Addition u/s. 56(2)(viib) not sustained as shares issued at lower rate than rate determined by AO: ITAT Delhi

ACIT Vs Addverb Technologies Pvt. Ltd. (ITAT Delhi)

ITAT Delhi held that addition on account of section 56(2)(viib) of the Income Tax Act unsustainable as shares are issued at rate lower than market value of shares determined by the AO.

Facts- Revenue has preferred the present appeal contesting that CIT(A) has erred in deleting disallowance of Rs. 3,95,014 made on account of proportionate interest expenditure and deleting addition of Rs. 25,09,76,959 made on account of section 56(2)(viib) of the Income Tax Act.

Conclusion- Held that disallowed interest payment of Rs. 3,95,014/- is TDS deducted and paid by the assessee in respect of said loan. The CIT(A) after examining the issue deleted the addition. No document controverting findings of the CIT(A) are brought on record by the Revenue. We find no infirmity in findings of the CIT(A)on this issue. Hence, the same are upheld.

Held that in the instant case, the assessee had issued shares having face value of Rs. 10/- per share at a premium of Rs. 4262.31 per share as against the market value of shares determined by the AO adopting NAV method Rs. 7426/- per share. Thus, the provisions of section 56(2)(viib) of the Act are not attracted in the present case. The AO disputed valuation of shares under DCF method which is one of the approved methods under Rule 11U and 11UA of the Income Tax Rules, 1962 and recomputed the value of equity shares following NAV method. Though the AO cannot tinker with the valuation report unless it is fundamentally flawed, without going further into merits of valuation, even, if the market value of shares as determined by AO is accepted the provisions of section 56(2)(viib) of the Act are not attracted as the assessee had issued shares at a rate lesser than the market value determined by the AO.

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal by the Revenue is directed against the order of Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [in short ‘the CIT(A)’] dated 18.08.2023, for Assessment Year 2020-21.

2. This appeal is time barred by 14 days. The Assessing Officer (AO) has filed an application dated 30.10.2023 seeking condonation of delay in filing of appeal. No serious objection was raised by the ld. Counsel of the assessee on condonation application. We have examined the said application. On perusal of the same, we find that the delay in filing of appeal was not intentional, but was for bonafide reasons explained therein. The delay in filing of appeal is condoned and the appeal is admitted for hearing on merits.

3. The Revenue in appeal has assailed the order of CIT(A) on following two grounds:-

1. Whether on the facts and circumstances of the case and in law the ld. CIT(A) has erred in deleting the disallowance of Rs. 3,95,014/- made on account of proportionate interest expenditure.

2. Whether on the facts and circumstances of the case and in law the ld. CIT(A) has erred in deleting the addition of Rs. 25,09,76,959/- made on account of section 56(2)(viib) of the Act.

4. Ms. Neha Chaudhary, representing the department vehemently defending the assessment order prayed for reversing findings of the CIT(A). She submitted that the assessee failed to show valid reasons for claiming excessive interest on repayment of loans. In so far as on the issue relating to valuation of shares she reiterated findings of the AO.

5. Per contra, Shri Ved Jain appearing on behalf of the assessee strongly supported the findings of the CIT(A). He submitted that the interest paid on loan in AY 2019-20 was Rs. 35,55,123/-. The amount claimed as finance cost for the year under consideration is Rs. 39,50,137/-. The difference of Rs. 3,95,104/- (i.e. Rs. 39,50,137-Rs 35,55,123/-) is the TDS portion. The assessee has neither claimed nor paid any accrued interest for the period beyond the dates of repayment of loan i.e. 29.06.2019. The CIT(A) in his detailed order has examined the issue and has thereafter directed the AO to delete the addition.

5.1. With regard to addition u/s. 56(2)(viib) of the Act on account of valuation of shares, the ld. Counsel submitted that the assessee had issued 79852 shares with Face Value of Rs. 10/- per share at a premium of Rs. 4272.31 per share. The shares were valued following Discounted Cash Flow (DCF) method. The AO determined the value of share at Rs. 7426/- per share adopting Net Asset Value (NAV) method.

He submitted that in the first instance the shares issued by the assessee were at lower value than the market value determined by the AO. The shares were issued at Rs. 4272.31 and the fair market value of shares according to the AO was Rs. 7426/-. Thus, the provisions of section 56(2)(viib) of the Act are not attracted. Secondly, the AO could not have changed the method of valuation. The DCF is one of the approved method and is in accordance with Rule 11U & 11UA of the Income Tax Rules, 1962 (in short ‘the Rules’)

6. We have heard the submissions made by rival sides and have examined the orders of authorities below. The AO had made addition on two counts:

(i) Excess payment of interest Rs. 3,95,014/- ; and

(ii) Addition u/s. 56(2)(viib) of the Act Rs. 25,09,76,959/- .

7. A perusal of the records reveal that during the period relevant to assessment year under appeal, the assessee has claimed interest expenditure of Rs. 39,50,137/- on account of loan received from M/s. Smiti Holdings & Trading Pvt. Ltd. The assessee had repaid entire loan in the relevant period along with interest. The AO allowed interest amounting to Rs. 35,55,123/- and disallowed interest payment of Rs. 3,95,014/-. In fact the amount disallowed was the TDS deducted and paid by the assessee in respect of said loan. The CIT(A) after examining the issue deleted the addition. No document controverting findings of the CIT(A) are brought on record by the Revenue. We find no infirmity in findings of the CIT(A)on this issue. Hence, the same are upheld. Ergo, ground no. 1 of Revenue’s appeal is rejected.

8. In ground no. 2 of appeal, the Revenue has assailed deleting of addition Rs. 25,09,76,959/- made u/s. 56(2)(viib) of the Act. The assessee company had issued 79582 shares to following parties:

9. The shares having face value of Rs. 10/- per share were issued at a premium of Rs. 4262.31. The assessee determined the market value of shares following DCF method as per Rule 11U and 11UA of the Income Tax Rules, 1962. The AO held that there is flaw in the method of valuation adopted by the assessee and applied NAV method for valuation of shares and computed the valuation of shares at Rs. 7426/- per share. Thus, he made addition of Rs. 25,09,76,959/- .

9.1. A bare perusal of provisions of section 56(2)(viib) would show that, if shares are issued on a rate exceeding the face value of such shares and the aggregate consideration received on such shares exceeds the market value of the shares, the amount that exceeds market value shall be chargeable to tax under the head ‘Income from other sources’. In the instant case, the assessee had issued shares having face value of Rs. 10/- per share at a premium of Rs. 4262.31 per share as against the market value of shares determined by the AO adopting NAV method Rs. 7426/- per share. Thus, the provisions of section 56(2)(viib) of the Act are not attracted in the present case. The AO disputed valuation of shares under DCF method which is one of the approved methods under Rule 11U and 11UA of the Income Tax Rules, 1962 and recomputed the value of equity shares following NAV method. Though the AO cannot tinker with the valuation report unless it is fundamentally flawed, without going further into merits of valuation, even, if the market value of shares as determined by AO is accepted the provisions of section 56(2)(viib) of the Act are not attracted as the assessee had issued shares at a rate lesser than the market value determined by the AO.

10. We find no error in findings of the CIT(A) in deleting the addition. Thus, ground no. 2 of appeal by the Revenue is dismissed, being devoid of any merit.

11. In the result, the order of CIT(A) is upheld, and appeal of the Revenue is

Order pronounced in the open court on Thursday the 08^th day of August, 2024.