The Bangalore Bench of Income Tax Appellate Tribunal (ITAT) has upheld the addition under Section 56(2) (viib) of the Income Tax Act as the share premium received by the company was in excess of the Fair market value of share.
The appellant company, Mobi Com Technologies Pvt. Ltd was engaged in providing software development services for computers of all kinds, peripherals, consumables and software, registered on 09.04.2015 filed its return of income on 23.09.2016 declaring loss. It was relevant to mention that the assessee company did not claim itself as a start-up as defined by DIPP, nor filed any certificate to prove that the company was registered as a start-up.
During the course of scrutiny assessment, it was revealed that the assessee credited a sum under security premium reserve account. It had allotted 1045 shares and treated the balance as share premium. The equity shares were issued at premium each to one Rathan Kumar. The valuation report of the accountant was also filed. It was found that the valuation of the shares was done on the books following DCF method forecasting the future growth which was a hypothetical estimation and not in accordance with Rule 11 UA of the Income Tax Rules as of the opinion of the Assessing Officer.
During the course of scrutiny assessment, the valuer of the shares was summoned
on 16.11.2018 in order to verify the basis and documents relied upon and strategy adopted to arrive at the share premium. The AO did not accept the DCF method of valuation of the share.
According to him the price of the share exceeded the fair market value. He further relied on Section 56(2)(viib) of the Income Tax Act wherein the fair market value of the shares shall be the value as may be substantiated by the assessee to the satisfaction of the AO based on the value, on the date of issue of shares of its assets including intangible assets being good will, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature whichever was higher.
According to the AO, the assessee received share premium on issue of preference shares and therefore the method adopted by the assessee in determining the fair market value of the equity share will not be applicable to determine the FMV of preference shares. The DCF method adopted by the assessee was, thus, not found acceptable.
Padam Chand Khincha, on behalf of the assessee submitted that authorities had failed to appreciate that the shares under consideration are preference shares and not equity
shares. Neither the addition under Section 56(2)(viib) of the Income Tax Act was applicable particularly when the share issued at a price lesser than the value determined as per Discounted Cash Flow method.
He also submitted that the AO had no jurisdiction to adopt a different method than
the one adopted by the assessee.
The two-member Bench of Chandra Poojari, (Accountant Member) and Madhumita Roy, (Judicial Member) having regard to the facts and circumstances of the case, upheld the finding of the authorities and dismissed the appeal filed by the assessee holding that the share premium received by the company was in excess of fair market value of the share, the addition thus made under Section 56(2)(viib) of the Income Tax Act was found to be just and proper.
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