Safe harbour valuation and revenue expenditure principles defeated the tax additions on share premium and professional fees.

The article notes that where the issue price remained within the 10% safe harbour under Rule 11UA as introduced by Notification No. 81/2023, the price is deemed to be fair market value and no addition can be sustained under section 56(2)(viib). It also states that legal and professional charges incurred for due diligence, advisory work, drafting and fund-raising facilitation were revenue expenditure because they did not create any capital asset or enduring capital advantage, so disallowance as capital expenditure under section 37(1) was not justified.

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Issues: (i) Whether the addition made under section 56(2)(viib) could survive when the variation between the issue price and the valuation under Rule 11UA remained within the 10% safe harbour introduced by Notification No. 81/2023. (ii) Whether the disallowance of legal and professional charges as capital expenditure was sustainable.

Issue (i): Whether the addition made under section 56(2)(viib) could survive when the variation between the issue price and the valuation under Rule 11UA remained within the 10% safe harbour introduced by Notification No. 81/2023.

Analysis: The applicable notification introduced a 10% tolerance where, upon a resident or non-resident issue, the issue price does not exceed the valuation by more than the permitted margin, the issue price is deemed to be the fair market value. The difference between the issue price and the valuation in the present case was within that statutory limit. The curative character of the amendment was treated as applicable retrospectively, and the legal fiction displaced any addition based on the small variation in valuation.

Conclusion: The addition under section 56(2)(viib) was unsustainable and had to be deleted, in favour of the assessee.

Issue (ii): Whether the disallowance of legal and professional charges as capital expenditure was sustainable.

Analysis: The expenditure was incurred for due diligence, advisory work, meetings, drafting and vetting of agreements in connection with the business and fund-raising process. It did not bring into existence any capital asset or any enduring advantage in the capital field. Applying the settled principle that expenditure facilitating business operations is revenue in nature unless it creates an asset or enduring capital benefit, the disallowance could not be sustained.

Conclusion: The disallowance under section 37(1) was not sustainable and had to be deleted, in favour of the assessee.

Final Conclusion: The appeal succeeded in full and both the addition and disallowance were deleted.

Ratio Decidendi: Where the difference between issue price and valuation falls within the statutory safe harbour, the issue price is deemed to be the fair market value and no addition can be made under section 56(2)(viib); further, expenditure incurred for business facilitation without creation of a capital asset or enduring capital advantage is revenue in nature.

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