The Bangalore bench of the Income Tax Appellate Tribunal (ITAT) has ruled that, Income received in Excess of Face Value of Shares under Section 56 of the Income Tax Act is Taxable.
The assessee is a company engaged in the business of manufacturing leather items. The assesse filed return of income for Assessment Year 2015-16 declaring a total loss of Rs.3,20,79,298/-. The case of the assessee was taken up for scrutiny assessment. AO issued notice under section 143(2) of the Act in which among other issues, AO specifically called upon the assesse to show cause as to why income should not be assessed under section 56(2)(viib) of the Act on the backdrop, previous year the assesse issued /allotted 560000 Equity shares at premium of Rs 50/- each . Under the aforesaid provision, if a company in which public are not substantially interested receives in any previous year from a person being a resident any consideration for issue of shares that exceeds the face value of such share, the aggregate consideration received for such share exceeds the fair market value of the shares, shall be assessed as “income from other sources”. In return assesse submitted that the valuation has been properly arrived at as per guidelines given by SEBI and RBI and is fair.
Thereafter another notice calling explanation as to why a sum of 4,12,85,817/- should not be brought to tax u/s 56(2)(viib) of the Act. For that assesse replied that share value as per the net assets value method is Rs.66/- and not Rs.22/- and on accepting this reply AO accepted the loss as return by the assesse.
The Principle CIT, in exercise of its powers revision u/s 263 of the ACT finds out that there was no application of mind by the AO and AO has accepted the version mechanically and set aside the order of AO. Against which the assesse files an appeal before the Tribunal.
The coram of Sri N V Vasudevan, Vice President, and Sri B R Baskaran Accountant Member held that the assessee did not file any valuation report to substantiate the fair market value of shares issued in terms of Sec.56(2)(viib) (a)(i) of the Act and Rule 11UA of the Rule. In such circumstances, ITAT of the view that the AO could not have accepted the intrinsic value without calling for a value in terms of Rule 11UA of the Rules to find out whether class (i) or class (ii) of explanation (a) to Sec.56(2)(viib) of the Act would be applicable, and the order of the AO without considering it was erroneous. And find that there was no merit on part of the assesse and hence appeal dismissed.
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