2022 (2) TMI 383 - AT - Income Tax

Tribunal Upholds Tax Assessment, Share Valuation, and Premium Determination

N.J. Eco-Build Pvt. Ltd. Versus The PCIT-1, Surat.

N.J. Eco-Build Pvt. Ltd. Versus The PCIT-1, Surat. - TMI Issues Involved:1. Whether the assessment order passed under section 143(3) was erroneous and prejudicial to the interest of the revenue.2. Validity of the valuation certificate used by the assessee for determining the fair market value (FMV) of shares.3. Applicability of Section 56(2)(viib) of the Income Tax Act, 1961 to the share premium received by the assessee.4. Adequacy of the inquiry conducted by the Assessing Officer during the assessment proceedings.Detailed Analysis:1. Whether the assessment order passed under section 143(3) was erroneous and prejudicial to the interest of the revenue:The assessee challenged the correctness of the order passed by the Principal Commissioner of Income Tax (PCIT) under section 263 of the Income Tax Act, 1961, contending that the assessment order was not erroneous or prejudicial to the interest of the revenue. The Tribunal noted that the PCIT had exercised jurisdiction under section 263, observing that the Assessing Officer (AO) had erred in accepting an invalid share valuation certificate and had not adequately examined the projections made by the assessee. However, the Tribunal found that the AO had conducted an inquiry and had taken a possible view based on the information and documents provided by the assessee. Therefore, the Tribunal concluded that the assessment order was neither erroneous nor prejudicial to the interest of the revenue.2. Validity of the valuation certificate used by the assessee for determining the fair market value (FMV) of shares:The PCIT observed that the assessee had used a valuation certificate based on the Discounted Cash Flow (DCF) method, dated 30.04.2013, to determine the FMV of shares, whereas the shares were allotted substantially later, and the latest audited balance sheet as on 31.03.2014 was available. The PCIT held that the valuation certificate was invalid as it did not reflect the FMV based on the latest balance sheet. However, the Tribunal noted that the assessee had also submitted a DCF valuation report with reference to the assessment year 2015-16, including the data of the latest audited balance sheet of 2013-14. The Tribunal found that the AO had examined these valuation reports and had taken a possible view, thus the valuation certificate used by the assessee was not invalid.3. Applicability of Section 56(2)(viib) of the Income Tax Act, 1961 to the share premium received by the assessee:The PCIT held that the provisions of Section 56(2)(viib) were applicable as the shares were issued at a premium, and the difference between the FMV and the issue price should be taxed under the head 'income from other sources.' The PCIT observed that the book value of shares as per the latest audited balance sheet was Rs. 22 per share, whereas the shares were issued at Rs. 50 per share, resulting in a difference of Rs. 28 per share. However, the Tribunal noted that the AO had examined the DCF valuation report and the projections made by the assessee, and had taken a possible view that the FMV of shares was correctly determined. Therefore, the Tribunal concluded that the AO's order was not erroneous in applying Section 56(2)(viib).4. Adequacy of the inquiry conducted by the Assessing Officer during the assessment proceedings:The PCIT observed that the AO had not called for any explanation from the assessee regarding the basis of the projections made in the DCF valuation report and had not verified the FMV of shares based on the latest balance sheet. However, the Tribunal found that the AO had issued a notice under section 142(1) and had raised relevant queries regarding the share premium and valuation of shares. The assessee had provided the required details and documents, including the DCF valuation report and the latest audited balance sheet. The Tribunal held that the AO had conducted an inquiry, and the order passed by the AO was based on a possible view after examining the information provided by the assessee. Therefore, the Tribunal concluded that the AO's order was not erroneous due to inadequate inquiry.Conclusion:The Tribunal quashed the order passed by the PCIT under section 263, holding that the assessment order passed by the AO under section 143(3) was neither erroneous nor prejudicial to the interest of the revenue. The Tribunal allowed the appeal filed by the assessee.