The Chennai Bench of the Income Tax Appellate Tribunal (ITAT) directed the Assessing Officer (AO) to Determine the Fair Market Value (FMV) of Shares by conducting a thorough Fact-Finding Process and by applying an Explanation under Section 56(2)(viib) of the Income Tax Act, 1961.
Priya Estate Developers Private Ltd., the assessee, is a real estate developer. During the assessment year 2016–17, the assessee issued 10,060 equity shares at a premium of Rs. 36,990 per share to one of its promoters, Sasikala Raghupati. The shares were issued by converting loans provided by the promoter into equity share capital supported by a valuation report from Raghu & Gopal Chartered Accountants.
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The AO rejected the valuation report on the grounds that it failed to consider the promoter’s loan of Rs. 37.23 Crores as a liability and lacked transparency in its methodology. The AO treated the share premium as taxable income under Section 56(2)(viib) of the Income Tax Act, 1961, and made the addition accordingly.
On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] observed that the AO failed to determine the FMV of shares as per Rule 11UA of the Income Tax Rules, 1962. The CIT(A) directed the assessee to obtain valuations from Integrated Enterprises India Pvt. Ltd. (IEPL) and Mr. CS Suresh.
The valuations which ranged from Rs. 37,115 to Rs. 37,162 per share, were higher than the issue price of Rs. 37,000/- per share. The CIT(A) directed the AO to adopt these valuations and make additions only if the issue price exceeded the FMV.
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The revenue appealed to the ITAT arguing that the valuations provided by IEPL and CS Suresh were flawed. The revenue pointed out that the IEPL valuation based on the discounted cash flow (DCF) method was unreliable as the assessee had no substantial business activities in subsequent years and the valuation by CS Suresh failed to account for the promoter’s loan as a liability treating it as share capital advance or share application money instead.
The two-member bench comprising Aby T. Varkey (Judicial Member) and Manoj Kumar Aggarwal (Accountant Member) observed that the AO had not conducted a proper valuation of shares as required under Section 56(2)(viib). The tribunal that CIT(A) had improperly limited the AO’s scope to rely on the two valuations provided by the assessee which appeared biased in favor of the assessee.
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The tribunal observed that the valuation exercise must consider all relevant financial factors, including liabilities, and that the AO should have the discretion to engage independent valuers if necessary.
The tribunal remanded the matter to the AO for a fresh assessment directing the AO to independently determine the FMV of shares and provide the assessee with an opportunity to substantiate its case. The tribunal allowed the appeal for statistical purposes.
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