If assessee produces proper documentary evidences and report of registered value towards fair market value of Shares, then no addition could be made against assessee.

This appeal by assessee has been directed against he order of the Ld. CIT(A), Muzaffarnagar, dated 27th June, 2017, for the A.Y. 2013-2014 on the following grounds :

1. “The order passed by Ld. CIT [A] was bad in law and against the facts of the case.

2. The CIT{A} has erred to sustain addition u/s 56(2) (of Income Tax Act, 1961)vii of income tax act of Rs.455500 on account of issue of shares, addition not based on objective satisfaction, deserves to be deleted. 3. It is contended that EQUITY SHARE VALUE as on the date of issue was fully substantiated ,based on the value on the date of issue of shares, of its assets, including intangible assets in terms of explanation (a)(ii) of sub-section (viib) of section 56(2) (of Income Tax Act, 1961) which was not considered ,therefore the order be set aside and addition be deleted.

4. Ld. CIT[A] erred to ignore higher Fair market value as provided in explanation (a) to section 56(2) (of Income Tax Act, 1961) subsection (viib) and did not provide adequate opportunity .

2. Briefly, the facts of the case are that assessee is a company filed return of income declaring NIL income as per normal provisions of I.T. Act. However, tax was paid under section 115JB (of Income Tax Act, 1961) on book profit of Rs.41,94,081/-. As per audit report, the business of the assessee has been shown as manufacturing of Kraft paper. During the year under consideration assessee company which is a closely held company has issued 50,000 shares of the face value of Rs.100/- at share premium of Rs.150/-. The assessee was called upon to furnish fair market value of the shares of the assessee company. It is seen that book value of the said shares/fair market value comes to Rs.240.89 as per computation furnished by assessee itself, whereas the shares have been issued at Rs.250/-. The A.O. referred to provisions of Section 56(2)(viib) (of Income Tax Act, 1961) and asked for the explanation of assessee as to why addition of Rs.4,55,500/- be not made. The A.O. noted that assessee is not able to contend anything against this addition on this ground.

Therefore, amount of Rs.4,55,500/- was added. The assessee challenged the addition before Ld. CIT(A). The written submissions of the assessee is reproduced in the appellate order in which the assessee also contended that Explanation to Section 56(2)(viib) (of Income Tax Act, 1961) have not been considered. As per Rule 11UA (of Income Tax Rules, 1962) valuation of fair market value is made at book value of assets of the company, except in case of discounted cash flow method. The book value of the assessee’s company as on 31st March, 2012 is Rs.240.89 and the company issued that allotted shares on 11th October, 2012. The company earned profit after tax at Rs.29,78,178.44ps in financial year ending 31st March, 2013. The earning per share for the year ended 31st March, 2013 is Rs.9.37 per share. If the same profit is added, the book value will come around Rs.245/-. The assessee company is doing business since more than 20 years and is a profit making company. The assets of the company in the balance sheet are stated at historical cost less depreciation. However, with the time, the value of the immovable assets like land and building has increased manifolds. The assessee has good value of intangible assets like Goodwill. Present value of installing such type of unit has also increased. Therefore, fair market value is more than Rs.250/-. The Ld. CIT(A) similarly noted that assessee has not brought any material on record to show the fair market value of the share of the assessee-company was in excessive of Rs.250/- per share. The addition was confirmed and appeal of assessee has been dismissed on this ground.

3. After considering the rival submissions, I am of the view that the matter requires reconsideration at the level of the A.O. Section 56(2)(viib) (of Income Tax Act, 1961) reads as under :

“[(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 notified79" 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, licenses, franchises or any other business or commercial rights of similar nature, whichever is higher;

(b) “venture capital company”, “venture capital fund” and “venture capital undertaking” shall have the meanings respectively assigned to them in clause (a), clause (b) and clause (c) of (Explanation) to clause (23FB) of section 10 (of Income Tax Act, 1961);)”

3.1. Proviso of the above Section provides that this clause shall not apply in certain circumstances and explanation provides that fair market value of the shares shall be the value - (ii) as may be substantiated by the Company to the satisfaction of the A.O, based on value, on the date of issue of shares of its assets, including tangible assets being goodwill, knowhow, patents, copy rights, trade marks, licenses, franchises or any other business or commercial rights of similar nature, whichever is higher. Learned Counsel for the Assessee filed the copy of the order sheet of the A.O. to highlight that as per query of the A.O. assessee furnished complete details before him which have not been considered by the A.O. He has referred to PB-1 which is certificate by the C.A. to show fair market value as per circle rate. PB-2 to 3 is reply before A.O. to show that even higher value is shown considering various tangible and intangible assets of the assessee which is supported by PB-42 i.e., valuation report of immovable property of the assessee. Learned Counsel for the Assessee submitted that A.O. took only less value and has not determined the fair market value. Ld. D.R, however, contended that assessee did not file any evidence before the authorities below.

3.2. Considering the facts of the case in the light of material on record and order sheet of the A.O. filed on record, it is clear that assessee filed reply before A.O. supported by documentary evidences with certificate of the C.A. and the report of the registered valuer. Therefore, the findings of the authorities below are incorrect that no documentary evidences have been filed to substantiate the claim of fair market value as on date of issue of the shares. The Explanation to Section 56(2)(viib) (of Income Tax Act, 1961) have not been considered by the authorities below.

The matter, therefore, requires reconsideration at the level of the A.O. I accordingly set aside the orders of the authorities below and restore the matter in issue to the file of A.O. with a direction to redecide this issue in the light of reply and material filed by the assessee on record in the light of Explanation to Section 56(2)(viib) (of Income Tax Act, 1961). A.O. shall give reasonable and sufficient opportunity to the assessee and shall pass detailed order on merit giving reasons following the decision as per law.

4. In the result, appeal of assessee is allowed for statistical purposes.

Order pronounced in the open Court.

Sd/-

(BHAVNESH SAINI)

JUDICIAL MEMBER

Delhi, Dated 09th May, 2018