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Facts
The assessee converted unsecured loans of Rs. 10,39,000/- into share capital in Baroque Pharmaceutical Ltd. The Assessing Officer (AO) valued these shares as per Rule 11UA of the Income Tax Rules and made an addition of Rs. 7,33,534/-. The CIT(A) dismissed the assessee's appeal.
Held
The Tribunal held that the conversion of unsecured loans into share capital was due to the company's business needs and a condition for obtaining a bank loan. The AO's valuation had discrepancies, and therefore, the addition was not justified.
Key Issues
Whether the addition made by the AO on account of difference in valuation of shares issued towards conversion of loan is justified.
Sections Cited
147, 144, 56(2)(vii)(c)(ii), 11UA
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Income Tax Appellate Tribunal, AHMEDABAD “SMC” BENCH
Before: Shri Sanjay Garg
आदेश/ORDER The present appeal has been filed by the Assessee against the order passed by the Learned Commissioner of Income Tax (Appeal)/National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as “CIT(A)’] dated 04.07.2024 arising from the order passed u/s. 147r.w.s.144 of the Income Tax Act, 1961 (here-in-after referred to as “the Act”) relevant to the Assessment Year 2016-17.
The sole issue involved in this appeal is relating to the valuation of shares allotted to the assessee by the company namely Baroque Pharmaceutical Ltd. while converting the unsecured loans given to the said company of Rs. 10,39,000/- . The Assessing Officer calculated the value of the shares as per Rule 11UA of the Income Tax Rules and made the impugned addition of Rs. 7,33,534/- u/s. 56(2)(vii)(c)(ii) of the Income Tax Act read with rule 11(UA) of the Income Tax Rules on account of difference in the valuation of shares calculated as per rule 11(UA) as compared to the valuation given in the valuation report obtained from independent valuer.
The Assessing Officer has passed the order u/s. 147 r.w.s. 144 of the Income Tax Act rejecting the return filed by the assessee stating that the return filed by the assessee was an invalid return. The CIT(A) dismissed the appeal of the assessee by way of an ex-parte order passed on 04-07-2024.
The ld. counsel for the assessee has submitted that it was not a case of transferring the money in kind i.e. by way of shares by way of transferring the higher value shares at low rates. The ld. counsel for the assessee has explained that, in fact, the company Baroque Pharmaceutical Ltd. for the purpose of its business needs had taken loan of Rs. 22 crores from State Bank of India that one of the conditions in the loan agreement was that the company will convert the unsecured loans obtained from private parties into share capital. Under the circumstances, the company had allotted shares to the assessee by converting loan of Rs. 10,39,000/- into share capital. The valuation of shares as obtained from the private valuer and accordingly the shares were allotted at Rs. 1000 per share. However, the ld. Assessing Officer calculated the value of the shares as per Rule 11UA at Rs. 1706/- per share.
The ld. counsel for the assessee has demonstrated that there were various discrepancies in the calculation of value of shares by the Assessing Officer. She has demonstrated that the Assessing Officer failed to compute book value of assets, the amount of income tax/TDS/TCS credit or advance tax, and unamortized expenditure etc. The ld. counsel has further submitted that it is not a case of passing for higher value of shares at lower rates, rather the unsecured loan were converted into share capital because of the business needs, especially due to the condition put by the bank for grant of loan to the company for its business needs. She, therefore, has contended that no addition was warranted in this case. The ld. Departmental Representative, however, has relied on the findings of the lower authorities.
I have considered the rival contentions and gone through the records. The ld. counsel for the assessee has demonstrated that it is not a case of allotment of shares of higher value at lower rates with a purpose of transferring capital asset of higher value for less money. In fact, the company Baroque Pharmaceutical Ltd. had obtained loan of Rs. 22 crores for its business needs from the bank and to comply the conditions of the loan sanction letter, the outstanding loan of Rs. 10,39,000/- given by the assessee was converted into share capital. Even, the ld. counsel has also demonstrated various discrepancies in the valuation done by the Assessing Officer. In view of this, I do not find justification on the part of the Assessing Officer to make impugned additions and the same are ordered to be deleted.