The Assessing Officer cannot reject the valuation method chosen by the assessee, and share premium from non-residents is not taxable under Section 56(2)(viib).

ORDER

PER B.R. BASKARAN, A.M :

The Revenue has filed this appeal challenging the order dated 26-06-2024 passed by Ld CIT(A), NFAC, Delhi and it relates to the Assessment Year (AY.) 2017-18. The Revenue is assailing the decision of Ld CIT(A) in granting partial relief granted to the assessee in respect of addition made u/s 56(2)(viib) of the Act. The Revenue is also contending that the Ld CIT(A) has violated the provisions of Rule 46A by admitting additional evidences without confronting them with the AO.

2. The facts relating to the above said issue are set out in brief. The assessee company is stated to be engaged in the development of software which enables transaction processing using debit/ credit cards and net banking. During the year under consideration, the assessee had issued equity shares and Cumulative Convertible Preference shares (CCPS) to certain resident individuals and also to a non-resident at a premium. The assessee had charged share premium of Rs.210/- per share to 11363 equity shares issued to a resident subscriber and Rs.756.37 per share in respect of both equity shares and preference shares issued to other resident and non-resident subscribers. The aggregate amount of share premium collected from resident and non-resident subscribers is detailed below:-

The AO noticed that the assessee had obtained valuation certificate from a Chartered Accountant, who had valued the shares under DCF method at Rs.532/- per share. The AO further noticed that the CA had valued the shares on the basis of projected cash inflows, but the data relating thereto had been provided by the assessee only. The AO further noticed that the actual financial results achieved by the assessee in the subsequent years did not match with the projected figures given in the valuation report. Hence, the AO rejected the valuation report furnished by the assessee. Accordingly, the AO proceeded to value the shares under NAV method, which worked out to Rs.1.21 per share only. Accordingly, the AO took the view that the entire amount of share premium collected by the assessee has exceeded the fair market value (FMV) of shares and therefore, it is liable to tax u/s 56(2)(viib) of the Act. Accordingly, the AO assessed the entire share premium of Rs.23.38 crores as income of the assessee u/s56(2)(viib) of the Act.

3. In the appellate proceedings before the Ld CIT(A), the assessee made a new submission, i.e., the share premium received from a non-resident subscriber is not taxable u/s 56(2)(viib) of the Act. The assessee had received share premium of Rs.19.74 crores from a non-resident named Kalaari Capital Partners III, LLC. In order to substantiate its claim that the above said subscriber is a non-resident, the assessee furnished following documents before Ld CIT(A):-

a) Copy of the special resolution passed at the extra-ordinary general meeting for issuance and allotment of shares.

b) Copy of the board resolution passed at the meeting of the Board of Directors for issuance and allotment of shares

c) Investors bank statement evidencing investment amount .

d) FIRC and FCGPR with respect to investment amount received from Kalaari Capital Partners III, LLC.

e) Tax Residency Certificate issued by Mauritius Revenue Authority to Kalaari Capital Partners III, LLC.

f) Copy of ledger accounts of the non-resident and all the resident investors in the Appellant’s books of account.

The Ld CIT(A) noticed that the provisions of sec.56(2)(viib) are applicable only to the share premium collected from the resident shareholders and it does not apply to the share premium collected from non-resident shareholders. Accordingly, he directed the assessing officer to delete the addition of share premium of Rs.19.74 crores collected from the non- resident subscriber mentioned above. The contention of the revenue is that the Ld CIT(A) had admitted and considered the above sai