Section 56(2)(viib) of the Income Tax Act
The decision most relied on for Section 56(2)(viib) is National Insurance Co. Ltd. v. Pranay Sethi (16 SCC 680), cited in 148 of the 207 judgments on BharatTax that turn on this section.
Leading authorities on Section 56(2)(viib)
The Supreme Court in Pranay Sethi laid down the principles for determining 'future prospects' to be added to the income of a deceased person for calculating compensation under the Motor Vehicles Act. It also clarified principles of judicial discipline, including the binding nature of coordinate bench decisions and how to resolve conflicting Supreme Court judgments.
The Income Tax Department cannot sit in the armchair of a businessman or question their commercial wisdom and business decisions. Expenses incurred for business expediency, determined from the businessman's point of view, are allowable business expenses.
The Assessing Officer cannot arbitrarily reject a share valuation report prepared by an expert using recognized methods like NAV or DCF for the purpose of Section 56(2)(viib) without providing valid reasons to demonstrate its perversity or unreasonableness.
When an assessee possesses sufficient interest-free funds, it is presumed that any interest-free advances or investments made are from these funds, preventing disallowance of interest under Section 36(1)(iii). This principle applies if own capital and interest-free loans exceed the interest-free advances given.
An assessee has the option to choose either the Discounted Cash Flow (DCF) method or the Net Asset Value (NAV) method for share valuation under Section 56(2)(viib) read with Rule 11UA. The Assessing Officer cannot substitute the chosen method or value without identifying a specific error in the assessee's valuation.
The Assessing Officer cannot reject the share valuation method adopted by an assessee under Section 56(2)(viib) if it adheres to prescribed methodologies and commercial prudence. The valuation cannot be challenged based on future performance or by substituting another method.
Share premium and share application money cannot be added as unexplained cash credits under Section 68 if the genuineness of the transaction and the creditworthiness and identity of the investors are established. The onus is on the revenue authorities to prove that the apparent nature of the receipt is not real.
The Assessing Officer (AO) cannot discard the Discounted Cash Flow (DCF) method for share valuation if the assessee opts for it as per Rule 11UA(2). The AO must record reasons for not accepting the assessee's valuation report and obtain a fresh report before proceeding with their own valuation, but cannot change the method chosen by the assessee.
The Assessing Officer (AO) has the power to disturb the valuation of shares provided by the assessee's chartered accountant, even if Rule 11UA(2) is followed. If the AO doubts the valuation report, they are not necessarily bound to refer the matter to the Valuation Officer and can adopt a different method to determine the fair market value.
Judgments on Section 56(2)(viib)
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