TaxTMI 
TaxTMI 
2025 (11) TMI 1603
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....(A) / NFAC erred in estimating the Fair market value of shares at 837.24 per shares instead of Rs. 1,777/- as submitted by the Appellant. 4) The CIT(A) /NFAC should have appreciated that, even under 11UA, what is being valued is the conglomeration of assets which together form a thriving running hotel business and the valuation should be based on/ estimated on the value of the business on commercial principles on what the business concern would fetch in the market and not on the basis of guideline value of a property which is not comparable. 5) The benefits accruing to association with an internationally recognized brand "HYATT" would certainly enhance the value of the business. Such benefits are real if intangible in nature and hence to be valued as has been done by the Appellant. The CIT(A) NFAC erred in completely ignoring the addition to the valuation due to the association with such an internationally recognized brand in the Hotel industry as "HYATT". 6) The CIT(A) / NFAC, in effect has concluded that the value of shares of the Hotel will not alter whether they have and association with а internationally recognized brand or operate without any ....
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....ts at Rs. 26 Crores as given by Registered valuers. Neither the AO or the CIT(A) have not given any reason as to why it did not reflect the correct market value of the running Hotel facility. 14) The AO/CIT(A) action of segregating the land portion alone and valuing the same on the basis of some sale of nearby land is not comparable and is not based on any rudimentary commercial principles. 15) The CIT(A) / NFAC should have appreciated that the valuation should be done from the angle of Investors and what would the business was worth and whether it would be a good risk to invest. 16) The CIT(A) / NFAC ought to have appreciated that in valuing assets of the business for the purpose of valuing the business, value of contribution of each asset as a constituent of the overall business value has to be considered and not what individual asset would fetch if sold in the market, because the valuation is not made as if the assets are all individually sold in the open market. Value of synergy cannot be ignored. 17) For all and other reasons, documents and evidence that may be submitted the order of the CIT(A) bet aside and delete the addition made u/s sec ....
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....in terms of Section 56(2)(viib) of the Income-tax Act (in short the Act) and added Rs. 106,65,08,947/-in the order of Assessment. 6. On appeal, learned Commissioner of Income Tax (Appeals) [CIT(A)] at Para 4.3.6 (Page 34) of his order generally accepted the valuation of the Valuer of Rs. 339.12 Crores (referred to in Page 8 of his order) in respect of all the assets except the land valuation and inclusion of Brand value at Rs. 26.00 Crores. He to adopted value of land at a rate of Rs. 12,000/- per sq.ft based on guideline values provided by the SRO, in place of the book value adopted by the AO. However, the CIT(A) concurred with the AO's decision to exclude the brand value of Rs. 26 Crores attributed to "HYATT" for enterprise valuation purposes. On this basis the CIT(A) arrived at valuation of the shares at Rs. 837.24 per share as against the value of she at Rs. 1767/- per share. The ld.CIT(A) worked out the addition, in respect 7,73,393 shares allotted to Domestic shareholders, under sec 56(2)(viib) at Rs. 72,69,89,420/-. 7. The Assessee is in further appeal before us. The issue in appeal, in effect, concerns the applicability of section 56(2)(viib) of the Act and the va....
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.... of measures to deter the generation and use of unaccounted money. To this end, I propose- * Compulsory reporting of assets held abroad. * Reopening of assessments up to 16 years in relation to assets held abroad. * Tax collection at source on cash purchase of bullion/jewellery exceeding Rs.2 lakh. * TDS on transfer of immovable property (other than agricultural land) above a prescribed threshold. * TCS on trading in coal, lignite, and iron ore. * Enhanced onus of proof on closely held companies for funds received from shareholders, and taxation of share premium in excess of fair market value. * Taxation of unexplained money, credits, investments, or expenditures at 30%, irrespective of income slab." (emphasis supplied) 9.2 From the above memo it is evident that introduction of section 56(2)(viib) has been grouped with other amendments all of which have been brought in with the main purpose to identify and curb transactions with unaccounted monies. It is evident that the provision was not meant to disturb genuine, bona fide business transactions but to curb tax abuse through unexplained money inflows. In the instant ....
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....han the FMV. The main objective behind this provision was aimed to curb unaccounted money being invested in shell companies. Later these provisions extended to include investments from non-resident investors from the F.Y.2023-24. However, the 2024 Union Budget effectively abolished the angel tax for all types of investors (i.e. resident and non-resident) by curtailing its application with effect from 01.04.2025 i.e. sunset clause was inserted. Therefore, the Section has been introduced by the Government only to curb unaccounted money/Black money and since no such presumption has been drawn in the present case, the application of Section 56(2)(viib) of the Act is unwarranted and we delete the same. 10. Genuine business transaction 10.1 It is also evident from the cash flow statement that the entire funds were utilized to pay off the ECB and term loan. It is the contention of the Assessee that since the Rupee value was depleting, servicing the foreign currency ECB will become extra expensive and it might severely affect the overall operation and growth of the Hotel. Similarly, the interest on term loans also impacted the business profits. Therefore, the existing shareholders in....
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..../or Preferential issue to the existing shareholders. However, it is an undisputed fact that these shares were offered to all the existing shareholders in the same proportion and at the same price. 11.2 The shares were offered to all existing shareholders in the same proportion/ratio and at the same price. Both the Resident shareholders, including the holding company, have subscribed to the shares. However, as far as Non-Resident shareholders are concerned only one non-resident shareholder has subscribed to the shares at the same price and other non-resident shareholders abstained from subscribing the same. In any case, there was no outsider subscribing to the rights/ preferential issue. In such a case there is no increase or decrease in the wealth of the shareholders (or of the issuing company). Shares are offered at the same price to all shareholders in proportion to their existing shareholding. Only those shareholders who rejected the offer are not allotted any shares. As the refusal is on their own volition and there is no disproportionate allotment, i.e., shares are allotted pro-rata to the shareholders, the Assessee cannot be said to have obtained higher premium for shares ....
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....ing unlisted shares at prices much below their fair market value, it is proposed to amend section 56 to also include within its ambit transactions undertaken in shares of a company (not being a company in which public are substantially interested) either for inadequate consideration or without consideration where the recipient is a firm or a company (not being a company in which public are substantially interested) ..........". 4. It is apparent from the legislative intent that clause(viia) was inserted in section 56(2) of the Act as an anti-abuse provision to prevent the practice of transferring shares of a specified company for no or inadequate consideration. Thus, the intention was never to apply these provisions of said clause (viia) to the fresh issuance of shares as mentioned in para 2 above, by the specified company. Keeping in view the legislative intent to apply anti-abuse provision contained in section 56(2)(viia) to transfer of shares for no or inadequate consideration, it is hereby clarified that section 56(2)(viia) of the Act shall apply in cases where a specified company or firm receives the shares of the specified company through transfer for no or inadequat....
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...., thereafter, withdrawn, but in our considered view, as the provisions of sec. 56(2)(vii) were introduced as an anti-abuse measure to prevent laundering of unaccounted money in the garb of gifts after abolition of Gift Tax Act, therefore, there is no justifiable reason to the said section is also introduced in the context of taxation of shares issued in excess of FMV in the same context withdrawn depart from the understanding that the said provisions were in the nature of counter evasion mechanism to prevent laundering of unaccounted money. In the case of issuance of bonus shares, allotting of shares to existing shareholders in proportion to their existing shareholding (akin to issue of right shares), there is neither any increase or decrease in the wealth of the shareholder (or of the issuing company) on account of a bonus issue and his percentage holding therein remains the same. What in effect transpires is that a share gets split (in the same proportion for all the shareholders). As observed by the Tribunal in its aforesaid order, such allotment of additional shares would be akin to changing a one thousand rupee note for two five hundreds rupee notes. Accordingly, we are of the....
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....We note that the Income Tax Appellate Tribunal in BLP Vayu (Project-1) (P.) Ltd. v. PCIT [2023] 151 taxmann.com 47 Delhi -Trib.) had an occasion to construe the ambit of that provision and had ultimately observed as follows:- "11.1. As per case records, it is an undisputed fact that the shares have been allotted at a premium to its 100% holding company. Thus, applicability of Section on 56(2)(viib) has to be seen in this perspective. The Co-ordinate Bench of Tribunal in DCIT v. Ozone India Ltd. in ITA No. 2081/Ahd/2018 order dated 13.04.2021 in the context of Section 56(2)(viib) has analyzed the deeming provisions of Section 56(2)(viib) of the Act threadbare and inter alia observed that the deeming clause requires to be given a schematic interpretation. The transaction of allotment of shares at a premium in the instant case is between holding company and it is subsidiary company and thus when seen holistically, there is no benefit derived by the assessee by issue of shares at certain premium notwithstanding that the share premium exceeds a fair market value in a given case. Instinctively, it is a transaction between the self, if so to say. The true purport of Section 56(2)....
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....Right Shares issued to Non-resident shall not be less than the price as applicable for resident shareholders. Therefore, the tax-payers are required to issue shares for a consideration which has to be necessarily be equal to or higher than the fair market value, arrived at by such approved method. Reason being, the tax-payer should not create an foreign obligation for India in favour of third country at a consideration which is below fair value of shares. Thus, to plug this loss to India, FEMA/RBI stipulate that issue price of shares should be equal to or more than fair value arrived at by approved method. Issuance of shares at a value higher was in compliance with the FEMA/RBI regulations. It is noted that, the RBI has not disputed the fair value of shares, which was supported by CA Certificate, and filed along with the Form FC-GPR through the authorized banker. Since one arm of the Government body has accepted the valuation, the other arm of the Government cannot dispute the same. 13.2 In this context we also refer to the jurisdictional Tribunal decision in the case of ACIT Vs RKM Power (P.) Ltd. [2024] 169 taxmann.com 692 (Chennai - Trib.) wherein it is held that if the RBI h....
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....e of shares computed by an approved method of valuation which will be loss to India as it will create higher foreign obligation of India in favour of third country represented by fair value of shares wherein the consideration price received for issue of shares was lower than fair value of shares, thus to plug this loss to India, FEMA/RBI stipulate that issue price of shares should be equal to or more than fair value arrived at by approved method viz. DCF. The guidelines are issued by RBI vide RBI/2009-10/445 A.P. (DIR series) Circular no. 49 dated 04-05-2010 as was applicable during the relevant period. The CA has arrived at value of Rs. 20 per equity share which consisted of face value of Rs. 10 and share premium of Rs. 10 per share using DCF method which is an approved method specified by RBI in its circular dated 04-052010. The Assessing Officer tried to demolish this fair value of Rs. 20 per equity share by basing its decision on perverse finding of facts. Thus, the assessee was on the right side of the law by issuing equity shares at a value of Rs. 20 per equity shares so far as FEMA/RBI compliances are concerned. RBI has also accepted the said fair price of shares supported b....
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.... the company to the assessee as the shares were not allotted by the company to the assessee in his capacity of being an employee of the company. The shares were offered and allotted to the assessee by the company by virtue of the assessee being a shareholder of the company. Therefore the provisions of section 17 are not applicable. Circular No.710 dated 24 July, 1995 also supports the assessee's stand that where shares are offered by company to a shareholder, who happens to be an employee of the company (as Mr. Subodh Menon indeed is), at the same price as have been offered to other shareholders or the general public, there will be no perquisite in the shareholder's hands. In the instant case, the shares were offered to the assessee and other shareholders at a uniform rate of Rs. 100 and therefore, the difference between the fair market value and issue price cannot be brought to tax as a perquisite under section 17 of the Act." 14. Accordingly, even under this premise we are of the view that the lower authorities having accepted the valuation for non-resident shareholder, ought not to have taken a different stand for resident shareholders and as such the addition u/s. 56....
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.... except the value apportioned to the land. The ld.CIT(A) replaced land value arrived by the valuer with a valuation derived from the Guideline value as reported by the SRO. The ld.CIT(A) also rejected the value of Rs. 26.00 Crores assigned to the well-known Brand HYATT which the Hotel was enjoying. The ld.CIT(A), accepted value of the other assets and liabilities as per the valuation Report and he arrived at market value of shares at Rs. 838/- per share. It was contended that both AO and ld.CIT(A) erred in rejection the value of the land adopted by the valuer as well as the value of Rs. 26.00 Crores of the 'HYATT' brand. 15.6 It is the contention of the Ld.AR that, unlike standard real estate or asset valuations, hotels require a different lens due to their operational integration of various facilities-rooms, restaurants, parking, and other infrastructure essential for smooth functioning. Importantly, the valuation of a hotel cannot be approached by simply aggregating the value of its individual components. If these assets-such as land, furniture, fixtures, or kitchen equipment-were valued independently, they would not command the same value as they do collectively as pa....
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.... apportioned value of developed land at Rs. 225.61 Crores out of the total value of Rs. 462.99 Crores for the entire tangible assets of the enterprise. 16. Valuation of Land: 16.1 The Ld.AR submitted as u/s. 56(2)(viib) of the Act contemplates determination of FMV and it does not state that guideline value could be employed. Hence, consideration/adoption of guideline value for the purpose of the land is incorrect and cannot be sustained in law. Further, in Valuing the market value of Land, some of the important factors to be considered are level of Development, Scale, and Commercial Utility. These are not taken into account in the determination of guideline value. Guideline value only fixes the value of bare undeveloped land and hence cannot be taken as representing the true market value of a well-developed land, which is part and parcel of part of a running 5 Star Hotel. 16.2 The Assessee owns land admeasuring 35 grounds (approximately 85,000 sq. ft), the entirety of which is operationally necessary for a running hotel enterprise. The Assessee has adopted a value of Rs. 255 Crores for the land, which works out to Rs. 30,000/- per Sq.ft, based on a registered valuer's ....
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....o Chennai Metropolitan Development Authority * A portion of the land gifted to the Chennai Corporation for development of the Hotel * Landscaping and beautification consistent with 4- or 5-star hotel standards * Drainage, access roads, foundation reinforcements, and utility provisioning These expenditures are capital in nature and add significantly to the functional and commercial value of the land parcel. They cannot be ignored simply because they are not visible in guideline valuations, which do not account for land development investments. 4. Valuation by Registered Valuer Based on Market Evidence: The assessee's value of Rs. 255 Crores was not arbitrarily adopted. It was derived by a registered valuer, considering: * Prevailing market rates for large commercial plots in similar zones (Rs.5 crores per ground) * Additional value contribution from on-site development * Comparable sales data where available Importantly, the valuer applied professional judgment, taking into account the realizable market value of the land in its current, commercially enhanced form. 5. Guideline Value is Not Absolute: It is well ....
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....e value cannot be fully captured by Explanation(i) but has to be valued as a business as a whole with assets recognised in the Books as well other commercial rights not reflected in the Books. 16.10 As pointed out above, market value asset forming part of a running concern cannot be valued individually as the asset cannot be sold individually but should be valued as an integral part of the enterprise and proportionate market value of the enterprise should be allocated to individual asset which form integral and indivisible part of the enterprise. 16.11 In the circumstances, rejection of the value of land estimated by the valuer by AO and ld.CIT(A), rejecting the method of valuation by the Assessee as per Explanation (ii) to sec 56(2)(viib) by an approved valuer and blindly without applying their mind adopting a different method of valuation under Explanation(i) to sec 56(2)(viib) cannot be upheld. 16.12 The ld.CIT(A) has held that the valuation of Mr R.Balajirangarajan, CA was prepared for non-resident's and it was prepared on the basis information provided by management of the company and it is not made on the basis of field enquiry. We find that the ld.CIT(A) has contrad....
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....axmann.com 303 (Delhi) dated 04.04.2024 held that while it would be open for Assessing Officer, for reasons so recorded, to doubt or reject a valuation that may be submitted for its consideration, statute clearly did not appear to empower it to independently evaluate face value of unquoted equity shares by adopting a valuation method other than one chosen by assessee. 16.17 The Delhi Tribunal in Cinestaan Entertainment (P.) Ltd. v. ITO [2019] 106 taxmann.com 300 (Delhi - Trib.) dated 27.05.2019 held Assessee has an option to do valuation of shares and determine fair market value either on DCF Method or NAV method and Assessing Officer cannot examine or substitute his own value in place of value determined. Income Tax Department cannot sit in armchair of businessman to decide what is profitable and how business should be carried out; Commercial expediency has to be seen from point of view of businessman. 16.18 The same was upheld by the Hon'ble High Court of Delhi in the case of Pr. CIT v. Cinestaan Entertainment (P.) Ltd. [2021] 433 ITR 82 dated 01.03.2021 and the Court also held as under: "The test laid down by the Courts for interfering with the findings of a v....
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.... helped the Assessee to augment the projected revenue. Therefore, the AO allegation is baseless and unsustainable. However, this misunderstands the principle of valuation: "Valuation is based on reasonable projections made at a point in time, using best available data. Actual outcomes differing from projections do not, by themselves, invalidate the original estimate." 17.4 It is not the Department's case that the brand lacks market appeal or fails to add value in terms of revenue generation. The only objection is that the actual performance didn't match projections, which is not a valid basis to disregard the value of an asset-especially an intangible like a brand. We are of the view that projections cannot be expected to be in line with actuals as projection is only an estimate based on positive prospects in the future. 17.5 The Ld.AR submitted that another way to cross-check the value of a Brand will be by way of present value of multiple of Turnover. Any Third Party purchaser will have to pay Royalty for the use of the Brand Name which will be computed as a percentage of the Turnover. An accepted method of computing the present value of the brand will be t....
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....the Assessee's Hotel, (Assessee's valuation at Page 34 of CIT(A) order) the value per room will be 339.12 / 201 = 1.68 Crores which is comparable with Industrial average and supports the valuation of the shares by the Assessee. 17.9 We also find that the Assessee has provided a data before the CIT(A) proving that the actual average occupancy for 3 years FY 2014-15 to 2016-17 was 74.3% which was much more than the projected occupancy of 72% estimated in the valuation report. This factual aspect clearly shows that the Hotel has out-performed the estimate in valuation report. The other contention of the AO is that the Assessee has incurred losses. However, we find that what the AO has lost sight of is that the said losses are tax losses and not actual business loss. In our view, while valuing a brand what is being considered is the incremental revenue that could be generated because of usage of brand. In the instant, the usage of brand and loyalty programme has augmented higher occupancy and corresponding higher turnover than estimated. Therefore, the basis of the AO to reject intangible valuation is ill-founded. 17.10 We are of the view valuation is at best an estimate.....
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....4 DTR (Mumbai)(Trib) 417 : (2019) 175 ITD 449 (Mumbai)." 17.12 In view of our elaborate discussion and findings we hold that the valuation conducted by the registered valuer has taken a holistic, business centric approach, recognizing both tangible and intangible contributors to the value of the running hotel. The reduction of land value to SRO guideline rates and the complete dismissal of brand value are both misaligned with standard valuation methodologies and economic reality. Thus, the valuation methodology adopted by the Assessee based on Valuer's report should be accepted and rejection of the same by Assessing Officer / Ld.CIT(A) is without any basis of valuation methodology or proper valuation considering the commercial considerations. They have also not proposed any alternate valuation in line with normally accepted valuation principles and hence should be rejected. 18. In light of the above, we hold that (i) Section 56(2)(viib) of the Act is not applicable as undisputedly the AO/ ld.CIT(A) have not made out a case of unaccounted money being infused and hence in the absence of the primary criteria, normal business transactions cannot be visited with rigou....