INCOME TAX OFFICER, MAIN BUILDING vs. PRIYA ESTATE DEVELOPERS PRIVATE LIMITED, ABHIRAMAPURAM, CHENNAI

As is evident, the sole issue that arise for our consideration is addition as made by Ld. AO u/s 56(2)(viib) of the Act.

2. The Ld. CIT-DR advanced arguments and filed written submissions supporting the assessment order. The Ld. AR also advanced arguments and supported the findings given in the impugned order. Having heard rival submissions and upon perusal of case records, our adjudication would be as under. Assessment Proceedings 3.1 The assessee being resident corporate assessee is stated to be engaged as real estate developer. It transpired that during this year (on 24-03-2016), the assessee issued 10060 equity shares of face value of Rs.10/- each to one of its promoters i.e., Smt. Sasikala Raghupati at a premium of Rs.36,990/- per share. The assessee submitted that the shares were allotted as per the fair market value (FMV) computed in accordance with Sec.56(2)(viib) read with Rule 11U / 11UA. In support of the same, the assessee furnished valuation report dated 24-02-2016 issued by a Chartered Accountant firm i.e., M/s Raghu & Gopal along with audited financial accounts. It also transpired that this money was not introduced in this year but it was given in earlier years as promoter’s loans which were converted into equity share capital in this year. The valuer valued the share at Rs.37073/- per share which is extracted in the assessment order. 3.2 However, Ld. AO did not accept the valuation on the ground that the valuer did not mention the methodology of valuing the property. The purpose of issuing valuation certificate was not mentioned. No liabilities were considered while making the valuation. The valuer had only given a certificate of valuation of asset as demanded by the director without any independent verification. Therefore, the valuation was found deficient. 3.3 The assessee defended the valuation on the ground that Mrs. Sasikala Raghupathy was holding 50% shareholding as on 17-02-2014. She funded Rs.37.18 Crores as long-term borrowing for purchase of immovable property. Due to inordinate delay in development of property, she requested the assessee company to convert the same into equity share capital. The valuation was arrived based on value of assets on the date of issue of shares in terms of explanation in clause (a)(ii) of Sec.56(2)(viib) and therefore, valuation report as per Rule 11UA was not required. The Ld. AO rejected assessee’s submissions on the ground that the valuation report ignored the outstanding liabilities. Accordingly, the amount of Share premium of Rs.3721.19 Lacs was brought to tax u/s 56(2)(viib). The provisions of this section provide that where specified company receives any consideration for issue of shares that exceeds the face value of such shares, such excess shall be deemed to be the income of the company. The explanation (a) provides that the FMV of the shares shall be higher of the value as determined in accordance with prescribed method or as may be substantiated by the company to the satisfaction of the Ld. AO based on the valuation of its assets on the date of issue of shares. Appellate Proceedings 4.1 The assessee assailed the addition before first appellate authority. It was submitted that entire shareholding was held by the mother and daughter. The conversion of loan into equity could not be brought within the scope of Sec. 56(2)(viib). The assessee referred to the decision of Tribunal in the case of its sister concern M/s Vaani Estates Pvt. Ltd. (ITA No.1352/Chny/2018) to bolster its submissions. 4.2 The Ld CIT(A), after considering the extant provisions of Sec.56(2)(viib), held that addition can be made in cases where the consideration received against issue of shares exceed the FMV of such shares (determined in accordance with the prescribed method i.e., as per Rule 11UA). Therefore, AO must first compute the value as per Rule 11UA and thereafter, make addition if the consideration received exceed such value. The Ld. AO erred in not making this valuation as per Rule 11UA. It was essential to value the shares in terms of Rule 11UA. The Ld. CIT(A) had directed the assessee to get FMV of shares determined either from M/s Integrated Enterprises India Pvt. Ltd. (IEPL) or from Mr. CS Suresh (registered valuer) or from both of them, at the option of the assessee. The assessee produced both the valuations. IEPL valued the shares at Rs.37115/- per share whereas CS Suresh valued the shares at Rs.37162/- per share. Both the valuation reports have been extracted in the impugned order. Considering the same, Ld. CIT(A) observed that valuation ranges between Rs.37115/- to Rs.37,162/- per share. The assessee was directed to furnish both the valuation report to Ld. AO and Ld. AO was directed to examine the same and adopt fair market value as per these two reports in terms of Sec.56(2)(vii)(b) r.w.r. 11UA. The AO was further directed to compute the difference between the consideration received by the assessee against issue of shares and FMV of such shares as adopted by Ld. AO. The consideration amount exceeding the FMV would be added to total income of the assessee u/s 56(2)(viib). If the consideration does not exceed FMV, no addition could be made. Aggrieved, the revenue is in further appeal before us. Our findings and Adjudication 5. From the facts, it emerges that the assessee has received promoter loan of Rs.37.18 Crores from Mrs. Sasikala Raghupati during the period from 10-01-2014 to 31-03-2014. A small loan of Rs.15 Lacs has been received subsequently. Out of this, amount of Rs.37.22 Crores has been converted into equity share capital on 24-03-2016 which include share premium of Rs.37.21 Crores. The Ld. AO has brought the same to tax u/s 56(2)(viib). During the course of assessment proceedings, the assessee, on its own, furnished valuation report from a valuer by the name M/s. Raghu & Gopal (CAs). The valuer valued the shares based on "asset method", but they did not consider the promoter’s loan which was shown as liabilities. The AO, therefore, rejected the valuation and made additions u/s 56(2)(viib). The Ld. CIT(A) directed Ld. AO to obtain FMV of the shares either from IEPL or from Mr. CSV Suresh, IBBI Registered Valuer or from both of them, at the option of the assessee. The Ld. AO, vide its letter dated 20-02-2020, called the assessee company to furnish copies of valuation report from the aforesaid valuers. Accordingly, the assessee company furnished valuation report. IEPL valued the shares at Rs.37,115/- per share based on "discounted cash flow method" (DCF). On the other hand, Mr. Suresh valued the shares at Rs.37,162/- per share. After considering these two reports, the CIT(A) had directed the AO to re-examine and adopt the FMV as per these two reports in terms of Sec. 56(2)(viib) r.w. Rule 11UA.