TaxTMI 
TaxTMI 
2022 (6) TMI 291
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....in Rule 46A is applicable in the case." 3. "Without prejudice 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 ....
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.... the appellant and the said details is annexed to the order as Annexure C. g) The estimated valuation did not consider reducing the negative Net Assets Value (NAV) 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 encl....
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....lant has merely converted its OFCDs into OCRPS. 2 14) In this regard, 47(x) which is reproduced below for your kind perusal. It inter-alia gives list of non taxable transfers. "any transfer by way of conversion of bonds or] debentures, debenture-stock 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 ....
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....o question of any gift of or accretion to property; the shareholder getting only the value of his existing shares, which stands reduced to the same extent. The same has the effect of reducing the value per share, increasing its mobility and, thus, liquidity, in the sense that the shares become more accessible for transactions and thus trading, i.e., 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....
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....6(2)(vilb) can be considered as attracted in the year in which the said consideration is received or in the year in which the shares are issued. For better understanding of the same, the provisions of section 56(2)(viib) is reproduced below. "where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any - consideration for issue of shares that 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 ar....
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....mption is provided to angel investors who invest in start-up company" Supplementary Circular explaining the amendments to provisions of Finance Bill, 2012 "Company which receives any consideration for issue of shares and the consideration for issue of such shares exceed the fair market value of the share then the aggregate consideration received for such shares as exceeds the fair market value of the share shall be chargeable to tax" Notes on Clauses to Finance Bill 2012 "....Company receiving the consideration for issue of shares shall be 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....
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....r where the shares have already been allotted (and that too on the date of allotment only) when the amount of the consideration can be compared with the FMV of the shares (on the date of the allotment) for the simple reason that unless there are shares in the existence there cannot be any valuation thereof. 2.34) Moreover the FMV can also be different if the year of the receipt of consideration and the year of the allotment are different. In the case of the appellant there was receipt of the consideration till AY 2012-13 but there was no allotment in those years (which was allotted in AY. 2016-17 only). In such facts, how the learned 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 assesse....
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.... as made in the assessment proceedings. The CIT(A) considering the same held that provision u/s 56(2)(viib) is not applicable to the present AY under consideration and deleted the addition made by the AO by giving reasons as under. 4.2 "I have considered the issue with reference to the assessment order as well as the written submissions made by the AR of the appellant. | find that the moot question to be decided here is whether provisions of section 56(2)(viib) are applicable in the instant case or not. From the plain reading of section 56(2)(viib), I find that clause (viib) of sub section (2) of section 56 was inserted vide Finance Act, 2013 w.e.f 01.04.2013 i.e. from AY 2014-15 to the effect that where a closely 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....
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.... observed that the taxability of income on receipt basis is provided in section 68 as against section 56(2)(viib) which deals with issue of shares. In this regard, in view of the reasons given above, I find that the said implication made by the learned AO is merely based on presumptions and does not lay down the' clear provisions of section 56(2)(viib) and Rule 11UA. The learned AO has not brought anything on record contrary so as to rebut the submissions on this very. aspect made by the Learned AR. 6. On without prejudice basis, the allotment of OFCDs is the relevant event and not allotment of OCRPS on conversion of OFCD into OCRPS. This is because the event of conversion of debentures into shares is not considered as taxable transfer u/s 47(x) 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 th....
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....are consideration during the same assessment year. One cannot interpret the law merely on the basis of issue of shares or from receipt of consideration, it has to be issue of shares and receipt of consideration during the same assessment year. It is needless to say that issue of shares includes allotment of shares. In our considered view, Ld.CIT(A) has discussed this issue elaborately in his order and we do not find any reason to interfere with the findings of the Ld.CIT(A). Accordingly, ground raised by the revenue is dismissed. 11. With regard to Ground No. 2 and 3 relating to admissibility of additional evidences and valuation of shares at market value, the relevant facts relating to these grounds are, the assessee filed additional evidences before the Ld.CIT(A) 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 sub....
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....ncials, ledger and bank statement of the company who has subscribed the share capital. • In his response, the appellant submitted on 05.10.2017 basic details of transaction together with evidences. These included following • Copy of the letters of allotment of OFCDs which inter-alia also stated the terms of issue, • Copy of the Letters of allotment of OCRPS which inter-alia also stated the terms of issue, • Copy of the audited financials along with audit report and return of income of the subscriber • Copy of letter -dated 15.03.2011 issued by the appellant in respect of the proposed issue of OFCDs wherein the appellant had justified the said share premium by giving estimated profit expected to be earned from the said Tapovan project. The appellant estimated expected profit at Rs 29.98 crores and also provided the basis of the said calculation. [Page 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.....
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....net revenue expected to be generated pursuant to the project potential was estimated to be Rs 29.98 crores as against the share premium of Rs 25.87cr. Subsequently, another working was carried out by an independent Architect Mr Avinash Pendse dated 27-01-2015 at the time of the proposed conversion of the OFCDs into OCRPS. Here the net revenue expected to be generated pursuant to the project potential was estimated to be Rs 32.29 crores as against the share premium of Rs 25,870. These workings/valuation report were duly submitted to the learned AO on 05.10.2017 and 16.10.2017 5respectively in response to the aforesaid notices / Letter (a) In this regard it is pertinent to mention that AT NO POINT OF TIME during the course of the assessment proceedings until 03.11.2017 (when the learned AO for the first time spoke out his mind to submit valuation report of CA or Merchant banker), that the learned AO ever rebutted any of appellant'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 nat....
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....e assessment proceedings is nothing but a new evidence and not the additional evidences and does not fall within the ambit of Rule 46A of the I.T.Rule." [first para of the page 2 of the Remand report] "Since the assessee was given ample opportunity to produce the valuation report and assessee never produced the valuation report as producing now before the Ld. CIT(a) is not the additional evidence but the new document which was never produced before the AO and hence, undersigned has strong objection against the admissibility of additional evidence on this ground. [second last para of the page 2 of the Remand report] (a) At the outset as submitted above, in the facts of the case, the valuation report of CA could not be submitted earlier due to the paucity of time as time given by AO vide the order sheet noting dated 03.11.2017 was very short. (b) The appellant submits that valuation report has been submitted as an additional evidence as learned AO did not accept 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....
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.... 1 OBJECTION OF THE DCF METHOD: "... Assessee has failed to establish the amounts of revenue, expenditure, project completion, working capital by DCF method is not supported with actual figures as on date, the same cannot be accepted and the same has alleged that the same can be implied as back tracked working to arrive at the valuation of Rs 1,000/-\ per share." [first para, page 3 of the Remand report] 'a) The valuation has been done by applying DCF method. By the very nature, DCF valuation is based on estimates. It would be incorrect to judge the correctness of valuation report by comparing the estimates with actual result. What is relevant is whether estimates done by valuer is based on reasonable information and evidences. Refer paras to follow. These estimates may vary due to change in circumstances, but, that itself may not make valuation report incorrect, All these propositions are well settled in the various tribunal rulings including jurisdiction IT AT ruling in the case 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 supp....
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....valuation of Rs 1.074/-under the NAV method, the assessee has valued the Inventory (Land and Building at Rs 21,19,49,4537-) at market value as on 31.03.2015 against the book value of Rs 9.44 crores which is not in accordance with Rule 11UA... Rule 11UA requires to derive the NAV on the basis of the book value of. the assets..... [Page 3 of the Remand report] "Further, as per the Inventory Valuation specified u/s 145 of the Act, it is to be valued at cost or market value whichever is lower and hence the upward revision in valuation of inventory for the purposes of valuation of equity shares is nothing but a dishonest effort of the assesses to increase the NAV of the equity shares of the assessee company so as to bring the issue price below the issue price and avoid the provisions of section 56(2)(viib)of the Act of the Act " [Page 4 of the remand report] (a) To recollect, the appellant has obtained valuation report dt 27.03.2018 from the Chartered Accountants, M/s G.K.Choksi & Co. Refer, pages 72 to 107 of paper book. This report values 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 r....
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.... it is also held in the following decisions including the jurisdictional Mumbai IT AT that since the methods are based on estimations, therefore it cannot be compared with actual if the method of valuation is correctly applied with assumptions and as per the prescribed principles of valuation enumerated in general parlance. It is also submitted that the assumption are realistic. • Rameshwaram Strong Glass (P.) Ltd. vs [TO [2018] 96 taxmann.com 542 (Jaipur - Trib.). • DCIT vs M/s Ozoneland Agro Pvt Ltd. ITA No. 4854/Mum/2016 dated 02-05-2018 • Medplus Health Services (P) Ltd. vs ITO (2016) 68 Taxmann.com 29 (Hyd ITAT) • ACIT vs Safe Décor P Ltd. (2018) 90 Taxmann.com 161 (Jaipur ITAT) 12. Thus the aforesaid reasoning's given by the learned AO in the Remand report to object the assertions in the "Valuation report" is devoid of any merits. Accordingly, we request your honour to admit the aforesaid Valuation Report as "Additional evidence" and accept the valuation provided thereunder. 4.5. Apart from the above written submissions, the appellant further submitted copy of the following documents in addi....