TaxTMI 
TaxTMI 
TaxTMI 
2020 (8) TMI 90
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....ity shares and preference shares as income for the year under consideration u/s. 56(2)(viib) of the Income-tax Act, 1961. The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject, the premium on issue of equity shares and preference shares cannot be considered as income and the Commissioner of Income tax (Appeals) ought to have held as such. 1.3 The Appellant submits that the Assessing Officer be directed to delete the addition so made by him and to re-compute its total income accordingly. 2 : 0 Re.: General: 2 : 1 The Appellant craves leave to add, alter, amend, substitute and / or modify in any manner whatsoever all or any of the foregoing grounds of appeal at or before the hearing of the appeal. 2. The only issue raised by the assessee is against the confirmation of addition by Ld.CIT(A) as made by the Ld. AO u/s 56(2)(viib) of the Act. 3. The facts in brief are that the assessee filed a return of income on 29/09/2014 at 'Nil'. The case of the assessee was selected under CASS for scrutiny and accordingly statutory notices were issued and served upon the assessee. The assessee is a registered company under the ....
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....w method calculated by the assessee stating the same of having unrealistic results and calculated the valuation of share as per provisions of Rule 11UA(2)(a). The ld. AO observed that since, the liabilities exceeds the assets of the company as calculated in para 5.8 of the assessment order, the fair market value of the shares is negative and hence, the market value is taken at face value of Rs. 10/- each and accordingly, the share premium received of Rs. 3,96,54,531/- was added back to the total income of the assessee u/s 56(2)(viib) of the I.T.Act. 4. In the appellate proceedings, the Ld. CIT(A) dismissed appeal of the assessee by observing and holding as under:- 4. I have given my careful consideration to the rival submissions, perused the material on record and duly considered the factual matrix of the case as also the applicable legal position. Ground No. 2 4.1 In this ground, the appellant has challenged the addition of Rs. 3,96,54,531 u/s.56(2)(viib) of the Act by the AO on account of issuance of shares o basis of Discounted Free Cash Flow Method instead of Net asset method. Section 56(2)(viib) of the Act states - "(2) In particular, and without prejudice to the gene....
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....wed discounted cash flow method, which was one of the two methods provided u/s 56(2) of the Act r.w. Rule 11UA of the Act. The Ld. AR submitted that the assessee determined the market value of the shares on the basis of orders book, which were either finalized or were at the final stage of the negotiations. The total order value of orders in hands were Rs. 18.01 crores based on the said orders book. The assessee has estimated the future cash flow and also submitted the orders book along with advance received from various clients. The Ld. AR prayed before the bench that the valuation, as per the DCF method requires revenue projections for the future years which is based on the current situation and the future estimates, which were based upon present circumstances and facts such as orders book and accordingly, the Ld. AR submitted that the assessee has a valid basis for the revenue forecasts and if due certain subsequent happenings and unavoidable circumstances, the projections were not achieved, the same cannot be attributable to the assessee. The Ld. AR, therefore stated that it is wrong on the part of the Ld. AO to reject the valuation done by the assessee, as per DCF method and p....
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.... 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 reads as under: "3.During the assessment proceedings u/s 143(3) of the Act, AO observed that the assessee company is a wholesale supplier of goods mainly to its group company M/s. Optival Health Solutions P. Ltd., which in turn is engaged in retail business of pharmaceuticals and general goods and further that both the companies have more than 67% common shareholdings. It was observed that during the F.Y. 2010-11, a major restructuring of the group had taken place wherein almost all the shares of M/s. Optival Health Solutions P. Ltd., were taken-over by the assessee company and the wholesale operations from the assessee were taken-over by M/s. Optival Health Solutions P. Ltd., resulting in the assessee company becoming the holding compan....
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....d 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. Optival Health Solutions P. Ltd., was (-) Rs. 64.48 ps (i.e., the value of M/s. Optival share is at negative figure) whereas, assessee has paid Re.1 per share and the basis for adopting Re.1 per share by the assessee is not provided. He further observed that one of the shareholders Mr. Kalyana Bhaskara sold his shares in Optival to Mr. Madhukar Reddy at Rs. 63.79 ps per share and the basis for adopting this rate is also not known but since it was much more than what is claimed by the assessee at Re.1 per share, he held that it was so shown to defraud the Revenue by transacting at abnormally low price. He therefore, held that the provision of deemed gift under section 56(2)(viia) of the I.T. Act is applicable. Thus, he adopted the price of Rs. 75.49 ps paid to unrelated parties to be the market price of the unqu....
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....d 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 rightly adopted the same instead of resorting to the valuation of the fair market value of the shares under Rule 11UA of the I.T. Act. Thus, according to him, the assessment order is to be upheld. 6. Having regard to the rival contentions and the material on record, we find that ground No.1 is general in nature and hence needs no adjudication. With regard to ground No. 2, we find that though the assessee has raised this ground of appeal before the Ld. CIT(A), it was rejected on the ground that the assessee did not press the said ground of appeal. Even before us, the assessee did not advance any arguments on this issue at the time of hearing. In view of the same, ground No. 2 of the assessee is not adjudicated and treated as rejected. 7.As regards grounds No. 3 to 5 are concerned, we find that the undisputed facts are that the assessee has purchased the shares of M....
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.... 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 the assessee to examine if it was less than the aggregate fair market value of the property exceeding Rs. 50,000. In the case before us, the AO had adopted the price at which the assessee has purchased the shares from two of the shareholders at a higher price of Rs. 75.49 ps as the fair market value of the share. The question before us is, whether this is valid and as prescribed under the Act? Clause (b) of the explanation to clause (vii) to section 56(2) defines 'fair market value' to be the value as computed under the prescribed rule i.e., rule 11UA. According to the ld counsel for the assessee, where the Act prescribes a rule, it has to be strictly and mandatorily followed and further if the statute has conferred a power to do an act and has laid down the method in which that power is to be exercised, it necessarily prohibits the doing of the act in any other manner than that has been prescribed. In support of this contention, the assessee has relied upon various decisions cited supra....
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.... 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 valuation date" but in the relevant provisions the definition of fair market value is given in the Act and method has also been prescribed thereunder. 11. On a careful reading of the judgments discussed above, it is seen that the Courts have held that where a method has been prescribed by the legislature, that method alone shall be followed for computation of the fair market value. The A.O. and the Ld. CIT(A) have not followed the relevant provisions for adopting or computing the fair market value of the shares, but have adopted the market value at which some of the shares have been purchased by the assessee as FMV. This, in our opinion, is not correct. As held by the Courts in the above judgments, the A.O. has to compute the fair market value in accordance with the prescribed method but cannot adopt the market value as fair market value under section 56(2)(viia) of the Act. The legislature in its wisdom has also given a formulae for computation of the fair market value which cannot be ignored by the authorities below. 12....
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....es as deferred revenue expenditure in the accounts to be written off over a period of five years. However, in its returns for the AY.s 1996-97 and 1997-98, it claimed the entire upfront interest payment as fully deductible expenditure. The AO denied the assessee's claim and instead, spread the deduction over a period of five years thereby giving deduction only to the extent of one-fifth in each of the respective assessment years. The FAA, Tribunal and the High Court maintained the method of deduction adopted by the AO. Allowing the appeal, the Hon'ble Supreme Court held as under: "..... the disallowance of the deduction on the ground that the debentures were issued for a period of five years was clearly not tenable. Two methods of payment of interest were stipulated in the debenture issued. By allowing only one-fifth of the upfront payment actually incurred, though the entire amount of interest was actually incurred in the very first year, the Assessing Officer, in fact, treated both methods of payment at par, which was clearly unsustainable. By doing so, the Assessing Officer, in fact, tampered with the terms of issue, which was beyond his domain (emphasis added).On exercise b....