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Income Tax Appellate Tribunal, KOLKATA ‘B(SMC
Before: Shri P.M. Jagtap
This appeal filed by the assessee is directed against the order of ld. Commissioner of Income Tax (Appeals)-5, Kolkata dated 18.10.2017, whereby he confirmed the addition of Rs.15,73,632/- made by the Assessing officer under section 56(2)(viib) of the Income Tax Act, 1961.
The assessee in the present case is a Company, which filed its return of income for the year under consideration on 24.09.2013 declaring total income of Rs.25,99,450/-. During the year under consideration, the assessee-company had received a sum of Rs.80 lakhs on account of allotment of 25,600 equity shares of the face value of Rs.100/- per share at a premium of Rs.212.50 per share. During the course of assessment proceedings, the assessee was required by the Assessment year: 2013-2014 Page 2 of 7 Assessing Officer to file a certificate as per Rule 11UA(1)(b) of the Income Tax Rules, 1962. As per the said certificate filed by the assessee, fair market value of the shares of the assessee-company was Rs.251.03 per share as against the price of Rs.312.50 per share received by the assessee. The difference of Rs.15,73,632/- calculated at the rate of Rs.61.47 per share, therefore, was added by the Assessing Officer to the total income of the assessee under section 56(2)(viib) in the assessment completed under section 143(3) vide an order dated 09.12.2015.
Against the order passed by the Assessing Officer under section 143(3), an appeal was preferred by the assessee before the ld. CIT(Appeals) challenging the addition of Rs.15,73,632/- made by the Assessing Officer under section 56(2)(viib). During the course of assessment proceedings before the ld. CIT(Appeals), it was contended on behalf of the assessee-company that proper and sufficient opportunity was not afforded by the Assessing Officer during the course of assessment proceedings to compute the valuation of shares on the basis of fair market value of its assets on the date of issue of shares. It was contended that the fair market value of equity shares of the assessee-company as per the said valuation was Rs.535.70 per share and since the same was higher than the price of Rs.312.50 per share at which the shares were issued, the addition made by the Assessing Officer under section 56(2)(viib) was not sustainable. The assessee also filed such computation of the valuation of its shares along with the valuation report of the Registered Valuer showing the fair market value of fixed assets.
The ld. CIT(Appeals) did not find merit in the submission of the assessee and rejecting the same, he proceeded to confirm the addition of Rs.15,73,632/- made by the Assessing Officer under section 56(2)(viib) for the following reasons given in paragraph no. 3.3, 3.4 and 3.5 of the impugned order:- “3.3. I have considered the submission of the appellant and perused the relevant assessment records. The Assessment year: 2013-2014 Page 3 of 7
appellant had sold shares valued at Rs.312.50 per share as per its I.T. Return. During the assessment proceedings, the A.O had issued notice under section 141(1) of the Act for furnishing certificate per Rule 11 UA(1)(b) of the Income Tax Rules 1962. The Chartered Accountant of the appellant had submitted detailed valuation report and valued the shares at Rs.251.03 per share. On the basis of this valuation submitted by the appellant, the A.O had added back the premium of Rs.61.47 per share u/s 56(2)(viib) of the I.T. Act, 1961 for total addition of Rs.15,73,632/-. However, during appellate proceedings, the AIR of the appellant had submitted a second valuation report under which shares were valued at Rs.535.70 per share. The contention of the A/R is that as the shares were sold at below market value (as per second valuation report) the question of addition of share premium does not arise.
3.4. The appellant in his desperation to escape the clutches of section 56(2)(viib) has unwittingly fell into the clutches of section 56(2)(viia) of the I.T. Act. Section 56(2)(viia) reads as follows:
"Where a firm or a company not being a company in which the public are substantially interested, receives, in any previous year, from any person or persons, on or after the 1st day of June, 2010, any property, being shares of a company not being a company in which the public are substantially interested- (i) Without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property; (ii) For a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration.
Provides that this clause shall not apply to any such property received by way of a tranaction not regarded as transfer under clause (via) or clause (vic) of clause (vicb) or clause (vid) or clause (vii) of section 47".
3.5. The appellant has whimsically submitted second valuation report which contradicts the first valuation report submitted by him to the AO. This second valuation report constitutes additional evidence under Rule 46A of the Assessment year: 2013-2014 Page 4 of 7
Income Tax Rule 1962. This evidence has no relevance to the appeal and is not admitted. Even if the submission of the A/R of the appellant is accepted, than it would mean that the appellant had sold shares at below market price amounting to Rs.223.20 per share (Rs.535.70 - Rs.312.50). This amount of Rs.223.20 per share, would be chargeable to tax in the hands of the purchaser, the total consideration amounting to Rs.57,13,920/- on 25600 equity shares sold, u/s 56(2)(viia) of the I.T. Act. When this fact was brought to the notice of the A/R of the appellant, he could not submit any reply.
It is obvious from the above facts that the appellant had sold his shares at a premium for which the AO had rightly added back the amount of Rs.15,73,632/- u/s 56(2)(viib) of the Act. The A/R of the appellant during the appellate proceedings has submitted a fresh valuation report, valuing shares at Rs.535.70 per share. If this Valuation Report is accepted than the provision of deemed gift under section 56(2)(viia) would apply. The deemed gift chargeable to tax amounts to Rs.57,13,920/-. As discussed, the A/R of the appellant could not submit any reply when this was brought to his notice.
The A.O has added back share premium of Rs.15,73,632/- after considering all relevant records. It should be mentioned here that this addition was done on the basis of valuation certificate submitted by the Chartered Accountant of the appellant”.
Aggrieved by the order of the ld. CIT(Appeals), the assessee has preferred this appeal before the Tribunal.
The ld. Counsel for the assessee contended that as per Explanation (a)(ii) to section 56(2)(viib) of the Act, an option is given to the assessee to substantiate its claim for the higher fair market value of its shares to the satisfaction of the Assessing Officer based on the value, on the date of issue of shares, of its assets including intangible assets. He contended that no opportunity was given by the Assessing Officer to the assessee to exercise this option and it was required by the Assessing Officer to file the valuation certificate under Rule 11UA, which was based on book value of assets and liabilities as shown in the balance-sheet. He contended that Assessment year: 2013-2014 Page 5 of 7 the assessee, therefore, exercised this option during the course of appellate proceedings before the ld. CIT(Appeals) and substantiated its claim for higher fair market value of its shares by filing the valuation based on the fair market value of its fixed assets as on the date of issue of shares. He contended that the said valuation based on the report of Registered Valuer, however, was not considered by the ld. CIT(Appeals) and he even declined to admit the same on the ground that it was not relevant to decide the issue. He contended that the said additional evidence filed by the assessee to substantiate its claim for higher fair market value of its shares was very much relevant and urged that the matter may be sent back to the Assessing Officer for deciding this issue afresh after verifying the claim of the assessee.
The ld. D.R., on the other hand, strongly supported the impugned order of the ld. CIT(Appeals). He contended that its claim for the higher fair market value of its shares was never made by the assessee during the course of assessment proceedings and the ld. CIT(Appeals), therefore, was fully justified in not entertaining the same. He contended that the ld. CIT(Appeals) was also justified in not admitting the additional evidence filed by the assessee to justify such higher valuation as the same was not filed by the assessee before the Assessing Officer inspite of sufficient opportunity.
I have considered the rival submissions and also perused the relevant material available on record. It is observed that the addition of Rs.15,73,632/- was made by the Assessing Officer under section 56(2)(viib) on the basis of a certificate of a Chartered Accountant issued under Rule 11UA(1)(b), which apparently was filed by the assessee as per the requirement of the Assessing Officer. As contended on behalf of the assessee-company before the ld. CIT(Appeals) as well as before the Tribunal, no opportunity, however, was given by the Assessing Officer to the assessee to substantiate its claim for higher fair market value of its shares on the date of issue of shares based on the fair market value of its Assessment year: 2013-2014 Page 6 of 7 assets in terms of Explanation (a)(ii) to section 56(2)(viib). There is nothing in the assessment order passed by the Assessing Officer to show that any opportunity was given by him to the assessee to exercise its option given as per Explanation (a)(ii) to section 56(2)(viib). The assessee, therefore, exercised the said option and filed the valuation of its shares based on the fair market value of its assets duly supported the valuation report prepared by the Registered Valuer. The ld. CIT(Appeals), however, did not admit the said additional evidence on the ground that it had no relevance to the issue involved in the appeal of the assessee. As rightly contended by the ld. Counsel for the assessee by relying on Explanation (a)(ii) to section 56(2)(viib), the said additional evidence was very much relevant to decide the issue relating to the addition made under section 56(2)(viib) involved in the case of the assessee and the ld. CIT(Appeals), in my opinion, was not justified in declining to admit the same. I, therefore, set aside the impugned order of the ld. CIT(Appeals) on this issue and restore the matter to the file of the Assessing Officer with a direction to decide the issue relating to the addition under section 56(2)(viib) afresh on merit after considering the valuation report filed by the assessee to substantiate its claim of higher fair market value of its shares on the date of issue of shares as per Explanation (a)(ii).
In the result, the appeal of the assessee is treated as allowed for statistical purposes. Order pronounced in the open Court on June 20, 2018.