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Income Tax Appellate Tribunal, ‘C’ BENCH: CHENNAI
Before: SHRI ABY T. VARKEY & SHRI JAGADISH
issue price and FMV of shares. The Ld PCIT has held the order erroneous and prejudicial to the interest of revenue and set aside the assessment order. The Ld PCIT has held that the A.O has not made complete verification and inquiry in respect of consideration received by the assessee in excess of fair market value to be charged as income from other sources u/s. 56(2) (viib) of the Act and passed order without application of mind .
The Ld. Authorized Representative (A.R) of the assessee has submitted that the A.O during assessment proceedings has called for particulars including the valuation of shares under Rule 11UA in the notice u/s. 142(1) of the Act. The Ld. AR has submitted that the A.O has specifically raised question on the issue of share and therefore, in view of the decision of Hon’ble ITAT, Delhi Benches in the case of Vaan Infra (P) Ltd. vs. PCIT [2024] 159 taxmann.com 29 (Delhi-Trib.), the Ld. PCIT was not justified in setting aside the order of A.O u/s. 263 of the Act on the ground that the A.O had merely accepted the claim of share premium. The Ld. AR has further submitted that investment in the assessee’s case has been made by ICICI venture through India Advantage Fund S4-I and therefore, in view of Notification GSR 685(E)[No.81/2023/F.No.370142/9/2023-TPLpart(1)]dated 25.09.2023, no addition is to be made in case the fund received from investment made by venture capital company. The Ld. AR has further submitted that as per sub clause (4) of Rule 11UA there is a tolerance limit of 10% permitted on the issue price and FMV as per valuation u/s 11UA and in assessee’s case difference between the issue price and fair market value is only 0.65%, which is less than 10% allowed by Rule 11UA. The Ld. AR has submitted that though Rule 11UA has been inserted w.e.f 25.09.2023 , it has been held by Hon’ble ITAT, Delhi dated 16.04.2024 that the Rule is to be treated as retrospective. The Ld. AR has further submitted that earlier there was no provision to value the compulsory convertible preference shares and the valuation of compulsory convertible preference shares has been brought in only w.e.f 25.09.2023 and therefore, section 56(2)(viib) has no application in such share.
The Ld. CIT-Departmental Representative (DR), on the other hand, relied on the order passed by Ld. PCIT.
We have heard the rival submissions, and perused the materials available on record. The assessee has issued compulsory convertible preference shares at a price of Rs. 416.69 per share as against the fair market value of Rs. 414 determined as per Rule 11UA. There is difference of 0.65% only in the issue price and FMV . The A.O during the course of assessment proceedings has issued notice u/s. 142(1) and in question No.9 has asked for a detailed note on determination of the fair market value of the issued share as per section 56(2)(viib) and the assessee has submitted the details after which the A.O has not made any addition. It is also seen that Rule 11UA has been amended w.e.f 25.09.2023 as under:
“(i) sub-clause (a) or sub-clause (b) of clause (A), for sub-clause consideration received from a resident, by an amount not exceeding ten per cent of the valuation price, the issue price shall be deemed to be the fair market value of such shares: (ii) sub-clause (a) or sub-clause (b) or sub-clause (d) of clause (A), for consideration received from anon- resident, by an amount not exceeding ten per cent of the valuation price, the issue price shall be deemed to be the fair market value of such shares.”
The ITAT, Delhi Bench in ITAT No.8389/Delhi/2019 in the case of Sakshi Fincap Pvt. Ltd. dated 16.04.2024 has held that the amendment brought in Rule 11UA was introduced to mitigate hardship faced by taxpayers by the unintended invocation of section 56(2)(viib) r/w Rule 11UA and therefore, the same is a curative amendment. The difference in the fair market value and the issue price of compulsory convertible preference shares is only 0.65%, therefore as per Rule 11UA issue price is deemed to be fair market value and hence no scope for addition required to be made u/s. 56(2)(viib) of the Act. In order to invoke Section 263 of the Act the twin condition of erroneous and prejudicial to the interest of Revenue are to be satisfied. In the present case, the second condition that order is prejudicial to interest of revenue is not being satisfied. We, therefore do not agree with the Ld PCIT that order the order passed by AO is prejudicial to the interest of revenue. We, therefore set aside the order passed by Ld. PCIT .
In the result, the appeal filed by the assessee is allowed statistical purposes.
Order pronounced on 30th September, 2024.