The Jodhpur Bench of the Income Tax Appellate Tribunal (ITAT) recently ordered the deletion of an income tax addition of ₹51,00,000/-, observing that the Assessing Officer (AO) had arbitrarily rejected the share valuation report of the concerned Company, leading to an unscrupulous assessment and subsequent taxation of the entire share premium and capital.
The Appellant-Assessee Patel Minerals Pvt. Ltd. filed their returns of income on September 3, 2015, declaring a loss of ₹7,58,076. Initially, the matter was selected for limited scrutiny to verify share premium, but it was later converted into full scrutiny, leading to an assessment order dated December 8, 2017, wherein the AO made an addition of ₹51 lakh.
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The AO had noted that the company, not being one having substantial public interest, had issued 1,70,000 shares at ₹30 per share (₹10 face value + ₹20 premium). The authorities determined the fair market value of the shares as ‘nil’ by applying the Net Asset Value (NAV) method under Rule 11UA of the Income Tax Rules, 1962. While doing so, the AO ignored the company’s valuation report which employed the Discounted Cash Flow (DCF) method, and deemed the entire share premium and capital as taxable income.
In appeal, the Commissioner of Income Taxes (Appeals) ( CIT(A) ) upheld the AO’s decision, stating that since the NAV method resulted in a negative valuation, the entire ₹51 lakh (including ₹34 lakh in share premium) should be taxed under Section 56(2)(viib) leading to the present appeal.
CA Yogesh Pakharna appearing for Patel Minerals Pvt. Ltd. reiterated before the ITAT that the DCF method was also a recognized method of valuation under Rule 11UA of the Income Tax Rules, 1962 and that the AO had disregarded the same without valid justification.
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Meanwhile, Arvind Kumar Gehlot appearing for the Revenue defended the decision of the AO, claiming that the company lacked business operations at the time and that the shares issued at a premium could not be satisfactorily justified.
The two-member Bench of Judicial Member Dr. S. Seethalakshmi and Accountant Member Rathod Kamlesh Jayantbhai ordered the deletion of income tax addition of ₹51 Lakh, observing that the AO had erred in rejecting the valuation report prepared using the DCF method and the CIT(A) had wrongly acceded to the observations of the AO without noting that Rule 11UA allows companies to choose between the NAV and DCF methods, and the AO cannot arbitrarily impose one method over the other.
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