2019 (7) TMI 920

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.... determining the NAV as he had excluded the amount of preference share capital from the net value but had divided the net value by the number of preference shares and the CIT(A) failed to understand the mistake in calculations pointed out by the company. 3. That the CIT(A) erred in upholding the addition in respect of preference shares issued during the year without appreciating that the company had duly submitted report of Chartered Accountants before the Assessing Officer determining the fair market value and the Assessing Officer had not pointed out any mistake in the report but had proceeded to determine the NAV in the manner which was inconsistent with report of the Chartered Accountants as well as Rule 11UA of Income-tax Rules. 4.That the CIT(A) erred in upholding disallowance of Rs. 2,85,835/-made by the Assessing Officer in respect of depreciation claimed by the company on residential building without appreciating that since no rate had been prescribed in Appendix-IA for residential building, depreciation was allowable as per rates provided in Appendix-I on WDV method. 5. That the CIT(A) also erred in not considering and adjudicating the alternative ground raised b....

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....lotted to M/s Jasmine Barter Pvt. Ltd at a value higher than the market value and therefore, A.O. is justified in making addition of Rs. 99,22,000/- U/s 56(2) of the Act. Accordingly, the addition of Rs. 99,22,000/- is sustained. Appellant's ground of appeal on this issue is dismissed." 4. Against the aforesaid findings of the ld CIT(A), the assessee is now in appeal before us. During the course of hearing, the ld. AR submitted that provisions of section 56(2)(viib) are not applicable in the case of issue of preference shares. It was further submitted that even where it is held that provisions of section 56(2)(viib) are applicable in the instant case, the valuation of preference shares have to be done as per clause (c) of Rule 11UA(1) and not Rule 11UA(2) which has been invoked by the ld. CIT(A). It was submitted that Rule 11UA(1)(c) provides that the fair market value of unquoted shares and securities other than equity shares shall be deemed to be the price it would fetch if sold in the open market on the valuation date and the assessee may obtain a report from a merchant banker or an accountant in respect of such valuation. It was submitted that the assessee has obtained the re....

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....share only get predetermined coupon rate of dividend. Since proposed issue of preference shares will get substantial redemption premium besides option to convert the same into equity shares of the company before due date of redemption therefore, Dividend discount model is not suitable method for ascertaining fair value of such Preference shares. Further since the Preference shares to be valued are optionally convertible shares , convertible into equity shares of the company, therefore , essential characteristic on exercise of conversion option is that of equity shares and hence Net Asset value method for valuation of these shares need to be considered . Since, proposed preference share has two options namely:- 1. Redemption after a tenure of 12 years 2. Conversion into equity shares Therefore, valuation need to carried out considering both the above options. OPTION - I Redemption after tenure of 12 years Preference shares are proposed to be redeemed at a redemption premium of 8% p.a i.e at a value of Rs. 196 /- after 12 years. Therefore, on the basis of redemption value, fair value of such preference shares can be worked out as Rs. 196/- per shares specially....

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....ompany will be about Rs. 200/- per share. It is the value which such preference share can fetch if sold in the open market based on the information available and as per above valuation methodology." 7. The Revenue has not disputed the adoption of the NAV method by the assessee. Therefore, once the NAV method has been accepted, what has to be determined is the valuation of the preference shares based on net asset value as on the date of issue of such preference shares. The valuation date thus has to be the date of issuance of preference shares and not as per the last balance sheet date as has been adopted currently. The net asset value is determined by applying the formula where difference between the total assets and total liabilities as on the date of issuance of shares is divided by total amount of paid up capital of the company and multiplied by paid up value of new shares. In the instant case, given that there are existing equity and preference share capital, paid capital in respect of both of these category of shares shall be considered for determining total paid up capital of the company. In the result, we set-aside the matter to the file of the AO who shall determine the v....