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Income Tax Appellate Tribunal, AHMEDABAD “A” BENCH, AHMEDABAD
Before: Ms. SUCHITRA KAMBLE & SHRI WASEEM AHMED
PER SUCHITRA KAMBLE, JUDICIAL MEMBER :
This appeal is filed by the Assessee against the order dated 25.01.2018 passed by the CIT(A)-2, Vadodara for the Assessment Year 2014-15.
2. The assessee has raised the following grounds of appeal :-
“1. The CIT(A) has erred both in law and in fact in upholding the order of Income Tax Officer and thereby confirming addition at Rs.2,41,96,000/- u/s.56(2)(viib) of the Income Tax Act.
a) Your appellant on facts of the case strongly submit that the Share Premium of Rs.92/- per share is at Fair Market Value of shares of the appellant company as on 31.03.2014 which is supported proof and evidence as required under law and all such conditions being satisfied the said amount cannot be treated as liable to be included u/s.56(2)(viib).
b) Your appellant further submits that during assessment proceedings and before CIT(A) all evidence proof and details and basis of premium of Rs.92/- per share was submitted duly supported by evidence which ought to have accepted.
Page 2 of 6 3. a) Your appellant also submits that section 56(2)(viib) does not apply since there is no transaction of money and the appellant company has not received any cash or “consideration” from share holders towards the premium of Rs.92/- per share. b) Your appellant submits that the shareholders had old unsecured loans given to the appellant company and the share premium of Rs.92/- per share is by way of a transfer entry and settling the old dues and no transaction towards premium on share has taken place in the accounting year under appeal and therefore Section 56(2)(viib) does not apply.
Without prejudice and in the alternative if at all premium of Rs.2,41,96,000/- share is held, taxable then it should be taken as a gross amount of receipt and only to the extent of net profit be taken as income.
It is therefore submitted that relief claimed above be allowed and the order of the CIT(A) be modified accordingly.”
The assessee company filed its return of income on 25.11.2014 declaring total income at Rs. Nil. The case of the assessee was selected for scrutiny and accordingly notice under Section 143(2) and 142(1) of the Income Tax Act, 1961 were issued from time to time. During the course of assessment proceedings, the Assessing Officer observed that the assessee has issued 263000 equity shares of Rs.10/- each and increase its share capital of Rs.26,30,000/- during the year under consideration. The assessee also received share premium of Rs.2,41,96,000/- (i.e. Rs.2,63,000 x 92) at the rate of share premium of Rs.92/- each for issue of 263000 equity shares. The assessee furnished share certificate and working for valuation of shares along with certificate. At the time of assessment proceedings, the Assessing Officer noticed that the assessee furnished copy of certificate of the assessee company bearing no date showing the fair market value of equity shares of Vanity Cerachem Pvt. Ltd. is Rs.96/- wherein it was mentioned that the calculation are based on projections submitted to bank in CMA report and further calculating discounted cash flows. The assessee also submitted copy of calculation for discounted cash flows bearing no date and signature. The assessee did not make valuation of its equity shares in accordance with the provisions of Section 56(2)(viib) of the Act and Rule 11U and 11UA. Therefore, show cause notice was issued to the assessee in respect of the Page 3 of 6 said amount should not be treated as income from other source within the provisions of Section 56(2)(viib). The assessee filed details of submissions before the Assessing Officer. After tacking cognisance of the same, the Assessing Officer made addition of Rs.2,41,96,000/- on account of share premium.
4. Being aggrieved by the assessment order, the assessee filed appeal before the CIT(A). The CIT(A) dismissed the appeal of the assessee.
The Ld. AR submitted that during the year under consideration the assessee issued 263000 equity shares having face value of Rs.10/- each at premium of Rs.102/- per share to M/s Gibralter Glass and Ceramics Pvt. Ltd. for Rs.2,68,26,000/-. The Ld. AR submitted that the assessee company borrowed money as unsecured loan from M/s Gibralter Glass and Ceramics Pvt. Ltd. in which the then management was having financial interest in earlier years and out of the same, Rs.2,68,26,000/- were converted into share capital by way of issue of equity shares. As such, there was neither new capital brought in by assessee company nor in infusion of new fund or money in the assessee company during the year under consideration. Ld. AR submitted that merely there was a change in accounting head from loan to capital account was exercised by the assessee company. The Ld. AR further submitted that as the management of the company had changed, it could not produce the valuation report but submitted the valuation details which were prepared for the purposes of Bank finance having actual data of preceding two financial years and projection for next two years. Ld. AR further submitted that management of the company as well as share holdings were transferred during F.Y. 2015-16. Ld. AR further submitted that while making addition, the Assessing Officer has not cited any tenable reason for the same and made huge addition to the returned income merely on the basis of assessee has not submitted report of accountant. The Ld. AR submitted that the Assessing Officer considered fair market value of the shares as the fair market value and not worked out the fair market value of the shares but considered the fair market value of the shares as fair market value and made addition accordingly.
Page 4 of 6 Ld. AR further submitted that the addition made is only due to deeming fiction of the provision of Section 56(2)(viib) of the Act and it is not the case of the Assessing Officer that the assessee failed to prove the genuineness of the transaction or creditworthiness of the investor or even the assessee brought in the unaccounted money via share capital or over-valuation. Thus, the Ld. DR submitted that addition made by the Assessing Officer is not just and proper.
The Ld. DR submitted that it is an undisputed fact that the assessee did not obtain and furnish any valuation report under Rule 11UA(2)(b) of the Income Tax Rules cited at assessment stage or at appellate stage. Fair market value of the share at Rs.102/- was only on the basis of report of the Director of the assessee company and there is no basis for the same. Since there is no provision under the law to consider the fair market value of the share as determined by the Director, the valuation made by the Director was rightly rejected by the Assessing Officer as well as by the CIT(A). As per Rule 11U and 11UA the fair market value unquoted equity share can be determined on the basis of net asset value for the business of valuation report under Rule 11UA(2)(b). Accordingly, on the basis of Balance Sheet as on 31.03.2013 the net asset value comes to Rs.4,60,752/- only. Thus, the fair market value of one share comes to Rs.0.62 only. However, the assessee allotted 26.35% shares (263 in numbers) to M/s Gibralter Glass and Ceramics Pvt. Ltd. and at a premium of Rs.92/-. Since the fair market value of the shares works out to Rs.0.62 only, this clearly establishes that the assessee has received share premium over and above the fair market value liable to be assessed as income of the assessee under Section 56(2)(viib) of the Act. Ld. DR further pointed out that the amounts received was in the form of loan liability which was required to be repaid. However, on conversion into equity shares along with share premium on 01.05.2013, the liability of loan has been ceased and hence it is clear that the assessee has received share capital and share premium only on 01.05.2013. Ld. DR relied upon the assessment order and the order of the CIT(A).
Page 5 of 6 7. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the assessee has not furnished any valuation report under rule 11UA or 11U of the Income Tax Rules, 1961. The assessee’s contention that the loan amount has been converted into equity shares at the rate of Rs.102/- but the basis given for fair market value of shares by the assessee as the contrary effect on the working of the fair market value adopted by the Assessing Officer comes to only Rs.0.62. It is a matter of record that the amount received was in the form of loan liability required to be repaid and, therefore, the conversion into equity share along with share premium on 01.05.2013 cannot be nnot called as cessation of loan liability. The contention of the Ld. AR that the unsecured loan obtained by M/s Gibralter Glass and Ceramics Pvt. Ltd. as the significance relating to interest uninvolved in management itself but the same was also not established by the assessee to any document as regards the transaction relating to share premium. The Assessing Officer has categorically observed that the certificates which were produced before the Assessing Officer does not bear any date or signature. This part was not controverted or no document to that effect was produced before us during the hearing. The Ld. AR at the time of hearing perused the Balance Sheet of M/s Gibralter Glass and Ceramics Pvt. Ltd. wherein pointed out that the share holding of assessed company and the said company was almost similar but while issuing the share premium, the assessee company has not taken cognisance that each share has been treated as Rs.10/- equity share value and the same was not justified by adopting the value of Rs.102/-. As per the requirement of Section 56(2)(viib), the fair market value of the shares has to be determined as per Rule 11U and 11UA of the Rules. But the assessee failed to do so and, therefore, the CIT(A) has rightly confirmed the addition thereby observing that the assessee received share premium over and above the fair market value is liable to be assessed as income of the assessee under Section 56(2)(viib) of the Act. There is no need to interfere with the same. At the time of hearing, the ld. AR referred various decisions including the decision of Ahmedabad Tribunal reported in 142 taxmanann.com 200 (Jigar Jashwant Lal vs. ACIT) wherein the issue was totally different as there were additional shares allotted to the assessee therein. The said decision will not be Page 6 of 6 applicable in the present case. The decision of Tribunal in the case of DCIT vs. Rankin Infrastructure (P) Ltd. will not be applicable as the determination of optional fully convertible debentures was the issue before the Mumbai Tribunal which is not similar to the present case. Hence, appeal filed by the assessee is dismissed.
In the result, appeal of the assessee is dismissed.
Order pronounced in the open Court on this 7th day of December, 2022.