2022 (10) TMI 452 - AT - Income Tax

Dispute over share premium valuation resolved in favor of fair market value

ITO, Ward-16 (2) New Delhi Versus Malibu Estate Dispensary Pvt. Ltd.

The case involved a dispute over the addition of Rs. 29,56,2912/- due to a difference in share price compared to Fair Market Value. The Assessing Officer ... Income from other sources - Addition on account of difference in share price viz-a-viz Fair Market Value - HELD THAT:- There is no dispute that the AO has not given any valid reason for discarding valuation report of a registered valuer filed by the assessee. It is equally true that as per explanation a to section 56 (2)(viib) of the Act it has been specifically provided that the fair market value of the shares shall be based on (1) the value determined under rule 11UA or (2) fair market value of the under lying assets whichever is higher. Therefore, in our understanding of the law the AO grossly erred in adopting the circle rate of the property. Considering the facts of the case in totality in the light of the relevant provisions of the Act we do not find any reason to interfere with the findings of the CIT(A). The appeal filed by the revenue is dismissed. Issues:1. Addition of difference in share price vs. Fair Market Value for assessment year 2016-17.Analysis:The case involved a dispute regarding the addition of Rs. 29,56,2912/- on account of the difference in share price compared to the Fair Market Value. The Assessing Officer (AO) raised the issue during scrutiny assessment proceedings, contending that the share premium of Rs. 69,97,9840/- introduced by the assessee company was excessive, based on the Net Asset Value (NAV) of shares calculated at Rs. 10 per rule 11UA of the IT Rules. The AO issued a show-cause notice to the assessee, questioning the issuance of shares at a high premium. The assessee provided a detailed response supported by a valuation report and a certificate from a Chartered Accountant (CA). The AO, however, calculated the addition based on the circle rate of the land, resulting in the disputed amount.The CIT(A) examined the matter and observed that the AO's adjustment based on the circle rate was unjustified. The CIT(A) noted that the fair market value of the land was higher than the circle rate, as evidenced by the valuation report and the actual sale price of a similar property. The CIT(A) emphasized that the fair market value should be considered for determining the share premium, as per the provisions of the Act. Referring to relevant case law, the CIT(A) directed the AO to adopt the fair market value as per the valuation report submitted by the appellant, leading to the deletion of the addition made by the AO.During the appeal before the ITAT, the Revenue supported the AO's position but failed to identify any factual errors in the CIT(A)'s findings. The ITAT reviewed the orders of the CIT(A) and the assessment order, noting the absence of a valid reason for disregarding the valuation report submitted by the assessee. The ITAT concurred with the CIT(A)'s interpretation of the law, emphasizing the requirement to consider the fair market value of shares based on relevant provisions. Consequently, the ITAT dismissed the appeal filed by the Revenue, upholding the CIT(A)'s decision to delete the addition of Rs. 29,56,2912/-.In conclusion, the judgment resolved the issue by emphasizing the importance of considering the fair market value of assets for determining share premiums, as per the provisions of the Act. The decision highlighted the need for assessing officers to rely on appropriate valuation reports and adhere to legal requirements when making adjustments in such cases.