2023 (3) TMI 769 - AT - Income Tax

Addition u/s 56(2)(viib) - consideration received by the assessee towards premium on issue of equity share represents the fair market value or exceeds the fair market value - AO discarded the FMV method as per DCF method and replaced the same with the NAV method - addition with respect to change in the method of valuation - AO rejected the DCF methodology adopted by the appellant company for the purpose of arriving at the FMV of equity shares - Whether AO has rightly applied NAV methodology for determining the FMV of equity shares? - HELD THAT:- The legal fiction inserted by Section 56(2)(viib) seeks to deem premium received from subscribers being Indian entities in excess of Fair Market Value as the chargeable income in the hands closely held company issuing such share at premium in excess of its Fair Market Value.

The assessee-company adopted DCF method for determination of Fair Market Value as per valuation report of the independent valuer filed to support and vindicate the share premium on issue of equity share. AO however found fallacy in the quantification of FMV so determined by DCF method and observed that the FMV determined as per DCF method is without any sound factual basis and the projected figures of the ensuing years widely vary with the actual figures reported and presently available at the time of assessment for Financial Years 2016-17 and 2017-18.

The assessee company in the instant case has proceeded to issue equity shares at a premium to none other than its wholly owned holding company and that too on the basis of independent valuer report where FMV was determined as per DCF method which is one of the prescribed method for determination of valuation under Rule 11UA r.w. Section 56(2)(viib) - AO has disputed the DCF method on account of variation in the projected figures used by the valuer with the actual figures available subsequently at the time of assessment. The Assessing Officer discarded the FMV method as per DCF method and replaced the same with the NAV method which action runs totally contrary to the ratio laid down in Cinestaan Entertainment [2021 (3) TMI 239 - DELHI HIGH COURT] wherein the additions made under the deeming provisions of Section 56(2)(viib) made by the Assessing Officer were reversed.

Section 56(2)(viib) creates a legal fiction whereby the scope and ambit of expression ‘income’ has been enlarged to artificially tax a capital receipt earned by way of premium as taxable revenue receipt. Hence, such a deeming fiction ordinarily requires to be read to meet its purpose of taxing unaccounted money and thus needs to be seen in context of peculiar facts of present case. The legal fiction has been created for definite purpose and its application need not be extended beyond the purpose for which it has been created. Bringing the premium received from holding company to tax net under these deeming fictions would tantamount to stretching provision to an illogical length and will lead to some kind of absurdity in taxing own money of shareholders without any corresponding benefit.

In totality, governed by the view taken by the Hon’ble Delhi High Court as well as the Co-ordinate Bench in similar fact situation coupled with the fact of the issue of shares to its holding company, we are unable to see any infirmity in the first appellate order on the point under determination - Decided against revenue.