Section 56(2)(viib) – Fair market value determined on the basis of NAV method accepted since the assessee was able to substantiate the value

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India Today
Online Pvt. Ltd. vs. ITO (New Delhi)

Members: Amit
Shukla (J.M.) and L. P. Sahu (A.M.)

ITA Nos. 6453
& 6454/Del/2018

A.Y.s: 2013-14
& 2014-15

Dated: 15^th
March, 2019

Counsel for
Assessee / Revenue: Salil Aggarwal and Shailesh Gupta / A.K. Mishra

Section 56(2)(viib) – Fair market
value determined on the basis of NAV method accepted since the assessee was
able to substantiate the value

FACTS

The assessee company was engaged in
the business of development, design and maintenance of website and sale and
purchase of shares. While assessing income for A.Y. 2013-14, the A.O. noted
that the assessee company had received share application money from Living
Media India Ltd., an investor, as under:

The above shares were issued @ Rs.
30 per share, i.e., face value of Rs. 10 and premium of Rs. 20 based on the
valuation report of a chartered accountant. As per the said valuation report,
the fair market value (FMV) of the share of the assessee company was Rs. 77.06
which was determined on the basis of the NAV method. One of the major assets
held by the assessee was investment of Rs. 112.01 crores (book value) in a
subsidiary, viz., Mail Today News Paper Private Limited. As per the report of
the independent valuer, the FMV of the subsidiary’s share was Rs. 40. This
valuation was done applying DCF method. Based on this report, the chartered
accountant valued the investment held by the assessee in the subsidiary at Rs.
286.17 crores, as against the book value of Rs. 112.01 crores.

The A.O. did not tinker with the
valuation except for holding that the assessee had taken the percentage of
shareholding of the subsidiary at 67%, whereas it was 64% as per the audit
report of the subsidiary. Based on this, he valued the share at Rs. 27.75.
Thus, according to him, since the assessee company had issued 5,07,94,056
shares at a premium of Rs. 20, the excess amount of Rs. 11.43 crores,
calculated @ Rs. 2.25 per share, was taxable as income from other sources u/s.
56(2)(viib).

On appeal by
the assessee, the CIT(A) held that the addition u/s. 56(2)(viib) should be made
in the year of issue of shares irrespective of the year of receipt of the share
application money. Secondly, he noted that the net worth of the subsidiary
company was completely eroded as reported by its auditor. Therefore, according
to him, while computing the FMV of the shares of the assessee, the FMV of
shares of its subsidiary at the most can be taken at face value, i.e. Rs. 10
per share as against Rs. 40 per share considered by the assessee. After
substituting the FMV of the share of the subsidiary at Rs. 10, the FMV of the
share of the assessee company came to negative.

Therefore, he held that the
assessee received the sum of Rs. 48.17 crores in excess of the FMV of
2,40,83,333 shares issued during F.Y. 2012-13 corresponding to A.Y. 2013-14.
Accordingly, he held that the same was taxable as income from other sources
u/s. 56(2)(viib). According to him, since 5,07,94,056 shares were allotted in
the financial year pertaining to the next assessment year, he deleted the
addition of Rs. 11.43 crores made by the A.O.

HELD

As per the provisions of clause (a)
of Explanation to section 56(2)(viib), FMV is the value determined in
accordance with the method prescribed in the Rules 11U and 11UA [sub-clause
(i)] or the value which is substantiated by the company to the satisfaction of
the A.O. [sub-clause (ii)], whichever is higher. The tribunal further noted that
the assessee had exercised the option under sub-clause (ii), viz., to
substantiate the value. Secondly, it was also noted that there were no
prescribed methods under Rules 11U and 11UA for the purpose of determination of
FMV on the date of issue of shares on 8.09.2012 as the methods were notified
only on 29.11.2012.

Therefore, according to the
tribunal, it would not be fair to make any kind of enhancement or addition
based on the provision of Rule 11UA. The Tribunal further noted that the
assessee had been able to substantiate the FMV which was based on the valuation
report of a chartered accountant. Further, the assessee also gave following
instances to substantiate the value of its share:

• the fair market value of the shares of the subsidiary from which
  the assessee company derives its value had been accepted by the A.O. in the
  assessment order of the subsidiary in the assessment years 2013-14 and 2014-15
  at Rs. 40;

• the subsidiary company
  had also issued its shares to a non-resident entity at Rs. 43.29;

• In the earlier
  assessment year, i.e., 2011-12, the assessee company had sold 40,302 shares
  held by it in the subsidiary company at Rs. 43.29 per share and the same was
  accepted by the Revenue in the order passed u/s. 143(3).

The tribunal
also noted that as per the valuation report, the value per share was determined
at Rs. 77.06, which was far more than the price at which the assessee had
issued shares, i.e. Rs. 30. Further, it noted that the A.O. had also accepted
the valuation of the share of the assessee, except for the factors stated
above. According to the tribunal, the report of the valuer of the assessee
company based on NAV method cannot be rejected on the ground that the Rules of 11U/11UA
do not recognise the said method, when the assessee has not exercised the
option under sub-clause (i) of Explanation (a) to section 56(2)(viib).