TaxTMI 
TaxTMI 
2024 (9) TMI 362
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....issued its Equity Shares based on valuation of its Shares following the then Rule 11UA(1)(c)(b) of Income Tax Rules 1962 as per provisions of Section 56(2)(viib). The Assessing Office rejected the valuation of shares of the assessee company after considering the fact that the property in subsidiary company was valued by the foreign valuer therefore assessee officer imposed valuation of share, which should not be a 'Fair Market Value'. Accordingly, added Rs. 6,10,00,000/- to the income of the assessee under Section 56(2)(viib) on the reasons recorded in Assessment Order, raising the following questions: 2. Whether method of valuation adopted by the assessee as per Rule 11UA(1)(c)(b) was not applicable on the assessee even after fulfilment of conditions given in section 56(2)(viib) and Rule 11UA? 3. Whether Section 56(2)(viib) restricts valuation of shares of assessee company based on valuation done by the foreign valuer of an overseas property? 4. That on the Facts and circumstances of the case and in law, the Ld.AO erred in initiating the penalty u/s. 271(1)(C) of the Income Tax Act 1961. 5. That on the facts and circumstances of the case....
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....oked the provisions of Section 56(2)(viib) and held that consideration received by way of share premium on issue of equity shares to M/s. Legacy Food Pvt. Ltd. is in excess of FMV and a sum to the extent of Rs. 6,10,00,000/- collected by way of share premium from M/s. Legacy Foods Pvt. Ltd. falls within the ambit of deeming fiction and thus susceptible to tax. Accordingly, the aforesaid sum was added to the total income of the assessee. 4. Aggrieved, the assessee preferred appeal before the CIT(A). It was reiterated before the CIT(A) that for the purposes of allotment, the value of shares have been arrived as per the then valuation Rules in accordance with the subsisting provisions of Rule 11UA of the Income Tax Rules, 1962. The CIT(A) however declined any relief on the action of the AO. The CIT(A) observed that the report of the Chartered Accountant has been prepared without any verification of the market value of the assets of the overseas company. The assessee has sought to directly replace and substitute the book value of its shares held in the subsidiary company (which in turn holds the asset being hotel property in Switzerland) by enhanced value of shares based on a Valuer....
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....ed income by a closely held company. Section 56(2)(viib) is one of the anti-abuse provision which brings to tax such excess consideration deemed to have been received by the closely held company while issuing shares at premium if such consideration is found to exceed the FMV of such shares. The rationale behind the introduction of deeming provisions of Section 56(2)(viib) in the statute is to deter generation and use of black money. 9.1 In the instant case, the assessee has issued shares to one M/s. Legacy Food Pvt. Ltd. for a consideration of Rs. 80 per share including Rs. 70 per share towards premium on face value of Rs. 10 per equity share. The assessee seeks to justify the premium of Rs. 70 per share as fair market value on the touchstone of Section 56(2)(viib) r.w. Rule 11UA of I.T. Rules, 1962. 9.2 For this purpose, the assessee submits that it owns overseas subsidiary by holding 100% shares thereon and thus have complete control over such entity. The investment value in such subsidiary company shown in its books at book value requires to be substituted by the intrinsic value of the shares of the overseas subsidiary company. 9.3 To assert such substituted valuation a....
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....n in its books towards 100% subsidiary company has been shown at book value but the intrinsic value / real worth of the subsidiary company is much higher owing to the revaluation of the hotel building held by the subsidiary company backed by valuation report obtained in the case of subsidiary company too. The assessee thus contends that the assessee rightly deserves to substitute the book value of the investment in subsidiary company while determining the NAV of the assessee company. 10. On perusal of extant provision of Section 56(2)(viib) r.w. Explanation thereto, it is noticed that for the purposes of the aforesaid provision, the FMV of the shares shall be the value as determined in accordance with such method as may be prescribed under Rule 11UA of the Income Tax Rules. Coupled with this and in addition thereto, the assessee is also entitled to substantiate the FMV to the satisfaction of the AO based any rational basis. The modification in the value of shares in subsidiary company appears rational in the context of the case. The law provides for an alternative option to the assessee to substantiate the FMV in the manner as may be considered expedient. Both AO and the CIT(A) ....