No additions towards excess premium if assessee valued shares at FMV computed in accordance with Rule 11UA of the Income Tax Rules, 1962: ITAT

Mantram Commodities (P.) Ltd. v. ITO – [2021] 127 taxmann.com 462 (Delhi – Trib.)

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R.K. Panda, Accountant Member

Rajiv Saxena, Adv. for the Appellant.

Rovin Rawal, Addl. CIT for the Respondent.

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Cases Referred To:

CIT v. Durga Prasad More [1971] 82 ITR 540 (SC) (para 3), McDowell & Co. Ltd. v. CTO[1985] 22 Taxman 11/154 ITR 148 (SC) (para 3), Sumati Dayal v. CIT [1995] 80 Taxman 89/214 ITR 801 (SC) (para 3), Agro Portfolio (P.) Ltd. v. ITO [2018] 94 taxmann.com 112/171 ITD 74 (Delhi – Trib.) (para 10) and A.K. Roy v. State of Punjab AIR 1986 SC 2160 (para 16).

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Assessee was a private limited company. It didn’t conduct any business activity during the year. During assessment proceedings, Assessing Officer (AO) noted that assessee received share premium during the year. From the information received from the investors, he opined that the financial statement of these investors indicated that these were shell companies and had no real business. Thus, he made an addition to the total income of the assessee under Section 68.

While making additions, AO further observed that since the addition of share premium and share capital had already been made under Section 68, no separate addition was being made under Section 56(2)(viib). Accordingly, AO rejected the calculation made by assessee in terms of Section 11UA for calculating the share premium on the ground that the company was not having any worth of receiving any share premium.

Aggrieved by order of AO, assessee preferred an appeal before CIT(A). CIT(A) deleted the additions on the ground that the assessee did not receive such share capital during the year and assessee had only allotted the shares during the year. However, CIT(A) confirmed the additions under Section 56(2)(viib) by holding that assessee had no business worth, and there was no tangible business activity being carried out by the assessee since incorporation. There were no fixed assets or any other intangible assets in possession of the assessee to justify the premium charged by it on shares. Therefore, the reliance of assessee on the valuation report for the premium charged on each share under Rule 11UA does not carry any force.

On further appeal, ITAT held that a combined reading of Section 56(2)(viib) and Rule 11UA states that for the purpose of this Section, the valuation of the shares has to be done in accordance with Rule 11UA. The fair market value of unquoted equity shares for said purpose shall be determined as per any of the methods prescribed under Rule 11UA at the option of the assessee. Assessee valued its shares as per the valuation certificate issued by the chartered accountant. The said valuation report was submitted before AO to justify that the shares issued by assessee were at fair market value and computed according to Rule 11UA. However, AO rejected the same by holding that assessee was not having any worth of receiving any share premium. He ignored the various assets shown by assessee in the balance sheet. AO did not apply the formula provided in Rule 11UA and did not make any attempt to compute the value of shares of assessee in accordance with Rule 11UA. When the statute provides for a particular procedure, the authority has to follow the same and cannot be permitted to act in contravention. Therefore, the order passed by CIT(A) was set aside, and AO was directed to delete the additions.