Section 56(2)(viib) and share conversion valuation: CCD conversion without fresh consideration fell outside the anti-abuse rule.

Section 56(2)(viib) does not apply to conversion of CCDs into equity shares where no fresh consideration is received in the relevant previous year, because the provision is triggered only when a company receives consideration for issue of shares in excess of fair market value. The earlier receipt of funds on issue of CCDs meant the conversion did not attract the anti-abuse provision. For valuation, Rule 11U(b) and Rule 11UA require the balance sheet drawn up on the valuation date, or, if unavailable, the latest balance sheet preceding that date; on this basis, use of the audited balance sheet as on 31.03.2016 for NAV valuation was accepted.

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Issues: Whether section 56(2)(viib) of the Income-tax Act, 1961 applied to the conversion of CCDs into equity shares when no fresh consideration was received in the relevant previous year, and whether the valuation for issue of shares at premium was to be made with reference to the balance sheet as on 31.03.2016 or 31.03.2017.

Analysis: The provision applies where a company receives, in any previous year, consideration for issue of shares in excess of their fair market value. In the present case, the funds had been received earlier on issue of CCDs and the conversion into equity during the year did not bring in fresh consideration. On that basis, the addition under section 56(2)(viib) could not survive. On valuation, Rule 11U(b) and Rule 11UA of the Income-tax Rules, 1962 require the balance sheet drawn up on the valuation date, and if it is not available, the balance sheet drawn up as on the date immediately preceding the valuation date. As the relevant consideration had been received in the earlier year, the valuer was justified in adopting the last drawn audited balance sheet as on 31.03.2016 for NAV valuation.

Conclusion: The addition under section 56(2)(viib) was not sustainable, and the valuation adopted by the assessee was accepted.

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