2022 (6) TMI 291 - AT - Income Tax

Tribunal affirms CIT(A)'s decisions, dismisses revenue's appeal on Section 56(2)(viib) valuation, fair market value.

The tribunal upheld the Ld.CIT(A)'s decisions on all grounds, dismissing the revenue's appeal. It was held that Section 56(2)(viib) applies in the year of ... Taxability under section 56(2)(viib) of the Income tax Act - temporal application of charging provision - year of receipt versus year of allotment - valuation date under Rule 11U and valuation methodology under Rule 11UA - admissibility of additional evidence before first appellate authority under section 250(4) - application of Rule 46A of the Income tax Rules - conversion of debentures into shares and non taxable transfer under section 47(x) and cost relation under section 49(2A)Taxability under section 56(2)(viib) of the Income tax Act - temporal application of charging provision - year of receipt versus year of allotment - conversion of debentures into shares and non taxable transfer under section 47(x) - Section 56(2)(viib) is not attractable in the assessment year where only conversion/allotment of shares occurred if the consideration had been received in an earlier year; the provision applies with reference to the year in which consideration was received. - HELD THAT: - The Tribunal upheld the CIT(A)'s conclusion that the language of clause (viib)-referring to a company that 'receives, in any previous year, any consideration for issue of shares'-and the definition of 'valuation date' in Rule 11U indicate that the charging provision and its computational machinery operate with reference to the year of receipt of consideration. The facts showed that the funds for OFCDs were received in earlier years (prior to the insertion of clause (viib) w.e.f. 01.04.2013) and the conversion into preference shares in the relevant assessment year did not constitute a fresh receipt of consideration. The Tribunal also noted the relevance of section 47(x) and section 49(2A) which treat conversion of debentures into shares as a non taxable transfer with cost relating back, supporting the view that the relevant event was receipt/allotment of OFCDs rather than subsequent conversion. Reliance placed by the AO on decisions concerning allotment/rights issues was treated as distinguishable on facts. Having reviewed the reasoning of the CIT(A) and found no infirmity, the addition under section 56(2)(viib) was held to be unsustainable. [Paras 5, 10]Ground challenging the applicability of section 56(2)(viib) was dismissed and the addition deleted.Admissibility of additional evidence before first appellate authority under section 250(4) - application of Rule 46A of the Income tax Rules - The CIT(A) properly admitted the valuation report as additional evidence in exercise of powers under section 250(4) and Rule 46A because the report went to the root of the controversy. - HELD THAT: - The Tribunal agreed with the CIT(A)'s determination that the valuation report constituted additional evidence central to the assessment issue (the correctness of the share premium/valuation) and that the CIT(A) has quasi judicial powers under section 250(4) to call for and admit such evidence. Although the AO objected that the report was not produced earlier and that prescribed formats/providers were not followed, the CIT(A) reasoned-and the Tribunal accepted-that the report addressed the core controversy, the AO had earlier sought valuation information, and the CIT(A)'s co terminous powers permitted admission in the interest of natural justice. The Tribunal found no reason to interfere with the exercise of discretion by the CIT(A). [Paras 5, 13]Grounds attacking admission of additional evidence were dismissed; the valuation report was admitted.Valuation date under Rule 11U and valuation methodology under Rule 11UA - valuation methodologies - DCF and asset based/NAV considerations - The valuation placed on the shares by the assessee (and supported by the admitted valuation report) was accepted for the purposes of the dispute and the AO's objections to the valuation methods were rejected. - HELD THAT: - On merits the Tribunal (following the CIT(A)) found that the valuation(s) submitted-including DCF and project/asset based valuations-addressed the relevant parameters under Rule 11UA or, where valuation was based on the value of prime assets of the company, fell within Explanation (a)(ii) to section 56(2)(viib) such that Rule 11UA did not strictly apply. The AO's criticisms (that DCF estimates could not be compared with actuals and that upward revision of inventory for NAV was impermissible) were held to be without sufficient basis; valuation involves reasonable estimates and assumed parameters, and the assessee's reports were supported by documentary material and independent inputs. The Tribunal found that the AO had not rebutted the valuation sufficiently nor given opportunity to the assessee to rectify alleged discrepancies before rejecting the reports. [Paras 11, 12]Grounds challenging the correctness/admissibility of the valuation were dismissed and the assessee's valuation accepted for the controversy.Final Conclusion: The appeal filed by the Revenue is dismissed: the Tribunal upholds the CIT(A)'s deletion of the addition under section 56(2)(viib) for A.Y.2015 16, affirms admission of the assessee's valuation report as additional evidence under section 250(4)/Rule 46A, and accepts the valuation on the merits. Issues Involved:1. Applicability of Section 56(2)(viib) in the year of receipt of consideration versus the year of issuance of shares.2. Admissibility of additional evidence in the form of a valuation report from a Chartered Accountant.3. Determination of the fair market value of shares and the discrepancies in the valuation reports submitted by the assessee.Issue-wise Detailed Analysis:1. Applicability of Section 56(2)(viib):The primary issue revolved around whether Section 56(2)(viib) applies in the year of receipt of consideration or the year of issuance of shares. The Assessing Officer (AO) contended that Section 56(2)(viib) applies to the issuance of shares, irrespective of when the consideration was received. The AO argued that the provision deals with the issue of shares and not the receipt of funds, relying on the jurisdictional ITAT decision in Sudhir Menon HUF vs ACIT.The assessee argued that Section 56(2)(viib) should only apply in the year the consideration was received, as the language of the section indicates. The assessee also cited scrutiny assessments for previous years where the receipt/payment of OFCDs was accepted. The Ld.CIT(A) agreed with the assessee, stating that the provision would be attracted in the year of receipt of consideration due to the language used in the section and supported by Rule 11U(j), which defines the 'valuation date' as the date on which the property or consideration is received.The tribunal upheld the Ld.CIT(A)’s decision, agreeing that 'receives' means both the issue of shares and the receipt of consideration during the same assessment year. The tribunal found no reason to interfere with the Ld.CIT(A)’s findings.2. Admissibility of Additional Evidence:The second issue concerned the admissibility of additional evidence, specifically a valuation report from a Chartered Accountant (CA), which the assessee submitted during the appellate proceedings. The AO objected, claiming that the assessee was given ample opportunity to submit the valuation report during the assessment but failed to do so.The assessee rebutted, explaining that the valuation report could not be submitted earlier due to time constraints and that the report was essential for addressing the AO’s concerns about the share premium. The Ld.CIT(A) admitted the additional evidence, invoking Section 250(4) of the Act, which empowers the CIT(A) to call for any such information/documents to ensure principles of natural justice are followed.The tribunal agreed with the Ld.CIT(A)’s decision to admit the additional evidence, emphasizing that the valuation report constituted the root cause of the additions made by the AO.3. Determination of Fair Market Value:The third issue was whether the valuation of shares was at fair market value, considering the discrepancies pointed out in the valuation reports submitted by the assessee. The AO rejected the valuation reports, arguing that the DCF method used was not supported by actual figures and that the NAV method incorrectly valued inventory at market value instead of book value.The assessee argued that the DCF method inherently involves estimates and that the valuation was based on reasonable information and independent technical reports. The assessee also provided alternative valuation reports to substantiate the fair market value of the shares.The Ld.CIT(A) accepted the valuation provided by the assessee, noting that the valuation methods were correctly applied and supported by realistic assumptions. The tribunal upheld the Ld.CIT(A)’s findings, agreeing that the valuation reports were admissible and the fair market value was correctly determined.Conclusion:The tribunal dismissed the revenue’s appeal, upholding the Ld.CIT(A)’s decisions on all grounds. The tribunal agreed that Section 56(2)(viib) applies in the year of receipt of consideration, the additional evidence was rightly admitted, and the fair market value of the shares was correctly determined.