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Judgment
PER MANISH AGARWAL, AM:
This appeal is filed by the Assessee against the order of Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [CIT(A) in short], dated 27.06.2025 in Appeal No. NFAC/2017-18/10047932 arising out of the order passed u/s 143(3) of the Income Tax Act, 1961 (the Act, in short) dated 06.05.2021 for Assessment Year 2018-19.
Brief facts of the case are that assessee is a company engaged in the business of providing tutoring to students through home tutoring and online tutoring. The return of income for the year under appeal was filed at a loss of Rs.5,49,463/-. The case was selected for limited scrutiny for reason – ‘Share Premium’. The AO observed that during the year under appeal assessee has converted ”Zero Coupon Unsecured Compulsorily Convertible Debentures” (herein after referred as CCD’s) into the equity of 2,24,250 share face value of Rs. 10/- each at a premium of Rs.1472/- per share to M/s Mayuka Investment Ltd. The assessee has filed valuation report obtained from the approved valuer who had valued the shares of the assessee at Rs.1482/- each as per Net Asset Value Method (NAV method) and the valuation report was based on the Balance Sheet as at 31st March, 2016. However, the AO observed that since shares were allotted on 08.06.2017, therefore, in terms of section 56(2)(viib) of the Act, the valuation should have been done on the basis of Balance Sheet as at 31st March, 2017 and on the basis of Balance Sheet as at 31st March, 2016. Accordingly, AO rejected to valuation report filed by the assessee and based on the figures appearing the in the Balance Sheet as at 31.03.2017, had revalued the value of shares where the premium was calculated at NIL and thus made the additions of entire premium received at Rs.3,30,09,600/- as income u/s 56(2)(viib) of the Act.
In first appeal, ld. CIT(A) has confirmed the order of the AO thus aggrieved by the said order, the assessee is in appeal before the Tribunal by taking following grounds of appeal:
1.The Ld. CIT(A) has erred in law and on facts in confirming the addition of Rs. 3,30,09,600/- under section 56(2)(viib) made by AO. The addition was confirmed ignoring the submission and evidences filled by appellant, and therefore deserves to be deleted.
2.The Ld. CIT(A) has erred in accepting the AO's rejection of valuation report by an independent Accountant as per relevant rules, alleging that valuation report is not binding and may be ignored, without identifying any defect vis-a-vis Rule 11UA formula or underlying data.
3.The appellant contends that rule 11U clearly referred to the balance sheet drawn up on a date immediately preceding the valuation date which had been approved and adopted in the AGM, which admittedly was the Balance Sheet for the period ending 31.03.2016 whereas AO misinterpreted the term "balance sheet" adverted to in Rule 11U to mean the audited accounts as on 31.03.2017 although these were approved in the AGM held on 30.09.2017 i.e. after the date of allotment of shares.
4.The Ld. CIT(A) and the AO both erred in applying Section 56(2)(viib) on the ground that it is triggered by the mere allotment of equity shares. However, Section 56(2)(viib) triggers only when the assessee receives, in any previous year, from any person, any consideration for issue of shares. In the instant case, the appellant did not receive any fresh consideration for the allotment of shares in the relevant assessment year; instead, the shares were issued in lieu of converting pre-existing CCDs into equity.
5.The appellant contended that the very intention behind the introduction of Section 56(2)(viib) is to capture unaccounted money, and it should not be invoked in the appellant's case, where CDs were issued at a premium and subsequently converted into equity shares backed by a Valuer's report.
6.The above grounds are independent and without prejudice to one and other.
7.The appellant may be allowed to add, amend and forgo any of the ground at the time of hearing.
Heard both the parties at length and perused the materials available on record. The solitary issue before us in the present appeal is whether the Balance Sheet as at 31.03.2016 is to be considered for determination of fair market value of the shares of the assessee allotted on 08.06.2017 by following NAV method for issue of share at premium or the last drawn audited Balance Sheet as at 31.03.2016 is to be taken. The assessee received a sum of Rs.3,32,33,850/- from the issue of CCDs to M/s Mayuka Investment Ltd. in preceding assessment year i.e. in A.Y. 2016-17 and were shown under the head ‘long term borrowings’ in the Balance sheet as at 31.03.2026 and 31.03.2017. Claim of the assessee is that during the year under appeal these CCDs were converted into 2,24,250 equity shares of face value of Rs.10/- each at the premium Rs. 1472/- per share. In support to the value per share and the premium charged, assessee filed valuation report of approved valuer wherein the valuation was done as per Rule 11UA of the Income Tax Rules, 1962 (the Rules) as per NAV method where the figures were taken from the last drawn audited Balance Sheet as at 31.03.2016. The case of the AO is that assessee should have taken the figures as per the Balance Sheet as at 31.03.2017 for determination of FMV under NAV method. It was the claim of the assessee that as per Rule 11UA, the last drawn audited Balance Sheet i.e. as at 31.03.2017 was not available at the time when the shares were issued, therefore, valuation has been done on the basis of the last available audited Balance Sheet as at 31.03.2016.
During the course of hearing, the Ld. AR drew our attention to the fact that funds against the issue of share were received at time when CCD’s were issued in FY 2-15-16 no funds were received during the year when the share were allotted thus the provisions of section 56(2)(viib) of the Act could not be invoked. For this proposition, reliance is placed on the judgement of Co-ordinate Bench of Mumbai ITAT in the case of DCIT vs. Ramkin Infrastructure Pvt. Ltd. in ITA No.7288/Mum/2019 dated 22.04.2022 and also on the judgement of Hon’ble Himachal Pradesh High Court in the case of PCIT-1, Chandigarh vs. M/s I.A. Hydro Energy (P) Limited in ITA No.4/2024 dated 31.05.2024. In the aforesaid judgment, in para 18 of the order the Hon’ble high Court has made following observation:
“We are of the opinion that the orders passed by the Income Tax Appellate Tribunal as well as the CIT(A), are fairly comprehensive. Both of them concurrently found that no consideration was received by the assessee at the time of allotment of shares, therefore, provisions of section 56(2)(viib) of the Act are not applicable, and it would be applied only if consideration was received for such a transaction”.
Though in the aforesaid judgment of Hon’ble Himachal Pradesh High Court the Hon’ble Court further dealt with issue of valuation on the basis of NAV or DCF method, however, the basic principle was laid down in para 18 above that when no consideration was received for allotment of shares, provisions of section 56(2)(viib) of the Act are not applicable. Before going further, provisions of section 56(2)(viib) of the Act are reproduced as under:
Sec. 56(2)(viib)
"where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares:
Provided that this clause shall not apply where the consideration for issue of shares is received-
(i)by a venture capital undertaking from a venture capital company or a venture capital fund; or
(ii)by a company from a class or classes of persons as may be notified by the Central Government in this behalf.
Explanation. For the purposes of this clause, -
(a)the fair market value of the shares shall be the value-
(i)as may be determined in accordance with such method as may be prescribed; or
(ii)as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, Whichever is higher;"
From the perusal of the same, it is observed that section 56(2)(viib) of the Act refers the sum “Receives during the year” which as per the Co-ordinate Bench of Mumbai in the case of DCIT vs. Ramkin Infrastructure Pvt. Ltd. (supra) refers to the amount receives only from the issue of shares and also to receipt of share consideration during the same assessment year.
Admittedly in the instant case, funds were received by the assessee in preceding assessment year which was duly recorded in the books of accounts and never doubted by the authorities below. During the year under appeal such sum was converted in the share capital issued at premium. Therefore, by respectfully following the judgments of the aforesaid case of Hon’ble Himachal Pradesh High Court in the case of M/s I.A. Hydor Energy (P) Ltd. (supra), since no funds were received during the year under appeal, no addition could be made u/s 56(2)(viib) of the Act. We order accordingly.
Now coming to the second aspect whether the Balance Sheet as at 31.03.2016 is to be taken for the purposes of valuation or audited Balance Sheet as at 31.03.2017 is to be considered. It is observed that the shares were allotted on 08.06.2017, and in terms of Rule-11U(b) of the Rules, the term balance sheet is defined as under:
“(b)“balance sheet”, in relation to any company, means,-
(i)for the purposes of sub-rule (2) of rule 11UA, the balance sheet of such company (including the notes annexed thereto and forming part of the accounts) as drawn up on the valuation date which has been audited by the auditor of the company appointed under section 224 of the Companies Act, 1956 (1 of 1956) and where the balance sheet on the valuation date is not drawn up, the balance sheet (including the notes annexed thereto and forming part of the accounts) drawn up as on a date immediately preceding the valuation date; and”
Similarly, under Rule 11U sub clause-j, the valuation date is defined as under:
(j)“valuation date” means the date on which the property or consideration, as the case may be, is received by the assessee.”
From the perusal of the above, as the definition of balance sheet under Rule 11U(b) of the Rules, two events are defined (a) the balance sheet has drawn up to the valuation deed which has been audited and (b) where balance sheet was not drawn up on valuation date, the Balance Sheet drawn up as on a date immediately preceding the valuation date. As per sub-rule (j) of 11U Rule the “valuation date” means the date on which the property or consideration, as the case may be, is received by the assessee. As observed above in the instant case, consideration was received by the assessee in FY 2016-17, therefore, the latest drawn audited Balance Sheet should be as at March, 2016 and not the Balance Sheet as at 31.03.2017. The Co-ordinate Bench of ITAT, Chandigarh in the case of Electra Paper and Board Pvt. Ltd. vs. ITO in ITA No.222/Chd/2021 has held that unaudited balance sheet as drawn on the valuation date should be sufficient, if on subsequent date there was no difference if compared to Audited Balance sheet of the same year.
As observed from the facts of the present case, the assessee converted the CCDs into Equity shares on 08.06.20217 however, the audited balance sheet as at 31.03.2017 was drawn on 28.09.2017 when the same was signed by the management of assessee company and put before the Board for approval. Since, the copy of the unaudited Balance Sheet and audited Balance sheet as at 31.03.2017 are available before us, thus we are unable to state whether the unaudited Balance sheet available as on the date of allotment were the same as shown in the audited balance sheet of the same period. Accordingly, once the valuation date is to be taken when the consideration was received which in the present case is the date when the funds from the issue of CCD,s were received which incidentally fallen in preceding assessment year, therefore, the valuer has rightly taken figure of the audited Balance Sheet as at 31.03.2016 for the purpose of determination of FMV of the shares by following NAV method. Therefore, on this score also, the assessee succeeded.
In the result, the appeal of the assessee is allowed.