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Income Tax Appellate Tribunal, CUTTACK ‘SMC’ BENCH, CUTTACK
Before: SHRI CHANDRA MOHAN GARG
O R D E R This is an appeal filed by the assessee against the order of the CIT(A)-2 Bhubaneswar dated 18.3.2019 for the assessment year 2014-15.
The only issued involved in this appeal is that the ld CIT(A) erred in confirming the addition of Rs.31,05,900/- as income from other sources u/s.56(2)(viib) of the Act.
Facts in brief are that the assessee company is engaged in the business of Real Estate (Developer). During the course of assessment proceedings, the Assessing Officer noticed that the assessee has received total consideration of Rs.76,20,000/- including premium and has issued
P a g e 1 | 14 4/CTK /2 020 Assessm ent Y ear : 20 15- 16 equity shares for a consideration that exceeds the face value of the shares.
The assessee has issued equity shares as under:
No.of shares Security Total Name of the entity Face value allotted premium amount M/s. Clubside Dealcom 10,000 500 100 60,00,000 Pvt Ltd. Sri Hiralal Patel 4,000 150 100 10,00,000 Sri Vasant Kumar Patel 2,480 150 100 6,20,000 Total: 16,480 76,20,000
On perusal of balance sheet, the AO noticed that the assessee company has shown Rs.76,20,000/- as unsecured loan in the name of the above persons as on 31.3.2015 and subsequently, in the assessment year 2015-16, has allotted equity shares to the above persons. He observed that since the assessee has issued equity shares against the outstanding unsecured loan and changed the nature of unsecured loan into share capital which exceeds the consideration of face value of shares and, therefore, provisions of section 56(2)(viib) of the Act are attracted. Therefore, the AO asked the assessee to furnish the fair market value of equity shares as per section 56(2)(viib) of the Act. Accordingly, the assessee company furnished the written submissions. Further, the AO asked the assessee to furnish the balance sheet of the company drawn up as on the date immediately preceding the valuation date of the shares, which was complied by the assessee. The AO noticed that in the balance sheet, the assessee has P a g e 2 | 14 4/CTK /2 020 Assessm ent Y ear : 20 15- 16 shown Rs.76,20,000/- under the head “share application money pending allotment”. On the basis of balance sheet drawn up as on 31.3.2015, the FMV u/s.56(2) (viib) of the Act r.w.r 11UA was calculated by the AO as under:
Statement of computation of FMV of Unquoted Equity Shares as on 30.03.2015 Particulars Amount Book Value of Assets (A) 3,53,83,598* (Refer to Note No. 1) 3,29,23,611 Book Value of Liabilities (L) 8,50,000 (Refer to Note No.2) 100 24,59,987 Amount of paid up equity shares (PE) (Refer to Note No.3) Paid up value of equity share (PV) (A-L) Fair market value of unquoted equity share (A-L)/PE*PV) 289.41 Note No. 1- Calculation of Book value of Assets Particulars Amount Total Value of Assets 3,S4>?4,9Pi Less: 16,304 Misc. Expenses to the extent not written off 25,000 Advance Tax . 0 Tax Deducted at Source / TCS Book value of Assets 3,53,83,598 Note No. 2- Calculation of Book value of Liabilities
Particulars Amount Total Value of Liabilities 3,54,24,902 Less: 8,50,000 Paid up share capital 15,59,986 Reserves & Surplus 91,305 Provision for Taxation 0 Amount set apart for Equity and Preference Dividend 0 Any amount representing provisions made for unascertained liabilities Any amount representing Contingent Liabilities
Book value of Liabilities 3,29,23,611 Note No.3-Calculation of amount of paid up of equity shares Particulars Amount Paid up share capital Rs.8,50,000 Amount of paid up share capital Rs.8,50,000
P a g e 3 | 14 4/CTK /2 020 Assessm ent Y ear : 20 15- 16 As per the above calculation sheet of FMV of unquoted equity shares arrived at is Rs.289.41 per share. From the above, it is clear that the company received Rs.600/- per share that exceeds the FMV to the tune of Rs.310.59 shares. However, as per the calculation sheet furnished by the company the FMV was Rs.1188/- per share. 5. In response to above FMV calculation sheet, the assessee furnished written submission as under:
“……..
First of all let us examine schedule III, part-l of the Companies Act. The liability, side of the Balance Sheet Part-l is depicted as below.:
LIABILITY SIDE (1)EQUITY AND LIABILITIES: (1) Share Holders Funds (a) Share Capital (b) Reserves & Surplus (c) Money Received against share warrants
(2) SHARE APPLICATION MONEY PENDING ALLOTMENT
(3) NON-CURRENT LIABILITIES: (a) Long Term Borrowings (b) Deferred Tax Liabilities (c) Other Long-Term Liabilities (4) CURRENT LIABILITIES: (a) Short Term borrowings (b) Trade Payables (c) Other current liabilities (d) Short term provisions ASSET SIDE The details of Asset side not quoted here as not required in this context.
P a g e 4 | 14 4/CTK /2 020 Assessm ent Y ear : 20 15- 16 From the above table it is seen that “SHARE APPLICATION PENDING ALLOTMENT" is shown as a separate head like Share Holders Fund but not taken anywhere in the Liability Part. In the above Table point 1 and 2 are taken as EQUITY PART and point 3 and 4 are taken as LIABILITY PART. It is always presumed that when the applicant for shares have agreed to take the shares at a premium and made a commitment the same is not considered as LIABILITY. And if you see the POST FACTO, the same have been allotted on the same day (30/03/2015) and resolution was passed and filed with Registrar of companies. Nowhere in this context has been explained that SHARE APPLICATION MONEY PENDING ALLOTMENT will be considered as liability. Note -2 calculation of book value of liabilities Total value of Liabilities in the Liabilities side of Rs. 3,54,24,902/- Less: Paid up share Capital Rs. 8,50,000/- Reserves & Surplus Rs. 15,59,986/- Provision for taxation Rs. 91,305/- ----------------------- Rs.1,01,21,291.00 Liabilities Rs.2,53,03,611.00 Hence finally 1. The Book value of Assets = A = 3,53,83,598/- 2. Total Value of Liabilities = L = 2,53,03,611/- 3. Amt. of Paid up Equity Share = PE= 8,50,000/- 4. Paid value of Equity Share = PV = 100/- A-L = 1,00,79,987.00 FMV =1,00,79,987x100 = 1,186.00 8,50,000”
On consideration of above, the Assessing Officer invoked the provisions of section 56(2)(viib) of the Act and without treating the share
P a g e 5 | 14 4/CTK /2 020 Assessm ent Y ear : 20 15- 16 application money as cessation of liability after allotment in the same financial year, calculated the FMV as required U/s 56(2)(viib) of the I.T. Act and Rule 11(UA) of the I.T. Rules at Rs. 310.59 per share instead of FMV as provided by the assessee at Rs. 1188/- per share and made an addition of Rs. 31,05,900/- to the total income towards income from other sources being excess money received exceeding the FMV of the shares in contravention of the provision of Sec 56(2)(viib).
Aggrieved, the assessee filed appeal before the CIT(A). The Commissioner of Income Tax (Appeals) vide impugned order rejected the contentions of assessee and confirmed the addition. Hence, the assessee is in appeal before the Tribunal.
Shri P.R. Mohanty appearing on behalf of the assessee submitted that during the financial year 2013-2014 relevant to assessment year 2014- 15, there was a loan by the Company to the tune of Rs. 60 lakhs from Clubside Deal Com Pvt. Ltd., which was subsequently converted to share application pending allotment during the financial year 2014-2015 relevant to assessment year 2015-2016. During the financial year 2014-15 the company wanted to issue shares at a premium. The above Clubside Deal Com Pvt. Ltd. was interested to take shares in the company at a premium along with Sri Harilal Patel and Sri Vasant Kumar Patel. Further, the ld. AR of assessee referred to the list of allottees of shares and the return of allotment filed with Registrar of Companies in the prescribed form under the P a g e 6 | 14 4/CTK /2 020 Assessm ent Y ear : 20 15- 16 provisions of the Companies Act, 1956 and these facts are not disputed by either party. He submitted that the only dispute is regarding the valuation of FMV as required U/s 56(2)(viib) of the I.T. Act and Rule 11(UA) of the I.T. Rules although both parties employ the same methodology i.e., FMV = (A – L)_ x (PV) but differ in calculating the Value of L which represents the value of total Liability as the AO includes the amount of Rs. 76,20,000/- in the Liability and the assessee excludes the same as the shares are already allotted and transaction is complete and in absence of any further action the liability seizes to exist. This inclusion & exclusion by the AO & assessee gives rise to FMV of shares at Rs. 310.59 & Rs. 1188/- per share respectively.
9. Replying to above, ld DR supported the orders of lower authorities.
On careful consideration of the rival submissions, I observe that the Assessing Officer noticed that the assessee has received total consideration of Rs.76,20,000/- including premium and has issued equity shares for a consideration that exceeds the face value of the shares. The contention of the assessee is that in the relevant assessment year, the company wanted to issue shares at a premium and the company M/s. Clubside Deal Com Pvt. Ltd. was interested to take shares in the company at a premium along with Sri Harilal Patel and Sri Vasant Kumar Patel. But the effective dispute is regarding the valuation of FMV as required U/s 56(2)(viib) of the I.T. Act and Rule 11(UA) of the I.T. Rules although both parties employ the same
P a g e 7 | 14 4/CTK /2 020 Assessm ent Y ear : 20 15- 16 methodology i.e., FMV = (A – L)_ x (PV) but differ in calculating the Value of L which represents the value of total Liability as the AO includes the mount of Rs. 76,20,000/- in the Liability and the assessee excludes the same as the shares are already allotted and transaction is complete and in absence of any further action the liability seizes to exist. This inclusion & exclusion by the AO & assessee gives rise to FMV of shares at Rs. 310.59 & Rs. 1188/- per share respectively. But the A.O. presuming the value of premium to be higher wanted the fair Market Value of shares as required u/s. 56 (2)(viib) of the I.T. Act. and Rule 11 (UA) of I.T, Rules. Accordingly, the assessee made the valuation of shares and furnished the same to the AO as follows:
Valuation of FMV as on 30/03/2015 as per Rule II (UA) A- Total value of Assets Rs. 3,54,24,902/- Less: Misc. Exp. To the extent not written off Rs. 16,304/- Advance Tax Rs. 25,000/- Rs. 41.304/- Book Value of Assets (A) 3.53,83,598/- L- Value of Liabilities: And the Fair Market Value of shares as per formula in Rule-11 (UA) FMV = (A-L) x (PV) PE. = (35383598 25303611 ) x 100 8,50,000/- = 1.00.79,987 x 100 = 1,186/- 8,50,000/= ,
P a g e 8 | 14 4/CTK /2 020 Assessm ent Y ear : 20 15- 16 All the above valuation have been taken on the basis of schedule - III of the Companies Act.2013 (Specifically the value of liability)
But the AO has made a mistake in calculating the Liability figurer:-
He has calculated the Liability as follows: . Total value of Liabilities in Liability side of Balance Sheet = 3,54,24,902,00 Less: Paid up share Capital 8,50,000/- Reserves & Surplus 15,59,986/- Provision for Taxation 91,305/- Rs. 25,01.291/- Rs. 3.29.23.611/- The AO also mentioned that the amount of Rs. 76,20,000/- is only unsecured loan against which equity shares are allotted during FY 2014- 2015. But the fact is that, the amount was shown under the head unsecured loan during the FY 2013-2014, but subsequently during the FY 2014-2015, it was converted into share application money pending allotment after receiving confirmation from the parties and also the shares were allotted within the financial year itself. Therefore, AO misunderstood that the unsecured loan has been converted into equity.
AO has written that, as per Rule 11UA, there is no provision to deduct pending share application money while calculating the FMV of unquoted equity shares. However, there is also no provision that it will not be deducted, because it is in the nature of equity and not of the nature of liability. In this context, I am of the view that it is the prerogative of P a g e 9 | 14 4/CTK /2 020 Assessm ent Y ear : 20 15- 16 assessee as to how much capital is to be raised based on its long term and short term funding requirements for the purpose of running its business.
The capital has been raised by issuing certain number of shares at certain price, which is again within the domain of assessee to decide. The assessee in captioned case issued shares at premium based on the value arrived at by an independent valuer prescribed under the law using the prescribed methodology. It is a well settled legal position that Revenue authorities cannot dictate the terms as to how a prudent businessman/assessee should have conducted its business. The revenue authorities cannot decide whether assessee should have collected premium on its shares or not. It is completely the businessman’s discretion, business requirement and investor’s willingness which determines the premium that should be collected on issue of shares.
Ld A.R. submitted that the provisions of section 56(2)(viib) aimed to check the menace of unaccounted money and are anti- abuse provisions.
These provisions have no applicability to genuine business transactions. The genuineness and creditworthiness of the strategic investors is not even doubted either by AO or by CIT (A). The provisions of section 56(2)(viib) require that in case of closely held company, the shares should be issued at its fair market value to resident investors based on notified valuation formula by a notified expert. The provisions of section 56(2) and section 68 are in the nature of anti-abuse measures aimed at preventing the malafide
P a g e 10 | 14 4/CTK /2 020 Assessm ent Y ear : 20 15- 16 transactions intended to avoid tax liability and to tackle the problem of black money and were never intended to be made applicable on genuine, bonafide and purely commercial transactions.
The Ld AR relied on various judicial precedents wherein the assessee highlighted that the bonafide business transactions cannot be taxed under 56(2)(vii) and that the provisions of section 56(2) were to strike at the generation and use of unaccounted money and was never intended the honest and bonafide transactions where consideration for transfer was correctly disclosed by the assessee. Before me, ld A.R. also relied on the decision of this Bench in the case of ITO vs M/s. Ashoka Industries Ltd in for A.Y.2013-14 order dated 10.8.2020, wherein, it has been held as under:
“………
“6. Ld Departmental Representative (DR) submitted that since Rule 11UA(2) was inserted w.e.f. 29.11.2012 and the assessee had received the consideration amount towards issue of shares prior to 21.11.2012, the provisions of Rule 11UA(2) were not applicable in the case of the assessee and, therefore, the market value of the shares was required to be determined as per Rule 11 UA(1)(c)(b) and not as per Rule 11UA(2), Ld DR submitted that, accordingly, the AO adopted the fair market value of the shares at Rs.49.22 per share and taxed the excess receipt of Rs.130.78 as income of the assessee to be taxed u/s.56(2)(viib) as income from other sources.
7 . Ld DR further submitted that the ld CIT(A) was not right in holding that the assessee is entitled to value the share as per provisions of Rule 11UA (2) w.e.f 29.11.2012 especially when the assessee had received the consideration amount towards issue of shares prior to 29.11.2012 on 21.11.2012. Ld DR strenuously
P a g e 11 | 14 4/CTK /2 020 Assessm ent Y ear : 20 15- 16 submitted that the ld CIT(A) was not right and justified in granting relief to the assessee. Therefore, the impugned order may kindly be set aside by restoring the order of the Assessing officer.
8. Replying to above and supporting to the order of the ld CIT(A), ld counsel for the assessee drew our attention towards para 2.2 of the order of the ld CIT(A) and submitted that as per the decision of ITAT Jaipur Bench in the case of M/s. Safe Decore (P) Ltd (supra), the assessee cannot be denied the benefit of discounted free cash flow method only because the consideration amount was received much before insertion of Rule 11UA(2), which came into force. Ld AR submitted that the ITAT Jaipur Bench in the case of Safe Decore (P) Ltd.(supra) has categorically held that since shares were issued at less than the fair market value calculated as per discounted free cash flow method, nothing is taxable u/s.56(2)(viib) of the Act. Ld counsel also pointed out that since shares have been issued by the assessee at Rs.180/- per share as against the fair market value of Rs.189/- determined as per discounted free cash flow method, no addition is required to be made in the hands of the assessee u/s.56(2)(viib) of the Act. Therefore, the findings recorded by ld CIT(A) may kindly be upheld.
We have heard the rival submissions and perused the relevant materials placed on the record of the Tribunal. In this case, the assessee had issued 2,00,000 equity shares of face value of Rs.10/- to One M/s. Enbee Resources Pvt Ltd., on 7.1.2003 at Rs.180/- per share which included premium of Rs.170/- per share. It is the explanation of the assessee that since the fair market value as per the valuation in accordance with Rule 11ua (2)(B) was Rs.189/- and the assessee had issued shares at Rs.180/- including premium of Rs.170/-, which is less than the fair market value, no amount was required to be taxed as income from other sources u/s.56(2)(viib) of the Act. As per Rule 11UA(1)(c)(b) of the Rules, it is the prerogative of the assessee to estimate the fair market value of the shares issued by it adopting one method out of two methods i.e. discounted cash flow method or book value method. The revenue authorities cannot force the assessee to adopt particular method for valuing the fair market value of the share especially when Rule 11UA(1)(c)(b) provides that it is the option of the assessee to chose any method either discounted or book value method for estimating the fair market value of the shares issued by it during the relevant financial period. In this case, the assessee has adopted the discounted free cash flow method as prescribed under Rule 11UA (2)((b) of the Act.
P a g e 12 | 14 4/CTK /2 020 Assessm ent Y ear : 20 15- 16
10. We also find that the Jaipur Bench of ITAT in the case of Safe Decore Pvt Ltd., (supra) has held that the assessee cannot be denied the benefit of discounted free cash flow method only because the consideration amount was received much before Rule 11UA(2) came into force, which is one of the method to be adopted by the assessee for valuing the fair market rate. The above decision has been followed by the ld CIT(A) in the impugned order in deleting the addition. We also find that in the present case shares have been issued by the assessee at Rs.180/- per share as against the fair market value of Rs.189/- determined as per discounted free cash flow method and, therefore, no addition is required to be made in the hands of the assessee u/s.56(2)(viib) of the Act Therefore, we find no infirmity in the impugned order of the ld CIT(A) to interfere. Accordingly, we uphold the findings of the ld CIT(A) and reject the ground of appeal of the revenue.”
14. In the present case at hand, the assessee had allotted the shares at a rate of Rs.600/- per share and Rs.250/- per share, which is well within the limits of the fair market value of the shares. Therefore, the provisions of section 56(2) (viib) of the Act are not attracted. Further, the AO has computed the fair market value of unquoted equity shares as on 30.3.2015 u/s.56(2)(viib) r.w.r 11UA of the I.T.Rules at Rs.289.41 per share as against the FMV adopted by the assessee at Rs.1188/-. The value adopted by the assessee is as per the liability side of the balance sheet, wherein, the assessee had deducted Rs.76,20,000/- placed under the head “ share application money pending allotment”, which is not disputed by the ld D.R.
Therefore, I am of the considered view that the FMF adopted by the assessee at Rs.1188/- per share is correct and, accordingly, allow the appeal of the assessee.
P a g e 13 | 14 4/CTK /2 020 Assessm ent Y ear : 20 15- 16
In the result, appeal of the assessee is allowed.
Order pronounced on 08/1/2021.