INCOME TAX ACT, 1961

Section 56(2)(viib) Rule 11UA(1)

Income from other sources - Excess premium received on shares - Taxation under section 56(2)(viib) -

Assessee-company had allotted 36,000 Compulsory Cumulative Convertible Preference Shares (CCCPS) at a premium of Rs. 490 per share to 7 parties. After noting this, he invoked the provisions of section 56(2)(viib). He also referred to rule 11UA(2) and thereafter, he referred to valuation report of Chartered Accountants which was obtained by the assessee as per DCF method at Rs. 516 per share on the basis of management certified future cash flow statement. The AO was of the opinion that this certificate obtained by the assessee from the said C.A. was a self serving document because the valuation had been done on the basis of projections made and certified by the management. AO was not satisfied with reply of assessee and he held that as per rule 11UA(2)(a), the fair market value of each share has Rs. 56.17 and since, share premium was received @ Rs. 490 per share, he made addition. Being aggrieved, the assessee carried the matter in appeal but without success. Assessee contended that sub-clause (c) of sub-rule (c) of rule 11UA(1) was applicable and as per the same, these shares were to valued at a price it would fetch if sold in open market.Held:All the terms of the issue of preference shares have to be looked into for this purpose. It was important to note that ultimately, these preference shares were to be converted into equity shares after a fixed time at a fixed rate and hence, this was important to find out as to whether the premium received is for equity shares to be issued later or for preference shares issued now since ultimately, these preference shares were compulsorily to be converted in to equity shares. The matter was restored to the CIT(A) for a fresh decision on this issue if it was held that sub-clause (c) of sub-rule (c) of rule 11UA(1) was applicable, than the acceptable value as per the same had to be worked out and if it was ultimately held that DCF method is to be adopted as prescribed under rule 11UA(2)(b), than the assessee had to establish that the projections given by the management to the chartered accountant for his certificate were on a scientific basis because the said Chartered Accountant has adopted those projections without commenting anything on its acceptability.

Applied:Rotork Controls India (P) Ltd. 2009 TaxPub(DT) 1730 (SC) :(2009) 314 ITR 62 (SC) and Bharat Earth Movers v. CIT 2000 TaxPub(DT) 1505 (SC) : (2000) 245 ITR 428 (SC).