ITAT Upholds Section 56(2)(viib) Addition for Excess Consideration on Share Allotment

Osianama Learning Experience Pvt. Ltd. Vs DCIT (ITAT Mumbai)”

Introduction: In the case of Osianama Learning Experience Pvt. Ltd. Vs. DCIT, the Income Tax Appellate Tribunal (ITAT) in Mumbai addressed the addition made under Section 56(2)(viib) of the Income Tax Act. The crux of the matter involved an excess consideration received by the company on the allotment of shares.

Detailed Analysis: Osianama Learning Experience Pvt. Ltd. is primarily engaged in various educational and promotional activities. In the relevant assessment year, the company had issued shares to multiple individuals at a price of Rs. 400, which included a premium of Rs. 390. However, the fair market value, as determined by a valuation report dated September 15, 2012, was Rs. 341 per share. This meant that the company received an excess consideration of Rs. 59 per share.

The Income Tax Department invoked Section 56(2)(viib) of the Income Tax Act, which applies to companies not substantially interested by the public. It considers any excess consideration received for the issuance of shares, in comparison to their fair market value, as income under the “income from other sources” category.

Provisions of Section 56(2)(viib) not apply to non-resident

In the case at hand, one individual to whom shares were allotted was a non-resident, and thus the provisions of Section 56(2)(viib) did not apply to those shares. However, for the remaining four individuals, including the company’s promoter-director, the excess consideration was deemed taxable under Section 56(2)(viib). The valuation report’s fair market value was not contested by the company.

Conclusion: The ITAT Mumbai upheld the addition made under Section 56(2)(viib) of the Income Tax Act, covering the excess consideration received by Osianama Learning Experience Pvt. Ltd. on the allotment of shares. The assessment was consistent with the fair market value determined by the valuation report. This case underscores the importance of adhering to tax regulations and valuation reports in share allotments to avoid adverse tax consequences.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The present appeal has been filed by the assessee challenging the impugned order dated 12/09/2019, passed under section 250 of the Income Tax Act, 1961 (‘the Act’) by the learned Commissioner of Income Tax (Appeals)^–9, Mumbai [‘learned CIT(A)’], for the assessment year 2013^–14.

2. When the present appeal was called for hearing, neither anyone appeared on behalf of the assessee nor was any application seeking adjournment filed. On perusal of the record, it is observed that on previous occasions also no one appeared on behalf of the assessee, apart from some intermittent representation on a few dates of hearing on behalf of the assessee. Therefore, in view of the above, we proceed to dispose off the present appeal ex^–parte, qua the assessee after hearing the learned Departmental Representative (‘learned DR’) and based on the material available on record.

3. In this appeal, the assessee has raised the following grounds:

“1. The learned CIT (Appeals) has erred in law and on the facts of the case in sustaining the addition of Rs. 25,96,000/- u/s. 56(2)(viib) of the Income Tax Act.

2. The learned CIT (Appeals) has erred in law and on the facts of the case in enhancing the income of the assessee company by Rs. 59,14,750/- u/s. 56(2)(viib) of the Income Tax Act.

3. The assessee craves leave to add, alter or amend the above grounds of ”

4. The only grievance of the assessee is against the addition made under section 56(2)(viib) of the Act on account of excess consideration received on allotment of shares.

5. The brief facts of the case as emanating from the record are: The assessee’s main business activity, as noted in the assessment order, is to establish, acquire, archive, promote, undertake, carry on, manage, organise, encourage, in India and/or abroad, singly or in collaboration with other institutions, whether affiliation with recognised universities in India or abroad, schools, colleges, institutes, coaching classes, master classes, through tutorial, lectures, fellowships, films, television, media, guided exhibition tours, visit to art collector homes, auctions, museums, art galleries, places of historical significances. For the year under consideration, the assessee filed its return of income on 30/09/2013 declaring a total loss of Rs.1,35,21,922. During the year, the assessee allotted 1,06,911 shares to various persons on 15/11/2012, at the price of Rs.400 including a premium of Rs.390. During the assessment proceedings, it was observed that the fair market value as determined vide valuation report dated 15/09/2012, was Rs.341. Since the assessee had received a sum of Rs. 59 per share in excess, the Assessing Officer (‘AO’) vide order dated 29/03/2016, passed under section 143(3) of the Act made an addition of Rs.25,96,000, under section 56(2)(viib) of the Act.

6. In further appeal, the learned CIT(A) noticed that the allotment of shares to the promoter director of the assessee company on which excess share consideration of Rs. 59 per share was also charged by the assessee was not considered while invoking the provisions of section 56(2)(viib) of the Act in the assessment order. Accordingly, the learned CIT(A) issued notice for enhancement under section 251(2) of the Act. After considering the submissions of the assessee, the learned CIT(A) vide impugned order held that insofar as allotment of shares to non-resident person is concerned, section 56(2)(viib) of the Act is not applicable, however, in respect of other 4 individuals, including the promoter director of the assessee, section 56(2)(viib) of the Act is applicable to the allotment of shares at Rs.400, which is more than the value determined by the valuation report. Accordingly, the learned CIT(A) held that issuing of shares totaling to 1,00,250, by the assessee at a value in excess of fair market value gets covered by the provisions of section 56(2)(viib) of the Act and disallowed an amount of Rs.59,14,750 being excess consideration received by the assessee over and above the fair market value determined by the valuer. Being aggrieved, the assessee is in appeal before us.

7. During the hearing, the learned DR by vehemently relying upon the impugned order passed by the learned CIT(A) submitted that the shares were issued by the assessee at a value higher than the fair market value calculated by the valuer and therefore the excess consideration received has rightly been disallowed under section 56(2)(viib) of the Act.

8. We have considered the submissions of the learned DR and perused the material available on record. As is evident from the record the assessee allotted 1,06,911, shares to the following persons on 15/11/2012, at a price of 400 including a premium of Rs.390:

9. In the present case, as is evident from the record, there is no dispute regarding the fact that the fair market value of the shares arrived on the basis of the valuation report dated 15/09/2012 by using the DCF method was Rs.341 per share. Out of the aforesaid 5 individuals to whom the shares were allotted by the assessee, one person viz. Mr. Mark Anthony De Boer, was a non-resident and therefore both the AO as well as the learned CIT(A) accepted that provision of section 56(2)(viib) of the Act is not applicable in respect of shares allotted to a non-resident. In respect of the other 4 individuals to whom shares allotted by the assessee in excess of the price determined by the valuation report were held to be covered within the ambit of section 56(2)(viib) of the Act. As per the provisions of section 56(2)(viib) of the Act, in the case of a company, in which the public is not substantially interested, receipts from any person being a resident as a consideration for the issue of shares in excess of the face market value of such shares is to be considered as the income of the assessee under the head ‘income from other sources’. Since there is no material available on record that the assessee has disputed the valuation of shares at Rs.341 per share vide valuation report dated 15/09/2012, therefore, we find no infirmity in the impugned order directing the disallowance of Rs. 59,14,750 being the excess consideration received by the assessee over and above the fair market value of the shares. As a result, grounds raised by the assessee are dismissed.

10. In the result, the appeal by the assessee is dismissed.

Order pronounced in the open Court on 24/01/2023.