TaxTMI 
TaxTMI 
2022 (4) TMI 323
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....on of Rs. 3,99,127/- u/s 14A r.w.r. 8D(2)(ii) of the Act. 5. The appellant prays that the order of the Ld. CIT(A) on the above grounds be set aside and that of the AO be restored. 6. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary. 3. Brief facts of the case are that the assessee is a private limited company engaged in the business of manufacturing of pharmaceuticals mainly injections. The assessee filed its return of income for A.Y. 2015-16 on 30.09.2015 declaring total income of Rs. 94,75,400, subsequently revised its return of income on 11,02,2016 declaring total income at Nil The case was selected under scrutiny. The AO completed assessment u/s. 143(3) on 27.12.2017 assessing total income at Rs. 77,80,74,240 after making addition of Rs. 33,26,40,000 u/s. 56(2)(viib), disallowance of depreciation on goodwill of Rs. 2,49,51,468, disallowance of Rs. 40,03,820 u/s. 14A and addition of Rs. 41,94,79,280 u/s. 56(2)(viia) of the Act. 4. Apropos issue of addition under section 56(2)(vii)(b) of the Act :- During the course of assessment proceedings the AO observed that the assessee issued 4,20,000 shares of Rs. 10 each at a premiu....
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....ated the value of shares @ Rs. 1000 and the same was not as per recognized methods as mentioned in the technical guide on share valuation, but it was made as per whims & fancies of the management to arrive at higher value to issue shares at huge premium, hence not reliable. AO further held that, preference shares are also like equity shares, with certain benefits of receiving their fixed rate dividend before equity share holders. That preference share holders do not have voting right or any say in the management of the company but there is no differentiation of equity shares and preference shares in the section. Therefore, considering the valuation report filed by the assessee, AO held that the dividend rate for the shares was estimated arbitrarily no verification of projections and assumptions adopted by management was made by the valuer. That as per the technical guide on share valuation published by the Institute of Chartered Accountants of India, Dividend Discount Model is not used in most practical situations as dividend may not reflect the true profitability of a business and payment is a management decision. That it suffers from a number of issues like forecasting of dividen....
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.... Madhurima International Pvt. Ltd. Vs. PCIT, Mumbai on whether the rules of valuation of equity shares to be extended to valuation of convertible preference share and no counter verification was required and done by the valuer. After considering the submission of the assessee, A.O. held that at least the assessee needed to substantiate the value determined by any other method to the satisfaction of the AO, as per the Explanation of section 56(2)(viib) of the Act, which the assessee failed to do, therefore, the valuation of shares provided was unreliable and highly suspicious. Therefore, she held that the valuation report was prepared by the valuer viz Mr. Jain to the satisfaction of the management of the assessee company, without any independent verification of the facts and the projections provided to him and the rejected the Valuation Report submitted by the Appellant. In view of the above, A.O. determined the fair market value of the share under Rule 11UA of the Income Tax Rules by reducing the liabilities from the assets and computed the same to be Rs. 208 (198+10) by using the formula prescribed for valuation of unquoted equity shares. She worked out Rs. 33,26,40,000 as excess....
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....create right in assets/funds of the company whereas valuation of 'preference shares' depends on the terms of issue of the said shares by the issuing company. That one cannot judge the actual value of equity shares from its face value. That for instance, an equity share of face value of Rs. 10 can even fetch Rs. 1000 on winding up of a company, if sufficient funds are left for the equity share holders. That however, preference shares being quasi debt instruments, the holders do not have such rights. Preference share holders can at the most receive face value of the preference shares and premium (which is decided at the time of issue of shares) on redemption or winding up. That for instance, a preference share of face value of Rs. 100 redeemable at a premium of 20% at the time of redemption will fetch Rs. 120 irrespective of the value of the assets of the company. That therefore, valuation of equity shares is different from valuation of preference shares. That the valuation of quasi debt instruments is entirely made on the basis of the returns receivable by the investors on such instruments. That at the cost of repetition it has to be mentioned that while the equity share hol....
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....ice which it would fetch if sold in the open market on the valuation date. The assessee can obtain a report from a merchant banker or an accountant for the valuation. Therefore, the section 56(2)(viib) r.w. Rule 11UA does not provide a specific method and it is left to the assessee to obtain a valuation report from a merchant banker or a chartered accountant. Therefore, it is held that the Dividend discount method used by the Chartered Accountant for valuation of preference shares is not an infringement of the section 56(2)(viib) r.w.Rules 11UA and the AO's finding in this report is erroneous. 3.13 Another issue is whether the AO has jurisdiction to get his own report on valuation of shares or replace the method adopted by the appellant under the provisions of section 56(2)(viib). It is observed that in the instant case, the assessee company had exercised an option to value the share by Dividend Discount Method, however the AO worked out the value based on NAV Method. It has to be noted here that the option of getting one of the NAV or DCF method given to the assessee is only for Unquoted equity shares by Rule 11UA(2), which is not applicable to preference shares. From the fa....
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....of Equity shares' and gave the deficiencies of valuation Report As already mentioned, method of valuation of 'equity shares' and that of valuation of 'preference shares' are different The ICAI also gives guidelines separately." 12. Referring to the ICAI guidelines for valuation of preference shares be held as under :- As can be seen, the guidelines for valuation preference shares are different from the guidelines for valuation of equity shares. The mistakes/short comings/problems mentioned by the A.O. on the Valuation Report are not correct as are made considering the 'ICAI Guidelines for valuation of Equity Shares'. Therefore, it is held that the Valuation Report of the Preference Shares is as per the guidelines given by the ICAI and based on the terms of issue of preference shares. The risk factor, past history of issue of dividend on equity shares, past performance of the company is relevant for valuation of equity shares but not relevant for valuation of preference shares, as preference shares are quasi debt instruments and the dividend and premium on redemption is pre decided by the Board of the company while issuing the preference shares. The va....
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....argeable to income-tax for the previous year in which such failure has taken place and, it shall also be deemed that the company has under-reported the income in consequence of the misreporting referred to in sub-section (8) and sub-section (9) of section 270A for the said previous year. Explanation. -For the purposes of this clause,- (a) the fair market value of the shares shall be the value- (i) as may be determined in accordance with such method as may be prescribed; or (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher; Following clauses (aa) and (ab) shall be inserted after clause (a) of Explanation to clause (viib) of sub-section (2) of section 56 by the Act No. 23 of 2019, w.e.f. 1.4.2020 : (aa) "specified fund" means a fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which has been granted....
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....he balance-sheet as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset; L = book value of liabilities shown in the balance-sheet, but not including the following amounts, namely:- (i) the paid-up capital in respect of equity shares; (ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company; (iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation; (iv) any amount representing provision for taxation, other than amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto; (v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities; (vi) any amount representing contingent liabilities other than arrears of dividends pay....
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....er than ascertained liabilities; (vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares; PE = total amount of paid up equity share capital as shown in the balance-sheet; PV = the paid up value of such equity shares; or (b) the fair market value of the unquoted equity shares determined by a merchant banker [***] as per the Discounted Free Cash Flow method.]" 15. We note that the assessee has issued Preference shares which fall under the category of unquoted shares and securities in (c) above. This has been issued at a premium of Rs. 990/-. The assessee had obtained valuation report from a Chartered Accountant who valued the same on the basis of dividend discounting model. The Assessing Officer was not satisfied. He applied net asset value and accordingly made disallowance. 16. First aspect noted in this regard is that the Assessing Officer in preface on this addition has held that equity shares and preference shares are almost the same. This we note in on the cusp of lack of proper understanding on the part of the Assessing Officer. By no stretch of imagination equity shares and preference shar....
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....that assessee may obtain valuation report from merchant banker or accountant. In this case the assessee has obtained valuation report of the accountant. To this extent, valuation adopted by the assessee cannot be said to be not in accordance with law. 18. Now we deal with the shortcoming observed by the Assessing Officer in the valuation method adopted by the assessee. We note that there is reference by the Assessing Officer for non-acceptability of dividend discount method adopted in Accountant's report. For this we note that as rightly pointed out by learned CIT(A) the Assessing Officer is not an expert. He can substitute the report obtained from an expert for cogent reasoning. The Assessing Officer has sought to take support from the Technical Guide of ICAI for the proposition that dividend discount model is not used in most practical situation as dividend may not reflect the true profitability of a business and payment is a management decision. That it suffers from a number of the issues like forecasting of dividend pay outs etc. We find that this reference by the Assessing Officer to this technical guide is itself misplaced as it runs contrary to the mandate provided under Ru....
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....the assessee company, which was the only major asset in the books of VDPL, stands cancelled and the liabilities of VDPL stand intact. AO held that the value of Goodwill as an asset had arisen only because of the reason that the investments in the books of VDPL were valued at a value more than the FMV as mentioned in ground number 1 above. Had the shares been transferred at fair/market value, there would not be any question of goodwill arising as a balancing figure upon merger. That it is mentioned in the High Court order that it had accounted for the amalgamation in its books in accordance with the purchase method of accounting as prescribed by the AS- 14. That under the purchase method, two alternatives suggested in AS-14 are incorporating the assets and liabilities at the existing carrying amounts and allocating the consideration identified individual assets and liabilities at their fair re-values, however, the same were not followed in this case. 22. The A.O. asked the assessee to explain why the depreciation claimed on goodwill, which had never been acquired due to the amalgamation, should not be disallowed u/s. 32(1)(ii) of the Act as the goodwill created in the books of the ....
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...." as prescribed by the AS-14 "Accounting for Amalgamation". The assessee stated that as per para 6.5 of the scheme of merger, the excess of liabilities over assets will be result into goodwill in the books of the Appellant Thus, the appellant has recorded goodwill of Rs. 9,98,05,871 on merger and claimed depreciation on goodwill at 50% of eligible 25% for the half year, i.e. Rs. 1,24,75,734 u/s. 32(1)(ii) of the Act. However, AO rejected the claim of the assessee on the ground that the company VDPL was formed only to issue shares by the assessee company at more than FMV, so that on amalgamation the investment of VDPL in the assessee company, which was the only major asset in e books of VDPL, stands cancelled and the liabilities of VDPL stand intact. Thus the A.O. held that the depreciation claimed on goodwill, has never been acquired due to the amalgamation and disallowed the claimed of depreciation on goodwill. The appellant has relied on various court's decisions in support of its contention that it is eligible for claiming depreciation on goodwill created due to merger u/s. 32(1)(ii) of the Act. It is seen that the Revenue had tiled appeal before the Hon'ble Supreme Cour....
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....hat every attempt at tax planning is illegitimate or that every transaction or arrangement which is perfectly permissible under the law, but has the effect of reducing the tax burden of the assessee must be looked upon with disfavour. Keeping in view the totality of facts and circumstances of the case and respectfully following the above decisions, it is held that appellant is eligible for claiming depreciation on goodwill created due to merger. Accordingly, the A.O. is directed to delete the disallowance u/s. 32(1)(ii) of the Act, made in the order. The appellant gets relief. This ground is allowed." 24. Against the above order the Revenue is in appeal before us. 25. We have heard both the parties and perused the records. We note that learned CIT(A) has decided the issue in favour of the assessee by placing reliance on the decision of the Hon'ble Supreme Court in the case of Smifs Securities Ltd.(supra). We agree with learned CIT(A) that the same is fully applicable in the present case. Hence, on this issue also we uphold the well reasoned order of learned CIT(A). 26. Apropos issue of addition under section 56(2)(viia) of the I.T. Act : During the course of assessment pro....
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....e, the consideration of Rs. 10,000 was more than the book value of the shares could not be accepted as the book value of shares of Impetus, had the underlying book value of the shares of VDPL. Further, since the balance sheet of the Impetus on valuation date was not available and as the last audited balance sheet of Impetus for year ending 31.03.2014, did not reflect the net worth of VDPL, after acquiring the shares of the assessee company, therefore, AO held that the aggregate fair market value needed to be calculated based on the book value of the assets and liabilities of Impetus as on 31.03.2014 and the book value of the assets and liabilities of VDPL as on 31.10.2014. In view of the above, A.O. calculated the aggregate FMV of the 19,160 shares of Impetus and 11,560 shares of VDPL as acquired by the assessee were Rs. (41,94,89,280+NIL)=41,94,89,280. Since, the assessee had paid a consideration of Rs. 10,000 for acquiring the shares of Impetus and in turn acquiring the shares of VDPL, therefore the aggregate FMV exceeding the consideration i.e. Rs. 41,94,79,280/- (Rs. 41,94,89,280-10,000) was added u/s. 56(2)(viia) of the Act. 28. Upon assessee's appeal learned CIT(A) held that....
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....valuation of shares, which appears to be in order. Be that as it may, the subclause (b) of 11UA(1)(c) that is applicable from 29.11.2012 to 31.03.2017 is as under: "(b) the fair market value of unquoted equity shares shall be the value, on the valuation date of such unquoted equity shares as determined in the following manner, namely:- the fair market value of unquoted equity shares = (A-L) X (PV) (PE) Where, A = book value of the assets in the balance-sheet as reduced by any amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Incomes-tax Act and any amount shown in the balance-sheet as asset including the unamortised amount of deterred expenditure which does not represent the value of any asset; L = book value of liabilities shown in the balance-sheet, but not including the following amounts, namely:- (i) the paid-up capital in respect of equity shares; (ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company; (iii) reserve....
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....s per method given in Rule 11UA(1)(b) for unquoted equity shares, which is already discussed above. 5.6 In view of the above, the argument of the AO that the assets and liabilities of VDPL have to be included in valuation of shares of Impetus appears to be against the formula given in the procedure laid down for determination of FMV applicable for the year 2015-16, and the method applicable for AY 2018-19 cannot be applied retrospectively. Therefore, the AO is directed to delete the addition made. Assessee gets relief. This ground of appeal is allowed." 29. Against the above order Revenue is in appeal before us. 30. We have heard both the parties and perused the records. Learned Counsel of the assessee pointed that application of valuation method adopted by the Assessing Officer is not applicable for A.Y. 2015-16 and the said method is applicable only from A.Y. 2018-19. That learned CIT(A) has rightly held that it cannot be applied retrospectively. We note that the Assessing Officer has invoked the provisions of section 56(2)(viia) of the Act. The same read as under : [(viia) where a firm or a company not being a company in which the public are substantially interested, recei....
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.... that the assessee company claimed exempt income in the form of dividend income of Rs. 4,61,97,831. Further, in the balance sheet, the assessee had shown investment to the tune of Rs. 76,09,47,445 which yield/may yield exempt income, not forming part of the total income. Therefore, A.O. concluded that assessee had not worked out the disallowance to earn the exempt income as per the provisions of section 14A r.w.r. 8D. Following the decision of the Hon'ble ITAT, Special Bench, Mumbai in the case of Daga Capital Management Pvt. Ltd. and the Hon'ble Bombay High Court in the case of Godrej Boyce Manufacturing Co. Pvt., A.O. worked out the disallowance as per section 14A r.w.r. 8D of Rs. 40,03,820/-. 32. Upon assessee's appeal as regard disallowance as per Rule 8D(2)(ii) learned CIT(A) gave a finding that the assessee has sufficient interest free funds. By referring to Hon'ble Bombay High Court decision in Reliance Utilities & Power Ltd. 313 ITR 340 & HDFC Bank Ltd. Vs. DCIT (383 ITR 529). He deleted the addition 33. As regard of Rule 8D(2)(iii) he held as under :- "Appellant also filed a copy of the order of the ITAT Mumbai in its own case for AY 2011-12 in ITA No.368/M....