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Facts
The assessee's assessment for AY 2013-14 was revised under Section 263, leading to a re-framed assessment where the AO made an addition of Rs.1.40 crore under Section 56(2)(viib) for alleged difference in the Fair Market Value (FMV) of shares issued at Rs.200 per share, considering FMV as Rs.186. The assessee contended that their valuation report showed FMV at Rs.200 and that Rs.10 crore of the share premium was received before Section 56(2)(viib) came into effect on 01.04.2013.
Held
The Tribunal deleted the addition under Section 56(2)(viib), holding that the assessee's valuation report, which included intrinsic and prospective value, adequately demonstrated an FMV of Rs.200 per share in accordance with Rule 11UA. Furthermore, the Tribunal ruled that Section 56(2)(viib) could not be applied retrospectively to the Rs.10 crore share premium received prior to its effective date of 01.04.2013. Ground 2, relating to TDS interest disallowance, was dismissed as not pressed.
Key Issues
1. Whether the addition under Section 56(2)(viib) was justified when the assessee provided a valuation report determining the Fair Market Value of shares at the issue price. 2. The retrospective applicability of Section 56(2)(viib) to share premium received prior to its effective date of 01.04.2013.
Sections Cited
250, 143(3), 263, 56(2)(viib), 147, Rule 11UA
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Income Tax Appellate Tribunal, MUMBAI BENCH “E”, MUMBAI
The instant appeal of the assessee is filed against the order of the Learned Commissioner of Income-tax (Appeals)-54, Mumbai [for brevity, ‘Ld. CIT(A)’] passed under section 250 of the Income-tax Act, 1961 (in short, ‘the Act’), for Assessment Year 2013-14, date of order 19.11.2024. The impugned order was emanated from Tutor Investments and Finance Pvt Ltd the order of the Learned Income-tax Officer-2(3)(3), Mumbai (in short, ‘the A.O.’) passed under section 143(3) read with section 263 of the Act, dated 26/02/2018.
The impugned appeal was filed with delay for 113 days. The assessee filed the condonation petition with explanation for filing the appeal in delay. The ld. DR has not made any strong objection. The delay for 113 days is condoned, and matter is taken for adjudication.
3. The assessee has taken the following grounds of appeal:-
“1. The Learned CIT (A)-54, Mumbai erred in confirming the action of the Learned Assessing officer in making an addition of Rs. 1,40,00,000/- on account of alleged difference in fair market value and actual consideration received for allotment of equity shares without appreciating the facts of the case in the right perspective.
2. The Learned CIT (A)-54, Mumbai erred in confirming the action taken by the Learned Assessing officer in disallowing interest incurred on late payment of TDS of Rs. 1,53,531/- without appreciating the facts of the case in the right perspective.
The Appellant reserve the right to amend, alter on add to the grounds of appeal. 4.The ground of appeal is without prejudice to the other.”
4. The brief facts of the case are that the assessment in the case of the assessee was originally completed under section 143(3) of the Act vide order dated 31.03.2016. Subsequently, the Ld. Principal Commissioner of Income Tax (Pr. CIT), invoking the provisions of section 263 of the Act, revised the said assessment order passed by the Ld. AO under section 143(3), on the ground that the implications of section 56(2)(vii)(b) of the Act were not adequately examined. The said revision order was challenged by the assessee before the ITAT, Mumbai Bench “E”, which, Consequent to the ITAT's direction, the Ld. AO re-framed the assessment under section 143(3) read with section 263 of the Act and made an addition of Rs.1.40 crores under section 56(2)(vii)(b) of the Act. The said addition pertained to the issuance of 10 lakh shares by the assessee at Rs.200 per share to M/s Chinar Commercials Pvt. Ltd. & M/s Chinar Finvest Pvt Ltd, for a total consideration of Rs.20 crores. During the reassessment proceedings, the Ld. AO adopted the book value of the shares at Rs.186 per share and treated the excess of Rs.14 per share (i.e., Rs.200 – Rs.186) as taxable under section 56(2)(vii)(b). Accordingly, the total differential amount of Rs.1,40,00,000 (Rs.14 × 10 lakh shares) was added to the total income of the assessee. The assessee contended that the issue of share capital at face value of Rs.10 and premium of Rs.190 per share had already been examined and accepted in the earlier assessment completed under section 143(3) read with section 147 of the Act for the AY 2009-10. Furthermore, the assessee submitted that the fair market value (FMV) of the shares as on 31.03.2013 was Rs.186 per share, while as on 31.03.2012, it was Rs.207 per share.
The Ld. CIT(A) observed that clause (viib) of sub-section (2) of section 56 was introduced by the Finance Act, 2012 with effect from 01.04.2013. It was further noted that out of the total share application money of Rs.20 crores, Rs.10 crores was received from M/s Chinar Commercials Pvt. Ltd. prior to 01.04.2013, i.e., at a time when the said provisions were not yet in force. Nevertheless, the Ld. CIT(A) upheld the addition made by the Ld. AO. Aggrieved by the order of the Ld. CIT(A), the assessee has preferred the present appeal before us.
Tutor Investments and Finance Pvt Ltd 5. The Ld.AR filed a paper book, which is containing Annexures “A” to “G” and he invited our attention in appeal order. The relevant part of appeal order is extracted below: - “8.2 During the appellate proceedings the appellant has fled a written submission, which reproduced as under During the year under reference, the Appellant has issued 10,00.000 shares at a price of Rs. 200/per share to Chinar Commercial Pvt. Ltd. and Chinar Fervest Pvt Ltd. for a total consideration of Rs.20 Crores. The value per share as per the valuation report dated was Rs. 186/ It is submitted that the valuation of Rs. 186per share wat worked out on the basis of book value of the assets as on 31.03.2013 without considering the intrinsic value or the market value of the assets of the Appellant. It is submitted that as per the categorical provision contained in explanation (a) of section 56(2)(viib), the fair market value of the shares shall be the value as determined in accordance with such method as may be prescribed (rule 11UA) or the value as substantiated to the satisfaction of the AO, based on the value. on the date of issue of shares, of its assets, including intangible assets being goodwill etc whichever is higher. In the course of original assessment proceedings, the Appellant explained the valuation of shares on the basis of value of various non- current investment held by the Appellant which has been taken on its books value rather than its intrinsic value while determining the FMV of shares, the value determined at Rs. 186 is indistinct and ambiguous. It is also pertinent to mention that the Appellant during the F.Y. 2011-12 has also issued shares Rs. 200/per share. The value of assets and investments of the Appellant has only strengthened from then and therefore the value of shares cannot be less than Rs. 200/by any stretch of Imagination. This issue was also examined during the regular assessment proceedings and the Appellant has also substantiated the value of shares issued during the year to the erstwhile Assessing Officer to which no objection whatsoever was raised by the Leamed Assessing Officer and the issue related to the fresh issue of shares and the value realized thereof was accepted. The value of share as may be substantiated by the Appellant company to the satisfaction of the Assessing Officer ought to be considered as the fair value of the shares issued Tutor Investments and Finance Pvt Ltd if such value exceeds the value as per rule 11UA. Therefore, the value of shares as issued by the Appellant and as accepted by the erstwhile Assessing Officer is legally acceptable and the deviation made now in the said settled issue is uncalled for and is not tenable.
It is also submitted that merely the value calculated on the basis of book values is less than the fair market value cannot be held as a conclusive basis of invoking the section 56 (2)(vii). The value of shares shall be construed in accordance with all the other material facts. On the basis of book value of assets as on 31.03.2012 the value of shares works out to Rs. 207/- (Share capital Reserve & Surplus) / No. of shares). The copy of audited financial statements is enclosed herewith as Annexure C The following table shall demonstrate the above the easier manner.
Particulars As on 31.03.2013 As on 31.03.2012 Share Capital Rs.71,921,500/- Rs.14,27,85,130/- Reserve & Surplus Rs.81,56,02,910/- Rs.63,72,38,924/- Total Rs.88,75,24,410/- Rs.78,00,24,054/- Total No. of Shares 4769650 Shares 3769650 Shares Book Value per share 186 Per Share 207 Per Share The value of shares considering the intrinsic value of investments is much higher. The Appellant negotiated an average price of Rs. 200/and issued the shares accordingly which was stand accepted in the earlier years as well as in this year by the erstwhile Learned Assessing Officer. The Appellant could property demonstrate the value of shares before the share applicants and after negotiations issued the shares at the value which was reasonable considering the overall facts and circumstance existed at the time of the issue. Without prejudice to the above submissions, it is submitted that though the provisions of Clause (viib) of sub section (2) of section 56 were inserted vide Finance Act, 2012 w.e.f 01.04.2013, it is most humbly submitted that out of the total impugned amount of share application money. 50% of the amount i.e. Rs. 10 crores was received from Chinar Commerce Pvt. Ltd. before 01.04.2012 i.e, the amount under question to this extent was received by the Appellant at the time when the provisions of this section were not in force. For this reason also no addition under section 56(2)(viib) is warranted in this respect it is Tutor Investments and Finance Pvt Ltd submitted that the appellant substantiated the fact that the value of Rs 200/per share was proper and hence was the fair market value under clause (a)(ii) of explanation to section 56(2)(viib).
Hence, the addition of Rs. 1,40,00,000/- u/s 56(2) (viib) of the Act is not justified the and hence the Appellant your goodself to kindly the delete the addition..."
5.3 The facts recorded and finding of the AO in the assessment order and the submission made by the appellant has been considered.
5.3.1 The facts of the case of the appellant are that during the year the appellant issued 10 lac shares at price of Rs. 200/- per share to M/s. Chinar Commercial Pvt. Ltd. and M/s. Chinar Finvest Pvt. Ltd for total consideration of Rs. 20 crore. The amount of Rs. 10 crore was received before 01.04.2012. The value of the share as per valuation report was Rs. 186/- per share. There was a difference of Rs. 14 in the fair market value of the share and issue price of the share, therefore, the AO made addition of Rs. 1,40,00,000/- u/s. 56(2)(viib) of the Act.
5.3.2 During the appellate proceedings, the appellant submitted that as per the valuation report the value of share was Rs. 186 per share. The value of Rs. 186 per share was worked out on the basis of book value of assets as on 31.03.2013. While working out the value of share at Rs. 186, the intrinsic value for market value of assets was not considered. The appellant also submitted that as per provisions of section 56(2)(viib) fair market value of share shall be value as determined in accordance rule 11UA or value as substantiated to the satisfaction of the AO.
The appellant further submitted that during F.Y. 2011-12 shares were issued at Rs. 200 per share, therefore, the value of share could not be less than Rs.
The appellant further submitted that the value of share was accepted by the earlier assessing officer. The appellant also submitted that on the basis of book value of assets the value of shares as on 31.03.2012 was Rs. 207/-. The appellant also reiterated that Rs. 10 crore was received before 01.04.2012, therefore provisions of section 56(2)(viib) are not applicable. Thus, the appellant submitted that addition of Rs. 1,40,00,000/- made u/s. 56(2)(viib) by the AO should be deleted.
Tutor Investments and Finance Pvt Ltd 5.3.3 The facts remains that the appellant issued shares during the year @ of Rs. 200/- per share. The value of the shares as per valuation report was Rs. 186 per share. The appellant has not given any working of value of share as per rule 11UA. In fact, the valuation report mentions the value of share at Rs. 186 per share. The appellant submitted that as on 31.03.2013 the book value was Rs. 186 per share and that on 31.03.2012 was Rs. 207 per share. However it has not been explained satisfactory regarding the value of share. Merely the value of shares at Rs. 200 per share was accepted by the AO in earlier assessment order which could not be accepted that the value which was required to be determined as per rule 11UA or to the satisfaction AO was not correct. Further the provisions of section 56(2)(viib) are applicable for the year in which the shares are issued. Therefore, the argument taken by the appellant that Rs. 10 crore was received before 01.04.2012 and therefore provisions of section 56(2)(viib) are not applicable is not a valid argument and it is rejected.
5.3.4 In number of the judgments, courts have upheld addition made u/s 56(2)(viib) where there is a difference in fair market value and issue price of shares.”
The Ld.AR placed that the assessee is holding the share value of Rs.207/- per share in the financial year 2011-12. So, the issuance of shares at Rs.200/- per share is not contravening the provisions of section 56(2)(vii)(b) of the Act. The assesse also submitted a valuation report duly certified by the Chartered Accountants, M/s A.B. Tandan & Co dated 17/07/2013 and the relevant part of the valuation report is reproduced as below:-
“VIIICONCLUSION We have determined Fair Market Value of Equity Share of the Company according to the method prescribed under Rule 11UA of the Income Tax Rules, 1962. No difficulties or obstacles have arisen in subject valuation.
Tutor Investments and Finance Pvt Ltd Based on the said methodology presented herein, since the Book value per share per Equity Share of Tutor Investment & Finance Private Limited as on March 31, 2012 is INR 207/-(Indian Rupees Two Hundred and seven Only)per share and Book value per share per Equity Share of Tutor Investment & Finance Private Limited as on March 31, 2013 is INR 186/-(Indian Rupees One Hundred and Eighty Six Only) per share, the Fair Market Value of Tutor Investment & Finance Private Limited based on future intrinsic value is arrived at Rs.200/-per share.
Wehavenoobligationtoupdatethisreportorourconclusionforinformationthatcomes to our attention after the date of report.”
The Ld. DR argued and stands in favour of order of the revenue authorities.
We have carefully considered the rival submissions and perused the material available on record, including the valuation report, audited financial statements, and prior year assessment records. 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 under section 56(2)(viib) of the Act. However, on perusal of 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).
Tutor Investments and Finance Pvt Ltd Furthermore, 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 under section 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. In view of the above, we are of the considered opinion that 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.
In case of ground No.2, the Ld.AR has not pressed the same. So ground 2 is dismissed.
Grounds 3 & 4 are general in nature; so, need not be adjudicated upon.