Assessee can choose merchant banker valuation over book value for share premium under Rule 11UA

ITAT Delhi dismissed revenue's appeal regarding share premium additions under section 56(2)(viib) and section 68. Assessee issued shares at Rs. 10 face value with Rs. 990 premium. For FMV determination, assessee chose merchant banker valuation over book value method, which was permissible under Rule 11UA. CIT(A) correctly deleted additions as AO failed to provide sound reasoning to counter assessee's higher valuation. Regarding section 68 addition, since AO accepted same applicants under section 56(2)(viib), he cannot question their identity and creditworthiness when assessee satisfied initial burden with confirmations and ITRs.

---

---

Issues Involved:
1. Deletion of the addition of Rs. 4,40,14,425/- made by the AO under Section 56(2)(viib) read with Rule 11UA.
2. Deletion of the addition of Rs. 11,28,575/- made by the AO under Section 68.

Issue 1: Deletion of Addition under Section 56(2)(viib) read with Rule 11UA

The assessee issued 45,143 shares at a premium of Rs. 990 per share during the Financial Year 2012-13. The AO questioned the justification of this premium and, after examining the balance sheets and profit & loss accounts for subsequent years, concluded that the premium was not justifiable. The AO calculated the fair market value of the shares at Rs. 25 per share based on the book value, resulting in an addition of Rs. 4,40,14,425/- under Section 56(2)(viib).

The Ld. CIT(A) deleted this addition, noting that the assessee's valuation was supported by a Chartered Accountant's report using the Discounted Cash Flow (DCF) Method, which is permissible under the law. The Tribunal upheld the Ld. CIT(A)'s decision, stating that the AO did not provide sound reasoning or material to counter the assessee's valuation. The Tribunal emphasized that the higher value as per the DCF Method, chosen by the assessee, was valid and should not be disregarded without proper justification. Thus, the Tribunal dismissed Ground No. 1 of the Revenue.

Issue 2: Deletion of Addition under Section 68

The AO made an addition of Rs. 11,28,575/- under Section 68, claiming that the assessee failed to prove the creditworthiness and genuineness of the share application money received. The AO cited various judicial pronouncements to support the addition, arguing that the assessee did not discharge its onus of proving the identity and creditworthiness of the investors.

The Ld. CIT(A) deleted this addition, noting that the assessee provided confirmations, ITRs, and share application forms, which were not doubted by the AO. The CIT(A) also observed that the AO accepted a sizable portion of the share application money under Section 56(2)(viib) without questioning the identity and creditworthiness of the investors. The Tribunal agreed with the CIT(A), stating that the AO's actions were inconsistent and that the assessee had satisfied the initial burden of proof under Section 68. Consequently, the Tribunal dismissed Ground No. 2 of the Revenue.

Conclusion

The Tribunal dismissed the appeal filed by the Revenue, upholding the Ld. CIT(A)'s deletion of the additions under both Sections 56(2)(viib) and 68. The order was pronounced in open Court on 22nd December, 2023.

---