TaxTMI 
TaxTMI 
2018 (2) TMI 1693
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....xpiry of 10 years from the date of allotment at a redemptions price of Rs. 5,200/- per preference share. As per the terms and conditions of issue of these RNCPS can be redeemed prior to the redemption date, on mutual consent and agreed terms. The assessee filed a valuation report from a Chartered Accountant as required under Rule 11UA(c)(c), in support of the valuation of RNCPS of Rs. 10/- at a premium of Rs. 1,990/-. A total of 75,000, 0.1% RNCPS were allotted to M/s Ashadeep Properties Private Limited and 1,30,000, 0.1% RNCPS were allotted to M/s. Jaguar Advisory Services Pvt. Ltd. The assessee had received an amount of Rs. 41 Crores from this allotment. The Assessing Officer considered the valuation report furnished by the assessee regarding the fair market value of RNCPS, applied Section 56(2)(viib) of the Act, and came to a conclusion that the assessee has received consideration for issuance of shares in excess of the face value of such shares and that the assessee could not substantiate during the course of assessment proceedings that the fair market value for the issuance of preference shares adopted by the assessee in the fair and correct market value. He determined the m....
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....n by the Assessing Officer, on the issue of valuation of RNCPS. A remand report was called from the Assessing Officer on all the submissions made by the assessee. After considering the remand report and the replies and the contention of the assessee, the ld. First Appellate Authority held as follows:- (a) Section 56(2)(viib) of the Act, applies to the facts of the case as the words used is "shares" which also includes preference shares. (b) The Assessing Officer has the right and duty to examine the valuation report and to adjudicate upon all aspects which had a bearing on the income of the assessee. (c) That the reasoning adopted by the valuer as well as the Assessing Officer, suffers from certain shortcomings and it would be reasonable to adopt 12.5 per cent discount rate as against 10% adopted by the assessee and 15% adopted by the Assessing Officer. (d) On the issue of disallowance u/s 14A of the Act, he gave certain directions to the Assessing Officer. 2.3. Aggrieved, both the assessee as well as the revenue is in appeal before us. 3. The ld. Counsel for the assessee submitted that Section 56(2)(viib) was brought into the statute with an objective to deter generation....
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....el for the assessee submitted that the Assessing Officer was factually incorrect in coming to the conclusion that the assessee does not have sufficient availability of funds for redemption of RNCPS for the reason that, it had made investment in equity shares of M/s Magna Fincorp Ltd. and the book value as on 31/03/2013 of this investment was Rs. 119.46 Crores and the market value as on that day was Rs. 280.46 Crores. He pointed out that the market value of this investment as on 31/10/2017 was Rs. 595.76 Crores. He submitted that the assessee company can, any day liquidate a fraction of this investment and redeem the RNCPS. On the finding of the Assessing Officer on the issue of ascertainable cash flow, he submitted that readily sellable investment in equity shares are available with the assessee and when the market value of these equity shares is very high as compared to the value of RNCPS, the question of the assessee not having an ascertainable cash flow, does not arise. He pointed out that the assessee company had earlier issued redeemable preference shares and had also successfully redeemed them. He submitted that the investors in RNCPS, which included an independent unrelated ....
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....additional 15.50 per cent of the equity shares through its group company Celica Developers Pt. Ltd., totalling to 33.41% of the share holding. He further submitted that the assessee is engaged in money lending business and that it has interest income of 70.74 Lacs and that this fact was ignored by the Assessing Officer and net expenditure has been allowed by the same. He further argued that the assessee had suo moto disallowed 2.46 Lacs u/s 14A in the return of income and that the Assessing Officer has not recorded satisfaction as to how the assessee was wrong in offering only Rs. 2.46 Lacs as disallowance u/s 14A and that, the invocation of Rule 8D, is bad in law. He relied on certain decisions in support of his contentions, which will be dealt by us as and when necessary. 5. The ld. DR, Md. Usman, CIT DR, on the other hand vehemently opposed the contentions of the assessee. He took this Bench through Section 56(2)(viib) of the Act, and submitted that the legislature has used the word "shares" and hence the arguments of the assessee that redeemable preference shares are quasi debt and hence out of the scope of Section 56(2)(viib) of the Act, is wrong. Referring to the CBDT Circul....
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....tor to be considered. On the issue of bench marking the rate of return with home loan interest rates, he submitted that this was a very conservative rate taken by the Assessing Officer as the home loans are given at a concessional rate and that too with full security. Thus he says 15 per cent discount rate taken by the Assessing Officer has to be upheld and the order of the ld. CIT(A), reversed. On Section 14 A of the Act, he relied on the order of the ld. CIT(A). 7. In reply the ld. Counsel for the assessee submitted that an investor has no option of advancing money as a housing loan to public, as the same is controlled by National Housing Bank and Reserve Bank of India. Hence, he submits that the housing loan rates cannot be taken as comparable investment opportunities. He submitted that investments are made in shares for the reason that, the dividend earned from the same are not subject to Income Tax and whereas the interest earned on debt instruments are subject to Income Tax. So, he submitted that to make the returns comparable, the tax factor has to be considered. On the argument of the ld. DR that the assessee has no liquidity and would possibly default in redeeming these p....
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....rically followed the prescription of law and taken a valuation report from an independent accountant and that the Assessing Officer is not an expert in this field and hence cannot interfere in this report and arrive at a different valuation. We do not find any merit in this contention. The Hon'ble Supreme Court in the case of Duncans Industries Ltd. vs. State of U.P. and Ors (supra), the case-law, which was relied upon by the assessee has at page 9 held as follows:- "These valuers are technical persons who have while valuing the plant and machinery taken into consideration all aspects of valuation including the life of the plant and machinery. The valuations made both by the Enquiry Committee as well as the valuers are mostly based on the documents produced by the appellant itself. Hence, we cannot accept the argument that the valuation accepted by the Collector and confirmed by the revisional authority is either not based on any material or a finding arrived at arbitrarily. Once we are convinced that the method adopted by the authorities for the purpose of valuation is based on relevant materials then this Court will not interfere with such a finding of fact. That apart, as ob....
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....hat the valuation is vitiated by fundamental errors cannot but be rejected. In the result IA Nos. 2 to 4 of 2002 are liable to be rejected. However, there is one direction concerning the interest which we consider appropriate to give in the given facts and circumstances of the case. Though the grant of interest, as prayed for by the petitioners, from 31st May, 2002-the stipulated date of submission of valuation report is not called for, we feel that the ends of justice would be adequately met if the respondents concerned are directed to pay the interest at the rate of 9 per cent, on Rs. 8.24 crores, which is the value of shares fixed by the valuer, for a period of 12 months. True, the petitioners contested the valuation and thereby delayed the implementation of settlement. However, having regard to the bona fide nature of the dispute and the fact that the respondents have, retained the money otherwise payable to the petitioners during this period of 12 months and could have profitably utilized the same, we have given this direction taking an overall view. In the result I.As. Nos. 2, 3 and 4 of 2002 are dismissed subject to the above direction as to payment of interest. The SLP(C). ....
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....er there would be a liquidity crunch leading to default in contractual obligation by the assessee in the future years. b) Whether while bench marking the rate of return, tax is to be considered and factored or not. c) Whether interest rate of a housing loan can be used as a bench mark the rate of return or is there any other relevant comparable. 11.2. On the first issue of liquidity we find that the Assessing Officer has not considered market value of investments held by the assessee company. Against the book value of Rs. 119.46 Crores as on 31/03/2017, the market value has grown up to Rs. 280.46 Crores on the same date i.e., 31st March, 2017. The observations of the Assessing Officer and the arguments of the ld. DR on the issue of cash flow, in our view are not based on facts and are mere presumptions and assumptions. The arguments that the assessee would suffer a liquidity crunch and would default on its repayments and redemptions and hence this factor would reduce the credibility and credit rating of the assessee is also based on surmises and conjectures. When the assessee has such good investment portfolio which has grown in value and when the same can be liquidated, such ....
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....ct, as to whether home loan interest rate has to be taken for the purpose of bench marking, we are of the view that it would not be correct to do so on the facts of this case. Home loans can be given by Banks and other NBFCs which are in the business of giving loans and advances and which have taken regulatory approvals to do so. Home loans are generally secured loans. A general investor has no choice of granting home loans. The rate of return for an investor should be considered and composed of instruments in which, he can deploy his funds. A choice of investment can be a fixed deposit or bonds issued by the Government or the Reserve Bank of India or debentures issued by various companies, when the investor seeks to invest in debt instruments. In equity shares or preference shares etc. in case he chooses to invest in equity. Thus taking home loan interest rates for the purpose of bench marking, in our view is highly erroneous as the investor has no choice or possibility of advancing housing loan. 14. Now we have to arrive at the rate of return that has to be bench marked in this case. The rate of return on preference shares issued by other companies for the relevant period in ou....