The Delhi bench of Income Tax Appellate Tribunal (ITAT) recently held that no addition shall be made on account of share premium received in excess of Fair Market Value (FMV) under Section 56(20(viib0 of the Income Tax Act, 1961.
The Assessee Continental Corrugators Pvt. Ltd is engaged in the business of corrugated boxes.During the scrutiny proceedings Assessing Officer observed that the assessee has issued Rs.10 lakh equity shares of face value Rs.10/- per share at Rs.36 per share, i.e, at a premium of Rs.26 per share.
In view of the absence of valuation report of Chartered Accountant in terms of Rule 11UA, the AO invoked the provisions of Section 56(2)(viib) and considered the premium amount of Rs.26 per share to be in excess of Fair Market Value (FMV) of equity shares of the company and consequently the excess consideration received on account of share premium on issue of equity shares were held to be assessable to tax under Section 56(2)(viib) of the Income Tax Act.
Aggrieved by the order the assessee filed appeal before the CIT(A).after analysing the submission the CIT(A) allowed the appeal filed by the assessee accordingly reversed the additions made by AO. Therefore the revenue filed another appeal before the tribunal with respect to the reversal of addition.
Rano Jain, Counsel for revenue submitted that In the absence of valuation report which is the basic document for such corroboration, the AO has rightly invoked the deeming provisions of Section 56(2)(viib) of the Act to treat the share premium to be excessive consideration over FMV for the purposes of Section 56(2)(viib) of the Act.
Vivek Kumar Upadhyay, Counsel for the assessee argued that for purposes of determining the FMV of unquoted equity shares under Rule 11UA(2)(a) of the Rules, there is no legal requirement of obtaining any valuation report. Since FMV has been determined on the basis of book value of assets and liabilities, the assessee was not required in law to obtain a separate valuation report.
The tribunal observed that the book value of assets and liabilities adopted for the purposes of NAV method of valuation is in consonance with last audited balance-sheet items as on 31.03.2016 whereas the allotment has been stated to be made in November, 2016 during the Financial Year 2016-17 relevant to Assessment Year 2017-18.
Further the phraseology of clause (a) to sub-rule (2) of Rule 11UA read with Explanation (a) to Section 56(2)(viib) do not thrust the requirement of Valuation Report for substantiation of valuation under NAV method.
After analyzing the submission of both parties the bench comprising Kul Bharat(Judicial Member) and Pradip Kumar Kedia, (Accountant Member) held that no addition was made on account of share premium received in excess of Fair Market Value (FMV) under Section 56(20(viib0 of the Income Tax Act.Therefore the bench reverse addition mae by the assessing officer.
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