INCOME TAX ACT, 1961

Section 56(2)(viib) Rule 11UA

Income from other sources - Chargeability - Shares issued at value less than fair market value as per valuation in accordance with rule 11UA(2)(b) -

Assessee-company issued equity shares of face value of Rs. 10 at Rs. 180 per share which included premium of Rs. 170 per share. It explained that the fair market value as per valuation in accordance with rule 11UA(2)(b) was Rs. 189 per share and it issued shares at Rs. 180, which was less than the fair market value. AO, however, did not accept the explanation of the assessee and was of the view that since rule 11UA(2) was inserted with effect from 29-11-2012 and the assessee received consideration towards issue of shares prior to 29-11-2012, the provisions of rule 11UA(2) were not applicable in the case of the assessee and, therefore, the market value of the shares was required to be determined as per rule 11UA(1)(c)(b) and not as per rule 11UA(2). Accordingly, the AO adopted the fair market value of the shares as per rule 11UA(1)(c)(b) and taxed the excess receipt under section 56(2)(viib) as 'Income from other sources'. Held: As per rule 11UA(1)(c)(b), it is the prerogative of the assessee to estimate the fair market value of the shares issued by it adopting one method out of two methods, i.e., discounted cash flow method or book value method. Thus, it was clear that the Revenue authorities could not force the assessee to adopt particular method for valuing the fair market value of the shares especially when rule 11UA(1)(c)(b) provided that it was the option of the assessee to chose any method for estimating the fair market value of the shares issued by it. Further, the assessee could not be denied the benefit of discounted free cash flow method only because the consideration amount was received much before rule 11UA(2) came into force. In instant case, the shares were issued by the assessee at Rs. 180 per share as against the fair market value of Rs. 189 determined as per discounted free cash flow method, therefore, no addition was required to be made in the hands of the assessee under section 56(2)(viib).

REFERRED : Asstt. CIT, Circle-2, Alwar v. Safe Decore (P) Ltd. and Vice-Versa [ITA No. 716/JP/2017 for the assessment year 2014-15] : 2018 TaxPub(DT) 750 (Jp-Trib)

FAVOUR : In assessee's favour.

A.Y. : 2013-14

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