The Income Tax Appellate Tribunal (ITAT), Mumbai bench upheld the addition made by the CIT(A) under section 56(2)(viib) of the Income Tax Act, 1961, on account of excess consideration received on allotment of shares.
The assessee, Osianama Learning Experience Pvt. Ltd, is engaged in the business activities of acquiring, archiving, promoting, undertaking, carrying on, managing, organizing, and encouraging activities in India and/or abroad, either singly or in collaboration with other institutions.
After filing the return of income, during the assessment proceedings, the AO noted that the fair market value as determined in the valuation report was Rs. 341. Since the assessee had received a sum of Rs. 59 per share in excess, the AO concluded the assessment, making an addition under section 56(2)(viib) of the Income Tax Act.
Aggrieved by the order, the assessee filed an appeal before the CIT(A), who dismissed the appeal and held that the issuing of shares by the assessee at a value in excess of the fair market value gets covered by the provisions of section 56(2)(viib) of the Act and disallowed an amount of Rs. 59,14,750 as excess consideration received by the assessee over and above the fair market value determined by the valuer.
Thus, the assessee filed a second appeal before the tribunal. During the proceedings, no one appeared for the assessee.
Satyaprakash Singh, Counsel for Revenue, argued that shares were issued by the assessee at a value higher than the fair market value calculated by the valuer, and therefore, the excess consideration received has been rightly disallowed under section 56(2)(viib) of the Income Tax Act.
The tribunal observed that the fair market value of the shares arrived at, based on the valuation report using the DCF method, was Rs. 341 per share. The provision of section 56(2)(viib) of the Income Tax Act is not applicable in respect of shares allotted to a non-resident. However, in the case of the assessee, the provision of section 56(2)(viib) of the Income Tax Act is applicable. Therefore, as per the provisions of section 56(2)(viib) of the Income Tax Act, in the case of a company in which the public is not substantially interested, receipts from any person, being a resident, as consideration for the issue of shares in excess of the face market value of such shares, is to be considered as the income of the assessee under the head ‘income from other sources.’
After reviewing the facts and records, the two-member bench of G.S. Pannu (Vice President) and Sandeep Singh Karhail (Judicial Member) held that shares allotted by the assessee in excess of the price determined by the valuation report were held to be covered within the ambit of section 56(2)(viib) of the Income Tax Act.
Therefore, the bench dismissed the appeal of the assessee.
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