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Tax Publishers Karmic Labs (P) Ltd. v. ITO [ITA No. 3955/Mum/2018, dt. 28-7-2020] : 2020 TaxPub(DT) 3105 (Mum-Trib) Sustainability of addition under section 56(2)(viib) of share premium *Facts:* Assessee in the business of clinical trials, testing, trial management etc. issued equity/preference shares at a premium based on (DCF) discounted cash flow method. The premium collected was found to be exorbitantly high hence was added as income from other sources applying section 56(2)(viib) by the assessing officer which was upheld in the first appeal. Aggrieved assessee went in higher appeal to ITAT - Held in favour of the assessee that the addition made by the assessing officer was incorrect without applying rule 11UA(2). The valuation done by the assessee was based on DCF cannot be telescoped to actual data of subsequent years which due to circumstances made their DCF valuation look farcical. All the assessing officer can do as per law is adopt a different method prescribed under rule 11UA(2) and arrive at his own valuation controverting the assessee's valuation prior to making the addition under section 56(2)(viib). *Applied:* DCIT v. Ozoneland Agro Pvt. Ltd. (ITA No. 4854/Mum/2016) -- (Mum-ITAT) *Editorial Note:* Below decisions may also be noted wherein the above rationale was applied -- Rameshwaram Strong Glass (P) Ltd. v. ITO 172 ITD 571 (Jaipur-ITAT) VBHC Value Homes Pvt. Ltd. v. ITO [ITA No. 2541/Bang/2019 Bangalore ITAT Order, dated 12-6-2020] Vodafone M-Pesa Ltd. v. Pr. CIT 164 DTR 257 Innovit Payment Solutions Pvt. Ltd. v. ITO (2019) 102 taxmann.com 59 ITO v. M/s Universal Polypack (India) Pvt. Ltd. [ITA No. 609/JP/2017, dated 31-1-2018] Flutura Business Solutions Pvt. Ltd. v. ITO [ITA No. 3404(Bang)/2018/Assessment Year 2013-14/Bangalore ITAT/dated 30-6-2020] Signure Technologies Pvt. Ltd. v. ACIT [ITA No. 1670/Bang/2019/Assessment Year 2015-16/Bangalore ITAT/dated 3-7-2020] It is to be noted that proviso to section 68 and section 56(2)(viib) are overlapping -- where the identity of the shareholders and the source is not explained then the entire consideration is taxed under section 68 proviso and where the identity and the source is explained then the scope of section 56(2)(viib) cannot travel beyond the share premium portion only. It was thus held in Royal Rich Developers v. DCIT (ITA No. 1835/Mum/2014) - (Mum-ITAT). Where the assessee is able to establish the identity, genuineness and the capacity of the investors then there cannot be an addition under section 68 then the question shifts to prove if such share premium is adequately supported to the fair market value, in the absence of the same tax can be fastened under section 56(2)(vii) as well. Thus the two sections operate in two different domain and are mutually exclusive. It was thus held in Subhlakshmi Vanijya Pvt. Ltd. v. CIT, ITA No. 1104/Kol/2014 in the realm of section 56(2)(vii) an analogous section to section 56(2)(viib).

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Karmic Labs (P) Ltd. v. ITO [ITA No. 3955/Mum/2018, dt. 28-7-2020] : 2020 TaxPub(DT) 3105 (Mum-Trib)

Sustainability of addition under section 56(2)(viib) of share premium

Facts:

Assessee in the business of clinical trials, testing, trial management etc. issued equity/preference shares at a premium based on (DCF) discounted cash flow method. The premium collected was found to be exorbitantly high hence was added as income from other sources applying section 56(2)(viib) by the assessing officer which was upheld in the first appeal. Aggrieved assessee went in higher appeal to ITAT -

Held in favour of the assessee that the addition made by the assessing officer was incorrect without applying rule 11UA(2).

The valuation done by the assessee was based on DCF cannot be telescoped to actual data of subsequent years which due to circumstances made their DCF valuation look farcical. All the assessing officer can do as per law is adopt a different method prescribed under rule 11UA(2) and arrive at his own valuation controverting the assessee's valuation prior to making the addition under section 56(2)(viib).

Applied: DCIT v. Ozoneland Agro Pvt. Ltd. (ITA No. 4854/Mum/2016) -- (Mum-ITAT)

Editorial Note: Below decisions may also be noted wherein the above rationale was applied --

Rameshwaram Strong Glass (P) Ltd. v. ITO 172 ITD 571 (Jaipur-ITAT)

VBHC Value Homes Pvt. Ltd. v. ITO [ITA No. 2541/Bang/2019 Bangalore ITAT Order, dated 12-6-2020]

Vodafone M-Pesa Ltd. v. Pr. CIT 164 DTR 257

Innovit Payment Solutions Pvt. Ltd. v. ITO (2019) 102 taxmann.com 59

ITO v. M/s Universal Polypack (India) Pvt. Ltd. [ITA No. 609/JP/2017, dated 31-1-2018]

Flutura Business Solutions Pvt. Ltd. v. ITO [ITA No. 3404(Bang)/2018/Assessment Year 2013-14/Bangalore ITAT/dated 30-6-2020]

Signure Technologies Pvt. Ltd. v. ACIT [ITA No. 1670/Bang/2019/Assessment Year 2015-16/Bangalore ITAT/dated 3-7-2020]

It is to be noted that proviso to section 68 and section 56(2)(viib) are overlapping -- where the identity of the shareholders and the source is not explained then the entire consideration is taxed under section 68 proviso and where the identity and the source is explained then the scope of section 56(2)(viib) cannot travel beyond the share premium portion only. It was thus held in Royal Rich Developers v. DCIT (ITA No. 1835/Mum/2014) - (Mum-ITAT).

Where the assessee is able to establish the identity, genuineness and the capacity of the investors then there cannot be an addition under section 68 then the question shifts to prove if such share premium is adequately supported to the fair market value, in the absence of the same tax can be fastened under section 56(2)(vii) as well. Thus the two sections operate in two different domain and are mutually exclusive. It was thus held in Subhlakshmi Vanijya Pvt. Ltd. v. CIT, ITA No. 1104/Kol/2014 in the realm of section 56(2)(vii) an analogous section to section 56(2)(viib).