Preference share valuation remanded for reassessment using Net Asset Value method. Depreciation set at 3.02% for building.

The Tribunal remanded the matter of preference share valuation to the Assessing Officer for reassessment based on the Net Asset Value method as of the issuance date. Regarding depreciation, the Tribunal directed the application of a 3.02% Straight Line Method rate for the residential building, in line with Section 32(1)(i). Other appeal grounds were dismissed, with the order issued on 02/05/2019.

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Issues Involved:
1. Addition of Rs. 99,22,000/- for issuing preference shares at a price higher than fair market value.
2. Determination of Net Asset Value (NAV) for preference shares.
3. Validity of Chartered Accountant's valuation report.
4. Disallowance of Rs. 2,85,835/- depreciation claimed on residential building.
5. Appropriate method and rate for calculating depreciation on residential building.

Detailed Analysis:

1. Addition of Rs. 99,22,000/- for Issuing Preference Shares at a Price Higher than Fair Market Value:
The assessee issued 2,00,000 preference shares at Rs. 100 each with a premium of Rs. 100 per share. The Assessing Officer (AO) determined the fair market value at Rs. 150.39 per share, invoking Section 56(2)(viib) of the Income-tax Act read with Rule 11UA. The excess amount of Rs. 99,22,000/- was taxed as "Income from other sources." The CIT(A) upheld this addition, noting that the AO correctly excluded the preference share capital from the NAV calculation.

2. Determination of Net Asset Value (NAV) for Preference Shares:
The CIT(A) and AO valued the shares on an NAV basis but differed from the Chartered Accountant's valuation, which included a 3-4% discount. The CIT(A) emphasized that preferred shares are akin to debt, reducing equity value to common shareholders. The Tribunal noted that the NAV method was accepted, but the valuation date should be the issuance date of the preference shares, not the last balance sheet date. The case was remanded to the AO to re-determine the NAV based on this principle.

3. Validity of Chartered Accountant's Valuation Report:
The Chartered Accountant's report valued the preference shares at Rs. 200/- each, using a combination of redemption value and conversion rights. The Tribunal highlighted that the valuation should consider both redemption after 12 years and conversion into equity shares. The Tribunal directed the AO to re-evaluate the valuation using the NAV method as of the issuance date, considering both equity and preference share capital.

4. Disallowance of Rs. 2,85,835/- Depreciation Claimed on Residential Building:
The assessee claimed depreciation on a residential building at 5% on a Written Down Value (WDV) basis, while the AO allowed only 3.02% on a Straight Line Method (SLM) basis. The Tribunal noted that assets of an undertaking engaged in power generation should follow SLM as per Section 32(1)(i). The residential building, being part of the business assets, should also follow SLM at the prescribed rate of 3.02%.

5. Appropriate Method and Rate for Calculating Depreciation on Residential Building:
The Tribunal clarified that the housing colony falls under the residuary category for buildings and civil engineering works of permanent nature, thus attracting a depreciation rate of 3.02% on an SLM basis. The AO was directed to compute depreciation accordingly.

Conclusion:
The Tribunal set aside the matter of preference share valuation to the AO for re-determination based on the NAV method as of the issuance date. The appeal regarding the depreciation rate was partly allowed, directing the AO to apply a 3.02% rate on an SLM basis for the residential building. The other grounds of appeal were dismissed. The order was pronounced on 02/05/2019.

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