ITO Vs Quark Enterprises Private Limited (ITAT Hyderabad)
ITAT Hyderabad held that addition under section 56(2)(viib) of the Income Tax Act sustained as method adopted for determination of FMV of equity shares by the assessee is not as per method prescribed under rule 11UA of Income Tax Rules.
Facts- During the course of assessment proceedings the AO, on verification of the financials observed from the balance sheet that the assessee company has received share premium to the extent of Rs.23,98,74,430/- during the financial year under consideration. In order to verify the same and examine the applicability of section 56(2)(viib) of the IT Act, he asked the assessee to provide the details of parties from whom share premium was received along with details of the mode of receipt and to explain why the provisions of section 56(2)(viib) of the Act should not be applied.
Put verification, AO held that the assessee is eligible to receive a premium Rs.0.305/ – per share only whereas the assessee received an amount of Rs.190/ – per share as “Premium” which is Rs.189.695/ – (Rs.190-0.305) higher than eligible premium as calculated. Hence, he treated the excess premium of Rs.189.695/ – per share as “Income from other sources” and made addition of Rs.23,94,89,308/- to the total income of the assessee.
CIT(A) allowed the appeal of the assessee. Being aggrieved, revenue has preferred the present appeal.
Conclusion- Held that in our opinion, this is a colorable device applied by the assessee for inflating the value of its share. The valuation of the company in our opinion should be done based on the basis of fundamentals and economic conditions of the assessee and must be in accordance with the method prescribed for that purpose. It should be independently done as, the valuation of holding company shares done on the basis of DCF method cannot be yardstick to determine the valuation of shares of assessee company. Hence, valuation made by the assessee of NAV method is not in accordance with law. Further, neither market value of shares of the sister concern had been taken into consideration nor the valuation of sister concerns had been independently examined by the ld.CIT(A). Hence, the same is required to be rejected.
In view of the above discussion, it cannot be said that no fault was found in such valuation report by the AO or that the AO has not found any defect in the valuation of shares arrived at by the assessee. We find the ld.CIT(A) in the instant case without properly understanding the facts of the case was merely carried away by the submissions of the assessee and deleted the additions, which in our opinion is not justified under the facts and circumstances of the instant case. The various decisions relied on by the ld.CIT(A) are not applicable in the facts of the present case. Since, the AO has given valid reasons while making the addition, therefore, the order of ld.CIT(A) which is contrary to facts cannot be upheld. We therefore set aside the order of the ld.CIT(A) on this issue and the grounds raised by the revenue is allowed.
FULL TEXT OF THE ORDER OF ITAT HYDERABAD
This appeal filed by the revenue is directed against the order dated 07.05.2019 of Learned Commissioner of Income Tax (Appeals)-4, Hyderabad relating to AY 2016-17.
2. There is a delay of ‘1’ day in filing of this appeal by the Revenue for which the Revenue has filed a condonation application explaining the reasons for delay. After considering the contents of the condonation application and after hearing both sides, the delay in filing of this appeal by the Revenue is condoned.
3. Ground of appeal No.1 by the revenue reads as under:-
1. “Whether on the facts & in the circumstances of the case, the ld.CIT(A) was right in deleting the addition made u/s. 56(2)(viib) of the Act without appreciating that the method adopted for determination of FMV of the equity share by the assessee is not as per the method prescribed under Rule 11UA of the I.T.Rules.
4. Facts of the case, in brief, are that the assessee is a company and engaged in the business of investment. It filed its return of income on 27.09.2016 declaring loss of Rs.1,93,66,158/- under normal provisions and book loss u/s. 115JB at Rs.1,93,45,628/-. During the course of assessment proceedings the AO, on verification of the financials observed from the balance sheet that the assessee company has received share premium to the extent of Rs.23,98,74,430/- during the financial year under consideration. In order to verify the same and examine the applicability of section 56(2)(viib) of the IT Act, he asked the assessee to provide the details of parties from whom share premium was received along with details of the mode of receipt and to explain why the provisions of section 56(2)(viib) of the Act should not be applied.
5. In response to the same, the assessee submitted that it has issued 12,62,497 shares @Rs.200/- per share (with face value of Rs.10/ – per share and premium of Rs.190/ – per share) to four parties the details of which are as under:
