FLY WITH VIP ONLINE PRIVATE LIMITED,SEWRI MUMBAI vs. DY. COMMISSIONER OF INCOME TAX - 5(1)(2), MUMBAI

Instant appeal of the assesseewasfiled against the order of theLearned National Faceless Appeal Centre (NFAC), Delhi [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 order25.07.2024. The impugned orderis emanated from the

1. The CIT(A) erred in confirming the action of the AO in making additionof Rs.2,58,13,413/- u/s 56(2) (viib) of the Act on the ground that the consideration received by the Appellant on issue of shares exceeds fair market value of shares.

3. The brief facts of the case are that the assessee is a private limited company based in Mumbai that owns a web portal “Fly With VIP.com” and provided the opportunity to the public to fly with celebrities. During the impugned assessment year, the assessee issued 62,450 equity shares of Rs.10/- at a premium for a total consideration of Rs.2,58,31,550/- including Rs.3,01,800/- towards share capital, Rs.1,64,47,510/- towards premium on share and Rs.90,82,236/- as call in advance from authorized shareholders towards issue of equity shares and the same are duly accounted in the books of account. The valuation of shares was based on the valuation report for both the share prices Rs.414/- per share and Rs.715/- per share. Such valuation was arrived at by the discounted cash flow (DCF) method. The assessment was completed and the Ld.AO did not accept the explanation and justification provided by the assessee and made addition of consideration received Rs.2,58,31,550/- being the aggregate consideration received for shares as the same exceeds the fair market value of the shares by invoking section 56(2)(viib) of the Act. Aggrieved, the assessee filed an appeal before the CIT(A). The Ld.CIT(A) issued notices of hearing on many occasions, but none of the notice was complied with. Therefore, on the Fly With VIP Online Pvt Ltd basis of the available records, the Ld.CIT(A) upheld the assessment order ex parte. Being aggrieved on the appeal order, the assessee filed an appeal before us.

4. We heard the rival submissions and considered the documents available in the record. The Ld.AR argued and filed a written submission which are kept in record. We found that the shares issued by the assessee is duly valued on the basis of the DCF method which is an accepted method under rule 11UA of the Income-tax Rules, 1962. The Ld.CIT(A) observed that the assessee had not shown any business activity in impugned assessment year. The assessee claimed that the assessee is a start-up company, so the notification No.45/2016 dated 14/06/2016 is coveredwhich exempts the start-up companies from provisions of section 56(2)(viib) of the Act. Butthe Ld.CIT(A) had denied the claim of assessee as this exemption is not applicable for A.Y. 2013-14. The relevant para 6 of the impugned appeal order is reproduced as below:-

“6. Findings and Conclusion:

The Appellant has provided valuation reports based on the DCF method which is an accepted method under Rule 11UA for determining the fair market value of shares the reports were prepared by a reputable firm of Chartered Accountants However, the AD's observation that there was no actual business activity during the year under consideration cannot be ignored. The lack of substantial business operations raises questions about the basis for the high premium.

The notification No. 45/2016 dated 14.06.2016, which exempts startup companies from the provisions of section 56(2)(viib), came into effect after the relevant assessment year. Therefore, this exemption does not apply to the assessment year 2013-14.

Fly With VIP Online Pvt Ltd Given the absence of business activity and the disproportionate share premium, the addition made by the AO under section 56(2)(vib) is justified. The premium received is not supported by the Appellant's business operations during the year under consideration.

In view of the above discussion, the addition of Rs. 25,813,413 made by the AO under section 56(2)(viib) is upheld. The appeal filed by the appellant is dismissed.”