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Facts
The assessee, Tex-Kare Cleaners Pvt. Ltd., issued 12,600 shares at a premium of ₹900 per share. The Assessing Officer added the premium to the income under Section 56(2)(viib) of the Income Tax Act, 1961, citing issues with the valuation method and creditworthiness of subscribers. The assessee contested this, arguing their valuation methods were appropriate.
Held
The Tribunal found that the assessee had consistently changed its valuation stand throughout the proceedings. They also noted that the assessee had not provided necessary documentation like annual accounts or valuation reports for its investment in a subsidiary. The court observed discrepancies in how share application money was treated as a liability.
Key Issues
The main issue was the correctness of the share valuation and the addition of share premium to the income of the assessee. This involved determining the fair market value of shares issued at a premium and whether the assessee provided adequate justification and evidence for their valuation methodology.
Sections Cited
Section 56(2)(viib) of the Income-tax Act, 1961, Section 143(3) of the Income-tax Act, 1961, Section 53 of the Companies Act 2013, Rule 11UA of the Income-tax Rules 1962
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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI PRASHANT MAHARISHI, AM & SHRI RAHUL CHAUDHARY, JM
This is an appeal filed by assessee recalled by an order of MA No.118/Mum/2022, dated 11th January, 2024, filed against the appellate order passed by Commissioner of Income-tax (Appeals)- 14, Mumbai [the learned CIT (A)], for A.Y. 2013-14 on 20th July, 2018, dismissing the appeal of the assessee against the assessment order passed under Section 143(3) of the Income-tax Act, 1961 (the The assessee has raised following grounds of appeal:- 02.
“Being aggrieved by the order of the Assessing Officer 8 (3)-1, Mumbai, this appeal petition is filed on the following amongst other grounds of appeal, which it is prayed may be considered without prejudice to one another.
1. On the facts, and in circumstances of the case, and in law, learned Commissioner of Income-tax (Appeal) erred in upholding action of the Assessing Officer in adding share premium of RS 11,340,000 being RS. 900 per share for 12,600 equity shares in aggregate without appreciating that the method of valuation adopted by the Assessee fetched the same result as prescribed in Rule 11UA of the Income-tax Rules 1962, and even otherwise, valuation as submitted to the Assessing Officer under discounted cash flow method recognized under Rule 11UA fetched the same result as worked out in earlier method.
2. On the facts, and in circumstances of the case, and in law, learned Commissioner of Income-tax (Appeal) erred in arriving value per share at RS. 27.90 which was below the face value per share disregarding the legal position that a company is prohibited from issuing shares at discount in terms of section 53 of the Companies Act 2013.
On the facts, and in circumstances of the case, and in law, without prejudice to grounds of appeal considered elsewhere, addition u/s 56 of the Income Tax Act, 1961, ought to be restricted to the amount received by the appellant on or after November 29, 2012, and not for amounts received in earlier years and also for amounts received prior to November 29, 2012, during the previous year 2012-13.
Your Appellant craves leave to add to, amend, alter, modify, and / or delete any of the above grounds of appeal at or before final disposal of appeal.”
The brief fact of the case shows that assessee is a company engaged in the business of laundry service, filed its return of income on 18thSeptember 2023, at ₹ nil. The return was selected for scrutiny by issuing notice under Section 143(2) of the Act on 4thSeptember2014.
During the year assessee had issued shares of face value of ₹100 at 04. ₹1,000/- per share at a premium of ₹900/-. The shares of the assessee The learned Assessing Officer examined the claim of the assessee 06. and considering the provisions of Section 56(2) (viib) of the Act, held that assessee has failed to bring on record any evidence that would satisfactorily explain the basis for the share premium and the valuation of the share. He further held that as on 31st march, 2012, the shares of the company had negative value and funding of shares at a substantial premium, as the underlying asset of the startup did not support higher fair market value. He further held that assessee has also failed to prove the source through which the subscriber had paid the shares at a premium. Accordingly, he held that the premium of ₹900 is not justified on the basis of valuation of the shares as well as the creditworthiness of the subscribers. Accordingly, the share premium of ₹900 for 12600 shares amounting to ₹1,13,40,000/- was added back to the total income of the assessee under Section 56(2)(viib) of the Act by passing an order under Section 143(3) of the Income-tax Act, 1961 (the Act) dated 28thMarch 2016.
Assessee aggrieved with the assessment order preferred the appeal 07. before the learned Commissioner of Income tax (Appeals). Before the learned CIT (A), the assessee contested that as per the net asset value method, the valuation of the shares of the assessee is ₹1,004.44 per share and therefore, the addition is wrongly made. With respect to the creditworthiness of the investor’sassessee, submitted the copy of the income tax return, computation of total The learned CIT (A) rejected the contention of the assessee 08. submitting that the valuation of the assessee before the learned Assessing Officer was valuation post issue of shares at a premium, which is not relevant. The assessee should have carried out the valuation before the issue of those shares to derive whether the shares are issued at fair market value or not. According to him, the total assets of the company is ₹1.26 crores and total liability of the company is ₹1.25 crores and therefore, the net asset of the assessee company is merely ₹2 lacs and face value of shares is ₹100 and according to him, the fair market value of shares is only ₹27.9, therefore, according to him, the assessee was not in a position to command any premium. Accordingly, he confirmed the addition under Section 56(2)(viib) of the Act and directed the learned Assessing Officer to recalculate the addition. Thus, the action of the learned Assessing Officer was confirmed by appellate order dated 20thJuly 2018. Assessee claims that it has enhanced addition. By order dated 25thMarch 2022, in 09. ordinate Bench disposed of the appeal by dismissing it. However, vide MA No.118/Mum/2022, dated 8thJanuary 2024, the appellate order of the co-ordinate bench was recalled. The co-ordinate bench,
The learned Authorized Representative referred to 2 paper books filed before us of 65 pages and 53 pages respectively and also detailed submission of additional information as required by the co- ordinate bench as per letter dated 21stMarch 2022. Her claim was that Assessee Company is a private limited company, which is owned by shareholders belonging to two different families. The assessee issued12600 shares at a premium of ₹900 per share. The assessee company is primarily an investment company by making an investment of ₹1.25 croers in equity shares of Spotless Laundry Services Private Limited, which is an operating company formed with another entity Lavasa Corporation Limited. Therefore, the value derived by the shareholders of Assessee Company is linked to the valuation of operating company. It was further stated that Spotless Laundry Services Private limited is a subsidiary of Lavasa Corporation Limited where the assessee is a minority shareholder. She referred to the submission made dated 21stMarch 2022, at the request of the Bench. She submitted that in Spotless Laundry Services Private Limited 76% is held by Lavasa Corporation Limited and 23.98 % is held by the assessee. she submitted that the total assets base of Spotless Laundry Services Private Limited as on 31st
The learned Departmental Representative vehemently supported the order of the lower authorities. He submitted that the assessee has failed to show what is the correct valuation i.e., fair market value of the shares issued. Assessee has not followed any of the methods for valuation of shares. Assessee also failed to substantiate the valuation based on its asset. Assessee has also wrongly calculated the net asset value of the shares issued by not considering share application money as current liability, even if the valuation of the shares post
The learned authorized representative submitted that assessee is an investment company, which has made investment in a spotless laundry private limited, which is an operating company;therefore, the value of the shares of this company derives valuation of shares of operating company. She submitted that though the assessee has stated that the net asset value is the method adopted for issue of shares, in fact in an investment company, the shares should be valued based on underlying investment.
We have carefully considered the rival contentions and perused the orders of the lower authorities. We find that during the year assessee has issued 12600 shares to the existing shareholders of the assessee company on 5th February, 2013 of the face value of ₹100 at a premium of ₹900 per share. The assessee has derived the valuation of shares by computing the net asset at ₹1.26 crores wherein the major asset is investment in shares of another company namely Spotless Laundry Services Private Limited. Undoubtedly the working provided by the assessee for the purpose of valuation of its shares was considered after receipt of the share application money and did not consider the said application money as a current liability. Therefore, naturally the amount of share application money stands invested in the balance sheet of the company, the net asset of the assessee company will go up but if, said application money is not considered by the assessee as current liability, the amount deployed is considered an asset but the source of such amount is not
In the result, appeal of the assessee is allowed for statistical purposes.
Order pronounced in the open court on 03.04.2024.