TaxTMI 
TaxTMI 
2023 (3) TMI 553
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....umstances of the case and in law, the learned PCIT has erred in assuming jurisdiction by issuing a notice u/s. 263 of the Income Tax Act, 1961 (Act), substituting his own valuation of share premium u/r. 11U and 11UA of the Income Tax Rules, 1962, never confronted to the appellant, to allege that the aforesaid assessment order was erroneous in so far as it was prejudicial to the interest of Revenue. 3. The learned PCIT has erred in law and on facts in issuing notice and passing the order u/s. 263 of the Act on the issue of valuation of share premium received when the AO had already raised specific queries in the questionnaires, considered and verified the detailed replies including the share valuation report prepared by an expert u/r. 11U and 11UA of the Income Tax Rules, 1962 filed during the course of assessment proceedings before passing the assessment order u/s. 143 of the Act de hors the allegations in the order u/s. 263 that the AO accepted the claim without making proper and in depth enquiries. 4. The learned PCIT has erred in law and on facts in assuming jurisdiction u/s. 263 of the Act on the specious ground of 'no enquiry or verification' in terms of Explanatio....
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....(APB-3) dated 23.03.2021. It was stated therein, that as per valuer's Valuation Report, as already filed before the AO, market value per share had been arrived at at Rs. 1,087/-; and that interest had been earned on fixed deposits made for the purpose of obtaining bank guarantee against the EPCG licences availed by the assessee, since the Assessee's hotel was under construction during the Financial Year 2015-16, and the same had been set-off against the total cost of capitalization. 6. However, rejecting the Assessee's reply as not tenable, the Ld. PCIT held that the AO had failed to examine and verify the issues related to share premium received and interest earned, which issues had remained unaddressed. It was held that the Assessment Order was a cryptic and routine Order, erroneous and prejudicial to the interest of the Revenue, within the meaning of explanation 2 to section 263 of the I.T. Act. The Assessment Order was set aside, with a direction to the AO to pass a fresh Assessment Order keeping in mind the observations made by the Ld. PCIT. 7. Aggrieved, the Assessee is in appeal before us. 8. Challenging the impugned Order, the Ld. Counsel for the Assessee has....
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....e Ld. PCIT has erred in holding that the AO has failed to assess the share premium received by the Assessee, over and above Rs. 450/-, by failing to make examination in this regard. 2) Whether, as per the Assessee, the Ld. PCIT has also gone wrong in holding that the AO has failed to enquire into the matter that the Assessee had earned interest income of Rs. 9,48,784/- and had claimed TDS, but no interest income had been offered for taxation, thereby leaving the amount of Rs. 9,48,784/- un-assessed. 11. Apropos the matter of share premium, it is seen that Notice dated 13.07.2018 (APB 29-30) was issued by the AO to the Assessee, under section 143(2) of the I.T. Act, informing, inter alia, that the Assessee's Return of Income for assessment year 2016-17 had been selected for scrutiny under CASS; that an opportunity was being given to the Assessee, to produce any evidence/information felt necessary in support of the said Return of Income; and that specific Questionnaires/requisition of information or documents would be sent subsequently, if required. 12. Notice, also dated 13.07.2018, along with Questionnaire (APB 31-34) was issued to the Assessee, under section 142(1) of the....
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....the Assessee under section 142(1) of the Act, along with Questionnaire (APB 66). As per the Questionnaire, the Assessee was asked to file the complete evidence and credit worthiness of the persons who had purchased the shares of the company during the year. 17. The Assessee filed Replies dated 11.12.2018 (APB 76-77) and 13.12.2018 (APB 78-79) before the AO. In the Reply dated 11.12.2018, the Assessee furnished the details of the share application money and the shares allotted, alongwith bank statements. In the Reply dated 13.12.2018, it was stated that the details of complete address, ID proof and copy of Income Tax Returns along with Computation Chart had already been submitted vide Reply dated 11.12.2018. 18. Before us, the Assessee has filed certified copies of the aforesaid Notices and Replies, alongwith the attachments appended thereto, obtained from the A.O., on file inspection by filing ASK Application dated 12.9.2022. These copies have been filed before us by way of a Synopsis, at pages 1A to 84 thereof. At page 1A of the Synopsis is the AO's letter dated 13.09.2022, providing these certified copies to the Assessee. 19. The AO, though he made no discussion on the iss....
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....ted, receives, in the 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...' 25. Thus, as per section 56(2)(viib), the aggregate consideration received in excess of the fair market value of the shares to be issued, where the consideration received exceeds the face value of such shares, is to be charged to tax as income from other sources. 26. 'Fair market value' of the shares, for the purposes of section 56(2)(viib), is defined by Explanation (a) to the section, as the higher of the value as may be determined in accordance with the method prescribed by rules 11U and 11UA of the I.T. Rules, or the value as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value of its tangible and intangible assets as on the date of issue of shares. 27. For ready reference, explanation (a) to section 56(2)(viib) is reproduced hereunder: 'Section 56(2)(viib)... Explanation - For the purposes of this clause,- (a) the fair market value of the shares shall b....
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.... the fair market value of unquoted equity shares =(A+B+C+D-L)x (PV)/(PE), where, A= book value of all the assets (other than jewellery, artistic work, shares, securities and immovable property) in the balance-sheet as reduced by,-- (i) any amount of income-tax paid, if any, less the amount of income-tax refund claimed, if any; and (ii) any amount shown as asset including the un-amortised amount of deferred expenditure which does not represent the value of any asset; B = the price which the jewellery and artistic work would fetch if sold in the open market on the basis of the valuation report obtained from a registered valuer; C = fair market value of shares and securities as determined in the manner provided in this rule; D = the value adopted or assessed or assessable by any authority of the Government for the purpose of payment of stamp duty in respect of the immovable property; 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 ....
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....eference 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 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. 31. It is evident from the fact that....
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....urpose of assessment. As per the valuation report the fair market value of shares was arrived at Rs. 1,087. The valuation report has been attached herewith for your reference." 34. In the order under appeal, the Ld. PCIT has observed that the Assessee had stated in its Reply that the valuation report had already been supplied to the A.O. and the fair market value of each share was arrived at Rs. 1,087/- as per the Valuation Report of the valuer; that this stand of the Assessee was not acceptable; that the fair market value of the shares, as per rules 11U and 11UA of the Rules, had been computed at Rs. 450/- per share; and that the share premium received by the Assessee in excess of the rate of Rs. 450/- per share had remained from being assessed at the hands of the Assessing Officer. The Ld. PCIT, however, did not venture to elaborate as to how the determination of the fair market value of the shares, as arrived at at Rs. 1,087/- per share by the Assessee, on the basis of the DCF Method and certified by the Assessee's Chartered Accountants, was not acceptable, remaining oblivious to the statutory mandatory option made available to the Assessee by the provisions of rule 11UA(2)....
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....,40,000/- shares having face value of Rs. 10 each, at a premium of Rs. 60 per share. The Assessee had determined the fair market value of the shares on the basis of the DCF Method, in accordance with rule 11UA(2)(b) of the Rules read with section 56(2)(viib) of the Act. The Assessing Officer rejected such market valuation and determined the fair market value of the shares on the basis of the NAV Method. The AO found that the calculation of the share premium was not in accordance with rule 11UA of the Rules, and after referring to Rule 11UA(2)(b), the fair market value of the shares was computed on the basis of Book Value. The Assessing Officer held that the fair market value of the unquoted shares of the Assessee came to Rs. 32.76 only, and the Assessee was entitled to charge premium of Rs. 2.27 lakhs [Rs. 32.76 (-) Rs. 10.00 = Rs. 22.76 x 10,000 shares], against which, the Assessee had charged premium of Rs. 84 lakhs; and that thus, the excess premium of Rs. 81.72 lakhs received by the Assessee was not justified and not in accordance with the amended provisions of section 56(2)(viib). The Ld. CIT(A) partly confirmed the addition by rejecting the valuation done as per the DCF metho....
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....could not be changed by the Assessing Officer. 37.5. It was further observed by the Tribunal that coming to the aspect whether the Assessee had complied with the conditions laid down under rule 11UA(2)(b), it was clear that to comply with this rule, the Assessee was required to obtain a certificate of a Merchant Banker or a Chartered Accountant and to base the valuation on the DCF Method only; and that to exercise the option under this clause, the Assessee was not to be subjected to the fulfillment of any other condition, except these two, which the Assessee had done. 37.6. The Tribunal next observed that CBDT Instruction (File No. 173/14/2018-ITA.I) dated 6.2.2018, given in the case of startup companies, is useful in the context of determination of fair market value of unquoted equity shares under section 56(2)(viib) read with rule 11UA(2), which Instruction states that though startup companies invariably submit valuation reports in accordance with rule 11UA(2)(b), in the assessments, such reports are not being accepted and are being rejected/modified by the Assessing Officers, considering the same as based on abnormal valuations, which results in additions; and that the CBDT ha....
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....an, and the Income Tax Department or Revenue official cannot guide a businessman as to in which manner risk has to be undertaken; that such an approach of the Revenue has been judicially frowned upon by the Apex Curt on several occasions; that the Income Tax Rules provide for two valuation methodologies; that one is the assets based NAV Method, which is based on actual numbers as per the latest audited financials of the Assessee Company, whereas in the other method, that is, the DCF Method, the value is based on estimated future projection; that if the investment has been made keeping in mind the Assessee's own business objective, then such commercial wisdom cannot be questioned; that even the prescribed rule 11UA(2) does not give any power to the Assessing Officer to examine or substitute his own value in place of the value determined, nor does it require any satisfaction on the part of the Assessing Officer to tinker with such valuation; that section 56(viib) of the Income Tax Act is a deeming provision and one cannot expand the meaning or scope of any word while interpreting such a deeming provision; that if the statute provides that the valuation has to be done as per the p....
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....rts for interfering with the findings of a valuer was not satisfied in that case, as the Respondent-Assessee had adopted a recognised method of valuation and the Appellant-Revenue had been unable to show that the Assessee had adopted a demonstrably wrong approach, or that the method of valuation was made on a wholly erroneous basis, or that it had committed a mistake going to the root of the valuation process; that the Tribunal had followed the dicta laid down by the Hon'ble Supreme Court in matters relating to the commercial prudence of an assessee relating to valuation of an asset; that the law required determination of fair market value as per prescribed methodology; that the Appellant-Revenue had the option to conduct its own valuation and to determine the fair market value on the basis of either the DCF Method, or the NAV Method; that the Respondent-Assessee, being a start-up company, had adopted the DCF Method to value its shares; that this had been carried out on the basis of information and material available on the date of valuation and projection of future revenue; and that there was no dispute that the method adopted by the Assessee had been done applying a recognise....
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.... of the Ld. PCIT is in direct contravention of the provisions of Explanation (a)(i) to section 56(2)(vii) of the I.T. Act read with rule 11UA(2)(b) of the I.T. Rules. (c) The AO could not have changed the method of valuation opted by the Assessee, in view of the statutory mandate of rule 11UA(2) of the Rules. (d) The above is in keeping with the caselaws discussed hereinabove. (d) Therefore, there was no error in the Assessing Officer's Order dated 21.12.2018, calling for revision under section 263 of the I.T. Act. 46. Accordingly, the grievance of the Assessee by way of Ground Nos. 1 to 4 is found to be justified and is accepted. The impugned order is reversed qua this issue and the assessment order is revived. 47. Now, we come to the other issue, i.e., whether or not the AO inquired into the interest income earned by the Assessee, amounting to Rs. 9,48,784/- on which, TDS was claimed, whereas as per the Ld. PCIT, no interest income was offered to tax by the Assessee. In the Show Cause Notice issued u/s. 263 of the Act (APB 1-2), the Ld. PCIT in para 5, stated that; "5. From the assessment record, it is also noted that you have earned interest income of Rs. 9,46,784/....
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....ated as valid and was processed at the returned income. The Ld. PCIT, though, failed to take note of both, the notice issued under section 139(9) of the Act and the order later passed u/s. 143(1), processing the return filed at the income returned. 52. The interest on the deposits for obtaining bank guarantee, which bank guarantee had been given for import of machinery for a hotel under construction, had been reduced by the Assessee from the cost of the asset under construction. This is entirely in keeping with the view in 'CIT vs. Bokaro Steel Ltd.', (1999) 236 ITR 315 (SC) and 'Commissioner of Income Tax vs. Karnal Co-operative Sugar Mills Ltd.', (2000) 243 ITR 2 (SC). 53. In 'Bokaro Steel' (supra), the Assessee company had received rent, plant and machinery hire charges and interest on sums advanced to contractors. 54. The rent received was charged by the Assessee to its contractors for housing workers and staff employed by the contractor for the assessee's construction work, including certain amenities granted by the Assessee to the staff. 55. The hire charges were for plant and machinery given by the Assessee to its contractors for use in its co....
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....e money so deposited, it was not a case where any surplus share capital money, which was lying idle, had been deposited in the bank for the purpose of earning interest; and that the deposit of money was directly linked with the purchase of plant and machinery. It was held that hence, any income earned on such deposit is incidental to the acquisition of assets for the setting up of the plant and machinery. 59. In the present case, the Assessee's hotel was under construction. Machinery was imported by the Assessee for the purpose of such construction. While so importing machinery, Export Promotion Capital Goods (EPCG) licenses, whereunder, capital goods including spares for pre-production are allowed, at zero customs duty, were availed. Fixed deposits were required to be made for the purposes of obtaining bank guarantee against the EPCG licenses. It was on these fixed deposits, that the interest in question was received by the Assessee. Now, this trail of events clearly shows that this receipt, like the ones in 'Bokaro Steel' (supra), was connected directly with the work of construction of the Assessee's hotel. Had the fixed deposits not been made, the Assessee would....