AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2025 (8) TMI 300
X X X X Extracts X X X X
X X X X Extracts X X X X
....43(2) of the Act was issued on 09.02.2022. In the course of scrutiny, the AO inter alia called for several details by issuing notice(s) u/s 142(1) of the Act. It is noted that, during the year, the assessee had purchased 5,92,41,134 shares of M/s IG3 Infra Limited (in short 'IG3') on 08.08.2020 at the rate of Rs. 12.43/- per share, viz., total consideration of Rs. 73,63,67,296/-. The assessee had also purchased 18,43,73,618 shares of M/s ETL Power Services Limited (in short 'ETL Power') at the rate of Rs. 14.30/- per share, which worked out to a total consideration of Rs. 263,65,42,737/-. Both these shares were purchased from M/s Green Grid Group Pte Ltd., Singapore (in short 'G3'). According to the AO, this transaction involving acquisition of shares from G3 qualified as an international transaction with an associated enterprise (AE) and therefore, made a reference to the Transfer Pricing Officer (TPO) u/s 92CA(2) of the Act, after obtaining necessary approvals. 3. The TPO is noted to have called for several details and the assessee is found to have furnished their reply as well as objections to the validity of the transfer pricing proceedings. The TPO vide show cause notice (SCN....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the assessee and therefore no addition was warranted u/s 56(2)(x) of the Act. Later on, the assessee furnished another valuation report dated 09.12.2022 [hereinafter referred to as 'updated valuation report'] which was prepared on the basis of audited financial statements prepared for the valuation date 08.08.2020 viz., the date of transaction. In this updated valuation report, the FMV of IG3 shares & ETL Power shares as per Rule 11UA was re-stated at Rs. 11.989/- & Rs. 13.41/- respectively. Since the actual purchase price was comparatively higher than the corrected FMV of these shares, the assessee reiterated that, no addition was permissible u/s 56(2)(x) of the Act. The AO however is noted to have rejected the submissions put forth by the assessee and his reasons, as taken note of, is summarized below:- i. The assessee had originally relied on unaudited financial statements of M/s IG3 Infra Limited for share valuation, violating Rule 11UA r.w. Rule 11U, which mandates usage of audited balance sheet for valuation; ii. On 08.08.2020, the assessee purchased IG3 shares at Rs. 12.43 per share, whereas on 07.08.2020, a third-party transaction for the same company shares occurred a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....a could have been applied by the assessee or the AO to ascertain the FMV. The assessee contended that, a third-party transaction viz., the price at which M/s Chidaatma Contractors Pvt. Ltd. purchased the shares of IG3 from M/s Vistra ITCL India Ltd. could not be adopted as FMV for the purposes of Section 56(2)(x) of the Act as the same was not in accordance with the prescribed Rule 11UA. The assessee is noted to have explained that, as long as the purchase price for a property paid by the assessee or for that matter any third person, is higher than the FMV computed as per Rule 11UA in respect of such property, no adverse inference can be legally drawn in terms of Section 56(2)(x) of the Act, even if the third person had transacted the same property at a price different/higher than the price paid by the assessee. It was additionally pointed out that, the price negotiated and paid by M/s Chidaatma Contractors Pvt. Ltd. to M/s Vistra ITCL India Ltd. was pursuant to an extra ordinary situation viz., for withdrawing pending litigation in Court and therefore, even otherwise the said price, according to the assessee, could not be said to represent FMV. 7. The assessee also filed an appli....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ements as on the date of share transfer itself. 9.79 The undersigned concurs with the appellant's argument that while Rule 11UA, read in conjunction with Rule 11U, which clearly stipulates that the valuation of shares in an unlisted company must be based on audited financial statements as on the date of the share transfer, it may not always be practically feasible to comply with this requirement at the time of the transfer. This is primarily because that the share transfer if occurs at any time in between the financial year, the same may not synchronize with the regular year end closing balance sheet date. In such cases, the audited financials for the relevant period may not yet be readily available. Consequently, relying solely on unaudited financial statements or interim reports at the time of the transfer may be necessary to conduct the valuation in the first instance. Such circumstances are not unusual, particularly in cases where the share transfer occurs at a date other than the year end closing date, and the company has not yet completed the audit process. Therefore, while the intention of the rule is to base the valuation on finalized, audited figures, the practical c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cordance with Rule 11UA(1)(c). In support, the assessee is noted to have furnished the audited financials of investee companies in support of the same, along with relevant copies of Board Resolutions, Form PAS-3 etc. The Ld. CIT(A) is noted to have called for specific comments of the AO on this aspect. The relevant questions put up by the Ld. CIT(A) and the comments given by the AO are noted to be as under:- "CIT(A): "3. With regard to the inconsistency in the valuation report pointed out at point (a) at Page No.23 of the assessment order, the appellant stated that the preference shares have been converted into equity shares before the date of drawing the audited financial statements as on 08.08.2020. The AO is requested to furnish his comments with regard to the same." AO Comments: The company M/s IG3 Infra Ltd. has converted the preference shares into equity shares of M/s IG3 Infra Ltd. and the Ld. CIT(A) has asked to verify the same. The assessee was asked to submit the proof for the conversion of preference shares into equity shares of M/s IG3 Infra Ltd. In response, the assessee submitted the required details regarding conversion of preference shares into equity shares lik....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the updated valuation report, this discrepancy would not have arisen. In light of the above, the undersigned concludes that there is no inflation in the denominator used the appellant for computing the FMV of the shares." 11. Likewise, the Ld. CIT(A) is found to have individually examined the alleged inconsistencies in the valuation of other assets & liabilities as mentioned by the AO in the impugned order and concluded that, the assessee had rightly computed the fair values of these assets & liabilities in their updated valuation report, which was in accordance with the methodology laid down in Rule 11UA(1)(c) of the Rules. 12. The next aspect examined by the Ld. CIT(A) was the AO's reliance on the third-party purchase price of Rs. 29.48/share paid by M/s Chidaatma Contractors Pvt. Ltd. for acquiring shares of IG3 from ILFS Realty Fund C/o Vistra ITCL India Ltd, to benchmark the FMV value of the assessee' acquisition of same shares, for the purposes of application of Section 56(2)(x) of the Act. It is noted that, the AO had issued notice u/s 133(6) of the Act upon ILFS Realty Fund seeking copy of the valuation report for arriving at the price of Rs. 29.48 per share, which was pr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Rs. 12.43/share paid for IG3 shares by the assessee was adequate. 13. Consequentially, the Ld. CIT(A) held that, as a cascading effect, the FMV of IG3 shares, to be adopted for valuing the FMV of ETL Power shares [which held shares of IG3], was to be Rs. 11.989/- and not Rs. 29.48/- as adopted by the AO. Resultantly, the FMV of ETL Power shares, as per Rule 11UA, stood reduced to Rs. 13.41/- per share as opposed to Rs. 53.95/- per share, as computed by the AO. The Ld. CIT(A) accordingly held that, the assessee's purchase price of ETL Power shares of Rs. 14.30/share was also adequate and higher than its FMV. The Ld. CIT(A) thus held that, since the price paid for purchase of both the shares were higher than their respective FMVs, the addition made by the AO u/s 56(2)(x) was impermissible and thus was directed to be deleted. Aggrieved by the order of Ld. CIT(A), the Revenue is now in appeal before us. 14. Assailing the action of the Ld. CIT(A), the Ld. CIT, DR appearing for the Revenue vehemently supported the order of the AO and the comments furnished by him in his remand report. According to him, the updated valuation report furnished by the assessee was post completion of the pu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....orities that, the assessee had acquired shares of two Indian companies, IG3 and ETL Power, from a foreign company G3, Singapore at price of Rs. 12.43/share and Rs. 14.30/share respectively. It is observed that, the principal dispute relates to the valuation of IG3 shares, as the underlying valuation of ETL Power shares is dependent on the FMV of IG3 shares, because the latter shares are the major asset held by ETL Power. As noted above, the assessee had furnished original valuation report in which IG3 and ETL Power shares were valued at Rs. 12.125/- & Rs. 13.67/- and later on an updated valuation report was obtained on 09.12.2022, according to which, the FMV of IG3 and ETL Power shares was Rs. 11.989/- & Rs. 13.41/- respectively. It is observed that, the original valuation report dated 06.07.2020 was based on the unaudited financials as on 31.03.2020 and therefore there is no quarrel between the parties that this particular report was not in accordance with Rule 11U read with 11UA of the Income Tax Rules, 1962. Rather the dispute between the parties relates to the updated valuation report which was obtained by the assessee on 09.12.2022. It is not in dispute that, this report was o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ompany appointed under the laws relating to companies in force; and (B) in relation to a company, not being an Indian company, the balance sheet of the company (including the notes annexed thereto and forming part of the accounts) as drawn up on the valuation date which has been audited by the auditor of the company, if any, appointed under the laws in force of the country in which the company is registered or incorporated;]] (j) "valuation date" means the date on which the property or consideration, as the case may be, is received by the assessee. Rule 11UA (1) For the purposes of section 56 of the Act, the fair market value of a property, other than immovable property, shall be determined in the following manner, namely,- (c) valuation of shares and securities,- 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 b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssessee is from a resident ; and under sub-clauses (a) to (e) at the option of the assessee, where the consideration received by the assessee is from a non-resident, in the following manner:-......"[Emphasis given by us] 16. The law is noted to stipulate that, where any property including any shares is received by any person for inadequate consideration, then the difference between the fair market value and the purchase price, is to be brought to tax by way of income from other sources u/s 56(2)(x) of the Act. It is seen that, the provisions of Section 56(2)(x) come into play only where the purchase price is lesser than the FMV and therefore, if the purchase price is equal or higher, the said provision has no implication. It is noted from Rule 11UA(1) that, the valuation methodology set out therein is to be applied for the purposes of Section 56 of the Act, and more specifically Rule 11UA(1)(c) is relevant to the present case. The valuation method set out in Rule 11UA(2) is noted to be applicable only for transactions covered by Section 56(2)(viib) viz., issuance of shares by a domestic company, which is not the issue involved in the present case, and therefore the said Rule 11UA(....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he FMV prevailing on the valuation date, which is to be computed in terms of prescribed Rule 11UA. We agree with the findings of the Ld. CIT(A) that, the date of transfer/receipt of shares may not coincide with the closing balance sheet date i.e. 31st March and it may happen on any date and therefore it is practically impossible to draw up and get the balance sheet audited immediately at the time of such transaction. Though the transaction may be negotiated/undertaken between the parties based on the unaudited results available then, but in terms of the intention of the Rule, the assessee, when called upon, is required to demonstrate the fairness of their actual consideration on the basis of valuation derived from the audited balance sheet drawn up on the date of the transaction, which understandably would be obtained at a date later to the date of transfer. Hence, according to us, even if, the assessee has obtained the valuation report at a later date, but as long as, the assessee is able to demonstrate that, the FMV has been ascertained in accordance with Rule 11UA(1)(c) on the basis of audited balance sheet drawn up on the valuation date [08.08.2020, in the present case], the sa....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... reports were not filed during original assessment proceedings or even during revision proceedings. We have gone through reasons given by the Assessing Officer for rejection of valuation report and we do not ourselves subscribe to the findings recorded by Assessing Officer, because he cannot reject valuation report merely for the reason such valuation report was not filed at the time of assessment proceedings. Further, timing of filing valuation report at the time of original assessment proceedings u/s. 143(3) or during revision proceedings u/s. 263 of the Act is not a relevant criteria to decide whether fair market value of shares issued by assessee is substantiated to the satisfaction of Assessing Officer or not. But, what is relevant is whether valuation report supports share price determined by the assessee or not. In this case, valuation report obtained by the assessee from independent Chartered Accountant supports share price. Therefore, when the assessee has substantiated share price to the satisfaction of the AO with the help of valuation report, even if, such valuation report is obtained subsequent to the date of issue of shares, it does not alter the situation. Therefore,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rd February, 2018 does not deal with the primary grievance of the petitioner. This, even after he concedes with the method of valuation namely, NAV Method or the DCF Method to determine the fair market value of shares has to be done/adopted at the Assessee's option. Nevertheless, he does not deal with the change in the method of valuation by the Assessing Officer which has resulted in the demand. There is certainly no immunity from scrutiny of the valuation report submitted by the Assessee. Therefore, the Assessing Officer is undoubtedly entitled to scrutinise the valuation report and determine a fresh valuation either by himself or by calling for a final determination from an independent valuer to confront the petitioner. However, the basis has to be the DCF Method and it is not open to him to change the method of valuation which has been opted for by the Assessee. If Mr. Mohanty is correct in his submission that a part of demand arising out of the assessment order dated 21st December, 2017 would on adoption of DCF Method will be sustained in part, the same is without working out the figures. This was an exercise which ought to have been done by the Assessing Officer and that ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....shares as an arm's length comparable to benchmark the assessee's transaction for the purposes of Section 56(2)(x) of the Act. This act of the Revenue is however found to be unjustified in as much as the same is contrary to the express provisions of law, as already discussed earlier. Section 56(2)(x) of the Act doesn't provide that, the FMV of the property received is to be valued at the price which it fetches in the open market or the arm's length price determined in terms of Section 92 of the Act or to be benchmarked against a price transacted between unrelated parties. Rather, the provisions are unambiguously clear that, the FMV is to be computed in the manner as laid down in the prescribed Rule 11UA and there is no other alternate method or valuation prescribed by the legislature. As held above, as long as the property is received for a consideration which is equal to or higher than the FMV as determined in terms of Rule 11UA, no addition can be made u/s 56(2)(x) of the Act. In the facts of the present case, the updated valuation report shows that the FMV as per Rule 11UA is Rs. 11.989/share. Indeed, another party, M/s Chidaatma Contractors P Ltd. had purchased IG3 shares at a p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ted price, which is higher than FMV as per Rule 11UA, also cannot be used for the purposes of application of Section 56(2)(x) of the Act. We thus countenance the following findings recorded by the Ld. CIT(A) rejecting the usage of the actual price paid by M/s Chidaatma Contractors P Ltd to buy IG3 shares from ILFS Realty Fund as FMV for the purposes of application of Section 56(2)(x) of the Act, in the present case. "9.96 The undersigned has carefully considered the issue in hand. Prima facie, the undersigned observes that there is no separate valuation report supporting the purchase price of Rs. 29.48 per share paid by M/s. Chidaatma Contractors Pvt. Ltd to ILFS Realty Fund (Vistra ITCL). The only valuation report available with ILFS Realty Fund (Vistra ITCL) is that of the same valuation report furnished by the appellant during the course of assessment proceedings with a value of Rs. 12.125 per share. This fact on record confirms the stand of the appellant that there is no separate valuation report available for determining the FMV of IG3 shares at Rs. 29.48 per share and the price at which ILFS Realty Fund (Vistra ITCL) sold the shares of IG3 to M/s. Chidaatma Contractors Pvt.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....llant is not justified and the AO is directed to delete the additions made u/s 56(2)(x) of the Act." 26. Now we come to the veracity of the FMV of Rs. 11.989/share ascertained in the updated valuation report in terms of Rule 11UA(1)(c). As already noted above, the major difference in the FMV determined by the AO vis-à-vis the FMV as per the updated valuation report was due to the dispute relating to the denominator in the computation of FMV. In terms of Rule 11UA, the net value of assets & liabilities, as determined in the manner prescribed therein, was to be divided by the number of paid up equity shares of the company as on the valuation date. According to AO, the assessee had wrongly included the preference shares while totaling the number of equity shares and thus the denominator in the calculation was inflated. To this, the assessee had pointed out that the preference shares had been converted into equity shares on 23.07.2020 & 07.08.2020 and therefore the base number of equity shares as on 08.08.2020 stood increased, which was verifiable from the audited financials drawn up as on the valuation date 08.08.2020 and hence, the same was rightly considered by the assessee ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....undersigned is of the view that that the adoption of the Rs. 70 crores value in the valuation report is well-founded and justified. 28. As noted by the Ld CIT(A), the AO in the remand report had acknowledged and accepted the assessee's submission that the sum of Rs 70 crores represented advance towards land and that the company didn't have ownership over the said land and therefore, the value of advance was rightly adopted by Ld CIT(A) at the book value by observing that, the impugned advance paid could be treated as 'other assets' and be therefore considered at book value, and the Ld. CIT(A) also countenanced the adoption of Rs. 70 crores as the value of advance for land, for the purposes of Rule 11UA. In our considered view, since the AO in his remand report has himself accepted the correctness of the valuation of land advance at Rs. 70 crores, we see no reason to interfere with the valuation of this particular asset. Likewise, it is noted that, though the AO had originally disputed the valuation of other land and buildings adopted by the assessee for the purposes of Rule 11UA due to non-submission of the supporting valuation reports from the registered valuers, but, later o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....der, the undersigned concludes that the updated valuation of the land and buildings is well-supported and merits consideration. Consequently, the AO's objections on this matter are found to be devoid of merits." 30. The last specie of asset in dispute was regarding the valuation of investments in unquoted shares and securities held by IG3. It is noticed that Rule 11UA(1)(c) provides for a specific mechanism to value the shares and securities which is stated to be fair market value of shares and securities as determined in the manner provided in this Rule. In our considered view therefore, the shares and securities held by the subject company [IG3] was to be valued in the like manner as provided in Rule 11UA. Consequently, the unquoted equity shares held by IG3 was to be valued in accordance with Rule 11UA(1)(c), which we have already extracted earlier. The Ld. AR pointed out that, the language used in the Rule is plain and unambiguous and, according to him, the fair market value of unquoted equity shares held by IG3, for the purposes of Rule 11UA, was to be computed as the summation of the value of assets less their liabilities, divided by the total equity capital and multiplied b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rt in the case of Commissioner of Customs (Import), Mumbai vs. Dilip Kumar and Company and Others [(2018) 9 SCC 1]. The Hon'ble Apex Court has categorically held that in taxation statutes, neither contextual nor purposive interpretation can be applied, nor can external materials be relied upon to discern intent. The statute must be interpreted based solely on its plain and clear language, with no room for intendment, presumptions, or equity. Only the explicit wording of the law should guide its application, and nothing should be added, inferred, or implied unless absolutely necessary for its operation. j) Moreover, as highlighted by the appellant, Rule 11UA(1) itself contains a specific clause prescribing that reserves and surplus-by whatever name called-even if resulting in a negative figure, should not be treated as a liability in the computation of FMV. This provision unequivocally underscores that negative values, when derived as per the prescribed computation methodology, are neither to be ignored nor substituted. This further reinforces the appellant's position that the valuation determined under Rule 11UA must be adopted as is, without deviation or reinterpretation. Th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed formula, and therefore, the view expressed by the Ld. CIT(A) is found to be plausible one. 32. The Ld. CIT, DR however insisted that, though, there was no such exclusion or adjustment provided in the Rule, but where the application of the formula yielded a negative value, the Tribunal ought to give an equitable consideration on this aspect and logically adopt the FMV of such unquoted investments at NIL. The Ld. AR, on the other hand, submitted that there is no presumption in tax laws and nothing is to be read in and nothing is to be implied in, which is not provided in the law and that one can only look at the language used. It is well settled that equitable considerations cannot be applied while dealing with a taxing statute and the words are to be taken as it stands. We have to construe the provisions of a taxing enactment according to the ordinary and natural meaning of the language used therein, particularly when, it is plain and unambiguous [literal interpretation]. While doing so, if the taxpayer is brought within its net, then he is caught or otherwise, he has to go free. In absence of any exclusion or adjustment provided in the Rule, where the resultant value is negativ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....his Tribunal in the case of Medi Assist Insurance TPA Private Limited vs. DCIT (139 taxmann.com 162). According to us, these decisions (supra) supports the Ld. CIT(A)'s view that, the negative values when derived through prescribed methods, cannot be ignored. Overall therefore, we are unable to find any infirmity in the findings of the Ld. CIT(A) concerning the valuation of unquoted investments held by IG3. 34. The Ld. AR in the alternate, pointed out that if the Revenue intended to expand or import new words into the Rule 11UA(1)(c)(b), then as a corollary, this Tribunal should also take cognizance of sub-rule (4) of Rule 11UA, which provides for a tolerance limit of 10%, for the purposes of Rule 11UA(2). Having perused the said sub-rule, we find that the Rule making authority was well aware that there may be unintended minor variations between the transacted price and the fair value due to diverse commercial reasons and therefore, it provided for a tolerance limit of 10% on the valuation price and the issue price. The Ld. AR brought to our notice that, if the Revenue's argument is upheld, and the negative value of unquoted investments is ignored, then the revised calculation of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ught to our notice that, the addition(s) made in the hands of M5 companies by way of deemed dividend u/s 2(22)(e) of the Act had been deleted by the appellate authorities including the Ld. CIT(A) and this Tribunal and therefore the foundational premise of the AO's action stood vacated. Upon enquiry by the Bench, the Ld. CIT, DR was unable to counter the same and he fairly stated that the decision of this Tribunal deleting the addition(s) made by way of deemed dividend in the hands of M5 companies had not been reversed by the Hon'ble High Court yet. We thus are in agreement with the Ld. CIT(A) that, on this score alone, the AO's action of reducing sum of Rs. 257.62 crores from the liability side alleging it to represent amount set apart for dividend was unwarranted. 37. Additionally, the Ld. AR also pointed out that, the language used in Rule 11UA shows that, the entire book value of liabilities as appearing in the balance sheet is to be reduced from computation under Rule 11UA, but it will not include 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 meetin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eeting of the company", for the purposes of Rule 11UA. In our considered view, the term "amount set apart for payment of dividend" is meant to include the liability provided by the Board of Directors in the books of the company towards payment of dividend to the shareholders, which is subject to approval at the Annual General Meeting. The loan(s) granted to other companies cannot be considered as amount set apart as dividend(s), having regard to the language used in Rule 11UA(1)(c). 38. Overall therefore, we concur with the Ld. CIT(A) that the FMV of Rs. 11.989/share computed by the assessee in the updated valuation report was justified and consistent with the manner laid down in Rule 11UA and does not warrant any interference. Accordingly, as the price of Rs. 12.43/share paid by the assessee was higher than the aforesaid FMV, we countenance the Ld. CIT(A)'s action deleting the addition made u/s 56(2)(x) of the Act in relation to the IG3 shares. 39. Coming to the valuation of ETL Power shares, it is noted that, the addition made by the AO was a consequence of the cascading effect of the valuation of IG3 shares. As noted earlier, ETL Power held shares of IG3, which had been valued....