The Chennai bench of Income Tax Appellate Tribunal ( ITAT ) ruled that no addition was required under Section 56(2)(viib) of the Income Tax, 1961 if the difference between the issue price and Fair Market Value ( FMV ) was below the 10% tolerance limit under Rule 11UA of the Income Tax Rules, 1962.
Go Fashion ( India ) Ltd., the assessee issued compulsory convertible preference shares on January 16, 2018, raising Rs. 100 crore under a private equity investment made by ICICI Venture through India Advantage Fund S4-I.
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The shares were issued for Rs. 416.69 per share, while the Fair Market Value ( FMV ) of the shares was determined to be Rs. 414 per share. During the assessment process, the assessing officer accepted the valuation of shares and made no addition under Section 56(2)(viib) for the difference in issue price and FMV of the shares.
The Principal Commissioner of Income Tax ( PCIT ) found that the AO did not make any additions regarding the differences and issued a revision order under Section 263, contending that the AO’s order was erroneous and prejudicial to the interest of the Revenue because of insufficient inquiry into the valuation difference.
The assessee challenged the PCIT’s revision order before the Mumbai Bench of ITAT arguing that Rule 11UA permits a 10% variation between the issue price and FMV and the difference was just 0.65% in their case. Therefore, no addition was required under Section 56(2)(viib).
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On the other hand, the revenue’s counsel relied on the order passed by the PCIT.
The two-member bench comprising Aby T. Varkey ( Judicial Member ) and Jagadish ( Accountant Member ) observed that the AO had indeed called for details during the assessment proceedings including the valuation of shares as per Rule 11UA and examined the issue and found the difference between the issue price and FMV was 0.65% and well within the 10% tolerance limit.
The tribunal noted that Rule 11UA allows a 10% margin between the issue price and FMV. Since the difference was only 0.65%, there was no addition required under Section 56(2)(viib) of the Income Tax Act, 1961.
Therefore, the tribunal set aside the PCIT’s order and upheld the assessing officer’s assessment order. The appeal of the assessee was allowed.
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