TaxTMI 
TaxTMI 
2019 (11) TMI 1355
X X X X Extracts X X X X
X X X X Extracts X X X X
....essee , which was also filed within the time prescribed u/s 139(5) of the Act. There is no dispute that notice u/s 143(2) of the Act was indeed issued and served on the assessee within the prescribed time limit after the filing of original return of income u/s 139(1) of the Act. Though the assessee had raised various grounds ( vide Sub Grounds 1 to 4 in Ground A) in this regard and though certain arguments were indeed made by both the parties before us, the ld Senior Counsel for the assessee stated that he would like to argue the issue on merits. In the peculiar facts and circumstances of the case before us, we treat the Grounds 1 to 4 raised by the assesee as not pressed. 3. The Ground No. (B) raised by the assessee is against the action of the ld CITA confirming the addition made in the sum of Rs. 107,40,00,000/- u/s 56(2)(viia) of the Act. 4. The brief facts of this issue are that the assessee is a company engaged in the business of manufacturing and distribution of natural and synthetic essential oils and aromatic chemical resinoids. The return of income for the Asst Year 2015-16 was filed by the assessee on 15.9.2015 declaring loss of Rs. 44,457/- . Later a revised re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h the projections and valuation to be taken as per Rule 11UA of the Rules for making addition u/s 56(2)(viia) of the Act. 4.2. The assessee replied as under:- a) The assessee acquired 400000 shares of KNP Industries Pte Ltd, a Singapore based company which was incorporated on 8.9.2008 and engaged in the business of Investment and Trading activites. b) M/s Kaveri Venkataraman & Associates carried out the valuation of shares of KNP Industries Pte Ltd, Singapore as on 31.12.2014 by adopting DCF method, for which they had relied on the financial projections provided by KNP Industries Pte Ltd applying a discounting rate of 8.5% and perpetual growth rate of 1% in order to commensurate with the business model of KNP Industries Pte Ltd. c) M/s Kaveri Venkataraman & Associates accordingly arrived at the fair value of share of KNP Industries Pte Ltd at USD 0.50 per share. d) The assessee submitted that KNP Industries Pte Ltd is an investment company having main investment in S H Kelkar and Company Limited. In the year 2014 and 2016, KNP had earned dividend on this investment. S H Kelkar and Company Limited was owned by three factions. Due to internal di....
X X X X Extracts X X X X
X X X X Extracts X X X X
....der DCF method worked out by the assessee as per the data provided by the management / directors was nothing but an eye wash and totally unrealistic and accordingly not acceptable. The ld AO observed that the valuer of shares had simply adopted the future cash flows certified by the management and no verification of projections and assumptions adopted by the management were carried out by the said valuer and hence he concluded that the entire valuation report was made as per the requirement of the management. The ld AO observed that there is no match between the projections and the actuals. The projections were made only on presumptions and assumptions which are not based on any reasonable variable. DCF method being a legitimate permissible method for the calculation of value of shares, should be based on certain variables. It cannot be used as a tool of reverse working / arithmetical calculation without any basis. Accordingly, the ld AO rejected the valuation of shares carried out by an independent valuer using DCF method and proceeded to adopt the book value of shares as per the provisions of Rule 11UA(2)(a) of the Income Tax Rules. The ld AO for this purpose observed that since ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he assessee. In the case of the assessee, the ld AO had relied on the balance sheet of KNP Industries Pte ltd drawn up on 31.12.2014 to ascertain its fair value instead of taking the fair value as on the valuation date i.e 11.2.2015 , as prescribed in the said rule. 6.1. The assessee submitted the Balance Sheet of KNP Industries Pte Ltd as on 10.2.2015 together with a valuation report obtained from the auditor of KNP Industries Pte Ltd dated 29.3.2018 valuing the shares based on NAV method. These documents were filed as additional evidences before the ld CITA as adequate time was not available before the ld AO to furnish the said documents. The ld CITA admitted these documents as additional evidences and sought for a remand report from the ld AO. The said remand report was submitted by the ld CITA on 20.12.2018 objecting to the admission of additional evidences filed by the assessee before the ld CITA. The ld AO in the remand report also stated that the valuation report dated 29.3.2018 suffers from various infirmities in as much as the same was not done by an independent auditor and that the same was furnished only by the auditor of KNP Industries Pte Ltd, Singapore and hence no....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o impinge on the shares that were pledged. 6.4. The assessee also drew the attention of the ld CITA to the submissions made before the ld AO with regard to the fact that the value of investments of KNP Industries Pte Ltd had diminished to a large extent due to various reasons which were explained in detail. These are reproduced in pages 30 to 34 of the order of the ld CITA. It was specifically pointed out by the assessee that the shares of S H Kelkar & Co which were owned by KNP Industries Pte Ltd were placed in escrow account and that during such period, when shares were placed in escrow, KNP could not have sold the shares in the open market due to the overriding charge created. Further, due to poor financial performance of S H Kelkar & Co. by December 2014 and consequent discussions among Blackstone Shareholder and promoters at the subsequent Board meeting of S H Kelkar & Co, it became probable that M/s Blackstone would exercise its right to escrow thereby resulting in forfeiture of shares and it is due to this reason, a provision for diminution in value of investment was made. In nut shell, the value of shares of S H Kelkar & Co held by KNP Industries Pte Ltd was virtually ze....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the assessee company at Rs. 1,36,00,000/- corresponds to the value at which the shares were originally procured by the directors. This itself corroborates the fact that the entire exercise of change in ownership was undertaken only to comply with the RBI / FEMA regulations and there was no intention to make any gains out of the said transaction. We find that the valuation of share has been arrived by an independent valuer by considering the future projections and performance of KNP Industries Pte Ltd. We find that the ld AO had disputed the valuation of USD 0.50 per share (considering dollar rate at Rs. 68 ) based on actual results which had occurred subsequent to the date of valuation. It is an undisputed fact that the valuer while making valuation of shares under DCF method had to resort to the projections of performance of the company as furnished by the management. The valuer has to just look into the reasonableness of the said projections furnished by the management in the light of purpose behind the said valuation considering the totality of facts and circumstances. We find that the following points require consideration to understand the background of the case which would in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....event occurred (resulting in loss of wealth for Blackstone), the escrow agent shall handover the shares of SHK held in the escrow account to the said M/s. Blackstone. h) In view of the above condition, the shares of S H Kelkar & Co. owned by KNP Industries Pte Ltd were placed in escrow account. During such period when shares were placed in escrow, KNP Industries Pte Ltd could not have sold the shares in the open market due to the overriding charge created. Further, if any adverse event was triggered, the shares would have been directly handed over by escrow agent to Blackstone (who had been roped in as an investor). In nutshell, the value of shares of S H Kelkar & Co. held by KNP Industries Pte Ltd was virtually zero. 8.1. We find that the ld AR submitted that the valuation report issued by an independent valuer had taken due cognizance of the aforesaid facts and the attached encumbrances thereon and accordingly had determined the value per share at USD 0.50. However, the ld AO had rejected the valuation per share based on DCF method due to variations arising in actual vis a vis the projections. From due appreciation of the entire facts narrated above, we find that the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....olutely no benefit derived by the directors also by selling the shares of KNP Industries Pte Ltd to the assessee company at the same purchase price of Rs. 34 per share. 8.3. We find that the ld AO had applied the provisions of Rule 11UA of the Rules, which in our considered opinion, are not at all applicable to the instant transaction. We find that the ld AO had invoked the provisions of Rule 11UA(2)(a) of the Rules as is evident from para 4.16 of his order. We find that the ld AO had invoked the provisions of section 56(2)(viia) of the Act read with Rule 11UA(2)(a) of the Rules for making the addition. We find that the provisions of Rule 11UA(2) of the Rules are applicable only in the case of issue of shares by an unlisted company under the provisions of section 56(2)(viib) of the Act. In this regard we find that the assessee had acquired shares in a foreign company i.e M/s KNP Industries Pte Ltd, Singapore. The ld AO had applied Net Asset Value Method (NAV method) and for this purpose had relied on the balance sheet of KNP Industries Pte Ltd as on 31.12.2014 which is prepared in accordance with the Companies Act of Singapore. We find that Rule 11U define the word 'Balance s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....in this regard has been rightly placed by the ld AR on the decision of Hon'ble Supreme Court in the case of CIT vs Official Liquidator, Palai Central Bank Ltd (In Liquidation) reported in (1985) 1 SCC 45 wherein it was held that :- "When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. Otherwise, one would be driven to conclude that while a certain income seems to fall within the charging section there is no scheme of computation for quantifying it." 8.4.1. Similar views were endorsed by yet another celebrated decision of Hon'ble Supreme Court in the case of CIT vs B.C.Srinivasa Shetty reported in 128 ITR 294 (SC). 8.5. We find that the assessee before the ld CITA had furnished the balance sheet of KNP Industries Pte Ltd as on the valuation date i.e 10.2.2015. We find that the assessee had also furnished a valuation report dated 29.3.2018 from the auditor of KNP Industries Pte Ltd, Singapore based on the balance sheet as on 10.2.2015 as stated supra and by applying NAV method. These documents were indeed admitted by the ld CITA as additional evidences and a re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he shares from its directors at Rs. 34 per share cannot be objected by the revenue. We also appreciate the contention of the ld AR that there is absolutely no prohibition in the provisions of Rule 11UA that the chartered accountant of the company cannot involve in valuation of shares. Accordingly, the observation made on account of conflict of interest in this regard deserve to be dismissed. We also find that the ld CITA had observed that the financial statements as on 10.2.2015 were unaudited and had been certified only by the directors. In this regard, we find from page 451 of the paper book that the auditor of KNP Industries Pte Ltd had furnished a review report to the management of KNP Industries Pte Ltd , wherein it had been categorically mentioned that based on their review of the said financial statements, nothing had come to their attention that caused them to believe that the accompanying financial statements were not presented fairly, in all material respects , in accordance with International Financial Reporting Standards. Hence it could be safely concluded that the financial statements submitted by the assessee as on 10.2.2015 cannot be simply brushed aside as it had go....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hod , in view of the fact that the Rule specifically provides that balance sheet as on the date of valuation i.e 11.2.2015 should be considered for valuation. Rule 11 U defines valuation data as the date on which the property or consideration, as the case may be, is received by the assessee. Since the shares were acquired by the assessee company on 11.2.2015 (being the valuation date) , the valuation arrived at by the ld AO relying on financial statements as on 31.12.2014 deserves to be ignored and disregarded as not being in consonance with the Rule. 8.8. We hold that the provisions of section 56(2)(viia) of the Act cannot apply to a foreign company as the relevant Rule 11U which defines 'balance sheet' was not applicable to a foreign company. We find that the amendment in this regard was brought in Rule 11U with effect from 1.4.19 under Rule 11U(b)(ii) of the Rules. This amendment is only prospective in nature and cannot apply to the year under appeal. We hold that the case of the assessee company herein falls under old provision of Rule 11U(b)(ii) of the Rules which reads as under:- 11U(b) "balance sheet" , in relation to any company, means ,- (ii) in any ot....