Case Law Details
Deep Jyoti Wax Traders Pvt. Ltd Vs ITO (ITAT Kolkata)
The Income Tax Appellate Tribunal (ITAT) Kolkata addressed a critical issue in the case of Deep Jyoti Wax Traders Pvt. Ltd vs. ITO. The dispute revolved around the Assessing Officer’s (AO) authority to reject an assessee’s valuation method under Rule 11UA(2) of the Income Tax Rules.
Deep Jyoti Wax Traders Pvt. Ltd issued shares and determined their fair market value (FMV) using the Discounted Cash Flow (DCF) method, as per Rule 11UA(2)(b). Despite the absence of any defect in the assessee’s chosen method, the AO calculated FMV using a different approach under Rule 11UA(2)(a). This discrepancy led to the addition of excess share premium by the AO under section 56(2)(viib) of the Income Tax Act.
The crux of the matter lay in the interpretation of Rule 11UA(2), which grants the assessee the option to select either clause (a) or clause (b) for determining FMV. Since the assessee opted for the DCF method, the ITAT Kolkata ruled that the AO’s deviation from this choice was unjustified. Furthermore, the absence of any identified flaws in the DCF method validated the assessee’s approach.
By upholding the assessee’s valuation method, the ITAT emphasized the importance of respecting an assessee’s prerogative in selecting a valuation approach. This decision underscores the principle of procedural fairness and adherence to prescribed rules in income tax assessments.
In a significant verdict, the ITAT Kolkata upheld the assessee’s valuation method, emphasizing the importance of respecting an assessee’s choice under Rule 11UA(2). The ruling serves as a reminder to Assessing Officers to refrain from overriding an assessee’s chosen method without valid grounds, ensuring procedural fairness and compliance with statutory provisions.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
The present appeal has been preferred by the assessee against the order dated 07.11.2022 of the National Faceless Appeal Centre (hereinafter referred to as the ‘CIT(A)’) passed u/s 250 of the Income Tax Act (hereinafter referred to as the ‘Act’).
2. The sole issue raised by the assessee is relating to the addition made by the Assessing Officer of Rs.1,16,65,600/- u/s 56(2) of the Act on account of excess share premium received by the assessee as compared to the fair market value of the shares.
3. The assessee during the year issued 920000 shares @10/- each and further of Rs.40/- each raising total share capital including share premium of Rs.46000000/- The Assessing Officer however determined the fair market price of the shares issued by the assessee at Rs.27.3/-per share and he further observed that the assessee had issued shares @ Rs.40/-. He added the differential amount of Rs.11665600/- u/s 56(2)(viib) of the Act. As per the provisions of section 56(2)(viib) of the Act, the fair market value of the shares can be determined in the following manner:
“(a) the fair market value of the shares shall be the value –
(i) as may be determined in accordance with such method as may be prescribed, or
(ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, Whichever is higher;”
4. The case of the assessee is that the fair market value of the shares was determined by the method prescribed under Rule 11UA of the Income Tax Rules 1962. The relevant part of which is reproduced as under:
“[(2) Notwithstanding anything contained in sub-clause (b) of clause (c) of sub-rule (1), the fair market value of unquoted equity shares for the purposes of sub-clause (i) of clause (a) of Explanation to clause (viib) of sub-section (2) of section 56 shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner under clause (a) or clause (b), at the option of the assessee, namely:—
(a) the fair market value of unquoted equity shares =
where,
A = book value of the assets in the balance-sheet as reduced by any amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act and any amount shown in the balance-sheet as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset;
L = book value of liabilities shown in the balance-sheet, but not including the following amounts, namely:—
(i) the paid-up capital in respect of equity shares;
(ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company;
(iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation;
(iv) any amount representing provision for taxation, other than amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto;
(v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities;
(vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares;
PE = total amount of paid up equity share capital as shown in the balance-sheet;
PV = the paid up value of such equity shares; or
(b) the fair market value of the unquoted equity shares determined by a merchant banker or an accountant as per the Discounted Free Cash Flow method.]”
5. It is pertinent to mention here that as per the relevant rules as applicable for assessment year under consideration i.e. 2014-15, it was at the option of the assessee to get the fair market value of the share determined from a merchant banker or an accountant as per the Discounted Free Cash Flow Method. The ld. counsel for the assessee has produced on record a report of S. K. Vyas & Associates, C.A., who have calculated the fair market value of the shares at Rs.50/- per share as per Discounted Cash Flow Method. A perusal of the order of the Assessing Officer reveals that the Assessing Officer has not pointed out any defect or infirmity in the aforesaid discounted cash flow method followed by the assessee as per the report given by the accountant as per the prescribed rules. The Assessing Officer however has proceeded to calculate the market value of the shares as per clause (a) of Rule 11UA(2)(a), whereas, the assessee has opted fair market value of the shares under Rule 11UA(2)(b) of the I.T. Rules. It has been specifically provided u/r 11UA(2) that the fair market value of the shares can be determined either in the manner as prescribed in clause (a) or clause (b) at the option of the assessee. Therefore, since it was the option of the assessee to follow either clause (a) or clause (b), the assessee has followed the method prescribed under clause (b) of Rule 11UA(2), therefore, the action of the Assessing Officer in determining the fair market value by following the method under clause (a) cannot be held to be justified. Therefore, the impugned additions made by the Assessing Officer are not sustainable in the eyes of law. The impugned additions are ordered to be deleted. The appeal of the assessee is hereby allowed.
6. In the result, the appeal of the assessee stands allowed.
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