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2018 (5) TMI 503
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....otal share premium of Rs. 4, 99, 99, 733/-, that the share premium was charged on the basis of valuation report of a chartered accountant, that the CA had valued the shares by adopting Discounted Cash Flow (DCF) method, that as per the valuation report value of each share was Rs. 25, 759. 78, that the assessee had also carried out project analysis by an Estate Consultant Firm, that the consultant had valued the project at Rs. 1, 47, 39. 39 millions and the valuation of land was fixed at Rs. 66, 000. 98 millions, that the valuation was made basis to adopt future cash flow. The AO directed the assessee to file explanation in this regard. Vide its letters dated 23/10/2015 and 19/11/2015, the assessee made submissions about the share premium. After considering the explanation of the assessee, the AO held that there was no business activity carried out during the year, that the premium received by the assessee was disproportionate to the business activities, that the purported nature of business was not undertaken, that the profit projections even for the first year were astronomical, that the applicability of DCF method was for limited period of only five years, that it had made projec....
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....e assessee keeping in mind the expected future gains, that the premium could not be termed as excessive or unreasonable. 3.1. With regard to business activities not being carried out during the year under consideration it was submitted before the FAA that the matter was subjudice due to "forest" remark at that point of time, that the assessee could not initiate preliminary activities, that the assessee was paying agriculture tax till the year 2016, that most part of the plot of land was under cultivation, that it could not be termed as forest, that the Hon'ble division High Court has decided the issue in favour of the assessee on 18/06/2015, that the AO did not provide sufficient opportunity to the assessee to substantiate its stand about carrying on of business activities. 3.1.1. The FAA, after considering the submissions of the assessee and the assessment order, held that the AO had made the addition on the ground that no business activity was carried out during the year under appeal, that he had held that NAV method was preferable to DCF method. He referred to the provisions of section 56(viib)of the Act and Rule 11UA (2) (b) and held that the assessee had liberty to exerc....
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..... As stated earlier, the assessee had adopted DCF method as per the provisions of section 56(viib)r. w. rule 11UA(2)whereas the AO was of the opinion that NAV method was appropriate method, as envisaged by Rule 11 UA(c)(b)of the Rules. Before proceeding further, we would like to reproduce the provisions of section 56 of the Act and the relevant rule and the same read as under: Section 56 "(viib) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares : Provided that this clause shall not apply where the consideration for issue of shares is received- (i) by a venture capital undertaking from a venture capital company or a venture capital fund ; or(ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf. Explanation For the purposes of this clause, - (a) the fair market value of the shares shall be the value- ....
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....n the valuation date and the assessee may obtain a report from a merchant banker or an accountant in respect of such valuation. '. (2) Notwithstanding anything contained in sub-clause (b) of clause (c) of sub-rule (1), the fair market value of unquoted equity shares for the purposes of sub-clause (i) of clause (a) of Explanation to clause (viib) of sub-section (2) of section 56 shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner under clause (a) or clause (b), at the option of the assessee, namely :- xxx (b) the fair market value of the unquoted equity shares determined by a merchant banker or an accountant as per the Discounted Free Cash Flow method. 5. 1. In our opinion, the valuation has been left to the discretion of the assessee. In other words the AO cannot adopt a method of his choice. In the case under consideration the whole controversy has arisen because of the AO has rejected the method adopted by the assessee. We find that in the case of Medplus Health Services P. Ltd. (supra)similar issue was deliberated upon and decided. We are reproducing the relevant portion of the order which re....
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....MV in short) has to be computed in accordance with Rule 11UA of I. T. Rules and that the assessee had computed the fair market value as per the prescribed rule according to which, the fair market value of the share is less than Re. zero and hence, payment of Re. 1 per share by the assessee to acquire the shares is more than the fair market value computed under Rule 11UA. Thus, according to him, the provisions of section 56(2)(viia) of the Act do not apply. The A. O. however, was not convinced with the assessee's contentions and held that the 'market value' mentioned in the rule means "price which it would have fetched if sold in the open market. " He observed that the valuation of any property is based on the fact as to what value the property would fetch if sold in the open market and since in the assessee's own case there are certain transactions to clearly establish market value of the shares sold, resorting to estimation/calculation of market value of the unlisted shares as per the formula under Rule 11UA of I. T. Rules does not arise. He observed that as per the computation of fair market value under Rule 11UA(c)(b) of I. T. Rules, the value of M/s. Op....
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....puted under Rule 11UA of I. T. Rules. He submitted that where the legislature prescribes a particular method to be adopted, then the said method alone should be adopted. He has submitted that in the case of assessee before us, neither the provisions of section 56(2)(viia) nor the Rules prescribe for adoption of the market value of the shares as the fair market value for the purpose of deemed gift under section 56(2)(viia) of the I. T. Act since the provisions relates to anti-abuse provisions. He submitted that where a specific method is prescribed, the A. O. is precluded from adopting any other method. He further drew our attention to the decision of Hon'ble Allahabad High Court in the case of Dr. Shashi Kant Garg v. CIT [2006] 285 ITR 158/ 152 Taxman 308 in support of his contention that a prescribed method has to be strictly followed. He has also placed reliance upon the following other judgments in support of his contention : xxxx 5. The Ld. D. R. on the other hand, supported the orders of the authorities below and submitted that where the market price of the shares at which the assessee has purchased the shares on the very same day is available, the A. O. has ri....
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....n which the public are substantially interested: ii. the purchaser of the shares is a company not being a company in which the public are substantially interested; iii. the consideration is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees; and iv. the deemed income in the hands of the transferee shall be the aggregate fair market value of such property as exceeds such consideration. 8. From the facts of the case before us, it is seen that the property i. e. , shares which are transferred are the shares of a company in which the public are not substantially interested. Since the transaction of sale and purchase of shares is between related parties and both the companies are companies in which the public are not substantially interested, we are of the opinion that the AO was justified in examining the applicability of the provisions of section 56(2)(viia) of the Act to the transaction of transfer of shares. 9. The next step for application of this provision is to arrive at the fair market value of the shares before comparing it with the consideration at which the shares are purchased by....
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....the fair market value in accordance with Rule 11UA of the I. T. Rules, he had evidence before him to be satisfied that the market value of the shares was much higher than the value at which the balance of shares were transferred to the assessee. The AO has observed that "mainly the valuation of any property is based on fact as to what value the property would fetch if sold in open market but generally the details as to how much value an unlisted share would fetch will not be available and hence the formula is given to overcome that deficiency". Since the market price of some of the shares at a higher value than Re. 1 was available, the AO has adopted the same as the fair market value. This stand of the AO could have been sustainable had the section provided that the FMV of an unquoted share shall be the value computed in accordance with the rule or the actual market value, if any, whichever is higher. But as can be seen from the Act and the rules provided thereunder, no such provision has been made. In fact, under the Wealth Tax Act, Section 7(1) defines the expression "value of an asset" as "the price which in the opinion of the WTO it would fetch if sold in the open market on the....
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....gate of the fair market value of the shares as computed can be brought to tax as deemed income in the hands of the assessee. .... . " 5.2. Here, we would like to refer to the case of Taparia Tools Ltd. (372 ITR 605)of the Hon'ble Apex Court. In that matter the assessee was following the mercantile system of accounting. It floated an issue of non-convertible debentures under the terms and conditions of which subscribers were given two options as regards the payment of interest thereupon : they could either receive interest half yearly at 18 per cent. per annum over a period of five years or opt for a one-time payment of Rs. 55 per debenture to be immediately paid. At the end of the five-year period, the debentures were to be redeemed at the face value of Rs. 100. Two subscribers gave their letter of acceptance opting for payment of interest upfront and were accordingly paid interest in sums of Rs. 2, 72, 25, 000/and Rs. 55 lakhs, respectively, in the accounting years 1995-96 and 1996-97, respectively. It showed the upfront payment of interest on debentures as deferred revenue expenditure in the accounts to be written off over a period of five years. However, in its returns for th....
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....se of action was permissible in law to the assessee as it was in consonance with the provisions of the Act which permit the assessee to claim the expenditure in the year in which it was incurred, the fact that a different treatment was given in the books of account could not be a factor which would bar the assessee from claiming the entire expenditure as a deduction. Once a return in that manner was filed, the Assessing Officer was bound to carry out the assessment applying the provisions of the Act and not to go beyond the return. There is no estopple against the statute and the Act enables and entitles the assessee to claim the entire expenditure in the manner it is claimed. " Considering the ratio of Taparia Tools(supra), we hold that the AO had 'tampered' with the provisions of the Act. Section 56 allows the assessees to adopt one of the methods of their choice. But, the AO held that the assessee should have adopted only one method for determining the value of the shares. In our opinion, it was beyond the jurisdiction of the AO to insist upon a particular system, especially the Act allows to choose one of the two methods. Until and unless the legislature amends the provis....
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....9), the Hon'ble Apex Court has held as under: "While it is true that the principle of res judicata would not apply to assessment proceedings under the Act, there is need for consistency and certainty and existence of strong and compelling reasons for a departure from a settled position has to be spelt out. In International Tractors Ltd. (397ITR 696), the Honble Delhi High Court has held that deductions allowed in the earlier assessment years should not be withdrawn unless the circumstances have changed. The Hon'ble Allahabad High Court, in the case of Zazsons export Ltd. (397 ITR 400), has held as under: "In order to maintain consistency, a view, which had been accepted in an earlier order ought not to be disturbed unless there was any material to justify the Department to take a different view of the matter. In respect of the earlier assessment year, 2005-06, the Department had accepted the decision of the Appellate Tribunal that the trade amount due to the trade creditors in the books of account of the assessee could not be added to the income of the assessee. There was nothing on record to show that any appeal had been filed by the Department against that....
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.... expenditure earning profit was not a prerequisites. He referred to the case of Espeejay Builders P. Ltd (ITA/8055/Mum/2011) and reversed the order of the AO. 7.2. Before us, the DR stated that assessee had not carried out any business activity during the year under consideration, that AO had rightly disallowed the disputed amount. The AR contended that the expenses were incurred to maintain the corporate entity as a going concern, that the assessee had set up its business and had purchased plots of land, that it had applied for permissions, that the assessee had paid professional tax and ROC filing fees, that audit fees and bank charges were paid for carrying out the routine business activities, that the assessee had paid legal and professional fee for the purpose of obtaining valuation report of shares, that all the expenses were required to carry out the business for the year under consideration, that the FAA had rightly deleted the addition made by the AO. He referred to the cases of Multi-Act Reality Private Ltd. (ITA/7274/Mum/2011, dated 28/08/2015), Premiums Investment And Finance Ltd. (ITA/4879/ Mum/2012, dated 13/05/2015) Rampur Timber and Turnery Co. Ltd. (129 ITR 58).....