The Income Tax Appellate Tribunal (ITAT), Patna Bench has held that the differential amount received by way of the issue of shares for a Premium above the Fair Market Value (FMV) shall be taxable for a Closely-held Company under the head “Income from Other Sources” under Section 56(2)(viib) of the Income Tax Act, 1961 but the same is not taxable for the Investor.
The assessee, SIS Prosegur Holdings Pvt. Ltd.represented by Shri Nageswar Rao has filed an appeal before ITAT against the revision order passed by the Principal Commissioner of Income Tax-1 (PCIT), Patna under Section 263 of the Income Tax Act, 1961.
The PCIThad observed thatas the aggregate consideration for the issuance of shares is more than its FVM, the difference has to be taxed as income under Section 56(2)(viib) of the Income Tax Act, 1961. The FMVcan be determined based on the Book Value or the Discounted Cash Flow (DCF) Method.
The PCIT clarified that the valuation report submitted by the assessee suffered from grave infirmities, and the valuation of shares done by the valuers using the DCF method was not reliable.
The PCIT found that no independent verification or third-party consultation had been conducted during the valuation process and the report lacked documentary evidence to substantiate the basis of projections in the cash flow.
The assessee challenged the invocation of revision jurisdiction by PCIT and argued that the assessment order passed by Assessing Officer (AO) was neither erroneous nor prejudicial to the interest of revenue.
The assessee also contended that the valuation report obtained by the company was binding upon the revenue and could not be questioned.
The PCIT highlighted the importance of considering various factors for a proper and scientific valuation citing the “Technical Guide on share valuation” issued by the Institute of Chartered Accountants of India (ICAI).
The PCIT held that the assessment order passed by AO under Section 143(3) of the Income Tax Act, 1961 was erroneous and prejudicial to the interest of revenue within the meaning of section 263 of the Act.The PCIT set aside the assessment order and directed AO to frame the assessment de novo by conducting fresh inquiries and verifications regarding the accuracy and completeness of the information provided by the management for the valuation of the shares as perthe DCF method.
Aggrieved by the order of PCIT,the assessee preferred to appeal before ITATchallenging the validity of the revision order.
The Revenue, represented by Smt. Rinku Singh challenged the valuation of the shares since the performance of the assessee did not match the projections made by it.
The two-member bench consisting of Shri Sanjay Garg (Judicial Member) and Shri Girish Agrawal (Accountant Member) upheld the PCIT’s decision to set aside the assessment order of AO as being erroneous and prejudicial to the interest of revenue and ordered AO to afford the assessee a reasonable opportunity to be heard before passing the appropriate order.
The bench also directed AO to make the enquiries as directed by PCIT regarding the correctness of the valuation report of the accountant, may call for an independent report from an expert to confront the assessee and thereafter to pass a speaking order per law.
Asa result, the appeal of the assessee is dismissed.
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