2023 (10) TMI 85 - AT - Income Tax

Tribunal Upholds Dismissal of Appeal on Share Premium Exceeding Fair Market Value

The Tribunal confirmed the addition under Section 56(2)(viib) of the Income Tax Act, finding the share premium exceeded the fair market value. The appeal ... Addition u/s. 56(2)(viib) - share premium received by the appellant company - Determination of fair market value - Premium is excessive or not? - HELD THAT:- We do not find any reason to interfere with the order passed by the authorities below in not accepting the valuation report so prepared by the CA in regard to the preferential share available to the assessee keeping in view the provisions of section 56(2)(viib) r.w.Rule 11UA and according to us, the value of preferential share is rightly taken as the value of the share at which the company should have received the preference share capital including the premium. Thus having regard to the facts and circumstances of the case, the finding of the authorities below to this effect that the share premium received by the company is in excess of fair market value of the share, the addition thus made u/s. 56(2)(viib) of the Act is found to be just and proper particularly in view of the ratio laid down in case of M/s. Agro Portfolio Pvt. Ltd. vs. ITO [2018 (5) TMI 1088 - ITAT DELHI]. The order passed by the authorities below is found to be without any ambiguity and thus, upheld. The assessee’s appeal is therefore found to be devoid of any merit and therefore dismissed. Issues Involved:1. Applicability of Section 56(2)(viib) of the Income Tax Act, 1961.2. Validity of the Discounted Cash Flow (DCF) method for share valuation.3. Requirement for reference to the Department Valuation Officer (DVO).Summary:1. Applicability of Section 56(2)(viib):The appeal concerns the addition of Rs. 1,04,50,000/- under Section 56(2)(viib) of the Income Tax Act, 1961. The Assessing Officer (AO) held that the share premium received by the appellant company exceeded the fair market value (FMV) of the shares. The AO relied on Rule 11UA of the Income Tax Rules to determine the FMV and rejected the DCF method used by the assessee, leading to the addition being confirmed by the First Appellate Authority.2. Validity of the DCF Method:The AO summoned the valuer and found that the DCF method used was based on hypothetical estimations and not in accordance with Rule 11UA. The AO cited several judgments, including the Hon'ble Supreme Court and the Hon'ble Karnataka High Court, to support the rejection of the DCF method in favor of the Net Asset Value (NAV) method. The AO noted significant discrepancies between projected and actual financials, leading to the conclusion that the share price was inflated.3. Requirement for Reference to DVO:The assessee argued that the AO should have referred the matter to the DVO if there were doubts about the valuation. However, the Tribunal found that the AO was justified in rejecting the DCF method without referring to the DVO, especially since the assessee failed to substantiate the basis of projections. The Tribunal upheld the AO's approach, citing the Hon'ble Delhi ITAT's decision in M/s. Agro Portfolio Pvt. Ltd. vs. ITO, which supported the rejection of the DCF method when its correctness is doubted.Conclusion:The Tribunal confirmed the addition made under Section 56(2)(viib), finding that the share premium received was in excess of the FMV. The appeal was dismissed, and the order passed by the authorities below was upheld as being without ambiguity.Order Pronounced:The appeal filed by the assessee stands dismissed, as pronounced in the open court on 12th September 2023.