TaxTMI 
TaxTMI 
2023 (3) TMI 553
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....judicial to the interest of Revenue. 2. On the facts and circumstances 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 o....
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....de any verification in this regard and amount of Rs. 9,48,784/- remained un-assessed". 5. The Assessee filed reply (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....
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....he parties and have perused the material on record. The two issues before us are: 1) Whether, as contended by the Assessee, the 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....
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.... for the purpose of valuation of equity shares under section 56 of the I.T. Act read with rules 11U and 11UA of the Income Tax Rules. 16. Again, Notice dated 22.11.2018 (APB 65) was issued to 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....
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....e following incomes shall be chargeable to income-tax under the head "Income from other Sources" namely:- (i) to (viia)....... (viib) where a company, not being a company in which the public are substantially interested, 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 o....
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....ther than immovable property, shall be determined in the following manner, namely- (a).... (b).... (c) valuation of shares and securities,- (a) ...... (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+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 o....
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.... collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act and any amount shown in the balance-sheet as asset including the un-amortised 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....
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....ercised the option made available by rule 11UA(2), and arrived at the market value of its unquoted shares on the basis of the Discounted Free Cash Flow Method, or the DCF Method, as provided in rule 11UA(2(b). In the Reply dated 23.3.2021 (APB-3) to the Show Cause Notice issued by the PCIT under section 263 of the Act, the Assessee stated that (para 1 of the Reply): "As per rules 11 and 11UA, a valuation report was obtained from a Chartered Accountant for the purpose of valuation of equity shares. The valuation report was already provided to the Assessing Officer for the purpose 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. ....
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....option; that nevertheless, the Commissioner had not dealt with the change in the method of valuation by the Assessing Officer, which change had resulted in the demand; that it was not open to the Assessing Officer to change the method of valuation which had been opted for by the Assessee; that in fact, the Assessing Officer had completely disregarded the DCF Method for arriving at the fair market value; and that therefore, the demand needed to be stayed. 37.1. In 'Rameshwaram Strong Glass (P.) Ltd. Vs. ITO', [2018] 96 taxmann.com 542 (Jaipur-Trib.), the Assessee company issued 1,40,000/- 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....
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....slative intent which has given the Assessee an option to choose any one of the two methods of valuation; that when the law has specifically provided different methods of valuation and the Assessee exercised an option by choosing a particular method, changing that method would go beyond the powers of the Revenue Authorities; that permitting the Revenue Authorities to do so would render clause (b) of rule 11UA(2) nugatory and purposeless; and that thus, to this extent, the action of the taxing Authorities was not justified. It was held that the Assessee had all the right to choose a method, which 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 Tribuna....
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.... in place of the value determined; that the Income Tax Department cannot sit in the armchair of the businessman to decide what is profitable and how business should be carried out; that commercial expediency has to be seen from the point of view of the businessman; that strategic investments and risks are undertaken for appreciation of capital and larger returns, and not simply dividend and interest; that any businessman or entrepreneur visualises the business based on certain future projections and undertakes all kinds of risks; that it is the risk factor alone, which gives a higher return to a businessman, 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 keep....
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....ounted Cash Flow Method (the DCF Method), which was appropriately followed by the Respondent-Assessee. 39.2. Dismissing the appeal filed by the Department, the Hon'ble High Court observed, inter alia, that the shares were issued based on the valuation report received from the prescribed expert, i.e., a Chartered Accountant, who used the DCF Method, which is one of the methods stipulated under section 56(2)(viib) read with rule 11UA(2)(b); that based on the valuation report of the Chartered Accountant, the Assessee issued shares to various equity partners at a premium; that the test laid down by the Courts 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....
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....01/Chd/2018, the Chandigarh Tribunal has followed 'Principal Commissioner of Income Tax Vs. Cinestaan Entertainment Pvt. Ltd.'(supra), 'Vodafone M-Pesa Ltd. Vs. Principal Commissioner of Income Tax' (supra) and 'Dada Ganpati Guar Products Pvt. Ltd. Vs. Principal Commissioner of Income Tax'(supra). 44. No decision contrary to the afore-discussed caselaws has been cited before use. 45. In view of the above discussion, we are of the considered opinion that: (a) The Assessee followed the DCF Method for valuing the shares, whereas the Ld. PCIT utilised the NAV Method to do so. (b) This action 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.....
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....e Act was issued to the Assessee to treat the return as a defective return, stating that as per Rule 37BA of the Income Tax Rules, 1962 read with section 199 of the Income Tax Act, 1961, credit of tax deducted at source shall be given in the assessment year for which such income is assessable; that as available from the return of income filed, credit of TDS had been claimed, but the corresponding receipt/income had been omitted from being offered for taxation; and that the said omission was a defect as per clause (a) to the Explanation to section 139(9) of the Act. However, later on, vide the aforesaid order dated 24.10.2016, issued u/s. 143(1) of the Act, the return filed was treated 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 keep....
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.... by the same reasoning, if the Assessee receives any amounts which are inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. It was held that these are receipts of a capital nature and cannot be taxed as income. 58. 'Bokara Steel' (supra) was applied by the Supreme Court in 'Commissioner of Income Tax Vs. Karnal Co-operative Sugar Mills Ltd.', (2000) 243 ITR 2 (SC), to hold that where the Assessee had deposited money to open a letter of credit for the purchase of machinery required for setting up its plant in terms of the Assessee's agreement with its supplier, and interest had been earned on the 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 w....