The Delhi Bench of Income Tax Appellate Tribunal (ITAT) has deleted the addition holding that the determination of fair market value of unquoted shares would not prohibit inclusion of share premium as part of reserves and surplus.
The assessee was CNR Leading Softek Pvt Ltdengaged in the business of software development, market research and public opinion polling, business and management consultancy etc. The assessee issued 50 lakhs shares of Rs. 20 per share comprising face value of Rs. 10 and share premium of Rs. 10. However during the under consideration, the assessee has received only Rs. 10, which included share premium of Rs. 7.50 per share and face value of Rs. 2.50 per share.
Accordingly, the subscribed share capital of the assessee company increased from 8,67,000 shares to 58,67,000 shares and share premium which was reflected under the head ‘reserve and surplus’ in the balance sheet, as per ‘liability approach’. Accordingly, the AO valued the share of the company using Net Asset Value Method both under ‘asset approach’ as well as under ‘liability approach’.
Rule 11UA of the Income Tax Rules which prescribes the method of determination of fair market value of unquoted shares does not prohibit inclusion of share premium as part of reserves and surplus.
Kapil Goel, appeared on behalf of the assessee and Maimun Alam appeared on behalf of the revenue.
Rule 11UA of the Income Tax Rules which prescribes the method of determination of fair market value of unquoted shares does not prohibit inclusion of share premium as part of reserves and surplus.
The Bench observed that the share premium would be included in the ‘reserves and surplus’ even as per Rule 11UA of Income Tax Rules. While this was so, it was completely wrong on the part of the AO to ignore the same while valuing the shares of the assessee company both under ‘liability approach’ and considering the same as a liability under ‘asset approach’
The two-member Bench of C.M Garg, (Judicial Member) and M.Balaganesh, (Accountant Member) deleted the addition made under Section 56(2)(viib) of the Income Tax Act 1961, holding that the value determined by the AO was totally flawed and no mistake was found by us in the valuation adopted by the assessee, and held that addition made by the AO would have no legs to stand.
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