The assessee, incorporated in 1999 and engaged in computer industry, had issued 50 lakhs shares of Rs. 20 per share comprising of face value of Rs. 10 and share premium of Rs. 10 each. However during the previous year relevant to the AY 2013-14, the assessee received only Rs. 10, which included share premium of Rs. 7.50 per share and face value of Rs. 2.50 per share. Accordingly the subscribed share capital of the assessee-company increased from 8,67,000 shares to 58,67,000 shares. The paid-up share capital increased from Rs. 86,70,000 to Rs. 2,11,70,000 resulting in an increase of Rs. 1,25,00,000 (50 lakhs shares \u00d7 Rs. 2.5 per share). The A.O. valued the shares of the assessee-company using the net asset value method as on March 31, 2012 by ignoring the share premium figure of Rs. 62 lakhs reflected in the \u201creserves and surplus\u201d on the premise that the assessee had no active business and derived only interest income. Accordingly, he determined the fair market value of the shares of the assessee-company at Rs. 14 as against the issue price of Rs. 17.50 per share and brought the excess of Rs. 3.50 per share to tax as income u\/s. 56(2)(viib) of the Income-tax Act, 1961. This action was upheld by the Commissioner (Appeals). On appeal, the Tribunal deleted the addition made by the A.O. The Tribunal held that the A.O. had under the \u201cliability approach\u201d ignored share premium of Rs. 62 lakhs lying in the balance-sheet as on March 31, 2012 under \u201creserve and surplus\u201d. Under the \u201casset approach\u201d, the A.O. treated the share premium of Rs. 62,00,000 as a liability and computed the net asset value. Both workings of the A.O. were completely flawed as they were neither in consonance with the mandate of the Companies Act, 1956,nor the provisions of rule 11UA of the Rules. Since no mistake was found in the valuation adopted by the assessee, the addition made by the A.O. would have no basis. In any case, the net asset value method adopted by the assessee was one of the recognised methods provided in rule 11UA of the Rules. Accordingly, the addition made by the A.O. in the sum of Rs. 1,75,00,000 u\/s.56(2)(viib) of the Act, was unsustainable. Rule 11UA does not prohibit inclusion of share premium as part of reserves and surplus. Even if the recipient company does not justify receipt of share premium, the share premium reflected in the balance-sheet cannot be ignored.\u00a0 Taxation of share premium u\/s. 56(2)(viib) of the Act is only by way of deeming fiction. In any case, what is required for the purpose of valuation of shares is the figures reflected in the books of account or in the balance-sheet prepared in accordance with the Companies Act, 1956 which the A.O. does not have power to tinker with. Only any reserve that has been set apart towards depreciation would not get included under \u201creserves and surplus\u201d. In other words, such reserves set apart for depreciation would partake of the character of a liability for the purpose of determination of fair market value of shares. Hence, the share premium would be included in the \u201creserves and surplus\u201d even under rule 11UA of the Rules. It is wrong on the part of the A.O. to ignore it while valuing the shares of the assessee-company both under the \u201cliability approach\u201d and considering the same as a liability under \u201casset approach\u201d. (AY. 2013-14)<\/p>\n","protected":false},"excerpt":{"rendered":"
S. 56 : Income from other sources-Share premium-Valuation of shares-Share premium reflected in balance-sheet-Figures reflected in books of account or in balance-sheet prepared in accordance with Companies Act, 1956-AO does not have power to disturb-Share premium to be included in \u201creserves and surplus\u201d-AO under \u201cliability approach\u201d ignoring share premium in balance-sheet under \u201creserve and surplus\u201d-Under \u201casset approach\u201d, treating share premium as liability-Both workings flawed-Net asset value method adopted by assessee recognised method-Taxation of share premium u\/s. 56(2)(viib) of the Act is only by way of deeming fiction.-Addition unsustainable: [S. 56(2)(viib),Rule ,11UA] <\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[21],"tags":[],"class_list":["post-41850","post","type-post","status-publish","format-standard","hentry","category-income-tax-act"],"acf":[],"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/p9S2Rw-aT0","jetpack-related-posts":[],"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts\/41850","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/comments?post=41850"}],"version-history":[{"count":1,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts\/41850\/revisions"}],"predecessor-version":[{"id":41851,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts\/41850\/revisions\/41851"}],"wp:attachment":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/media?parent=41850"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/categories?post=41850"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/tags?post=41850"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}