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Income Tax Appellate Tribunal, AMRITSAR BENCH, AMRITSAR.
Before: SH. LALIET KUMAR & DR. M. L. MEENA
ORDER Per Laliet Kumar, J.M. This appeal of the assessee is directed against the order dated 22.02.2018 passed by the Commissioner of Income Tax (Appeals)-1, Jalandhar in respect of A.Y. 2014-15.
2. Grounds of appeal:
“1. That the Ld. CIT(A) has erred in confirming the order of the Assessing Officer by making the addition of Rs. 80,33,892/- as income from other sources and taxing the same as revenue income.
2. That the Ld. CIT(A) has wrongly treated the amount of share premium as income from other sources and written submissions as filed during the course of assessment proceedings have not been considered appropriately.
That the Ld. CIT(A) has failed to appreciate the fact that the detail of the parties from whom share premium received, have been given viz-a- viz identity, bank statements, ITR returns and it has wrongly been stated that no detail of the parties from whom the share premium received, have been given.
That the addition has been confirmed against the facts and circumstances of the case.
That the Appellant craves leave to add or amend the grounds of appeal before the appeal is finally heard or disposed off.
Brief Facts
The Assessee during the year under consideration, filed its return of income on 28.01.2015 declaring income of Rs. 62,070/-. The case of the Assessee was selected under CASS and notice u/sec 143(2) of the Act was issued in the case of the Assessee Company. The reason for selection of the case of the Assessee was "Large share premium received during the year".
During the Assessment proceedings, the AO doubted the issue of shares (2,12,200 in number) at premium of Rs. 40 i.e an amount of Rs. 84,88,000/. 3. During the course of assessment proceedings, though the Assessing Officer asked the Assessee to file certificate as per Rule 11UA but, the assessee before the assessing officer had submitted that rule 11UA was not applicable to the case of the assessee.
4. As the assessee failed to comply with provisions of rule 11 UA, therefore the assessing officer had calculated the fair market value of share of on his own as per the book value at a price of Rs. 12.14/- (Calculation forming part of the order). On this basis addition was thus made by the AO at the rate of (50-12.14 i.e Rs. 37.86 per share). Total addition of Rs. 80,33,892/- was thus made to the total income of the Assessee by invoking the provisions of sec 56(2)(viib) of the Act.
5. Feeling aggrieved by the order passed by the assessing officer, appeal was filed before the CIT(A) but the same was dismissed. The learned CIT appeals had reiterated the finding recorded by the assessing officer and confirmed the addition made by the assessing officer. It was the case of the assessee before us that the report of the Chartered Accountant evidencing the value of shares as per Rule 11UA of the Act was duly filed before the CIT(A) but the same was not considered by her and no comment were even given on the same. Relevant portion of the order passed by CIT(A) reads as under :-
“5. I have carefully considered the facts of the case and submissions of the appellant. The brief facts of the case are that the assessee filed return of income for assessment year 2014-15 on 28.01.2015 declaring income of Rs.62,070/-. The case was selected for limited scrutiny under CASS with the reasons that “(i) Large share Premium received during the year’. During the year under consideration the assessee company has issued 2,12,200 new shares @ Rs.10/- amounting to Rs.21,22,000/- at a premium of Rs.84,88,000/- @ Rs.40/-. During the assessment proceedings, the assessing officer required the assessee to furnish certificate under Rule 11UA of the I.T. Rules. Before the assessing officer it was stated that the unit was a new one and was yet to start the operations. The share premium was calculated on the basis of the market goodwill of the Directors and nature of the business of the company as it involves storage of Apples with the aid of highly technical machinery and under controlled temperatures. This type of facility was one of the first to be established in the Shimla region where the Apples are stored for procurement. It was stated by the assessee that no fair market value was required to be calculated under Rule 11UA of the Income Tax Rules. In its support, the assessee has placed reliance on the case of Green Infra Ltd Vs ITO, ITAT Mumbai Bench, 38 Taxmann.com 253. The assessing officer noted that the case referred and relied upon by the assessee pertained to assessment year 2009-10 prior to introduction of new provisions in the Income Tax Act i.e. Sec56 (2)(viib) read with Rule 11UA which was introduced w.e.f 29.11.2012. The case of the assessee under appeal is assessment 2014-15, therefore, the amended provisions of the Income Tax Act 1961 were applicable in the case of the assessee in the year under consideration. The assessing officer has calculated the share premium received in excess of Fair Market Value at Rs.80,33,892/- under Rule 11UA read with sec. 56(2)(viib) of the Income tax Act 1961 and made addition of the same. During appeal proceedings, reiterated the submissions made before the assessing officer. The assessee is a private limited company. It has neither submitted the details of the parties from the share premium was received nor has given details to support its contention that the share premium was based on the Goodwill of Directors and the nature of the business of the company. The assessee has placed reliance on the decision of Mumbai bench of ITAT which pertains to assessment years prior to the amendment of the Income Tax Act. In the case of the M/s Green Infra Vs ITO, ITAT Mumbai relied upon by the assessee, the Hon’ble Tribunal noted that there was not a single evidence which could lead to the entire transaction as sham and that the share holders in all the related transactions under issue were directly or indirectly related to the Govt. of India. In the case of the assessee it is a private limited company. The assessee has not brought on record in the appeal proceedings to show the genuineness of the share premium received nor has brought on record any facts to justify the receipt of premium on the basis of goodwill of the directors or techniques employed by the company. The assessee has not explained how the decision of Vodafone India Services Private Ltd. Vs. VOI 50 Taxmann 2014 was applicable in its case which pertained to earlier years before the amendment was made in the Income Tax Act, 1961. In view of the above, the addition made by the assessing officer is upheld and appeal of the assessee is dismissed.”
Now feeling aggrieved by the order passed by the CIT appeal the assessee is before us on the grounds mentioned hereinabove.
At the outset it is submitted that the Assessee has issued the shares @ Rs. 50/- per share which includes Rs. 40 as share premium. The Assessee during the course of assessment proceedings was not able to submit the report as made by the Chartered Accountant as per Discounted cash flow method due to the negligence of the counsel. Further it was submitted that Assessee had duly filed the copy of the said valuation report with the CIT(A) but the same was neither considered by her nor any comment was given on the same.
It was further submitted that the value of shares as per the said method was Rs. 50.06/- per share. The Discounted cash Flow method is an approved method as per rule 11UA of the Income Tax Rules.
He had relied upon the following decision:- (a) ITO vs Unicersal Polysack (India) Pvt Ltd. in ITA No. 609/JP/2017
(b) Rameshwaram strong glass P Ltd. Vs ITO in ITD 571 (Jaipur Bench) dated 12.07.2018 (PB pg-21-39)
(c) Vodafone M-Pesa Ltd. vs PCIT as reported in 92 taxmann.com 73 (Bom HC)
(d) Cinestaan Entertainment P Ltd vs ITO as reported in 106 taxmann.com 300 (Del Trib). (Pb Pg-60-83)
(e) Karmic Labs Pvt Ltd. vs ITO (Mumbai Bench) in order dated 28.07.2020. (PB Pg-87- 103)
(f) DCIT Vs M/s Ozoneland Agro Pvt. Ltd. (PB Pg-45- 49)
(g) M/s Innviti Payment Solutions Pvt. Ltd. Vs ITO in (Pb Pg-84-86) and wherein, the Hon'ble ITAT Bench has held as under:-
(h) "The AO can scrutinize the valuation report and the if the AO is not satisfied with the explanation of the assessee, he has to record the reasons and basis for not accepting the valuation report submitted by the assessee and only thereafter-, he can go for own valuation or to obtain the fresh valuation report from an independent valuer and confront the same to the assessee. But the basis has to be DCF method and he cannot change the method of valuation which has been opted by the assessee. Further, for scrutinizing the valuation report, the facts and data available on the date of valuation only has to be considered and actual result."
On the other hand, the ld. DR for the revenue had relied upon the order passed by the lower authorities. At the outset, on the enquiry of the Bench, it was fairly accepted by the DR that the paper book filed by the assessee is correct and is in accordance with the rules of ITAT. Further on pointed enquiry by the bench, it was submitted that though the report of the chartered accountant in respect of valuation of the shares under DCF method was on the record of the learned CIT appeal, however for the reason best known to her the same was not referred to by the CIT(A).
We have heard the rival contentions of the parties and perused the material on record. As is emanating from the record that the assessee had filed the valuation report of the share duly certified by the chartered accountant before the learned CIT appeal however the learned CIT appeal had not discussed the same and confirmed the addition made by the assessing officer. In our view this approach of the learned CIT appeal cannot be countenanced. Further we are also of the opinion that once the assessee had opted to valuation of shares under rule 11 UA by following the DCF method, then it is not open for the assessing officer or to the CIT(A) to adopt a different method of valuation, for determining the fair market value. As per rule 11 UA, the choice is given to the assessee not to the assessing officer. The assessing officer is duty bound to examine the working of the DCF method but has no right to change the method of calculating the fair market value of the shares. Once the assessee has exercised its option of opting for DCF method, then the said method is required to be applied however the assessing officer is having the power to review the calculations and correct adoption of the parameters applied by the assessee for the purpose of arriving at valuation of the shares by applying the DCF method.
In the case of the Assessee also, the report has duly been submitted vide DCF method and the Assessing Officer has applied his own method and has computed a different value of share.
In our view Explanation to S. 56(2)(viib) of the Act provides that the fair market value (FMV) of unquoted equity shares for the purpose of 56(2)(viib) of the Act shall be the value as determined in accordance with such method as may be prescribed. The prescribed methods of valuations are given under Rule 11 UA of Income Tax Rules, 1962 (herein after referred as "Rules"). The relevant extract is as under:
(2) Notwithstanding anything contained in sub-clause (b) of clause (c) of sub-rule (1), the fair market value of unquoted equity shares for the purposes of sub-clause (i) of clause (a) of Explanation to clause (viib) of sub-section (2) of section 56 shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner under clause (a) or clause (b), at the option of the assessee, namely:—
(a) or (a) The fair market value of the unquoted equity shares determined by a merchant banker or an accountant as per the Discounted Free Cash Flow method
Hence the law has specifically conferred an option upon the assessee that for the purpose of S. 56(2)(viib) of the Act an assessee can adopt any of the methods mentioned u/r 11UA(2) of the Rules. From Rule 11UA, it is clear that either the Break Up Value Method (Clause 'a') or DCF Method (Clause 'b') can be applied for the purpose of S. 56(2)(viib) Expl. a(i) of the Act, at the option of the assessee.
In the present case, it is not denied that the assessee adopted clause (b) of Rule 11UA(2) of the Rules and accordingly obtained a Valuation Report from a Chartered Accountant. Since the law has prescribed the specific method for valuation i.e Discounted Cash Flow Method (hereinafter also referred as "DCF"), so he was free (and rather entitled) to choose this method. The method of valuation could be challenged by the AO only if it was not a recognized method of valuation (as per Rule 11UA (2) of the Rules).The very purpose of certification of DCF valuation by a merchant banker or chartered accountant is to ensure that the valuation is fair and reasonable.
In the present case as mentioned hereinabove the lower authorities have not examined the method adopted by the assessee for the purposes of arriving at the fair market value of the shares and have made the additions on the basis of book value of the shares. The said action of the assessing officer as well as of the CIT(A) cannot be approved as once the assessee has opted for DCF method, then it is not open for the assessing officer/CIT appeal to change the method of valuation the shares.
In the light of the above we deem it appropriate to remand back the matter to the file of the assessing officer with a direction to consider the valuation report dated 6 January 2014 forming part of the paper book based on DCF method and determine the fair market value of the shares allotted by the assessee. For the above said purposes, the assessing officer shall be bound by the decision rendered in the case of M/s Innoviti Payment Solutions Pvt. Ltd. Vs ITO in (2019) 102 taxmann.com 59 in which one of the member( namely JM) was co-author and he is directed to decided afresh the case of the assessee after affording the opportunity of hearing to the assessee and considering the document if any filed by the assessee.
The assessee is also directed to participate in the assessment proceedings and provide all information as may be sought by the assessing officer in the remand proceedings.
In the light of the above the appeal of the assessee is allowed for statistical purposes.