Fair Market Value of Share for Sec 56: Variance of 1% in Issue price & FMV immaterial; ITAT Deletes Addition

The Income Tax Appellate Tribunal (The “ITAT”) in the matter of Suzuki Suiting Pvt. Ltd. deleted addition made of Rs. 7,02,500/- u/s. 56(2)(viib) of the Act being the excess consideration/premium received by the assessee on the issue of shares as compared to the fair market value of shares.

Ld. Counsel for the assessee (Shri S. N. Divetia) pointed out that the face value of the shares was Rs. 100 and had been issued at a premium of Rs. 100. Thus the shares had been issued for Rs. 200. He thereafter pointed out that the valuation of these shares at fair market value certified by the C.A. was admittedly 197.19 per share and the difference therefore of Rs. 2.81 per share was treated as income of the assessee u/s. 56(2)(viib) of the Act.

The ITAT was of view that the difference in the price of the share issued by the assessee and its fair market value and calculated and certified by the C.A. is barely 1% of its total value. The difference being Rs. 2.81 against the share value of Rs. 200/-, it is meager and immaterial to hold that the shares were issued at unjustifiably high prices, which is the essence and purport of the section invoked. In fact, ITAT held, that the valuation by the C.A. justifies the value at which the shares was issued by the assessee. The method for determining the fair market value is by way of a calculating the net worth of the company based on the value of assets and liabilities, some of the assets like land and plant and machinery being valued at market price. There is no doubt that this involves some degree of estimation. Therefore variance in value of shares by 1% can justifiably be attributed to this estimation.

The Pronouncement was made by T.R. Senthil Kumar (Judicial Member) and Annapurna Gupta (Accountant Member)

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