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May 9, 2022

Section 56 addition for 1% difference in Valuation of Shares deleted by ITAT Ahmedabad

by CA Shivam Jaiswal in Income Tax

Section 56 addition for 1% difference in Valuation of Shares deleted by ITAT Ahmedabad

Facts and Issue of the case

The present appeal has been filed by the Assessee against the order passed by the Commissioner of Income Tax (Appeals)-4, Ahmedabad, (in short referred to as CIT(A)), dated 18-12-2018, u/s. 250(6) of the Income Tax Act, 1961(hereinafter referred to as the “Act”) pertaining to Assessment Year (A.Y) 2014-15.

The grounds raised by the assessee reads as under:

1.1 The order passed u/s.250 on 18.12.2018 for A.Y.2014-15 by CIT(A)-4 , Abad upholding the addition of Rs.7,02,500/- u/s.56(2)(viib) and disallowance of ROC expenses of Rs.2 lakhs made by AO is wholly illegal, unlawful and against the principles of natural justice.
1.2 The Ld. CIT(A) has grievously erred in law and or on facts in passing a non- speaking order without considering fully and properly the submissions made and evidence produced by the appellant with regard to the impugned additions.
2.1 The Ld.CIT(A) has grievously erred in law and on facts in confirming the addition of Rs.7,02,500/- u/s.56(2)(viib) though there was no substantial difference between the share premium charge and the value as per certificate.
2.2 That in the facts and circumstances of the case as well as in law, the Ld.CIT(A) ought not to have upheld the addition of Rs.7,02,500/-u/s.56(2)(viib).
3 The Ld.CIT(A) has erred in law and on facts in upholding the disallowance of ROC expenses of Rs.2 lakhs.

Observation and Conclusion of the court

Ground no. 1, it was stated before us by the ld. Counsel for the assessee were general in nature and are therefore not being dealt with by us. Ground no. 2 .1 and 2.2, Ld. Counsel for the assessee stated related to addition made of Rs. 7,02,500/- u/s. 56(2)(viib) of the Act being the excess consideration/premium received by the assessee on issue of shares as compared to the fair market value of shares.

Ld. Counsel for the assessee pointed out that the face value of the shares was Rs. 100 and had been issued at a premium of Rs. 100. Thus the shares had been issued for Rs. 200. He thereafter pointed out that the valuation of these shares at fair market value certified by the C.A. was admittedly 197.19 per share and the difference therefore of Rs. 2.81 per share was treated as income of the assessee u/s. 56(2)(viib) of the Act.

Noting the above facts, court is of the view that there is no cause for making any addition u/s. 56(2)(viib) of the Act in the present case. Admittedly, the difference in the price of the share issued by the assessee and its fair market value and calculated and certified by the C.A. is barely 1% of its total value. The difference being Rs. 2.81 against the share value of Rs. 200/-, it is meager and immaterial to hold that the shares were issued at unjustifiably high prices, which is the essence and purport of the section invoked. In fact, we hold, that the valuation by the C.A. justifies the value at which the shares was issued by the assessee. The method for determining the fair market value is by way of a calculating the net worth of the company based on the value of assets and liabilities, some of the assets like land and plant and machinery being valued at market price. There is no doubt that this involves some degree of estimation. Therefore variance in value of shares by 1% can justifiably be attributed to this estimation.

Court therefore hold that there was no case or justification at all for making any addition u/s. 56(2)(viib) in the present case amounting to Rs.7,02,500/- and direct deletion of the same. Ground No.3.1 relates to disallowance of ROC expenses amounting to Rs 2 lacs incurred for issuing share capital. The same was disallowed holding it to be capital in nature. The Ld.Counsel for the assessee could not controvert the above and fairly admitted that the disallowance had been rightly made. In view of the above ground of appeal No.3.1 was dismissed by the court.


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