 05/04/2013 was deleted.For the shares allotted on 26/03/2014, the Tribunal upheld the AO's valuation based on the previous balance sheet, as there was no balance sheet drawn on the date of allotment. This approach aligns with the decision in Sadhvi Securities Ltd., which mandates using the balance sheet of the immediately preceding year if no balance sheet is drawn on the valuation date.Conclusion:The Tribunal partly allowed the appeal filed by the Revenue and the cross-objection filed by the assessee. The valuation of shares should consider the post-allotment scenario, and transactions between close relatives are exempt from taxation under Section 56(2)(vii)(c)(ii). However, for shares allotted on 26/03/2014, the previous balance sheet should be used for valuation.