TaxTMI 
TaxTMI 
2025 (5) TMI 2283
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....16 on 30.09.2015 declaring a total Loss of Rs. 30,59,040/-. Subsequently, the case was selected for complete scrutiny in order to verify large share premium on issue of shares during the year. During the course of assessment proceedings the Assessing Officer (AO) noticed that the assessee has received a sum of Rs. 1,48,09,256/- as share premium on issue of shares. The AO further noticed that the assessee has shown the authorized share capital of Rs. 5,00,000/- and paid capital of Rs. 1,89,370/- . The AO issued a show cause notice as to why the provisions of section 56(2)(viib) of the Act cannot be invoked for the reason that the premium received is more than the Fair Market Value (FMV) of the shares. The assessee submitted that the funds have not come from outside source and it is the promoter director who has invested the money. The assessee further submitted that the promoter director has given loan to the assessee in earlier years and the same is converted to shares @ premium during the year. The also stated that the tax consultant has erroneously filed the forms with Registrar of Companies without understanding the tax implications of issuing shares on premium. The assessee als....
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.... menon who brought in earlier as unsecured loan. 3. The appellant company had three initial shareholders Sl No. Name Before Allotment After Allotment Amount Equity share % before allotment Amount Equity share % before allotment 1 Paradip Menon 40,000 40% 129320 68% 2 Mukund Gharpure 45,000 45% 45000 24% 3 Shashidhar Shastri 15,000 15% 15000 8% At the time of allotting shares it was discussed amongst promoters / shareholders that in order to keep existing shareholding undistorted, it was essential to take only small amount of unsecured loan towards share capital while balance amount was to be treated as share premium. If 15 lacs shares were allotted to Mr. Pradip Menon his share holding would have gone to 99.60% which was not in the interest of other two technocrats who possessed knowledge to produce and market the product. For easy understanding of the situation, we have extrapolated the possible situation, if shares were allotted as face value which is as under. Name of share holder Existing share holding before allotment If shares were allotted without prem....
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....ng shares on premium. The ld. AR further argued that given these facts the AO should have appreciated the genuineness of the transaction and that it is not carried out with an intention to convert undisclosed money. In support of the contention that the provisions of section 56(2)(viib) needs to be harmoniously interpreted lifting the corporate veil the ld. AR relied on the decision of the Chennai Tribunal in the case of Vaani Estates Pvt. Ltd. vs. ITO [(2018) 172 ITD 629 (Chennai)] and decision of the Co-ordinate Bench in the case of ACIT vs. Subodh Menon (2019) 198 TTJ 79. Without prejudice, the ld AR submitted that the AO is not correct in rejecting the valuation report submitted by the assessee which is prepared using the DCF method that is certified a Chartered Accountant. 7. On the other hand, the ld. DR submitted that the assessee himself is very much aware that the share premium received is not well substantiated by the valuation and therefore the assessee now claiming the entire transaction as bonafide is not correct. The ld. DR further submitted that filing of petition before NCLT is an afterthought after the initiation of assessment proceedings and therefore cannot be....
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....rtaking" shall have the meanings respectively assigned to them in clause (a), clause (b) and clause (c) of Explanation to clause (23FB) of section 10; 9. From the plain reading of the above provision it is clear that if a closely held company receives any consideration during the year for issue shares in excess of the face value, then the excess over the fair market value will be treated as Income from Other Sources to be taxed under the Act. Before proceeding further, it is important to understand the intention of the legislature for introducing the stringent provisions of section 56(2)(viib) of the Act The Hon'ble Finance Minister in his speech of Finance Bill 2012 had stated at para 155 as follows "I propose a series of measures to deter the generation and use of unaccounted money. To this end, I propose- **** * Increasing the onus of proof on closely held companies for funds received from shareholders as well as taxing share premium in excess of fair market value. * Taxing of unexplained money, credits, investments, expenditures etc., at the highest rate of 30%., irrespective of the slab of income." 10. From the above observations o....
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....l v. CIT [1986] 28 Taxman 509/164 ITR 28, wherein it was held that "legal fictions are created only for a definite purpose and they are limited to the purpose for which they are created and should not be extended beyond the legitimate field. But the legal fiction has to be carried to its logical conclusion within the framework of the purpose for which it is created." Further it is apparent from the Finance Minister's speech that the provisions of Section 56(2)(viib) has been enacted to deter the generation and use of unaccounted money. At this juncture we are also reminded of the decision of the Hon'ble Apex Court in the case Allied Motors (P.) Ltd. v. CIT [1997] 91 Taxman 205/224 ITR 677, wherein it was held that the Finance Minister's Budget speech explaining the provisions are relevant in construing the provisions. ******** 11. Further the coordinate bench in the case of ACIT vs Subodh Menon [(2019) 198 TTJ (Mumbai) 79] has considered the issue of allotment of shares to the existing shareholders for a consideration below the book value in the context of section 56(2)(vii) has held that - 17. We further observe that provisions of section 56(2)(vii....
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.... as the underlying assumption of sub-section (2) that there is understatement of consideration in respect of the transfer and sub-section (2) applies only where the actual consideration received by the assessee is not disclosed and the consideration declared in respect of the transfer is shown at a lesser figure than that actually received." 19. In view of the above, the provisions of section 56(2)(vii)cannot be applied to transaction under consideration. 12. We also notice the that the Delhi Bench of the Tribunal while considering a similar issue of invoking the provisions of section 56(viib) in a case where shares are issued at premium to holding company has held that - 12. We have carefully considered the submissions of the parties and perused the records. It is not in dispute that the assessee issued 12,03,000/- equity shares to its 100% holding company, M/s Goyal MG Gases Pvt. Ltd. at a premium of Rs. 40/- each. It is also not in dispute that shares have been issued at premium based on fair market value as computed and certified by Chartered Accountant who determined the fair market value in accordance with Discounted Cash Flow method which is a well recog....
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.... made under section 56(2)(viib) of the Act. For arriving at such conclusion, I draw support from the decisions of the Tribunal in the case of ACIT v. Y. Venkannachaudhary (supra) and Vaani Estates Pvt. Ltd. v. ITO (supra). 10. Even otherwise also, it requires consideration, whether the FMV of the shares allotted by the assessee can be taken at Rs.1,500/- per share as per the assessee or Rs.1082 per share as determined by the Assessing Officer. Undisputedly, the assessee has got the FMV of the shares valued through a registered valuer. As per the said valuation report, the registered valuer has applied the Net Asset Value method by considering the value of land at Delhi admeasuring 5.35 acres owned by the assessee. Applying the circle rate declared by the State Government, as on 31.03.2016, the registered valuer has determined the FMV of the land at Rs. 26.75 crores as against the value of land as per the circle rate of Rs. 50.40 crores. However, learned Commissioner (Appeals) has upheld the valuation made by the Assessing Officer primarily on the reasoning that the value of land determined by registered valuer at Rs. 26.75 crores is much higher compared to the book value o....
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....cribed methodology. The Appellant-Revenue had the option to conduct its own valuation and determine FMV on the basis of either the DCF or NAV Method. The Respondent-Assessee being a startup company adopted DCF method to value its shares. This was carried out on the basis of information and material available on the date of valuation and projection of future revenue. There is no dispute that methodology adopted by the Respondent-Assessee has been done applying a recognized and accepted method. Since the performance did not match the projections, Revenue sought to challenge the valuation, on that footing. This approach lacks material foundation and is irrational since the valuation is intrinsically based on projections which can be affected by various factors. We cannot lose sight of the fact that the valuer makes forecast or approximation, based on potential value of business. However, the underline facts and assumptions can undergo change over a period of time. The Courts have repeatedly held that valuation is not an exact science, and therefore cannot be done with arithmetic precision. It is a technical and complex problem which can be appropriately left to the consideration and w....
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....rge from the combined perusal of the legislative intent and the above judicial precedence - (i) Section 56(2)(viib) is an anti-abuse provision introduced to the statute to check and regulate introduction of unaccounted money through share premium. (ii) The bonafide nature of the transaction also needs to be considered in the light of the legislative intent (iii) For the harmonious interpretation of section 56(2)(viib), the corporate veil is to be lifted while testing transaction viz., between relatives, existing shareholders, holding and subsidiary companies etc. (iv) Once the assessee has exercised an option for valuation of an unquoted equity share, in terms of Rule 11UA either as per NAV Method or as per DCF Method, the AO is bound to follow the valuation unless the AO brings in cogent material on record to establish perversity in the method adopted by the assessee. 14. In assessee's case it is not disputed that the shares having face value of Rs.10 are issued at a premium of Rs. 1,658 each. From the perusal of the submissions of the assessee before the AO and Form PAS-3 filed before ROC, it is noticed that the assessee has converted un....