2022 (9) TMI 696 - AT - Income Tax

ITAT Delhi upholds CIT(A)'s decision on income tax addition

The ITAT Delhi upheld the CIT(A)'s decision to add Rs. 1,81,91,344 under section 56(2)(viia) of the Income Tax Act. The appeal challenging the addition ... Fair Market Value (FMV) determination under Rule 11UA - Addition under section 56(2)(viia) for receipt of shares for inadequate consideration - Non-application of section 56(2)(viib) where FMV exceeds consideration - Irrelevance of subsequent winding up or later collapse of share value to valuation on date of transferFair Market Value (FMV) determination under Rule 11UA - Addition under section 56(2)(viia) for receipt of shares for inadequate consideration - Validity of the addition under section 56(2)(viia) based on FMV computed under Rule 11UA in respect of shares received for inadequate consideration. - HELD THAT: - The Tribunal recorded that the Assessing Officer computed FMV of the shares at Rs. 1202 per share by applying Rule 11UA and made addition of the difference between that FMV and the consideration paid. The CIT(A)'s reasoning that FMV ascertained just before the transfer must be taken and that book value (cost to the assessee) cannot be treated simultaneously with FMV was accepted. The Tribunal found no infirmity in applying Rule 11UA to determine FMV and in treating the excess of FMV over consideration as income under section 56(2)(viia). The assessee's contrary contention that treating the FMV as income would nullify the effect of the enhanced value of shares was rejected as untenable, and the addition was confirmed. [Paras 4, 7]Addition under section 56(2)(viia) based on FMV determined under Rule 11UA is valid and confirmed; the appeal is dismissed on this ground.Non-application of section 56(2)(viib) where FMV exceeds consideration - Irrelevance of subsequent winding up or later collapse of share value to valuation on date of transfer - Whether section 56(2)(viib) applies instead of section 56(2)(viia), and whether subsequent winding up or later nil valuation of the transferor company can be taken into account. - HELD THAT: - The Tribunal upheld the CIT(A)'s conclusion that section 56(2)(viib) was not attracted because the facts involved receipt of shares for inadequate consideration and the FMV (as per Rule 11UA) exceeded the consideration received; therefore section 56(2)(viia) applied. The assessee's plea that the investee company's inventory was notional, that the company later went into winding up and its shares became valueless was treated as a subsequent development. The Tribunal accepted the CIT(A)'s view that such subsequent events cannot be considered for valuation on the relevant date and that no evidence was placed on record during assessment to displace the FMV determined under the Rules. Accordingly these contentions were rejected. [Paras 7]Section 56(2)(viia) applies and section 56(2)(viib) is not attracted; subsequent winding up or later nil value of shares is irrelevant for valuation on the date of transfer and does not negate the addition.Final Conclusion: The Assessing Officer's computation of FMV under Rule 11UA and the consequential addition under section 56(2)(viia) were upheld; the appeals are dismissed and the addition confirmed. Issues:Challenge to addition under section 56(2)(viia) of the Act.Analysis:The appeal was filed against the CIT(A)'s order upholding the addition of Rs. 1,81,91,344 made by the Assessing Officer under section 56(2)(viia) of the Income Tax Act. The assessee received 90,000 shares of Bhawani Portfolio Limited at a rate of Rs. 1000 per share, which was deemed to be less than the fair market value by the AO. The AO calculated the fair market value at Rs. 1202 per share based on the Net Asset Value (NAV) as per the Audited Financial Filed, resulting in the addition of Rs. 1,81,91,344.The CIT(A) rejected the assessee's argument that no addition was required if the fair market value determined by the AO was considered as income, as the value of the shares allotted would automatically be affected. The CIT(A) emphasized that the fair market value of shares should be determined just before the transfer of shares, not after, and that the value as per Rule 11UA was correctly applied by the AO. The CIT(A) also dismissed the argument that the real value of the shares was nil due to subsequent developments, stating that the value remained Rs. 1202 as per Rule 11UA for the relevant period.Additionally, the appellant's contention that section 56(2)(viib) should apply instead of section 56(2)(viia) due to the shares being allotted at a premium was rejected by the CIT(A). The CIT(A) concluded that the provisions of section 56(2)(viia) were applicable as the fair market value determined under Rule 11UA was higher than the consideration received.The CIT(A) also distinguished various cases cited by the appellant, stating that they were not directly applicable to the current matter. After careful consideration, the ITAT Delhi upheld the CIT(A)'s decision, finding no error or infirmity in the findings. The appeal was dismissed, confirming the addition of Rs. 1,81,91,344.In conclusion, the ITAT Delhi found no grounds for interference in the CIT(A)'s decision and dismissed the appeal, upholding the addition under section 56(2)(viia) of the Income Tax Act.