TaxTMI 
TaxTMI 
2026 (7) TMI 1071
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.... another NBFC Manappuram Finance Limited at a price of Rs. 83.32 per share which includes the share premium of Rs. 73.32 per share. The assessee has justified the share premium based on valuation using discounted cash flow method (DCF). The AO rejected the valuation and carried out independent valuation using net asset value method (NAV) to arrive at the value per share at Rs. 48/-. The A.O called on the assessee to justify the valuation and why the difference cannot be added as addition u/s. 56(2)(viib) of the Act. The assessee submitted that the valuation of shares are based on estimation of future cash flows and DCF method is as per Rule 11A of income tax Rules. The assessee further submitted that the valuation is carried out by a Chartered Accountant who has considered the future business of the assessee as accepted by the Rules. The A.O however rejected valuation report stating that the valuation of the C.A is based on the details submitted by the assessee and that the CA clearly stated that he has not conducted any audit or due diligence of the figures given by the assessee. The A.O accordingly treated the difference between the valuation done under the DCF method by the asse....
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....addition. The ld AR also presented written submissions elaborating the above arguments supported by various case laws and the same has been taken on record. 5. The Ld. Departmental Representative (DR), on the other hand, submitted that the valuation by C.A does not justify the premium charged and is not commensurate with the financials of the company. The Ld. DR further submitted that the assessee has submitted the valuation report dated 21.11.2017 which goes to prove that the valuation is carried out as an afterthought and is not done at the time of issue of shares at a premium. The Ld. DR also submitted that the valuation report obtained after two years of issue of shares cannot be considered as valid under Rule UA since the rule does not permit time travelling. The Ld. DR in summary submitted that as on the date of issue of shares at premium, the valuation report was not existing and therefore, the claim of the assessee that the premium is based on the valuation report under Rule 11UA cannot be accepted. 6. We have heard the parties, and perused the material available on record. The assessee during the year under consideration has issued shares at a premium of Rs. 73.32 pe....
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....or (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher; (b) "venture capital company", "venture capital fund" and "venture capital undertaking" shall have the meanings respectively assigned to them in clause (a), clause (b) and clause (c) of Explanation to clause (23FB) of section 10; 7. 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 mea....
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....ness in the law, the interpretation which will correct that weakness is the one to be adopted. 7.3 It should be also kept in mind that provisions of Section 56(2)(viib) of the Act creates a deeming fiction and while giving effect to such legal fictions all facts and circumstances incidental thereto and inevitable corollaries thereof have to be assumed. At this juncture we are reminded of the decision of the Hon'ble Kolkata High Court in the case M.D. Jindal 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 ....