2023 (7) TMI 1447 - AT - Income Tax

Tribunal Overturns Assessing Officer's Additions, Endorses Assessee's Valuation Method for Fair Market Value of Shares.

The tribunal ruled in favor of the assessee, ordering the deletion of the additions made by the Assessing Officer under section 56(2)(viib) of the Income ... Addition u/s 56(2) - excess share premium received by the assessee as compared to the fair market value of the shares - case of the assessee is that the fair market value of the shares was determined by the method prescribed under Rule 11UA of the Income Tax Rules 1962 HELD THAT:- A perusal of the order of the AO reveals that he has not pointed out any defect or infirmity in the aforesaid discounted cash flow method followed by the assessee as per the report given by the accountant as per the prescribed rules. The Assessing Officer however has proceeded to calculate the market value of the shares as per clause (a) of Rule 11UA(2)(a), where as, the assessee has opted fair market value of the shares under Rule 11UA(2)(b) of the I.T. Rules. As been specifically provided u/r 11UA(2) that the fair market value of the shares can be determined either in the manner as prescribed in clause (a) or clause (b) at the option of the assessee. Therefore, since it was the option of the assessee to follow either clause (a) or clause (b), the assessee has followed the method prescribed under clause (b) of Rule 11UA(2), therefore, the action of the AO in determining the fair market value by following the method under clause (a) cannot be held to be justified. Therefore, the impugned additions made by the Assessing Officer are not sustainable - Appeal of the assessee allowed. Issues:1. Assessment of excess share premium under section 56(2) of the Income Tax Act.Analysis:The appeal was filed against the order of the National Faceless Appeal Centre regarding the addition made by the Assessing Officer under section 56(2) of the Income Tax Act. The sole issue raised by the assessee pertained to the addition of Rs.1,16,65,600/- on account of excess share premium received compared to the fair market value of the shares issued. The Assessing Officer determined the fair market price of the shares at Rs.27.3/- per share, while the assessee issued shares at Rs.40/- each, resulting in the addition of the differential amount under section 56(2)(viib) of the Act.The assessee contended that the fair market value of the shares was determined following Rule 11UA of the Income Tax Rules 1962. The rule provides two methods for determining the fair market value of unquoted equity shares, and the assessee opted for the method prescribed under clause (b). The accountant's report calculated the fair market value at Rs.50/- per share using the Discounted Cash Flow Method. The Assessing Officer, however, calculated the market value using clause (a) of Rule 11UA(2)(a), contrary to the assessee's chosen method under clause (b). Since the assessee had the option to follow either clause (a) or clause (b) as per Rule 11UA(2), the Assessing Officer's decision to use clause (a) was deemed unjustified. Consequently, the impugned additions were held unsustainable in law, and the appeal of the assessee was allowed.In conclusion, the tribunal ruled in favor of the assessee, ordering the deletion of the impugned additions made by the Assessing Officer. The decision emphasized the importance of adhering to the chosen method for determining the fair market value of shares as per the prescribed rules, ultimately leading to the allowance of the assessee's appeal.