Deemed income u/s 56(2)(viib) – Company – Receipt of consideration for issue of shares in excess of their fair market value – Determination of fair market value – General principles – Assessee valuing shares following prescribed method – No evidence that method was erroneous – Addition based on estimate by A.O. – Not justified

Deemed income u/s 56(2)(viib) – Company – Receipt of consideration for issue of shares in excess of their fair market value – Determination of fair market value – General principles – Assessee valuing shares following prescribed method – No evidence that method was erroneous – Addition based on estimate by A.O. – Not justified

For the A.Y. 2015/16, the assessee had filed its return of income declaring Nil income. The case of the assessee was selected for ‘limited scrutiny’ inter alia for the reason ‘large share premium received during the year [verify applicability of section 56(2)(viib)(b)]’. By an order dated 31st December, 2017, the assessment was framed u/s 143(3) determining the total income of the assessee at Rs. 90,95,46,200, making an addition u/s 56(2)(viib).

The Tribunal deleted the addition and held that neither the identity nor the creditworthiness and genuineness of the investors and the pertinent transaction could be doubted. This fact stood fully established before the A.O. and had not been disputed or doubted. Therefore, the nature and source of the credit stood accepted. It held that if the statute provides that the valuation has to be done as per the prescribed method and if one of the prescribed methods had been adopted by the assessee, then the A.O. had to accept it.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

‘i) Section 56(2)(viib) lays down that amounts received by a company on issue of shares in excess of their fair market value will be deemed to be income from other sources. Valuation is not an exact science and therefore cannot be done with arithmetic precision. It is a technical and complex problem which can be appropriately left to the consideration and wisdom of experts in the field of accountancy, having regard to the imponderables which enter the process of valuation of shares.

ii) The shares had not been subscribed to by any sister concern or closely related person, but by outsider investors. The methodology adopted was a recognised method of valuation and the Department was unable to show that the assessee adopted a demonstrably wrong approach, or that the method of valuation was made on a wholly erroneous basis, or that it committed a mistake which went to the root of the valuation process. The deletion of addition was justified.’