2025 (7) TMI 759 - AT - Income Tax

Revision u/s 263 - Addition u/s 56(2)(vii)(b) - alleged difference in fair market value and actual consideration received for allotment of equity shares - HELD THAT - It is an admitted position that the assessee issued 10 lakh equity shares at Rs. 200 per share to M/s Chinar Commercials Pvt. Ltd. and M/s Chinar Finvest Pvt. Ltd. The AO relying upon a valuation report determined the fair market value (FMV) at Rs. 186 per share and treated the differential amount of Rs. 14 per share as taxable u/s 56(2)(viib) of the Act. On perusal of the valuation report issued by M/s A.B. Tandan Co. we find that the fair value of Rs. 200 per share has been computed by taking into account not just the book value but also the intrinsic and prospective value of the investments and business assets of the assessee. The valuation report expressly states that the FMV has been determined in accordance with Rule 11UA of the Income Tax Rules 1962 and no difficulty was encountered in its application. This satisfies the statutory requirement of explanation (a) to section 56(2)(viib). We find merit in the contention of the assessee that in earlier years similar shares had been issued at Rs. 200 per share and accepted in scrutiny proceedings u/s 143(3) of the Act. The assessee has demonstrated a consistent financial position with the share value as on 31.03.2012 being Rs. 207 per share and as on 31.03.2013 being Rs. 186 per share purely on book value basis. The claim that the intrinsic value supports the issuance at Rs. 200 per share remains uncontroverted by the revenue. We also find force in the argument that out of the Rs. 20 crore of share application money Rs. 10 crore was received prior to 01.04.2012 i.e. before the insertion of section 56(2)(viib) by the Finance Act 2012 w.e.f. 01.04.2013. In view of settled legal principles a taxing provision cannot be applied retrospectively unless expressly stated. Therefore no addition under section 56(2)(viib) can be made in respect of the Rs. 10 crore received before the provision came into force. Addition made by the AO and sustained by the Ld. CIT(A) under section 56(2)(viib) is unsustainable in law and on facts. Accordingly the said addition is directed to be deleted. Decided in favour of assessee.

Summary

Issues Presented and Considered

The core legal questions considered by the Tribunal in this appeal were:

• Whether the addition of Rs. 1,40,00,000 made under section 56(2)(viib) of the Income-tax Act, 1961, on account of difference between the fair market value (FMV) and actual consideration received for allotment of equity shares, was justified.
• Whether the disallowance of interest incurred on late payment of TDS amounting to Rs. 1,53,531 was correctly sustained.
• Whether the provisions of section 56(2)(viib), introduced with effect from 01.04.2013, could be applied to share application money received prior to that date.

Issue-wise Detailed Analysis

Issue 1: Legitimacy of Addition under Section 56(2)(viib) on Difference Between FMV and Issue Price of Shares

Relevant Legal Framework and Precedents: Section 56(2)(viib) was introduced by the Finance Act, 2012, effective from 01.04.2013, to tax the difference between the FMV of shares and the actual consideration received by closely held companies on issue of shares. The FMV is to be determined as per the prescribed method under Rule 11UA of the Income Tax Rules, 1962, or as substantiated to the satisfaction of the Assessing Officer (AO), whichever is higher. Explanation (a) to section 56(2)(viib) clarifies the method for determining FMV, including consideration of intangible assets such as goodwill.

Judicial precedents have upheld additions under section 56(2)(viib) where the issue price was less than FMV determined in accordance with Rule 11UA or substantiated value.

Court's Interpretation and Reasoning: The AO relied on a valuation report which computed the FMV at Rs. 186 per share based on book value of assets as on 31.03.2013 and made an addition of Rs. 14 per share (difference between issue price Rs. 200 and FMV Rs. 186) totaling Rs. 1.40 crores.

The assessee contended that the valuation report undervalued the shares by considering only book value without intrinsic or market value, and that the FMV was in fact Rs. 200 per share as per a valuation report dated 17.07.2013 prepared by a Chartered Accountant firm. The assessee further submitted that shares were issued at Rs. 200 per share in the previous year (2011-12) and accepted by the AO, and that the financial position had strengthened since then. The assessee also submitted audited financial statements showing book values of Rs. 186 per share (31.03.2013) and Rs. 207 per share (31.03.2012).

The Tribunal noted that the valuation report dated 17.07.2013 determined FMV in accordance with Rule 11UA, taking into account intrinsic and prospective value, not merely book value. The report expressly stated no difficulty was encountered in applying the prescribed method. This satisfied the statutory requirements under explanation (a) to section 56(2)(viib).

The Tribunal also observed that the assessee's prior issuance of shares at Rs. 200 per share was accepted in scrutiny proceedings and that the revenue did not controvert the intrinsic value claim. The Tribunal thus found the AO's reliance on the Rs. 186 valuation report insufficient to justify the addition.

Key Evidence and Findings: The valuation report dated 17.07.2013 by M/s A.B. Tandan & Co., certified by Chartered Accountants, was pivotal. It determined FMV at Rs. 200 per share considering intrinsic and prospective value in compliance with Rule 11UA. Audited financial statements corroborated the book value figures.

Application of Law to Facts: The Tribunal applied the statutory provisions of section 56(2)(viib) and Rule 11UA, requiring FMV determination by prescribed method or satisfactory substantiation. The valuation report met these criteria, and the prior acceptance of Rs. 200 per share further supported the assessee's position.

Treatment of Competing Arguments: The AO's argument based solely on book value was rejected as incomplete. The assessee's argument that the valuation report considered intrinsic value and complied with Rule 11UA was accepted. The Tribunal also rejected the AO's contention that prior acceptance of Rs. 200 per share was irrelevant, holding that such acceptance was material and not displaced by the AO's valuation.

Conclusion: The addition of Rs. 1,40,00,000 under section 56(2)(viib) was unsustainable and was directed to be deleted.

Issue 2: Applicability of Section 56(2)(viib) to Share Application Money Received Prior to 01.04.2013

Relevant Legal Framework: Section 56(2)(viib) was introduced by the Finance Act, 2012, effective 01.04.2013. Taxing provisions are generally prospective unless expressly stated otherwise.

Court's Interpretation and Reasoning: The assessee submitted that out of Rs. 20 crore share application money, Rs. 10 crore was received before 01.04.2013, when section 56(2)(viib) was not in force, and therefore no addition could be made on that portion.

The Tribunal held that taxing provisions cannot be applied retrospectively in absence of express language. Hence, section 56(2)(viib) cannot be invoked on share application money received prior to its effective date.

Key Evidence and Findings: The date of receipt of Rs. 10 crore share application money was undisputedly prior to 01.04.2013.

Application of Law to Facts: The Tribunal applied settled legal principles on retrospective taxation and held that no addition under section 56(2)(viib) could be made on Rs. 10 crore received before 01.04.2013.

Treatment of Competing Arguments: The AO's rejection of this argument was found incorrect. The Tribunal rejected the AO's contention that the provisions apply to the year of issue regardless of date of receipt.

Conclusion: No addition under section 56(2)(viib) was warranted on Rs. 10 crore received before 01.04.2013.

Issue 3: Disallowance of Interest on Late Payment of TDS

The assessee did not press this ground during the appeal. Accordingly, the Tribunal dismissed this ground without detailed adjudication.

Significant Holdings

On the principal issue of addition under section 56(2)(viib), the Tribunal held:

"...the valuation report dated 17.07.2013 issued by M/s A.B. Tandan & Co., we find that the fair value of Rs. 200 per share has been computed by taking into account not just the book value, but also the intrinsic and prospective value of the investments and business assets of the assessee. The valuation report expressly states that the FMV has been determined in accordance with Rule 11UA of the Income Tax Rules, 1962, and no difficulty was encountered in its application. This satisfies the statutory requirement of explanation (a) to section 56(2)(viib)."

"...the addition made by the AO and sustained by the Ld. CIT(A) under section 56(2)(viib) of the Act amounting to Rs. 1,40,00,000/- is unsustainable in law and on facts. Accordingly, the said addition is directed to be deleted."

"...a taxing provision cannot be applied retrospectively unless expressly stated. Therefore, no addition under section 56(2)(viib) can be made in respect of the Rs. 10 crore received before the provision came into force."

Core principles established include:

• FMV for shares issued by closely held companies must be determined in accordance with Rule 11UA or substantiated to the satisfaction of the AO, including consideration of intrinsic and prospective value, not merely book value.
• Prior acceptance of share valuation in earlier assessment years is a relevant factor in determining FMV for subsequent years.
• Taxing provisions are prospective unless expressly made retrospective; hence, section 56(2)(viib) cannot be applied to share application money received before 01.04.2013.

Final determinations:

• The addition of Rs. 1,40,00,000 under section 56(2)(viib) was deleted.
• The disallowance of interest on late payment of TDS was dismissed as not pressed.
• General and additional grounds were not adjudicated.