TaxTMI 
TaxTMI 
2022 (11) TMI 610
X X X X Extracts X X X X
X X X X Extracts X X X X
....tive meant for and has been diverted for non specified purpose. Therefore, the Assessing Officer had correctly brought to tax the amount brought in the books of assessee in the form of share premium under the head "income from other sources" as per the provisions of section 56(2)(vii)(b) of the I.T. Act. 3. The Ld. CIT(A) erred in holding that M/s. Grande LLP has a net asset value of Rs. 168.31 Crores as on 31.03.2014 and the net asset value of M/s. Grande LLP would assume the character of intrinsic value of shares of Assessee Company. 3.1 The Ld. CIT failed to the appreciate; the fact that though the assessee company is having 99.97% shareholding in M/s. Grande LLP, the entire amount of Rs. 168.63 Crores from the revaluation reserve had already been withdrawn by the partners i.e. Shri Harbinder Singh, Gurbinder Singh and Harinder Singh of M/s. Grande LLP, who held 0.01% of the share in the firm as on 31.03.2015. 4. The Ld. CIT erred in accepting the assessee company's claim of development of land acquired and receipt of 17,43,903 sq.ft. of saleable land multiplied by Rs. 5000/- per sq.ft. to arrive consideration of Rs. 872 crores. 4.1 The Ld....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eceived share premium of Rs. 1,68,60,00,000/- during the financial year relevant to assessment year 2015-16. The assessee company is one of the partners of M/s. Grande City Development Co. LLP, a limited liability partnership firm and holds 99.97% capital in LLP. M/s. Grande City Development Co. LLP is having three partners Mr. Gurubinder Pal Singh, Mr. Harinder Singh and Mr. Haribinder Singh. The assessee company is having 99.97% of capital in partnership firm and other three partners are having 0.01% of share capital in partnership firm as on 31.03.2015. During the financial year relevant to assessment year 2015-16, the assessee company has made capital contribution of Rs. 1,68,13,22,096/- in M/s. Grande City Development Co. LLP and said capital contribution has been made out of proceeds received from allotment of equity shares to M/s. Estra Enterprises P. Ltd and M/s. Sakh Holding Co. LLP. 4. The case was selected for scrutiny and during the course of assessment proceedings, the Assessing Officer noticed that the assessee company has received huge share premium to the tune of Rs. 168 crores for allotment of equity shares to two group companies and thus, called upon the assess....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lands are marsh lands not suitable for development activity. Under these circumstances, it is difficult to accept cash flow projected by the assessee based on cash flow of partnership firm and thus opined that valuation arrived at by the assessee cannot be true and correct position of the assessee and therefore, rejected DCF method followed by the assessee and has adopted Net Asset Value method as prescribed under Rule 11UA of the I.T. Rules, 1962, and determined fair market value of shares as on 31.03.2015 as at Rs. -441 as against fair market value determined by the assessee under DCF method at Rs. 1676/- per share. The Assessing Officer finally rejected arguments of the assessee and had made additions towards share premium received by the assessee for allotment of equity shares at Rs. 1,67,60,00,000/- u/s. 56(2)(viib) of the Income Tax Act, 1961. 6. Being aggrieved by the assessment order, the assessee preferred an appeal before the learned CIT(A). Before the learned CIT(A), the assessee justified allotment of shares with premium of Rs. 1676/- per share along with valuation report issued by the independent valuer and submitted that once the assessee follows a particular metho....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ship firm which is involved in the business of real estate development. The partnership firm had also entered into MoU with builder for development of land and if said development activity happens, the assessee would receive 17,45,903 sq.ft of saleable residential space. The saleable space is having prevailing market value rate of Rs. 5,000/- per sq.ft. If you consider possible saleable area comes to the share of the assessee with prevailing market rate, the assessee would get total consideration of Rs. 872 crores from the project. If you consider share of the assessee, then the assessee may get about Rs. 207.66 crores, which is much higher than share premium received by the assessee company. Therefore, opined that the assessee has justified allotment of equity shares with premium and thus, question of making additions towards share premium u/s. 56(2)(viib) of the Act does not arise and accordingly, deleted additions made by the Assessing Officer. The relevant findings of the learned CIT(A) are as under:- "11. The contents of the assessment as well as the submissions of the assessee are considered. The assessee company has owned 99.82% of shares in M/s. Grande LLP. TO this....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... sole ground for rejecting the DCF method adopted by the assessee. As per the valuation submitted, the assessee company has had certain fundamental strength of asset value in its subsidiary company. Even though these strengths have not been fully realised, the net asset value of the subsidiary company is itself available and evident at Rs. 168 crores as on 31.3.2014. To this extent, it appears that the valuation arrived at by the assessee adopting DCF method cannot be said as being farfetched or fictitious one. The DCF valuation given by the assessee can also not be completely rejected as imaginary or superfluous one. In view of the combined reasons as above, I am of the considered opinion that the assessee company has sufficiently and reasonably justified the share premium received of 168.60 crores for the year. Addition of share premium amount u/s. 56(2) is not called for. The grounds of appeal of the assessee are accepted." 8. The learned DR submitted that the learned CIT(A) erred in deleting additions made by the Assessing Officer towards share premium u/s. 56(2)(viib) of the Act, without appreciating fact that share premium received by the assessee has not been utilized for....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... which means the assessee is eligible for 99.97% free cash flow of partnership firm. If you consider possible revenue generation from partnership firm and free cash flows along with percentage of capital held by the assessee in the partnership firm, then the assessee would get more than Rs. 200 to 250 crores from the project. If you consider above cash flows, for the purpose of valuation of shares, the assessee has considered real cash flow from the operations which is according to the industries standard. Therefore, the learned A.R. submitted that the learned CIT(A), after considering relevant facts has rightly deleted additions made by the Assessing Officer and their orders should be upheld. 10. We have heard both the parties, perused material available on record and gone through orders of the authorities below. The factual matrix of the impugned dispute are that during the financial year relevant to the assessment year 2015-16, the assessee company has received share premium of Rs. 168.60 crores from allotment of equity shares to two group companies. The assessee has allotted 10 lakhs equity shares of Rs. 10/- face value with premium of Rs. 1676/- per equity share and has col....
X X X X Extracts X X X X
X X X X Extracts X X X X
....at Rs. 1676/- per equity share. According to the assessee, value arrived at by DCF method is correct value of shares as on the date of issue, because even if it is considered on net asset value method, the value for equity shares works out to Rs. 168,60,00,000/-, if stock in trade held by the assessee is valued at market value or value as per stamp duty purposes. Therefore, it is incorrect on the part of the Assessing Officer to come to the conclusion that value arrived at by the assessee under DCF method is not showing correct value of shares as on the date of issue of shares. 12. The provisions of section 56(2)(viib) of the Act, deals with issue of shares at premium. As per said provisions, if a company issues share at premium and fair market value of shares as on the date of issue is less than the issue price, then difference may be treated as income to be taxed under section 56(2)(viib) of the Act. As per Explanation provided to section 56(2)(viib) of the Act, fair market value of shares has been defined, as per which value of shares shall be valued as may be determined in accordance with such method as may be prescribed or as may be substantiated by the company to the satis....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssessing Officer cannot brush aside DCF method for simple reason that assessee does not carry any tangible or intangibles in its business. Further, once assessee chooses a particular method and said method is approved method for valuation of shares, then Assessing Officer cannot change the method adopted by the assessee for valuing market value of shares from discounted cash flow method to net asset value method, because the statue does not permit the Assessing Officer to choose a method other than the method selected by the assessee. If at all the Assessing Officer was not satisfied with the value arrived at by the assessee, then he can very well examine valuation of shares and in case any difference in value of shares, he can rework the share price for the purpose of valuation, but at no time, he can adopt different method from the method adopted by the assessee for valuation of shares. In this case, on perusal of facts, we find that assessee has adopted DCF method, which is one of the prescribed method under Rule 11UA. No doubt, there may be a difference in projections considered by the assessee for valuation of shares when compared to actual financial for relevant financial yea....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... followed by the assessee for valuation of shares. But, the Assessing Officer has questioned method followed by the assessee and relevant ratios considered in light of industrial standards to arrive at different valuation for rejection of DCF method followed by the assessee. In our considered view, the Assessing Officer has completely erred in rejecting DCF method followed by the assessee, because DCF method is one of the permissible method for valuation of shares. Further, DCF method of valuation or any other method of valuation by experts can be done only on the basis of information available on the date of valuation and also future business prospects of the company and its cash flows. In this case, independent valuer has considered future cash flows of the assessee, which is once again based on capital contribution held by the assessee in partnership firm, where the partnership firm is in the business of land aggregation and development of housing projects. Further, from the details filed by the assessee what we could noticed is that M/s. Grande City Development Co. LLP, partnership firm, owns about 50 acres of land in prime location of Chennai, where lot of IT Parks and IT enab....