2021 (2) TMI 175 - AT - Income Tax

Tribunal favors assessee, directs deletion of share premium additions under Income Tax Act

M/s. Sri Sakthi Textiles Ltd. Versus The Deputy Commissioner of Income Tax, Corporate Circle-1, Coimbatore.

M/s. Sri Sakthi Textiles Ltd. Versus The Deputy Commissioner of Income Tax, Corporate Circle-1, Coimbatore. - TMI Issues Involved:1. Validity of the valuation method used for determining the fair market value of shares.2. Applicability of Section 56(2)(viib) of the Income Tax Act, 1961.3. Admissibility of valuation reports submitted by the assessee.4. Role of the Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)] in determining the fair market value of shares.Issue-wise Detailed Analysis:1. Validity of the Valuation Method Used for Determining the Fair Market Value of Shares:The assessee argued that the valuation of shares was based on a Chartered Engineer's report, which should be considered valid. The AO rejected this valuation, stating it was not presented during the original assessment or revision proceedings. The AO applied the net asset value method as prescribed under Rule 11UA(2) and found the company's net worth to be negative, thus questioning the premium charged on shares. The Tribunal found that the assessee had substantiated the share price with a valuation report from an independent Chartered Accountant supported by a Chartered Engineer's report, which valued the company's land and assets at a significantly higher market value. The Tribunal concluded that the valuation method chosen by the assessee was valid and supported by substantial evidence.2. Applicability of Section 56(2)(viib) of the Income Tax Act, 1961:Section 56(2)(viib) applies when a company receives consideration for shares that exceeds the fair market value, and the excess amount is taxed as income. The assessee chose to determine the fair market value of shares based on the value of its assets as per Explanation (a)(ii) to Section 56(2)(viib), rather than the prescribed method in Rule 11UA. The Tribunal held that the assessee had the option to choose either method and had substantiated the fair market value to the satisfaction of the AO. Therefore, the Tribunal ruled that the provisions of Section 56(2)(viib) could not be invoked to tax the share premium collected by the assessee.3. Admissibility of Valuation Reports Submitted by the Assessee:The AO rejected the valuation reports submitted by the assessee, stating they were not presented during the original assessment or revision proceedings. The Tribunal found this reasoning flawed, emphasizing that the timing of the submission of the valuation reports was irrelevant. What mattered was whether the valuation reports supported the share price. The Tribunal noted that the reports from the independent Chartered Accountant and the Chartered Engineer substantiated the fair market value of the shares, making them admissible.4. Role of the Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)] in Determining the Fair Market Value of Shares:The CIT(A) upheld the AO's decision, stating that the relevance of the Chartered Accountant's valuation report only applied if the assessee chose Explanation (a)(i) for determining the fair market value. The Tribunal found this interpretation incorrect, stating that Explanation (a)(ii) allows the assessee to substantiate the fair market value based on asset value, which can include a Chartered Accountant's valuation. The Tribunal concluded that both the AO and CIT(A) erred in rejecting the valuation reports and directed the AO to delete the additions made towards the share premium under Section 56(2)(viib).Conclusion:The Tribunal ruled in favor of the assessee, allowing the appeal and directing the AO to delete the additions made towards the share premium on the issue of shares under Section 56(2)(viib) of the Income Tax Act, 1961. The Tribunal emphasized the validity of the valuation method chosen by the assessee and the admissibility of the valuation reports submitted, highlighting that the assessee had substantiated the fair market value of the shares to the satisfaction of the AO.