Validity of Share Premium Valuation u/s 56(2)(viib): ITAT Deletes AO's Addition, Accepts DCF Method [Read Order]

The Delhi Bench of Income Tax Appellate Tribunal(ITAT) deleted the addition made by the Assessing Officer (AO) under Section 56(2)(viib) of Income Tax Act,1961 regarding the share premium valuation, accepting the assessee's use of the Discounted Cash Flow (DCF) method.

East Delhi Leasing P. Ltd.,appellant-assessee,filed its return of income on 30.09.2013, declaring Rs. 3,89,400/- as income. The assessment was completed on 29.03.2016, with the AO raising the income to Rs. 14,97,26,462/-. During the assessment, the AO found that the assessee had received Rs. 14.93 crores in share capital from two group companies, issuing shares at Rs. 100 each (Rs. 10 face value and Rs. 90 premium).

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The AO asked the assessee to justify the premium under Section 56(2)(viib) of the Income Tax Act. The assessee explained that the premium was part of a group restructuring and submitted a valuation report using the DCF method. However, the AO rejected this, calling the report unrealistic.

The AO determined the fair market value (FMV) of the shares at Rs. 19.04 each using the NAV method and added Rs. 12,08,73,280/- to the appellant’s income for the excess premium. The AO also initiated penalty proceedings for concealment of income.

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The Commissioner of Income Tax(Appeals)[CIT(A)] upheld the addition made by the Assessing Officer under Section 56(2)(viib).The CIT(A) based the decision on several cases, including those from the Apex Court and the Delhi High Court, such as Konark Structural Engineers, Pavankumar M. Sanghvi, Durga Prasad More, and others.

The two member bench comprising C.N.Prasad(Judicial Member) and Naveen Chandra(Accountant Member) examined whether the valuation of shares at a premium of Rs. 90/- per share reflected the fair market value. The assessee argued that the DCF method, introduced during the assessment year, was used to determine the valuation. However, the AO stated that the DCF method could not be applied, as the shares were allotted on 29.09.2012, before the DCF method became effective.

The Counsel for the Assessee argued that the DCF method was applicable because the assessment was pending when the rule was introduced and completed later on 29.03.2016. The ITAT agreed with this view, pointing out that the Circular allowed the DCF method for pending assessments.

The appellate tribunal also noted that Rule 11UA(2)(b) accepted the valuation by a Chartered Accountant. The assessee had submitted a report from CA Sh. V.P. Tyagi, certifying the fair market value at Rs. 106/- per share. The AO's objections to the report were found to be irrelevant. Since valuation is a specialized task, it could only be disputed by another expert's findings.

In conclusion, the ITAT ruled that there was no over-valuation and the AO's application of Section 56(2)(viib) was incorrect. The addition made by the AO was deleted.

In short,the appeal was allowed.

To Read the full text of the Order CLICK HERE

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