Company wins appeal against excess share premium additions under Section 56(2)(viib) using modified NAV method with proper valuation evidence

The ITAT Delhi ruled in favor of the assessee company regarding additions under Section 56(2)(viib) for alleged excess share premium. The tribunal held that both the AO and CIT(A) misconceived the law by assuming book value cannot be substituted when determining fair market value (FMV) using net asset value (NAV) method. The assessee was entitled to modify NAV components with proper evidence, including valuation reports and market valuations of subsidiary assets. The tribunal found the DCF method and reworking of subsidiary company valuations permissible under Explanation (a)(ii) of Section 56(2)(viib), provided correctness could be established through competent evidence. The appeal was allowed.

---

---

Issues:
Valuation of shares under Section 56(2)(viib) of the Income Tax Act, 1961 concerning A.Y. 2016-17.

Detailed Analysis:

Issue 1: Valuation of Shares
The assessee issued equity shares based on valuation rules, which the Assessing Officer (AO) disputed, leading to the addition of Rs. 6,10,00,000 to the income under Section 56(2)(viib). The AO rejected the valuation based on the property in the subsidiary valued by a foreign valuer. The assessee argued that the valuation method adopted was appropriate under Rule 11UA(1)(c)(b) and Section 56(2)(viib). The AO recalculated the Fair Market Value (FMV) resulting in excess premium charged. The CIT(A) upheld the AO's decision, stating that the valuation method was not supported by prescribed rules.

Issue 2: Application of Section 56(2)(viib)
The AO treated the excess premium as deemed income under Section 56(2)(viib) due to the discrepancy in the FMV of the shares issued by the assessee. The CIT(A) supported the AO's decision, emphasizing that the valuation method used was not in line with Rule 11UA. The Tribunal, however, found that the assessee had the right to modify the Net Asset Value (NAV) based on competent evidence, contrary to the AO and CIT(A)'s understanding. The Tribunal held that the assessee's approach to reworking the subsidiary company's value was permissible under Section 56(2)(viib).

Conclusion:
The Tribunal overturned the decisions of the AO and CIT(A), allowing the assessee's appeal. The Tribunal ruled that the assessee could adopt the FMV of the asset held by the subsidiary company to rework the value of investments, which was not contrary to the purpose of Section 56(2)(viib). The Tribunal emphasized the importance of substantiating the FMV to the satisfaction of the AO and held that the assessee's valuation approach was valid.

---