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Facts
The assessee, a private limited company, issued shares at a premium. The Assessing Officer (AO) made an addition under section 56(2)(viib) of the Income-tax Act, 1961, contending that the consideration received exceeded the fair market value of the shares, citing lack of business activity. The CIT(A) upheld the AO's order ex parte as the assessee did not comply with hearing notices.
Held
The Tribunal found that while the DCF method was accepted for valuation, the CIT(A) correctly noted that the exemption for start-up companies under notification No. 45/2016 was not applicable for Assessment Year 2013-14. However, the Tribunal also noted that the assessee was denied a reasonable opportunity of hearing by the CIT(A).
Key Issues
Whether the addition made under section 56(2)(viib) is justified when the assessee claimed start-up exemption, and whether the assessee was denied a proper opportunity of hearing by the CIT(A).
Sections Cited
56(2)(viib), 250, 143(3)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, MUMBAI BENCH “F”, MUMBAI
Before: SHRI. B.R. BASKARAN & SHRI. ANIKESH BANERJEE
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
The assessee has taken the following grounds:-
“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.”
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.
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.”
The Ld.AR in argument placed that the said clarification is duly implemented for the assessee and the section 56(2)(viib) is not justified for application of the same. On perusal of the impugned appeal order, we find that the assessee had not responded a single notice of hearing issued by the Ld.CIT(A). We find that the reasonable opportunity for the assessee was denied in appeal proceeding. We find that the matter should be restored to the file of the Ld.CIT(A) for adjudication denovo. We are not expressing our view on the merit of the case which will impair the set aside appeal proceeding. Needless to say, the assessee should get a reasonable opportunity of hearing in set aside appeal proceedings. On the other hand, the assessee should be diligent and co-operative before the ld. CIT(A) for quick disposal of the appeal.
In the result, the appeal of the assessee bearing is allowed for statistical purpose. Order pronounced in the open court on 29th day of October, 2024. Sd/- sd/- (B.R. BASKARAN) (ANIKESH BANERJEE) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai,दिन ांक/Dated: 29/10/2024 Pavanan