TaxTMI 
TaxTMI 
TaxTMI 
2022 (6) TMI 291
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....dice to ground (i) and (ii), on the facts and circumstance of the case and in law, the Ld. CIT(A) erred in holding that valuation of the shares is at fair market value when the discrepancies have been pointed out in the valuation reports submitted by the assessee-company." 4. "The appellant prays that the order of the Ld.CIT(A) on the above grounds be set aside and that of the Assessing officer be restored." 5. "The applicant craves leave to add, amend or alter any grounds or add new ground, which may be necessary." 3. We shall deal the issues ground wise raised by the revenue. 4. Brief facts relating to Ground No. 1 raised by the revenue are, during the assessment proceedings, Assessing Officer observed that assessee had issued 6% non-cumulative preference shares at issue price of Rs..1000/- per share which includes premium of Rs..900/- per share. The above said shares were issued to M/s. Ranon Infrastructure Pvt. Ltd., on 01.04.2015 which was plain conversion of unquoted Optionally Fully Convertible Debentures (OFCDs). The OFCDs were issued by the assessee in the earlier assessment years as under: - Date of allotment of OFCDs No. of OFCDs issued Issue price [Rs 1000 pe....
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.... of the company at that point in time and without discounting the Net Present Value (NPV) of the future profit, which is the basic norm of valuation. The appellant had negative net worth of Rs 1,75,51,942/- before the conversion of OFCD into preference shares. h) On a without prejudice basis, the learned AO stated that if the contention of the Revenue is not accepted by the appellate Authorities and valuation report of the Architect is considered, then the fair market value should be determined in the manner stated in para 4.1.11 of the assessment order." 6. Aggrieved assessee preferred an appeal before the Ld.CIT(A) and filed detailed submissions before him, for the sake of clarity it is reproduced below: - "2.01) ..... 2.06) At the outset, it is submitted that the years of receipt of the consideration being AY 2010-11 and AY 2011-12 were both under scrutiny assessment u/s 143(3) in the case of the appellant. Copy of the assessment orders passed u/s 143(3) for the said years is enclosed herewith at pages 108 to 112 of the pb for your kind perusal. 2.07) Further AY 2013-14 was also under scrutiny assessment u/s 143(3), wherein the learned AO has mentioned the details of th....
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....tock or deposit certificates in any form, of a company into shares or debentures of that company." [Emphasis supplied] 2.15) Your Honour's further attention is invited to the provisions of section 49(2A) which reads as under: "Where the capital asset, being a share or debenture of a company, became the property of the assessee in consideration of a transfer referred to in clause (x) or clause (xa) of section 47, the cost of acquisition of the asset to the assessee shall be deemed to be that part of the cost of debenture, debenture-stock, bond or deposit certificate in relation to which such asset is acquired by the assessee." [Emphasis supplied] 2.16) Thus your honour will appreciate that conversion of debentures into shares is not considered as taxable transfer and the cost of OCRPS relates back to the cost of OFCDs. Accordingly it is submitted that the said conversion should not attract the provisions of section 56(2)(viib). 2.17) In this regard it is pertinent to refer to para 4.1.3 of the order passed u/s 143(3), wherein the learned AO has relied on the decision of the jurisdictional Mumbai ITAT in the case of Sudhir Menon HUF vs ACIT (2014) 45 Taxmann.com 176. The ....
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....., considered from the holders' point of view ......: e) In the decision, the Hon'ble ITAT then held at para 4.3 that "..As long as, therefore, there is no disproportionate allotment, i.e., shares are allotted pro rata to the shareholders, based on their existing holdings, there is no scope for any property being received by them on the said allotment of shares; there being only an apportionment of the value of their existing holding over a larger number of shares. There is, accordingly, no question of section 56(2)(vii)(c), though per sé applicable to the transaction, i.e., of this genre, getting attracted in such a case. ..." [Emphasis supplied] f) In the decision, the Hon'ble ITAT then held at para 4.5 that "...... A transaction could be either with or without consideration. Consideration signifies a price, so that it is a case of transfer, which the impugned transaction is not, while if considered as without consideration, the transaction is void in law, being not gift in-as-much as the company is not the owner of its shares. The argument seeks to support the contention that the transaction in order to qualify as valid in law has to be e case of tra....
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....at 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-....... 2.21) Thus it can be noticed that the said clause is applicable on receipt of consideration for issue of shares. Accordingly it is submitted that if it is stated that the provisions of section 56(2)(viilb) is applicable to the facts of the case of the appellant, then it will be applicable only in the year in which the consideration is received. Your honour will note that similar language is also used in other clauses of section 56(2) such as clause (v), (vi), (vii), (viia) which are also on taxability of similar receipts 2.22) Further it also pertinent to refer to Explanation (a) to section 56(2)(viib) which refers to Rule 11U and Rule 11UA for determining the fair market value of shares. These rules are the computational machinery of the charging section 56(2)(viib). On perusal of Rule 11UA(1)(c)(b), 11UA(1)(c)(c) and 11UA(2) which are relevant to the appellant; all states that the fair market value should be determined as on the ....
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....e provided an opportunity to substantiate its claim regarding the fair market value of shares" 2.26) After having discussed that the provisions of section 56(2)(viib) is attracted only in the year in of receipt, it is important to ascertain whether the provisions of séction 56(2)(viib) was in the statue books in the year of receipt. 2.27) As submitted above, the entire receipts were received till AY 2012-13 i.e in the year in which OFCDs are issued. Your honour will note that section 56(2)(viib) is incorporated wef 1.4.2013 i.e from AY 2013-14 and onwards. Thus it must be appreciated that the impugned section 56(2)(viib) is not applicable to the appellant and thus no additions can be made under the said section. 2 28) Rule 11U(j) being the rule which defines the 'valuation date" is applicable wef 29-11-2012. Thus it must be noted that since the entire consideration is received prior to the date of determining the "valuation date" for the purposes of section 56(2)(viib), therefore the valuation rules envisaged in Explanation to the said section would not apply to the facts of the case of the assessee. Accordingly the computational machinery also fails and to this effect....
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.... AO can apply the provisions in the year of receipt. For these reasons the said provision is evidently not workable on the peculiar facts of the case of the appellant. In the case of CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC), it was held that unless. the machinery section is found workable, the substantive provision of the law even can't be applied. 2.35) Thus the entire addition made by the learned AO is bad-in-law and must be deleted." 7. After considering the submissions and additional evidences filed by the assessee, Ld.CIT(A) decided the issue in favour of the assessee by observing as under - "5.13 I have carefully perused the detailed written submissions of the AR on this issue. I find force in the AR's argument and therefore inclined to agree with the Learned AR that the provisions of section 56(2)(viib) would be attracted in the year of receipt of consideration and not in the year of allotment of OCRPS. This is due to the following reasons which remain undisputed and not rebutted by the learned AO. a) The language used in section 56(2)(viib) is not free from ambiguity. it states "where a company, not being a company in which the public are substantially....
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....ely held company issues its shares at a price which is more than the FMV, then the amount received in excess of the FMV would be chargeable to tax in the hands of the recipient company as its income from other sources. | find from the facts of the case that the shares were indeed allotted in FY 2013-14 but the share application monies were received in the FY 2012-13 pertaining to AY 2013-14. According to my considered opinion, the connotation of the meaning 'received in any previous year' used in section 56(viib) of the Act would be in respect of the year of receipt and not the year of allotment. In the instant case as rightly pointed out by the AR based on materials on record, share application monies were received during the year under - consideration. Thus, | find that the provisions of section 56(2)(viib) aré to be construed with respect to the year in which considerations were received and not the year in which the allotment of shares were made..... 13. Keeping in view the submissions of both the sides, we find since shares were applied in AY 2012-13 as per the terms and conditions settled in AY 2012-13, the provision u/s 56(2)(viib) of the Act introduced from AY 2013....
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.... and the cost of OCRPS also relates back to the cost of OFCDs u/s 49(2A). This pre-supposes that the relevant event is the receipt of consideration of OFCDs (OR) at the most allotment of OFCDs and not allotment of OCRPS. I do not find any rebuttal of this submission of the AR as well. 7. Thus in view of the above reasoning's, I hold that learned AO has wrongly applied the provisions of section 56(2)(viib) to the facts of the case of the appellant. Accordingly the addition made by the learned AO u/s 56(2)(viib) is not made on strong footing and cannot stand the test of law and the AO is therefore directed to delete the same. Accordingly, the grounds of appeal relevant to the applicability of the provisions of section 56(2)(viib) are considered as ALLOWED." 8. At the time of hearing, Ld.DR brought to our notice the findings of the Ld.CIT(A) in Page No. 40 of the order wherein he has decided the issue in favour of the assessee by interpreting the words "receives" to mean that the section 56(2)(viib)of the Act is applicable in the year of receipt of consideration and not in the year of issuance of shares. He objected to the above interpretation of section 56(2)(viib)of the Act and h....
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....with the application for admission of the same as per Rule 46A of I.T. Rules. Ld.CIT(A) called for the remand report and also forwarded the remand report to the assessee. Assessee also submitted detailed rebuttal for the remand report, for the sake of clarity it is reproduced below: - Sr. NO. Reasoning given by the learned AO to object the admissibility of the additional evidence Our rebuttal 1. Non submission of the Valuation report of Merchant Banker' or Chartered Accountant as required by section 56(2) (viib) rw Rule 11UA during the assessment proceedings "........Assessee has been granted ample opportunity vide letter dated 08.02.2017, 28.07.2017 & 14.09.2017 in which it specifically mentioned that the assessee has to submit valuation report for the above mentioned transaction but assessee chose not to submit further....." [last para of the page 1 of the Remand report] (a) As regards the various letters referred to by the learned AO in terms of different opportunities accorded, we hereby submit as follows. Letter dated 08.02.2017 [Copy enclosed]: * This is notice issued u/s 142(1) which asked for basic details such as computation of income, return of income....
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....13 of the pbj The learned AO then vide order sheet of 05.10.2017 asked the appellant to justify as to why the provisions' of section 56(2)(viib) rw Rule 11UA be not attracted in the case of the appellant. In response to the said requirement, the appellant on 16.10.2017 inter-alia submitted as under. (i) Note providing justification of share premium received. The note also carried detailed submission of the appellant that the provision of s.56(2)(viib) of ITA not applicable to the facts of the case of the appellant. Briefly, the said provision was stated to be not applicable for the following brief reasons: (a) Since the present case is that of conversion of OFCDs into OCRPS (and, there is no issuance of shares for cash consideration at premium, provisions of section 56(2) per se are not applicable to facts of the case (b) That the provisions of section 56(2)(viib) v/ould apply only in the year of the receipt of the consideration and not in the year of conversion of OFCDs into OCRPS. Since the said consideration was received till AY 2012-13. section 56(2)(viib) which is incorporated wef 1.4.2013 did not have any applicability to the appellant. (c) Even if it is argued that....
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....t's submissions. All along, the appellant carried a bonafide belief that its submissions are acceptable to the learned AO. Without prejudice to the same, the requirements called for in the notices specified by the learned AO herein are of generic nature and without any specific query or issue. It would not be correct to have too much weightage of the same to be treated as grant of specific opportunity by the learned AO to the appellant to comply with the requirement of j submitting valuation report. Thus your honour will appreciate that the primary allegation of the learned AO of ample opportunity being accorded to the appellant wherein the appellant did not submit the valuation report and other details to justify the share premium is devoid of any merits. 2. Architect report submitted which is not the requirement of section 56(2) (viih): "...... as a final opportunity vide order sheet dated 03.11.2017 it was again show caused "to explain why provisions of section 56(2)(viib) rw Rule 11UA not be attracted as the premium charged..... is purely based on the valuation report of the architect for Tapovan project and not merchant Banker or accountant as prescribed under Rule 11....
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....cept appellant's primary submission that, in its facts of the case, provision of s.56(2)(viib) did not trigger and the learned AO insisted for the valuation report of CA. (c) The appellant strongly objects to the learned AO's allegation that valuation report now obtained and submitted is an after-thought and/or that it was with a view to delaying the proceeding from attaining finality. The allegations are baseless and devoid of any merits. (d) Valuation report of CA is dt 27 March 2018 which provides valuation of shares as on 24.03.2015. Kindly refer to page 73 of the submissions already made. Circumstances under which the valuation report is obtained have already been narrated above. Admittedly, valuation report is obtained post date of assessment in response to posture that the learned AO took in the assessment of the appellant. Even if it may be treated as new evidence, it is in connection with and related to issue involved in the assessment and is in furtherance of submission of the appellant that the share premium received by appellant is at fair value. Since valuation report goes to root of the controversy, it is an important evidence, which it is prayed, needs to b....
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....se of DC/7 vs M/s Ozoneland Agro Pvt Ltd. ITA No. 4854/Mum/2016 dated 02-05-2018. Thus the learned AO's reasoning to object the DCF valuation on the basis that it is not supported by actual is contrary to the legal position set out by number of IT AT rulings including jurisdictional Mumbai ITAT. (b) The appellant submits that the valuation report of CA is after collating several information, representations of the management, third party independent technical reports Approved plans, Development agreement etc as can be perused from the Valuation report. These are various parameters which need to be relied for calculation of the Value as per Rule 11UA. This is more so for applying the "Discounted Cash Method" as this method also requires estimation of the future expected earnings. (c) Further your honour will note that it is not the case of solely relying on the information provided by the appellant alone. In this regard your kind attention is provided to "The Land Valuation report" enclosed at Annexure '3' of the aforesaid valuation report is of Khandekar Architects & Surveyors which are Government Registered Valuers and not in any way related to the appellant or his d....
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....lues shares of the appellant company as on 31.03.2015 at Rs 1,007/- per share under DCF method. b) The appellant also obtained valuation report dt 05.01.2018 from Khandekar Architects & Surveyors who provides valuation of project as on 31.03.2015. Tapovan land and under construction building. The value of the project land building worked out at Rs..16,98,60,243/-. Refer pages 89 to 99 of paper book. Since the appellant company during the relevant period was predominantly involved in project Tapovan, value of its shares could be determined based on the value of project viz comprises of land and under construction building. Basis value of land and building, the value per share of the appellant company is worked out to Rs 1,074/- per share, (c)Two alternative valuation reports are submitted to show that the value of shares of the appellant is more than Rs 1,000 per share by adopting two different method of valuation. (d) It may be noted that valuation report of Khandekar is based on the valuation of Land and building. It values Land, building being the prime asset of the company which commands the value of shares. The appellant thus substantiates the value of shares on the basis of....
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....lant further submitted copy of the following documents in addition to the paper book filed with written submissions. a. Copy of assessment order passed u/s 143(3) for AY 2010-11 in the case of appellant. b. Copy of assessment order passed u/s 143(3) for AY 2011-12 in the case of appellant. c. Copy of assessment order passed u/s 143(3) for AY 2013-14 in the case of appellant. d. Copy of the assessment order passed u/s 143(3) in the case of M/s Ranon Infrastructure Pvt. Ltd (erstwhile known as Rubaina Properties Private Limited) for AY 2011-12, e. Copy of the assessment order passed u/s 143(3) in the case of M/s Ranon Infrastructure Pvt. Ltd (erstwhile known as Rubaina Properties Private Limited) for AY 2013-14 4.6. Lastly the AR of the appellant further submitted copy of the following decisions in addition to the decisions already relied on in the written submissions. a. Cinestaan Entertainment (P.) Ltd. Vs ITO [2019] 106 taxmann.com 300 (Delhi - Trib). b. ACIT vs M/s. Diach Chemicals & Pigments Pvt. Ltd. ITA No.546/Kol/2017 dated 19-06-2019." 12. We observed that after considering the remand report from the Assessing Officer as well as rebuttal from the assessee, L....