No Section 56(2)(viib) Addition Required for Discrepancy of less than 10%

Sakshi Fincap Pvt. Ltd. Vs ITO (ITAT Delhi)

FULL TEXT OF THE ORDER OF ITAT DELHI

The present appeal has been filed by the assessee against the order of ld. CIT(A)-XXV, New Delhi dated 23.08.2019.

2. Following grounds have been raised by the assessee:

“1 On the facts and circumstances of the case, the order passed by the learned CIT(A) is bad both in the eye of law and on facts.

2. (i) On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the addition of Rs. 50,77,334/- made by the AO on account of difference in valuation of shares invoking the provision of section 56(2)(viib) of the Act read with rule 110 & 11 UA of the Income Tax Rule, 1962.

(ii) That the addition has been confirmed rejecting the explanation and evidences brought on records in support of its contentions.

3. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in rejecting contention of the assessee that the addition has been made by rejecting the valuation report of the shares submitted by the assessee.

4. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the above addition despite that amount has been wrongly calculated as per the method given under section 56(2)(viib) of the Act.

5. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the above addition by indulging in surmises without bringing on any adverse evidence against the assessee, only on the basis of presumption and assumption.”

3. The assessee has also raised the following additional grounds of appeal:

“7. On the facts and circumstances of the case and in view of CBDT notification 81/2023 dated 25.09.2023 introducing safe harbor of 10% by curative amendment in Rule 11UA of the Income tax Rules 1962, addition u/s 56(2)(viib) is unsustainable in law as the difference between fair value adopted by the AO and issue price is only 2.1% i.e. less than 10%.”

4. Admission of the additional ground has been opposed in principle by the ld. DR. Keeping in view, the judgment of the Hon’ble Apex Court in the case of National Thermal Power Co. Ltd. Vs CIT (1998) 229 ITR 383, the additional ground filed by the assessee is accepted. The relevant portion of the judgment is as under:

“5. Under Section 254 of the Income-tax Act, the Appellate Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit. The power of the Tribunal in dealing with appeals is thus expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. If, for example, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction is denied, we do not see any reason why the assessee should be prevented from raising that question before the tribunal for the first time, so long as the relevant facts are on record in respect of that item. We do not see any reason to restrict the power of the Tribunal under Section 254 only to decide the grounds which arise from the order of the Commissioner of Income-tax (Appeals). Both the assessee as well as the Department have a right to file an appeal/cross-objections before the Tribunal. We fail to see why the Tribunal should be prevented from considering questions of law arising in assessment proceedings although not raised earlier.

6. In the case of Jute Corporation of India Ltd. v. C.I.T. . this Court, while dealing with the powers of the Appellate Assistant Commissioner observed that an appellate authority has all the powers which the original authority may have in deciding the question before it subject to the restrictions or limitations, if any, prescribed by the statutory provisions. In the absence of any statutory provision, the appellate authority is vested with all the plenary powers which the subordinate authority may have in the matter. There is no good reason to justify curtailment of the power of the Appellate Assistant Commissioner in entertaining an additional ground raised by the assessee in seeking modification of the order of assessment passed by the Income-tax Officer. This Court further observed that there may be several factors justifying the raising of a new plea in an appeal and each case has to be considered on its own facts. The Appellate Assistant Commissioner must be satisfied that the ground raised was bona fide and that the same could not have been raised earlier for good reasons. The Appellate Assistant Commissioner should exercise his discretion in permitting or not permitting the assessee to raise an additional ground in accordance with law and reason. The same observations would apply to appeals before the Tribunal also.

7. The view that the Tribunal is confined only to issues arising out of the appeal before the Commissioner of Income-tax (Appeals) takes too narrow a view of the powers of the Appellate Tribunal [vide, e.g., C.I.T, v. Anand Prasad (Delhi), C.I.T. v. Karamchand Premchand P. Ltd. and C.I.T. v. Cellulose Products of India Ltd. . Undoubtedly, the Tribunal will have the discretion to allow or not allow a new ground to be raised. But where the Tribunal is only required to consider a question of law arising from the facts which are on record in the assessment proceedings we fail to see why such a question should not be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee.

8. The reframed question, therefore, is answered in the affirmative, i.e., the Tribunal has jurisdiction to examine a question of law which arises from the facts as found by the authorities below and having a bearing on the tax liability of the assessee. We remand the proceedings to the Tribunal for consideration of the new grounds raised by the assessee on the merits.”

5. Brief facts of the case are that the assessee received an amount of Rs. 23,80,00,050/- on account of issue of 1,58,66,670 equity shares issued at the rate of 15/- (including premium of Rs. 5/-) on 16.03.2015. The assessee company has allotted the shares to the following parties:

6. The assesse filed the copy of valuation certificate issued by Chartered Accountant to explain the calculation done under Rule 11UA of the Income Tax Rules. The assessee submitted that as per valuation certificate issued by Chartered Accountant in accordance to Rule 11UA of the rules, value has been arrived at Rs.14.77 per share and suggested value was Rs. 15 per share. Accordingly, assessee allotted above shares at value of Rs. 15 per share (inclusive of premium of Rs. 5/share).

7. Contrarily, the Assessing Officer computed the fair market value of the share at Rs. 14.68 per share and made the addition of Rs. 50,77,334/- u/s 56(2)(viib) on account of difference in value. {1,58,66,670 *(15- 14.68)}

8. Aggrieved, the assessee filed appeal before the ld. CIT(A).

9. Before the ld. CIT(A), the assessee reiterated the stand taken before the Assessing Officer. However, the ld. CIT(A) ignored the submissions made by the assessee, confirmed the addition made by the AO, while doing so ld. CIT(A) has relied upon Section 56(2)(viib) read with rule 11UA (1)(c)(b).

10. Aggrieved, the assessee filed appeal before the Tribunal. The significant fact is that,

• The value adopted by the assessee is Rs. 15/- share whereas the AO has computed the value of Rs. 14.68/-share and the difference between the value adopted assessee and computed by the AO is 2%.(15-14.68/15).

11. Hence, this fact itself makes it evident that no addition is warranted u/s 56(2)(viib) of the Act as the difference between the two values is minuscule and this contention of assessee is supported by the order of the Co-ordinate Bench of ITAT Chennai in the case of DCIT, Non Corporate Circle-1(1), Chennai Vs. M/s Jain Housing, 2019(8) TMI 1827- ITAT Chennai, Dated-August 8, 2019, where the ITAT deleted the addition made by AO u/s 56(2)(viib) holding as under:

“11. Grounds 3 & 4 challenges the direction of the ld. CIT(A) in deleting the addition made u/s. 56(2) (viia) of the Act. The ld. CIT(A) granted relief after considering the fact that the difference of fair market value and the value adopted by the Assessing Officer is less than 1%. Nothing was brought to our notice controverting the findings of the ld. CIT(A). In these circumstances, we uphold the order of the ld. CIT(A) in this issue. Accordingly, grounds of appeal 3 & 4 raised by the Revenue stand dismissed.”

12. We find that the CBDT after having detailed consultation with various stakeholders, in order to mitigate the hardship faced from the un-intended consequences of Section 56(2)(viib) read with rule 11UA, via notification 81/2023 dated 25.08.2023 has introduced a safe harbor of 10% variation in value. Relevant extract of the notification are as follows:

“(4) For the purposes of clause (A) or clause (B) of sub-rule (2), where the issue price of the shares exceeds the value of shares as determined in accordance with –

(i) sub-clause (a) or sub-clause (b) of clause (A), for consideration received from a resident, by an amount not exceeding ten per cent, of the valuation price, the issue price shall be deemed to be the fair market value of such shares;

(ii) sub-clause (a) or sub-clause (b) or sub-clause (d) of clause (A), for consideration received I from a non- resident, by an amount not exceeding ten per cent, of the valuation price, the issue price shall be deemed to be the fair market value of such shares.”

13. From perusal of above notification, it is evident that where the difference between the issue price and value adopted by the AO is 10% or less, in such cases issue price will be deemed to be the fair value of shares for the purpose of Rule 11UA of the Income Tax Rules, 1962. In the present case the issue price is Rs.15 per share and the value adopted by the AO is Rs.14.68/per share, hence the difference between the issue price and value adopted by AO is Rs.0.32 i.e. 2.21% (0.32/15) which is less the then the safe harbor of 10% variation in value introduced by CBDT notification 81/2023 dated 25.08.2023.

14. Hence, in view of above mentioned submission and curative amendment introduced by CBDT notification 81/2023 dated 25.08.2023, addition of Rs.50,77,334/- u/s 56(2)(viib) read with Rule 11UA is unsustainable.

15. With regard to the applicability of the amendment introduced by CBDT notification 81/2023 dated 25.08.2023 which is a curative amendment and the same will be applicable retrospectively, we find that the Hon’ble Apex Court in the case of Allied Motors Private Limited Vs. CIT, 1997 (3) TMI 9 – (SC) Dated March 10, 1997, has observed that where a proviso which is inserted to remedy unintended consequences and to make the provision workable, a proviso which supplies an obvious omission in the section and is required to be read into the section to give the section a reasonable interpretation, requires to be treated as retrospective in operation, so that a reasonable interpretation can be given to the section as a whole, relevant finding of the apex court are as under:

“A proviso which is inserted to remedy unintended consequences and to make the ” provision workable, a proviso which supplies an obvious omission in the section and is required to be read into the section to give the section a reasonable interpretation, requires to be treated as retrospective in operation, so that a reasonable interpretation can be given to the section as a whole.

This view has been accepted by a number of High Courts. In the case of CIT vs. Chandulal Venichand [1994] 209 ITR 7, the Gujarat High Court has held that the first proviso to section 43B is retrospective and sales tax for the last quarter paid before the filing of the return for the assessment year is deductible. This decision deals with assessment year 1984-85. The Calcutta High Court in the case of CIT vs. Sri Jagannath Steel Corporation [1991] 191 ITR 676, has taken a similar view holding that the statutory liability for sales tax actually discharged after the expiry of the accounting year in compliance with the relevant statute is entitled to deduction under section 43B. The High Court has held the amendment to be clarificatory and, therefore, retrospective. The Gujarat High Court in the above case held the amendment to be curative and explanatory and hence retrospective. The Patna High Court has also held the amendment inserting the first proviso to be explanatory in the case of Jamshedpur Motor Accessories Stores v. Union of India [1991] 189 ITR 70. It has held the amendment inserting first proviso to be retrospective. The special leave petition from this decision of the Patna High Court was dismissed. The view of the Delhi High Court, therefore, that the first proviso to section 43B will be available only prospectively does not appear to be correct. As observed by G. P. Singh in his Principles of Statutory Interpretation, 4th Edn., page 291, ” It is well settled that if a statute is curative or merely declaratory of the previous law, retrospective operation is generally intended.” In fact the amendment would not serve its object in such a situation, unless it is construed as retrospective. The view, therefore, taken by the Delhi High Court cannot be sustained.”

16. Further, reliance in this regards is placed upon the ITAT Mumbai judgment in the case of Shaista Irphan Mogul Vs. ACIT, CC-5 (3) , Mumbai, 2021 (8) TMI 270 – ITAT Mumbai, Dated July 1, 2021:

“9. Upon careful consideration we note that the difference between value declared and value as per stamp value authority is less than 10%. This is within the tolerance limit specified in section 50C. The authorities below have rejected it on the premise that the tolerance limit was introduced by the Finance Act, 2018; hence it is not applicable for the year under consideration.

We note the plea that the amendment was intended to cure a hardship and hence retrospective has been duly accepted in the ITAT decision referred in the assessee’s submission above. Moreover, the speech of Hon’ble Finance Minister while introducing the provisions duly support this premise. Moreover, in such situation curative provision to remove hardship should be retrospective is duly supported by Hon’ble Supreme Court decision in the case of Allied Moters (P) Ltd. (91 Taxman 205) by the following exposition.

“A proviso which is inserted to remedy unintended consequences and to make the proviso workable, a proviso which supplies an obvious omission in the section and is require to be read into the section to give the section a reasonable interpretation, requires to be treated as retrospective in operation so that a reasonable interpretation can be given to the section as a whole.”

Undoubtedly this amendment was done to obviate hardships arising out of minor variation in value of transaction qua 50C valuation. In this view of the matter assessee’s plea succeeds. Hence, we set aside the orders of the authorities below and decide the issue in favour of the assessee. ”

17. The amendment brought in Rule 11UA of the Act was introduced to mitigate the hardship faced by taxpayers by the un-intended invocation of Section 56(2)(vlib) read with rule 11UA and therefore the same is a curative amendment. In view of the of the above mentioned judgment of Apex court and judgments of multiple bench’s tribunals , it is established in law that where an amendment which is inserted to remedy unintended consequences and to make the proviso workable, an amendment which supplies an obvious omission in the section and is required to be read into the section to give the section a reasonable interpretation, requires to be treated as retrospective in operation so that a reasonable interpretation can be given to the section as a whole. Hence, in view of above mentioned submissions and judicial pronouncements curative amendment in Rule 11UA of the Income Tax Rules, 1962 introduced by CBDT notification no. 81/2023 dated 25.08.2023 will apply retrospectively and consequently, the addition of Rs.50,77,334 u/s 56(2)(viib) read with rule 11UA is unsustainable as the difference between issue price and value adopted by AO is 2.1% i.e. less than 10%.

18. In the result, the appeal of the assessee is allowed.

Order Pronounced in the Open Court on 16/04/2024.