The Delhi Bench of the Income Tax Appellate Tribunal ( ITAT ) has ruled that Section 56(2)(viib) of the Income Tax Act, 1961 does not apply when shares are issued at a premium below the market value determined by the Assessing Officer ( AO ).
The Revenue had appealed to the ITAT, challenging the decision of the Commissioner of Income Tax (Appeals) [CIT(A)] to delete an addition of ₹25,09,76,959 made under Section 56(2)(viib). The central issue was whether the CIT(A) had erred in removing the addition on account of the share valuation method used by the assessee.
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The case involved Addverb Technologies, which had issued 79,852 shares with a face value of ₹10 per share at a premium of ₹4,272.31 per share. The company valued the shares using the Discounted Cash Flow (DCF) method, an approach in compliance with Rule 11U and 11UA of the Income Tax Rules, 1962. However, the AO disagreed with this valuation, opting instead to apply the Net Asset Value (NAV) method, which resulted in a market value of ₹7,426 per share.
The counsel for Addverb Technologies argued that the shares were issued at a price lower than the market value as determined by the AO. Since the shares were issued at ₹4,272.31 per share, while the AO’s valuation was ₹7,426 per share, the provisions of Section 56(2)(viib) should not apply.
Furthermore, the counsel contended that the AO had no basis to change the method of valuation from DCF to NAV, as DCF is an approved method under the Income Tax Rules.
The ITAT Bench noted that the shares, with a face value of ₹10 each, were issued at a premium of ₹4,262.31. The valuation method used by the assessee was DCF, which is permissible under Rule 11U and 11UA. Despite the AO’s concerns about the DCF method and subsequent application of the NAV method, the ITAT clarified that Section 56(2)(viib) is applicable only when the consideration received exceeds the market value of the shares. In this case, the shares were issued at a price lower than the market value determined by the AO, meaning the provisions of Section 56(2)(viib) were not applicable.
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The members stated that “Though the AO cannot tinker with the valuation report unless it is fundamentally flawed, without going further into merits of valuation, even, if the market value of shares as determined by AO is accepted the provisions of section 56(2)(viib) of the Act are not attracted as the assessee had issued shares at a rate lesser than the market value determined by the AO.”
The two-member bench of Naveen Chandra and Vikas Awasthy found no fault in the CIT(A)’s decision to delete the addition and dismissed the Revenue’s appeal as lacking merit. The CIT(A)’s order was upheld, confirming that the addition under Section 56(2)(viib) was rightly deleted.
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