2. [2019] 109 taxmann.com 165 (Ahd. – Trib.) Unnati
Inorganics (P.) Ltd. vs. ITO ITA No.:
2474/Ahd./2017 A.Y.: 2014-15 Date of order:
11th September, 2019
Section 56(2)(viia)
– Value of tangible or intangible assets once substantiated would be replaced
with the book value for the purposes of FMV regardless of the book entries in
this regard
FACTS
The assessee, a
private limited company, filed its return of income for A.Y. 2013-14 declaring
Nil total income. In the course of assessment proceedings the AO noticed that
the assessee company has, during the previous year, issued 10,16,000 shares of
face value of Rs. 10 each at a premium of Rs. 23 per share. The AO made
inquiries regarding the Fair Market Value (FMV) of the shares allotted, having
regard to the provisions of section 56(2)(viib) of the Act, for the purposes of
ascertaining the correctness of the premium charged.
The assessee
submitted that the company holds certain land parcels in Vadodara and Dahej
whose FMV is substantially high on the date of allotment of shares and
consequently premium charged of Rs. 23 per share is quite commensurate with the
FMV of shares allotted as contemplated in Explanation to section 56(2)(viib) of
the Act. By producing a valuation report of the land, the assessee demonstrated
that the value of land adopted by the assessee for this purpose is only 45% of
the jantri price. However, the AO disputed the FMV of the fresh
allotment and proceeded to apply the prescribed method of valuation as
stipulated in Rule 11UA to determine the FMV of the shares; for this purpose he
adopted the book value of the assets and liabilities including land as on 31st
March, 2013 and determined the FMV of fresh allotment at Rs 12.84 per share in
place of Rs. 33 per share adopted by the assessee. The AO, accordingly, added a
sum of Rs. 2,04,82,560 to the total income, on issue of shares at a price in
excess of the FMV of the shares, u/s 56(2)(viib) of the Act.
Aggrieved, the
assessee preferred an appeal to the CIT(A) who upheld the action of the
assessee by observing that (i) no accounting entry has been passed in respect
of the difference between the FMV of the land at the relevant point of time and
its corresponding actual costs as reflected in the books of accounts; (ii) if
share premium was charged on the basis of jantri price, then it was less
than what was required to be charged, and therefore there is arbitrariness in
deciding the issue price; (iii) the assessee first acquired land at Vadodara
for setting up its plant and thereafter acquired another plot of land at Dahej
since it was not in a position to complete legal formalities qua the
first property acquired by it, and therefore there is an element of ad
hocism in the actions of the assessee.
Aggrieved, the assessee preferred an appeal to the Tribunal.
HELD
The Tribunal observed that section 56(2)(viib) seeks to enable the
determination of FMV by two methods: (i) prescribed method as purportedly
embedded in Rule 11UA of the Income-tax Rules; and (ii) FMV based on the
intrinsic value of the assets both tangible and intangible on the date of issue
of shares. Thus, the FMV of all the assets (tangibles, intangibles, human
resources, right of management or control or other rights whatsoever in or in
relation to the Indian company), whether recorded in the books or not,
appearing in the books at their intrinsic value or not, is a sufficient warrant
to value the premium on issue of unquoted equity shares by a closely-held
company. Thus, the Explanation (a)(ii) itself implies that book entry for
recognition of intrinsic value is not necessary at all. Moreover, the higher of
the values determined as per the first and second limbs of Explanation shall be
adopted for the purposes of section 56(2)(viib) of the Act.
It also observed that the FMV of the land belonging to the assessee
company was sought to be substantiated by the valuation report. And that the
valuation report has not been controverted by the Revenue. No rebuttal of the
fact towards the value of land is on record. It observed that one of the
grounds taken by the Revenue for rejecting the basis of determination of FMV is
that no accounting entry has been passed in respect of difference between the
FMV of the immovable property at the relevant point of time and its actual cost
as reflected in the books of accounts.
The Tribunal
held that the value once substituted would be replaced with the book value for
the purposes of FMV regardless of the book entries in this regard. What is
relevant is whether at the time of allotment of shares the value of shares as
claimed existed or not. The valuation report is not evidence in itself but
merely an opinion of an independent having regard to totality of expert facts
and circumstances existing on the date of valuation. So long as the facts and
circumstances exist, the presence or otherwise of valuation report per se
has no effect. It observed that the AO has himself, in a subsequent year,
disputed the higher valuation of Rs. 46 and unequivocally adopted Rs. 33 as its
fair value. The assessee has also been able to demonstrate arm’s length
transaction and unison of two different groups bringing different capabilities and
expertise for furtherance of business. Also, the existing promoters, too,
subscribed at a rate similar to the rate at which shares were allotted to the
new group which, according to the Tribunal, further reinforces the inherent
strengths in the valuations of the company as represented by the value of
equity shares.
The Tribunal
set aside the order of the CIT(A) and directed the AO to delete the addition
made u/s 56(2)(viib) of the Act. The appeal filed by the assessee was allowed.
