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2022 (11) TMI 610 - AT - Income TaxAddition u/s 56(2)(viib) - share premium received - Whether share premium received by the assessee has not been utilized for the objective meant for and has been diverted for non-specified purpose? - HELD THAT - As per the assessee, land held by the partnership firm may get roughly about Rs. 850/- crores revenue if said land is put into development. If you consider fair amount of sharing between the developer and assessee, the assessee may get anywhere between Rs. 200 to 300 crores from the projects. Since, the assessee company is having 99.97% share in partnership firm and its free cash flows, the cash flow considered by the assessee on the basis of project of partnership firm is in accordance with law. Assessee has justified allotment of equity shares with premium of Rs. 1676/- per share with the help of multiple documents, including DCF method of valuation of shares. Further, the assessee had also justified share premium with the help of independent valuer report, as per which capital held by the assessee in the partnership firm is roughly valued about Rs. 367.96 crores. The assessee has also justified cash flows with the help of MoU with M/s. Prestige Estates Projects Pvt. Ltd. Therefore, we are of the considered view that there is no error or lacuna in the method followed by the assessee for determination of value of shares. AO without appreciating above facts has simply made additions towards share premium on flimsy grounds by assigning grounds which are not relevant to consider share premium for the purpose of provisions of section 56(2)(viib) - CIT(A) after considering relevant facts has rightly deleted additions made by the AO and thus, we are inclined to uphold findings of the learned CIT(A) and dismiss appeal filed by the Revenue.
Issues Involved:
1. Justification of share premium received by the assessee. 2. Applicability of section 56(2)(viib) of the Income Tax Act, 1961. 3. Method of valuation of shares: Discounted Cash Flow (DCF) method vs. Net Asset Value (NAV) method. 4. Utilization of share premium for specified purposes. 5. Determination of intrinsic value of shares based on the net asset value of a partnership firm. Issue-wise Detailed Analysis: 1. Justification of Share Premium Received by the Assessee: The assessee company issued 10 lakh equity shares at a face value of Rs. 10 each with a premium of Rs. 1676 per share, amounting to a total share premium of Rs. 168.60 crores. The assessee justified this premium using the DCF method as per Rule 11UA of the Income Tax Rules, 1962. The company argued that the valuation was supported by the financial statements of its partnership firm, M/s. Grande City Development Co. LLP, which held significant land assets and had entered into a MoU for land development. The CIT(A) accepted the assessee's justification, noting that the net asset value of the partnership firm was Rs. 168.34 crores, aligning with the share premium received. 2. Applicability of Section 56(2)(viib) of the Income Tax Act, 1961: The Assessing Officer (AO) contended that the share premium received should be taxed under section 56(2)(viib) as income from other sources, arguing that the premium was not justified and was diverted for non-specified purposes. The CIT(A) disagreed, stating that the assessee had sufficiently justified the share premium with a valuation report and that the net asset value of the partnership firm supported the premium amount. 3. Method of Valuation of Shares: DCF Method vs. NAV Method: The AO rejected the DCF method used by the assessee, arguing that it was not suitable since the company's revenue depended on a third party (the partnership firm). Instead, the AO adopted the NAV method, determining the fair market value of shares as Rs. -441 per share. The CIT(A) ruled that once the assessee chose a prescribed method (DCF), the AO could not change it but could only verify the projections. The CIT(A) found no discrepancies in the DCF method and upheld its use, supported by the Bombay High Court's decision in Vodafone Mpesa Ltd. vs. PCIT. 4. Utilization of Share Premium for Specified Purposes: The AO argued that the share premium was not utilized for its intended purpose and was instead diverted to a sister concern, with the funds ultimately withdrawn by the partners. The CIT(A) did not find this argument sufficient to reject the DCF method or the share premium valuation, emphasizing that the valuation was based on future cash flows and the intrinsic value of the partnership firm's assets. 5. Determination of Intrinsic Value of Shares Based on Net Asset Value of a Partnership Firm: The CIT(A) noted that the partnership firm, M/s. Grande LLP, held significant land assets and had entered into a MoU for development, which justified the share premium. The net asset value of the partnership firm was Rs. 168.34 crores, aligning with the share premium received. The CIT(A) concluded that the DCF method provided a reasonable valuation, and the share premium was justified based on the intrinsic value of the partnership firm's assets. Conclusion: The CIT(A) deleted the additions made by the AO, ruling that the assessee had sufficiently justified the share premium using the DCF method, supported by the net asset value of the partnership firm. The appeal filed by the Revenue was dismissed, and the CIT(A)'s order was upheld.
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