2024 (6) TMI 236 - HC - Income Tax

Section 56(2)(viib) not attracted when shares issued on conversion of explained loans; AO cannot override DCF under Rule 11UA(2)(d)

HC dismissed Revenue's appeal, upholding the Tribunal and CIT(A) findings that Section 56(2)(viib) did not apply because no consideration was received on ... Income from Other Sources u/s 56 (viib) - excess amount per share paid as premium - valuation report furnished by the assessee-company was rejected by the Assessing Officer (AO), holding that the Discounted Cash Flow (DCF) valuation used by the assessee, is bogus and has no connection with the real figures - CIT(A) deleted addition - Appellate Authority held that since no money/consideration was received by the assessee on issue of shares and the shares are allotted merely on account of conversion of outstanding loans received in earlier years and source whereof was accepted to be satisfactorily explained into share capital, Section 56 (2) (viib) in absence of receipt of consideration, is not applicable - also held that the valuation is done by the assessee as per DCF method, which is an internationally accepted method of valuation of shares, and is a permissible methodology as per Rule 11UA (2)(d) of the Rules HELD THAT:- We are of the opinion that the orders passed by the Income Tax Appellate Tribunal as well as the CIT(Appeals), are fairly comprehensive. Both of them have concurrently found that no consideration was received by the assessee-firm for allotment of the shares, therefore Section 56 (2) (viib) of the Act would not apply, and that it would have applied only if consideration was received for such a transaction. Also, both the Tribunal and the CIT (Appeals) have held that the Assessing Officer had no jurisdiction to substitute the NAV method of assessing the valuation of shares, once the assessee had exercised option of a DCF valuation method as per Rule 11UA (2) of the Income Tax Rules. Revenue appeal dismissed. Issues involved: Appeal by Revenue u/s 260-A of Income Tax Act challenging Tribunal's order for Assessment Year 2018-19 regarding valuation of shares and applicability of Section 56 (2) (viib) of the Act.Details of the Judgment:1. The respondent-assessee, engaged in Hydro Electricity business, filed a return for AY 2018-19 declaring a loss.2. The assessee issued equity shares to partners at a premium, converting unsecured loans into share capital.3. The shares were valued using Discounted Cash Flow Method as per Rule 11UA of Income Tax Rules.4. Assessment under e-Assessment Scheme resulted in an addition under 'Income from Other Sources' due to premium paid on shares.5. AO rejected DCF valuation, computed fair market value using NAV method, leading to a dispute.6. CIT(Appeals) held that Section 56 (2) (viib) doesn't apply as no consideration was received for shares, upheld DCF valuation, and deleted the addition.7. Tribunal affirmed that no consideration was received, rejected AO's valuation method substitution, citing Rule 11UA (2).8. Revenue challenged before ITAT, which upheld the CIT(Appeals) findings and rejected Revenue's contentions.9. The Court found no legal errors in the Tribunal and CIT(Appeals) orders, dismissing the appeal.In conclusion, the Court upheld the Tribunal's decision that no consideration was received for shares, hence Section 56 (2) (viib) doesn't apply, and the AO cannot substitute the valuation method chosen by the assessee. The appeal was dismissed, affirming the lower authorities' comprehensive findings.