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Income Tax Appellate Tribunal, ‘B’ BENCH, CHENNAI
Before: SHRI V. DURGA RAO & SHRI G. MANJUNATHA
per share with premium of Rs.99.31 per share on 21.03.2011.
As per terms of issue, an amount of Rs.7/- per share along with premium of Rs.68.90 per share has been received for the financial year 2010-11. During the financial year relevant to the assessment year 2014-15, the assessee company has received balance amount of Rs.3/- as call money and balance share premium amount Rs.30.31 per share payable on partly paid equity shares held by shareholders. Accordingly, for the year under consideration, the assessee had received Rs.16,36,72,485/- as balance share premium. The assessee had also justified premium charged on issue of share capital and explained that share price has been determined after taking into account, inter-alia, future profitability of the company after commissioning marine chemical project.
The Assessing Officer, however, was not convinced with the explanation furnished by the assessee and according to the Assessing Officer, the assessee could not justify issue of shares at premium of Rs.99.31 per share as against face value Rs.10/- per share, therefore, the A.O opined that excess consideration received on allotment of equity shares over and above fair market value as on date of allotment is income of the assessee u/s.56(2)(viib) of the Income Tax Act, 1961. The relevant findings of the Assessing Officer are as under:-
“4. ADDITION U/S. 56(2)(viib):
4.1 On verification of Note No. 3 to the Audited financials and further details submitted by the assessee it is found that, the assessee company has received a consideration of Rs.16,36,72,482/- under Securities Premium Account. This is on account of part consideration received during the year on 30% of face value and share premium at Rs.99.21 out of 93,99,950 equity shares allotted on 21.03.2011 for paid up value of Rs.7/- and premium of Rs.99.31/- per share.
4.2 During the assessment proceedings the assessee was asked to produce the fair market value of the share on the date of allotment of shares. In response to that the assessee filed computed fair market value as on 15.3.2011. As per the computation of the subject company, the fair market value as on 15.3.2011 is Rs.10/-. Whereas, the assessee company sold its shares at a premium of Rs.99.21/-.
4.3 In his regard show cause notice was issued to the assessee on 09.03.2016 as to why the provision u/s 56(2)(viib) of the IT Act should not be applied to the above receipt of Rs.12,12,40,000/-. In response to the show cause notice, the assessee replied as follows: We wish to state that the company received share premium of Rs. 16,36, 72,482/- during the Financial year 2013-14 in respect of equity shares allotted to the shareholders during the financial year 2010-11. The shares were allotted to the shareholders on 21.03.2011 at the face value of Rs.l0/- and the share premium of Rs. 99.21 at the time of allotment. The company received 70% of face value (Rs. 7/- and Share Premium (Rs. 68.90 i.e. 70% of 99.21) during the FY 2010-11 as per the company ‘s demand.
During the FY 2013-14, the company received the balance consideration of face value of Rs. 1,66,99,850/- and share premium Rs. 16,36,72,485/- from the shareholders in proportion to the number of shares held by them.
In the light of the above stated facts, we humbly submit that the provisions of Section 56(2)(viib) which has cone into force with effect from 01.04.2013 are not applicable in our case as the company has not issued any shares during the F.Y 2013-14. The shares were allotted during the F Y 2010-11. In other words the share premium received during the FY 13-14 pertains to the shares issued in 2010-11 when such provisions were not in the statute book.”
The above submissions of the assessee was carefully considered. As per provisions of section 56(2)(viib) of the Income Tax Act, 1961, which is reproduced below:
“Where a company, not being a company in which the public are substantially interested, yes, in any previous year, from any person being a resident, any consideration for of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares.”
Company - the subject company is not a public company, it is closely held private company. Receives - received during the previous F.Y. 2013-14 Any consideration - consideration of Rs.16,36,72,482/-
From the above, it is clear that, if the assessee receives any consideration in any previous year for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares will be treated as Income from Other Sources. In the present case, the provision of section 56(2)(viib) is very well applicable on specific point that, the assessee has received any consideration during the previous year which is squarely applied in this case. From the beginning, the assessee did not agitate the point of receiving the consideration during the previous year. The assessee repeatedly stated that allotment of shares was done in 2010-11. The section is not specific about any allotment of share. Hence, the contention of the assessee is not acceptable. Therefore, Rs.163672482/- is treated as income under Section 56(2)(viib) of the Income Tax Act, 1961 and added back to the total income of the assessee under the head “income from other sources.”
Being aggrieved by the assessment order, the assessee preferred an appeal before the learned CIT(A). Before the learned CIT(A), the assessee submitted that provisions of section 56(2)(viib) cannot be applied to the case of the assessee, because said provisions has come into statute w.e.f.
01.04.2013, whereas the assessee had received premium on allotment of equity shares for the financial year 2010-11, much before the date, the provisions was inserted to statute. The assessee had also justified issue of shares at premium of Rs.99.31 per share and argued that fair market value as per net asset value method as at end of the financial year 31.03.2014 is at Rs.147.36 per share, which is much higher than issue price of Rs.109.21 per share. The assessee further contended that it has considered value of intangible assets while determining value of shares at Rs.109.21 per share.
Further, the assessee has also substantiated price of shares under DCF method by considering future cash flows from operations, as per which equity share price had been worked out at Rs.109.21 per share at the time of allotment in March, 2011. It was further submitted that the assessee had also allotted 5.00 lakhs equity shares to a non-resident shareholder at issue price of Rs.450.10 per share, which includes premium of Rs.440.10 per share. Therefore, the assessee argued that the Assessing Officer has erred in invoking provisions of section 56(2)(viib) of the Act and taxed premium under the head ‘income from other sources’.
The learned CIT(A), after considering relevant submissions of the assessee and also taken note of provisions of section 56(2)(viib) of the Act, opined that when the assessee had issued shares in financial year 2010-11 and received share premium, the Assessing Officer cannot invoke provisions of section 56(2)(viib) of the Act, when the assessee had received call money from shareholders in the financial year 2013-14, because when the shares has been allotted in the financial year 2010-11, provisions of section 56(2)(viib) of the Act, was not in statute book. The learned CIT(A) further noted that even otherwise, additions made by the Assessing Officer towards share premium cannot be sustained, because the assessee had determined fair market value of the shares under discounted cash flow method, as per which, as on date of allotment value of equity shares is higher than issue price.
Therefore, the learned CIT(A) directed the Assessing Officer to delete additions made towards share premium under section 56(2)(viib) of the Act. The relevant findings of the learned CIT(A) are as under:-
“The submissions of the appellant were considered vis-à-vis the findings of the AO. During the assessment proceedings, the AO invoked the provisions of section 56(2)(viib) as the aggregate consideration of the shares received during the F.Y 2013-14 exceeded the face value of the shares. The excess consideration amounting to Rs.16,37,72,482/- was brought to tax under the head ‘Income from other sources’. Prior to evaluating the comprehensive submissions made by the appellant, it would be edifying to examine the provisions of clause (viib) which was inserted in section 56(2) of the Act from the assessment year 20 13-14:
“where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares”
This clause provides that where a closely held company issues shares to a resident for an amount received in excess of the fair market value of the shares, it shall be deemed to be the income of the company under the head ‘income from other sources’. The fair market value for this purpose is the higher of the value a right that on the basis of the method to be prescribed or the value as substantiated by the company to the satisfaction of the A.O. As per this section, the excess consideration that stems from the issue of shares shall be brought to tax with effect from 1.4.2013.
In the instant case, the equity shares numbering 93,99,950 were issued, applied for and allotted on 2 1/3/2011 and an amount of Rs.7/- per share along with the premium of Rs.68.90 was collected. Therefore, the total sum collected during the financial year 2010-11 out of the 93,99,950 equity shares issued, subscribed and allotted towards face value was Rs.6,57,99,650/ - and towards securities premium was Rs.64,76,56,555/-. During the F.Y. 2013-14, the shareholders holding 53,99,950 equity shares have paid the amounts due towards face value of share amounting to Rs.1,61,99,850/- and towards share premium amounting to Rs.16,36,72,482/- to the appellant company.
The appellant filed copy of Form No.2 filed with the ROC, Ministry of Corporate, Affairs indicating the allotment of 93,99,950 shares made on 21/3/2011. It also indicated that Rs.7/- out of Rs.10/- was received towards face value of shares and Rs.68.91 towards premium and the balance Rs.3/- was to be paid on calls towards face value and the balance of Rs.30.31 towards premium. The appellant stated that these details were already filed before the A.O. at the time of assessment proceedings. Thus, in effect the crucial date to be considered for invoking the provisions of section 56(2)(viib) is the date of allotment i .e 21/3/2011. Moreover, it is apparent that no shares had been issued by the appellant during the relevant previous year i.e. FY. 2013-14. Hence, the provisions of section 56(2)(viib) cannot be invoked in this case as it came into effect from 1/4/2013.
Furthermore, the AO has not found any serious defect in the facts and details used in determining the fair market value of the shares under discounted cash flow method adopted by the appellant. The Hon’ble Jaipur Bench in the case of CIT vs. Safe Decore (P) Ltd [2018] 90 taxmann.com l6l (Jaipur-Trib) held that in such instances the additions made by the AO have to be deleted. Taking into account the facts and circumstances of this case, the addition of Rs. 16,36,72,482/- which was treated as income u/s.56(2)(viib) requires to be deleted. This ground of appeal is allowed. As a consequence, the appellant’s grounds in paras 2.8 and 2.9 of the Grounds of appeal pertaining to the raising of demand of Rs.5,00,74610/- under section 156 of the Act becomes infructuous. Hence, these grounds of appeal are treated as dismissed.”
The learned DR submitted that the learned CIT(A) erred in deleting addition made u/s. 56(2)(viib) of the Act, by holding that said provisions cannot be invoked in the case, as it came into effect from 01.04.2013 and as there was no fresh issue of shares on premium and also for the reason that share premium received by the assessee pertains to financial year 2010-11, without appreciating fact that section 56(2)(viib) of the Act can be invoked for share premium received in any previous year starting from 01.04.2013, where such shares exceeds fair market value of the company not being a company in which public are substantially interested. The learned DR further submitted that the learned CIT(A) erred in deleting addition made u/s. 56(2)(viib) of the Act, relying on the decision of the Tribunal in the case of CIT Vs. Safe Decore (P)
Ltd. (2018) 90 taxmann.com 161, because facts and circumstances of the case referred to above is different with that of the assessee’s case, in view of the fact that during the assessment proceedings the assessee had only submitted fair market value of the share at Rs.10/- as per on NAV method, where no DCF value has been submitted to the Assessing Officer . The learned DR further referring to decision of the Hon’ble Kerala High Court in the case M/s. Sunrise Academy of Medical Specialties (India)(P) Ltd., Vs. ITO in W.P. (C)
No.3485 of 2018, dated 22.05.2018 submitted that where a company receives consideration on allotment of shares in excess of face value, aggregate consideration received for such shares as exceeds fair market value of shares is liable to be assessed under the head ‘income from other sources’.
The learned CIT(A) without appreciating above facts deleted additions made by the Assessing Officer and hence, order of the Assessing Officer should be upheld.
The learned A.R for the assessee, on the other hand, submitted that the Assessing Officer has erred in making additions towards share premium u/s.56(2)(viib) of the Act, without appreciating fact that when the shares were allotted in financial year 2010-11, provisions of section 56(2)(viib) of the Act was not there in statute book. The learned A.R for the assessee further submitted that the assessee had allotted shares in the financial year 2010-11 and has filed necessary return of allotment in Form No.2 with Registrar of Companies and proved that allotment has been completed in the financial year 2010-11. Further, although the assessee had received 70% of consideration in the year of allotment, but such arrangement between the assessee and its shareholders is in terms of provisions of the Companies Act, 1956, as per which the assessee can allot equity shares and collect part of capital and balance can be collected on call. In this case, the assessee has completed allotment of equity shares in 2010-11 and has also collected substantial portion of share capital.
The balance 30% consideration, including Rs.3/- per equity shares on face value and balance 30% premium was collected on call. Therefore, it cannot be considered that shares have been issued in the financial year relevant to the assessment year 2014-15 and the provisions of section 56(2)(viib) of the Act is applicable. The learned A.R for the assessee further submitted that even otherwise, on merits, the Assessing Officer cannot invoke provisions of section 56(2)(viib) of the Act, because the assessee has justified premium charged on issue of shares, as per discounted cash flow method, the value of shares at the time of allotment is higher than issue price of Rs.109.21 per share. Further, the assessee had filed valuation certificate from the valuer, where he has followed discounted cash flow method and arrived at share price of Rs.109.21 per share. Therefore, once the assessee chooses a particular method, the Assessing Officer cannot change method and determine value of shares and make additions u/s.56(2)(viib) of the Act. The learned CIT(A), after considering relevant submissions has rightly held that the Assessing Officer has erred in invoking provisions of section 56(2)(viib) of the Act for the assessment year in question, when the shares were allotted in the year 2010-11 and thus, order of the learned CIT(A) should be upheld.
We have heard both the parties, perused material available on record and gone through orders of the authorities below. The facts borne out from records indicate that the assessee had allotted 93,99,950 equity shares of Rs.10/- face value with premium of Rs.99.21 per share on 21.03.2011 and received Rs.7/- towards face value along with premium of Rs.68.90 per share on allotment. Further, as per terms of allotment of shares, balance Rs.3/- per share along with premium of Rs.30.31 per share was to be paid on subsequent call. Therefore, the assessee has allotted 93,99,950 equity shares @ Rs.109.21 per share on 21.03.2011 and has received share capital of Rs.6,57,99,650/- and securities premium of Rs.64,76,56,555/-. However, as per terms of allotment, share holders have paid balance amount on call during the financial year relevant to assessment year 2014-15 towards share premium amounting to Rs.16,36,72,482/-. The Assessing Officer had assessed security premium under section 56(2)(viib) of the Act for impugned assessment year on the ground that as per provisions of section 56(2)(viib) of the Act, where a company, not being a company in which public are substantially interested, receives, in any previous year from any person being resident, any consideration for issue of shares that exceeds face value of such shares, aggregate consideration received for such shares as exceeds fair market value of shares is income of the assessee. According to the Assessing Officer, if the assessee receives any consideration in any previous year for issue of shares that exceeds face value of such shares, then aggregate consideration received for such shares in excess of fair market value of shares will be treated as income from other sources. Therefore, the Assessing Officer was of the opinion that when the assessee has received part securities premium for the impugned assessment year, the provisions of section 56(2)(viib) of the Act is very well applicable, when the assessee has received any consideration and thus, assessed securities premium u/s. 56(2)(viib) of the Act.
The provisions of section 56(2)(viib) has been inserted to the statute by the Finance Act, 2012 w.e.f. 01.04.2013 and as
per said provisions, where a company, not being a company in which public are substantially interested, receives in any previous year, from any person being a resident, any consideration for issue of shares that exceeds face value of such shares, aggregate consideration received for such shares as exceeds fair market value of shares shall be treated as income from other sources. For the purpose of this section, fair market value of shares shall be value as may be determined in accordance with such method, as may be prescribed under Rule 11U and 11UA or as may be substantiated by the company to the satisfaction of the Assessing Officer based on value on the date of issue of shares of its assets, including intangible assets, being goodwill, know-how, patent, copy rights etc., whichever is higher. Therefore, to resolve the issue in hand, one has to understand provisions of section 56(2)(viib) of the Act, and period for which such provision is applicable. There is no dispute with regard to assessment year for which provisions of section 56(2)(viib) is applicable. The said provision has been made applicable from assessment year 2013-14 onwards.
Further, in order to apply said provisions to a person who receives security premium, there must be two events simultaneously happen i.e., (i) the assessee must receive in any previous year consideration for issue of shares & (ii) consideration received for issue such shares exceeds face value of such shares. Therefore, in order to apply provisions of section 56(2)(viib) of the Act, for any previous year, there must be allotment of equity shares and such allotment should be over and above face value of such shares. In this case, allotment took place on 21.03.2011 relevant to assessment year 2011-
12. The assessee had allotted equity shares and filed return of allotment with Registrar of Companies. However, as per terms of agreement between the assessee and its shareholders, shareholders should pay 70% of issue price on allotment and balance 30% of issue price on call. The said arrangement between the assessee and its shareholders is in accordance with the Companies Act, 1956, as per which the assessee can collect part of consideration towards allotment of shares and balance can be collected on call. Therefore, in our considered view, when the assessee has allotted equity shares in the financial year 2010-11, allotment referred to under the Companies Act is complied with, because the assessee has filed necessary return of allotment with Registrar of Companies. Subsequent event of receipt of part consideration subsequent to date of allotment does not in any way change date of allotment. In other words, balance consideration payable by shareholders on allotment of equity shares becomes debt which can be collected at any time, as per terms of agreement between the parties, but for the purpose of reckoning date of allotment, it is important to consider date of allotment as considered by the parties, in terms of provisions of the Companies Act, 1956, by filing return of allotment in Form No.2 with the Registrar of Companies. In this case, as per details filed by the assessee, including return of allotment in Form no.2, allotment is completed in the financial year 2010-11, when the provisions of section 56(2)(viib) of the Act, was not in the statute book. Therefore, we are of the considered view that the Assessing Officer cannot invoke provisions of section 56(2)(viib) of the Act, for the impugned assessment year when allotment has been completed in the financial year 2010-11 itself, because receipt of balance consideration towards allotment of shares cannot be equated with allotment of equity shares. Hence, we are of the considered view that the Assessing Officer has erred in invoking the provisions of section 56(2)(viib) of the Act and taxed securities premium under the head ‘income from other sources’ for the assessment year in question.
Be that as it may, coming to other facet of the issue. The Assessing Officer has questioned premium charged on issue of shares. According to the Assessing Officer, fair market value of shares as on date of issue is at Rs.10/- on net asset value method. Therefore, the Assessing Officer was of the opinion that consideration received over and above fair market value of the shares is income of the assessee. We have gone through reasons given by the Assessing Officer in light of various arguments advanced by the learned A.R for the assessee and we ourselves do not subscribe to the reasons given by the Assessing Officer for simple reason that the assessee has determined value of shares as per discounted cash flow method, as per which fair market value of shares as on date of issue was at Rs.109.21 per share. The assessee has determined such valuation on the basis of discounted cash flow of subsequent years by taking into account project under implementation and its relevance, including intangibles possessed in the line of business carried out by the assessee.
The assessee has also justified fair market value determined as on date of allotment of shares by filing necessary details to establish fair market value of the shares as per net asset value method as at end of the assessment year 2014-15, as
per which value per equity share is at Rs.146.3 per share which is higher than issue price at Rs.109.21 per share, which means, fair market value determined by the assessee at the time of allotment of shares is not hypothetical, but intrinsic value of the share based on its future earning capacity.
Therefore, we are of the considered view that even on merits, the assessee has justified price charged for allotment of equity shares, including premium.
Further, as per provisions of section 56(2)(viib) of the Act, the assessee shall determine fair market value of the shares in accordance with such method, as may be prescribed or as may be substantiated by the company to the satisfaction of the Assessing Officer. Rule 11UA is prescribed method of valuation of unquoted equity shares and as per said rules, the assessee at its option can choose either DCF method or net asset value method to determine value of shares of a company. From plain reading of Rule 11UA, it is very clear that option is given to the assessee to choose particular method for valuation of shares, either DCF method or net asset value method. Once an assessee chooses a particular method, the Assessing Officer cannot change method followed by the assessee for valuation of shares, however, he can very well examine correctness of method followed by the assessee and determine price of shares. In this case, the assessee has adopted DCF method for valuation of shares.
The Assessing Officer has neither called for any details nor examined correctness of method followed by the assessee, but called upon the assessee to work out fair market value of the shares on the basis net asset value method and formed opinion that share price charged by the assessee for allotment of equity shares is in excess of fair market value of shares as on date of allotment. In our considered view, the Assessing Officer has grossly erred in changing method of valuation of shares, even though law is very clear in this regard that the Assessing Officer does not have any power to change method of valuation, once the assessee chooses a particular method.
If at all, the Assessing Officer is not satisfied with the value arrived at by the assessee, then he can very well examine method followed by the assessee and in case any difference in value of shares, the Assessing Officer can re-work share price based on necessary details filed by the assessee. In our considered view, DCF method is one of the permissble method for valuation of shares and such method is recognized under Rule 11UA of the Income Tax Rules, 1962. Further, there may be difference in projection considered by the assessee for valuation of shares, when compared to actual financial for relevant financial year. However, that by itself is not a ground for rejection of DCF method, because DCF method follows projected cash flow of the assessee for future years which may not be equal to actual financial of the assessee company. However, what is relevant to see is whether projection worked out by the assessee is based on same degree of estimation and further, said estimation is more or less equal to actual performance of the company. In this case, the assessee has filed fair market value of the shares worked out as at end of the impugned assessment year on net asset value method, as per which, share price has been worked out at Rs.147.36 per share which is much higher than issue price of Rs.109.21 per share. Further, the assessee had also allotted 5 lakhs equity shares to non-resident shareholder M/s.Sojitz Corporation, Japan, at issue price at Rs.450.10
per share, which includes premium of Rs.440.10 per share. If you compare, premium charged on resident shareholders, when compared to non-resident shareholder, premium charged to resident shareholders is much below to premium charged on non-resident shareholders. From the above, it is very clear that the assessee has justified premium charged on issue of shares with necessary evidences, including fair market value of the shares as on date of issue. Therefore, we are of the considered view that the Assessing Officer has completely erred in making additions towards securities premium u/s.56(2)(viib) of the Income Tax Act, 1961. The learned CIT(A), after considering relevant facts has rightly deleted additions made by the Assessing Officer. Hence, we are inclined to uphold findings of the learned CIT(A) and dismiss appeal filed by the Revenue.
The facts and issues involved in are identical to the facts and issues which we have already considered in for the assessment year 2014-15. The Assessing Officer has made addition towards securities premium u/s.56(2)(viib) of the Income Tax Act, 1961. We find that an identical issue has been considered by us in ITA No.1998/Chny/2019 for the assessment year 2014-15. The reasons given by us in the preceding paragraphs of ITA No.1998/Chny/2019 shall equally applies to this appeal, as well. Therefore, for similar reasons, we are inclined to uphold findings of the learned CIT(A) and dismiss appeal filed by the Revenue.