The Bombay High Court quashed re assessment notice as there was true and full disclosure regarding valuation of equity shares.
The Petitioner, The Suminter Organic and FairTrade Cottton Ginning Mill Pvt, had issued premium of Rs.17 per share, which was not valued correctly in terms of Rule 11UA r/w Section 56(2)(viib) of the Income Tax Act and that the correct valuation of equity shares as per the aforesaid rule worked out at Rs.6.48 per share.
It was thus stated that an amount of Rs.1 crores received as premium was required to be added as income from other sources. The reasons also reflect that the assessee had failed to disclose truly and fully the material facts and, therefore, the case was selected to be reopened under Section 147 of the Act.
The Petitioner challenges the notice under Section 148 of the Income Tax Act, 1961 for the assessment year 2015-16 as also the order rejecting the objections raised by the Petitioner regarding the reopening of the assessment proceedings.
Objections were fled to the reopening by the Petitioner in which a stand was taken that the assessee had issued 9,90,000 shares of the face value of Rs.10 at premium of Rs.17 per share to its parent company, for a total consideration of Rs.2 crores, which was disclosed by the assessee in its annual income tax return fled for the assessment year 2015- 16.
The Counsel for the Petitioner urged that there was no failure on the part of the Petitioner to disclose fully and truly the material facts during the assessment proceeding and that the reopening of assessment proceeding was nothing but a change of opinion.
The Counsel for the Petitioner submitted that in accordance with Rule 11UA2(b) of the Income Tax Rules, 1962, as it stood during the relevant year, before its amendment in 2018, the fair market value of the unquoted equity shares could also be determined by a merchant banker or an accountant as per the Discounted Free Cash Flow Method.
Post the amendment with effect from 24th May, 2018 the words “or an accountant” were omitted. It was thus urged that Discounted Free Cash Flow Method adopted by the Petitioner certified by the C.A. was a permissible mode for determining the fair market value of the shares as it had been rightly accepted by the A.O. during the scrutiny assessment proceedings.
The Bench comprising Justice Kamal Khata and Justice Dhiraj Singh Thakur, observed that “We have no hesitation that there was no failure on the part of the assessee to disclose fully and truly the material facts, nor there was any tangible material with the A.O. which would have otherwise justified the reopening of the assessment by issuing the notice impugned.”
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