In a recent ruling, the Ahmedabad bench of the Income Tax Appellate Tribunal ( ITAT ) upheld the disallowance under Section 56(2)(viib) of the Income Tax Act, 1961, due to Unexplained Share Premium Fluctuation within the same Financial Year
In this case, the assessee, Parasmani Gems Pvt. Ltd., is engaged in the trade of manufacturing and trading of gold and diamond jewellery, and it filed its income tax returns ( ITR ) for the assessment year ( AY ) 2013-14, declaring a total income of Rs. 51,74,100.
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The assessing officer ( AO ) noted that the assessee had raised funds by way of share capital and noted that the face value of the share allotted on 03-11-2012 was Rs. 10, a premium of Rs. 90 per share, and noted that the shares allotted on 26-03-2013 were issued at a premium of Rs. 31.67 per share only.
The assessee submitted before the AO that the shares were allotted based on the fair market value (FMV) of the shares as determined under the discounted cash flow (DCF) method, in support of which a report of the accountant was filed.
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The above submission was not accepted by the AO, and the passed final order disallowing Rs. 27,72,500 under Section 56( 2 )( viib ) of the Income Tax Act was restricted to Rs. 27,72,500.
The Commissioner of Income Tax ( Appeals) [ CIT( A ) ] upheld the disallowance made by the AO.
The counsel on behalf of the assessee submitted that the provision of Section 56(2)(viib) of the Act was introduced by the Finance Act, 2012, and Rule 11UA for determining the FMV of the shares was introduced only on 29-11-2012. Thus, there was no prescribed method for determining the FMV of unquoted equity shares for the purpose of Section 56(2)(viib) of the Income Tax Act for the period from 01-04-2012 to 28-11-2012.
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The Ahmedabad ITAT observed that it is not possible to have such a wide fluctuation in the value of shares within a period of less than 5 months and that too within the same financial year.
The bench observed that there was a lack of proper explanation on the part of the assessee for charging a premium of Rs. 31.67 per share only in the subsequent allotment of shares on 26-03-2013.
The bench comprising T. R. Senthil Kumar ( Judicial Member ) and Narendra Prasad Sinha ( Accountant Member ) upheld the additions made by the AO and dismissed the appeal filed by the assessee.
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