Section 56(2)(viib) provisions apply on share allotment date, not when application money received, assessee's valuation method choice under Rule 11UA upheld

ITAT Delhi held that provisions of Section 56(2)(viib) regarding excessive share premium apply on the date of share allotment, not when share application money is received. The assessee received consideration in F.Y. 2010-11 but shares were allotted in F.Y. 2014-15, making the provision inapplicable as it became effective from April 1, 2013. Additionally, the tribunal ruled that the choice of valuation method under Rule 11UA for unquoted shares lies with the assessee, not the AO. The AO can only reject the chosen method if proven incorrect or non-compliant with prescribed standards. Decision favored the assessee against revenue.

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Issues:
1. Whether the deletion of addition of excessive share premium by the CIT(A) under section 56(2)(viib) was correct.
2. Whether the AO was justified in rejecting the valuation report filed by the assessee and resorting to his own valuation method.

Analysis:
1. The appeal involved the question of whether the addition of Rs. 1,63,35,000/- made by the AO on account of excessive share premium under section 56(2)(viib) was correctly deleted by the CIT(A). The assessee, a construction company, had received share application money in F.Y. 2010-11 but allotted shares in F.Y. 2014-15. The AO treated the premium amount on allotment of preference shares as income of the company under section 56(2)(viib). However, the CIT(A) held that since the shares were allotted in a different year from when the money was received, the provisions of section 56(2)(viib) were not applicable. The Tribunal agreed, citing that the provisions cannot be invoked before the completion of the transaction, and the share allotment date is crucial for triggering section 56(2)(viib).

2. The second issue revolved around the rejection of the valuation report by the AO. The assessee had submitted a valuation report valuing the shares at Rs. 1000/- per share. The AO rejected this valuation, citing the negative net worth of the company. However, the Tribunal noted that the assessee had followed Rule 11UA for valuation and had the right to choose the method. The Tribunal emphasized that the AO cannot change the valuation method unless it is proven incorrect, as confirmed by previous court judgments. Therefore, in this case, the AO's rejection of the valuation report was unwarranted, and the appeal of the revenue was dismissed.

In conclusion, the Tribunal upheld the CIT(A)'s decision to delete the addition of excessive share premium under section 56(2)(viib) and rejected the AO's rejection of the valuation report. The Tribunal emphasized that the provisions of section 56(2)(viib) should be applied based on the share allotment date and that the assessee had the right to choose the valuation method as per Rule 11UA. The appeal of the Revenue was dismissed, and the order was pronounced in open court on 23/05/2023.

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