Share premium received by company in excess of FMV merits addition u/s 56(2)(vii)(b)

The Bangalore Bench of The Income Tax Appellate Tribunal upholds the CIT(A) order rejecting the DCF method adopted by the Assessee to determine the fair market value of the preference shares by holding that the DCF method is a hypothetical method of estimation lacking a cogent basis.

The ITAT held that “the value of preferential share is rightly taken as the value of the share at which the company should have received the preference share capital including the premium”.

A Division Judge Bench of Justice Madhumita Roy and Accountant Member Chandra Poojari observed that “the share premium received by the company is in excess of the fair market value of the share, the addition thus made u/s. 56 (2) (vii b) of the Act is found to be just and proper.”

Advocate Padam Chand Khincha appeared for the Petitioner/Assessee whereas Advocate V. Parithivel appeared for the Respondent/Revenue. 

The brief facts of the case were that the Assessee is engaged in providing software development services and is not registered with DIPP as a startup. For AY 2016-17, the Assessee issued 1045 preference shares at the face value of Rs.1000 and a share premium of Rs.10,000 per share. Revenue found that the valuation of the shares was done by following the discounted cash flow (DCF) method forecasting the future growth which is a hypothetical estimation and not in accordance with Rule 11UA of the Income Tax Rules, 1962. Thus, rejected the same along with the CA certificate, the revenue held that the preference shares should have been issued at the face value including the premium and share premium of Rs.1.04 Cr received by the Assessee is in excess of the fair market value of the shares, thus added to the same in Assessee’s hands, which was confirmed by the CIT(A).

After considering the submission, the Bench noted that the method adopted by the Assessee in determining the fair market value of the equity share will not be applicable to determining the fair market value of preference shares, thus the DCF method adopted by the Assessee is not acceptable.

The Bench stated that the Assessee has not provided the value of assets including intangible assets as required under Section 56(2)(vii b) to substantiate the fair market value of the shares as determined by the Assessee, to the satisfaction of the Revenue.

Referring to the case M/s. Agro Portfolio Pvt. Ltd. vs. ITO, the Bench reiterated that “when the correctness of result of the DCF method is doubted, the Revenue has no option left other than to reject the DCF method and adopt the NAV method to determine the fair market value of the share”.

The Bench further expressed that there is no reason to interfere with the order passed by the authorities in not accepting the valuation report so prepared by the CA in regard to the preferential share available to the assessee keeping in view the provisions of section 56(2)(vii b) read with Rule 11UA.

“The value of the preferential share is rightly taken as the value of the share at which the company should have received the preference share capital including the premium”, added the Bench.

Accordingly, on finding no merit in submission, the Bench dismissed the appeal. 

Cause Title: M/s. MobiCom Technologies Pvt. Ltd. Vs. The Income Tax Officer [Neutral Citation: ITA No. 494/Bang/2023 / 2023-Enterslice-34-ITAT-Bang]

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MobiCom-Technologies-Pvt.-Ltd-Vs-The-Income-Tax-Officer