MAX FINANCIAL SERVICE LIMITED ,NAWANSHAHR vs. PRINCIPAL COMMISSIONER OF INCOME TAX -1, JALANDHAR

आदेश/ORDER

Per Annapurna Gupta, Accountant Member:

3. The specific issues vis-à-vis the assessment order was found to be erroneous and prejudicial to the interest of the Revenue by the Ld. Pr.CIT ,as set out in the show cause notice issued to the assessee are as under:

(a) Allowability of depreciation and other expenses as business expenditure and their purpose for earning revenue from operations and other income; b) Basis of computation of loss from sale of unquoted investment of Rs.4037.19 lakhs; (c) Allowability of expenditure incurred on Corporate guarantee given on behalf of a sister concern as business deduction; (d) Basis of valuation of various assets sold in slump sale to Max Speciality Films Ltd. (e) Rent received from letting out of a property to the employee taxable as ‘income from house property’ vis-à-vis ‘business income’ offered by the assessee in the return of income and consequential claim of depreciation thereon. (f) Basis of valuation of unquoted current investment sold during the year to a sister concern.

4. It is the aforesaid order of the Ld. Pr.CIT which is in challenge before us and the grounds raised by the assessee challenge both the validity of the assumption of jurisdiction by the Ld. Pr.CIT u/s 263 of the Act as well as the merits of the case. The grounds raised by the assessee are as under:

“1. That the order passed by the Principal Commissioner of Income Tax ("PCIT") under Section 263 of the Income Tax Act, 1961 ("Act") is bad in law and void ab-initio. 2. That the order of the PCIT is bad in law, being based on surmises and conjectures without any finding of fact as to how the order passed under section 143(3) of the Act was erroneous or prejudicial to the interest of the revenue. Jurisdictional grounds

3. That the assumption of jurisdiction under section 263 of the Act was also patently bad in law since neither of the conditions prescribed stood satisfied since neither the assessment framed under section 143(3) of the Act was erroneous or prejudicial to the interest of revenue.

6. The PCIT failed to appreciate that the assessment order was passed by the Assessing Officer after due application of mind and after making due investigation/enquiries which fact is clearly borne from the assessment records and hence was not a case of lack of enquiry as envisaged in Explanation 2 to section 263.

7. That the assumption of jurisdiction by the PCIT under section 263 is contrary to the Position of law laid down by the jurisdictional High Court and the Supreme Court and it is not for the PCIT to determine a threshold of conducting enquiry when the issue has been examined by the AO.

On merits

8. Without prejudice to the above, the PCIT failed to appreciate that acceptance of the treatment and taxation of income from leasing of property by the Appellant as “profits and gains of business” as against “income from house property” and consequential claim of depredation under section 32 of the Act, being supported by various decisions of the High Courts could not have been termed as erroneous.

10. Without prejudice to the above, the PCIT failed to appreciate that the tax treatment of income /loss arising from sale of shares of Neeman Medical International BV and Max Healthcare Institute Limited by the Appellant, as offered by the Appellant and accepted by the Assessing Officer after making specific enquiries, and hence could nto be termed as erroneous.

12. Without prejudice to the above, the PCIT failed to appreciate that the appellant had not incurred any expenses in the provision of corporate guarantee to its sister concerns and hence the order passed by the AO was neither erroneous nor prejudicial to the interest of the revenue.

13. That the Pr.CIT grossly erred in law in not appreciating the positions taken by the Appellant on the issues raised

by the PCIT were duly supported by various decisions of High Courts of the country and hence, acceptance of the same by the assessment order while framing the assessment would not render the assessment erroneous, and the PCIT is not permitted to supplant his opinion with that of the AO.” 5. Before us the primary contention of the Ld.Counsel for the assessee, addressing each issue raised, was that due disclosure regarding the issue had been made by the assessee before the AO during the assessment proceedings, due inquiry had been conducted by the AO on the issue, who had applied his mind to the same and thereafter made no addition/disallowance with regard to the same, finding the claim to be in accordance with law. It was contended by the Ld.Counsel for the assessee that despite bringing out the above aspect before the Ld.Pr.CIT and addressing each query raised by her during the revisionary proceedings satisfactorily, the Ld. Pr.CIT had merely stated that the issues required further verification, without pointing out any fallacy, sustainable in law, in the explanation of the assessee. That there was no finding by the Ld.Pr CIT of any error causing prejudice to the Revenue and therefore the revisionary jurisdiction assumed by her u/s 263 of the Act was not in accordance with law.

9. It would be pertinent to begin with reproducing the relevant provisions of the section for the aforestated purposes.

“Revision of orders prejudicial to revenue. 263.(1) The [Principal Commissioner or] Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing] Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he, may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. . . . . . . . …………………………………………………………………………….. Explanation 2.- For the purposes of this section, it is hereby declared that an order passed y the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner, - (a) the order is passed without making inquiries or verification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.]”

i) PCIT Vs Modicare Ltd., decision dated 14.09.2017. ii) PCIT Vs. Delhi Airport Metro Express Pvt. Ltd., ITA No.705/2017, decision dated 05.09.2017. iii) ITO Vs. DG Housing Projects Limited (2012) 343 ITR 329 (Delhi) 11. Explanation 2 to the section, outlines specific circumstances in which order of assessing officer shall be deemed to be erroneous and prejudicial to the interest of the Revenue. The said explanation has been interpreted in various decisions of the ITAT holding that the explanation cannot be resorted to simpliciter for giving a finding of error, and the substantive requirements of section 263 ,as stated above, have still to be fulfilled for applying the explanation. The case laws holding so, as pointed out by the Ld.Counsel for the assessee are as under: i. Torrent Pharmaceuticals Ltd. Vs. DCIT, decision dated 08.08.2018. ii. Asian Homes Pvt. Ltd. Vs. PCIT (2012) 78 ITR (Trib) 240 (Mumbai). iii. Citystar Ganguly Projects Ltd. Vs. PCIT, ITA No.1103/Kol/2019,decision dated 31.10.2019, Kolkata Tribunal.

Issue No.1: Claim of depreciation on rented out building

The Ld. Pr.CIT noted that the AO had neither examined the claim of depreciation on this building, nor as to why the rent from building was a ‘business income’ and not income under the head ‘house property’ against which claim of depreciation was not allowable.

14. Before us, the Ld.Counsel for the assessee firstly pointed out that all due disclosure of all facts relevant to the issue were there before the AO,

a) with the impugned property having been duly capitalized in the books of account under the head

‘investment property’ and reflected in Schedule-XI of the Financial Statement. b) That the assessee had claimed depreciation of Rs.2,73,16,571/- u/s 32(1) of the Act and the rental income earned from the said property had been duly disclosed under the head ‘income from business and profession’ and disclosed in Schedule-XXI as ‘other income in the Financial Statement of the assessee company.

1) Jamdeshpur Engineering & Machine Manufacturing Company, 32 ITR 41

2. CIT Vs. Delhi Cloth & General Mills (1966) 59 ITR 152

3. CIT Vs. Mcleod & Co.,(1993) 203 ITR 290 (Cal)

4) CIT Vs. Modi Industries Limited,(1994) 210 ITR 1 (Del)(FB)

5) CIT Vs. New India Maritime Agencies (1994) 207 ITR 392(Mad)

1) Jamdeshpur Engineering & Machine Manufacturing Company, 32 ITR 41

2. CIT Vs. Delhi Cloth & General Mills (1966) 59 ITR 152

4) CIT Vs. Modi Industries Limited,(1994) 210 ITR 1 (Del)(FB)

5) CIT Vs. New India Maritime Agencies (1994) 207 ITR 392(Mad)

Issue No.2 : non-examination by the AO of the expenses claimed by the assessee 25. Taking up the next issue raised by the Ld. Pr.CIT, the same relates to non-examination by the AO of the claim of expenses by the assessee particularly, as per the Ld.Pr.CIT, in the backdrop of the fact that the assessee had no other source of income other than from investment activity.

a) That the assessee was earning income not only from investment activity but also from rendering operational consultancy to its sister concerns and had also income from other sources. That the expenses accordingly had been incurred for the purposes of carrying out the aforestated activity of rendering functional support services to group companies and making holding and nurturing investments in group companies. b) That the assessee had suo moto disallowed 45% of the expenses claimed in its Profit & Loss Account. c) That the expenses in any case were of the nature for maintaining the corporate entity of the assessee, after hiving off the manufacturing business of the assessee. d) That the investment activity undertaken was the main business activity of the assessee and, therefore, the claim of expenses was allowable against the same. e) That no discrepancy has been observed by the auditors in the Books of accounts maintained.

“6.2 Decision The perusal of the facts of the case as accepted by the assessee show that the Assessee Company earned the following revenue/income during the previous year: • Income from investment activities’ (Schedule 20 of the financial statements): Rs.581.77 Crs. • Other income (Schedule 21 of the financial statements): Rs.2.87 Crs. • Income from functional support services (Schedule 24 & 25 of the financial statements) (Recovery of expenses): Rs.12.47 Crs. Further the assessee has explained that the Assessee Company was primarily engaged in providing functional support services to its subsidiaries and in the activity of investing, holding and nurturing investments made in its subsidiaries and the cost incurred to render such services was recovered from the operating subsidiaries to whom such services were rendered. Singh the cost was recovered from the sister concern in such cases there is not issue of any loss on this account. Besides this the other income shown by the assessee is only income from investing activity wherein the assessee has shown dividend income and interest income. Dividend income being exempt under the Income Tax Act no expense against it can be claimed by the assessee as per provisions of section 14A. Interest shown by the assessee is from investing activity and not from business activity. The AO has failed to examine the issue of admissibility of expense claimed by the assessee against such income and the reason for showing losses on the basis of facts of the case. According to section 37(1) of the Income Tax Act, 1961, any expenditure (not being expenditure of the nature described in section 30 to 35 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession. Also according to Explanation inserted by the Finance (No.2) Act, 1998, w.e.f. 1-4-1962 to section 37(1), any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction of allowance shall be made in respect of such expenditure. An expenditure can be claimed as a deduction while computing income from “business or profession” if the following condition are fulfilled. (i) Expenditure is not of the nature as described in section 30 to 35 of the Act; (ii) Expenditure is of revenue in nature nto of capital in nature; (iii) Expenditure is not personal expenses of the assessee;

(iv) Expenditure has been laid down or expended wholly and exclusively for the purposes of business or profession of the assessee; (v) Expenditure has not been incurred for any purpose which is an offence or which is prohibited by law. ……………………………………………………………………… …………………………………………………………………….. ……………………………………………………………………..

In the assessee’ case the nexus between the expenditure incurred and the income earned has not been shown. Even if a liberal view is taken that the expenses was incurred for dealing with the residual aspects of the MSF division which was sold as slump sale on 01-04-2015 then also only 10% of the total expenses claimed should have been allowed. The adminssibility of expenditure claimed by the assessee needs to be examined by the assessing officer. The order of the AO is thus erroneous and prejudicial to the interest of the revenue.”

Pr.CIT had countered the justification of the assessee by stating that though admittedly the assessee was earning income from operational consultancy but as per the assessee itself it was only recovering the cost incurred on the same so there was no question of any loss being incurred by the assessee on account of all such activities. That other income earned by the assessee included dividend income and interest income and that no claim of expenses attributable to the earning of dividend income were allowable under the Act. That the interest income earned was on account of the investment activity carried out by the assessee and could not be categorized as the business income of the assessee.

Therefore, the Ld. Pr.CIT held that the justification of the claim of the expenses stood negated and the non- examination of the claim of expenses by the AO had rendered the assessment order erroneous so as to cause prejudice to the Revenue.

a) Since the assessee was recovering cost on account of operational consultancy given and, therefore, there was no reason for incurring losses. b) Interest income is from investment activity which therefore is not the business income of the assessee. c) That since dividend income is exempt no claim of expenses is allowed against the same under the Act.

Ld. Pr.CIT’s finding that no loss could possibly have been incurred in operational consultancy, we fail to understand.

It is not the case of the Ld. Pr.CIT that the assessee had claimed losses under the head ‘business and profession income’, on the contrary the only contention of the Ld. Pr.CIT is that the assessee had claimed expenses when no business activity/income has been earned by it. There is no reference to any fact vis a vis the claim of losses in operational consultancy activity, in the order and we fail to understand how this reasoning /finding has been arrived at.

Further we find no basis for the finding of the Ld.Pr.CIT that the interest income from investment activity was not business income of the assessee, despite the repeated assertions by the assessee before her that investment activity and operational consultancy were in the nature of business activity of the assessee, which has not been controverted by the Ld.Pr.CIT. All in all we find that the Ld. Pr.CIT has not given any basis or reasoning at all for rejecting the justification of the claim of expenses made by the assessee.

Therefore, we set aside the findings of the Ld. Pr.CIT of the order being erroneous and prejudicial to the interest of the Revenue on account of non examination of expenses claimed by the assessee.

ISSUE: Non Examination of the liability of expenditure incurred by the assessee on guarantee given to sister concerns which stood discharged during the year.

“10.2 Decision The AO has failed to examine the expenses incurred on giving corporate guarantee. The AO has also failed to examine whether interest free funds or interest bearing funds were used for giving any such guarantee. The loss to the assessee on account of guarantee has also not been examined by the AO. The order of the assessing officer is thus prejudicial and erroneous.” 37. The Ld.Counsel for the assessee stated that in view of the categorical statement of fact that no expenditure had been incurred by the assessee on this account which has not been controverted by the Ld. Pr.CIT, there is no error I the order of the AO.

Clearly the consistent and categorical stand of the assessee has been that it had not incurred any expenditure on account of corporate guarantee given to its sister concerns and the said fact had also been pointed out from its financial statements. The Ld. Pr.CIT has not controverted this fact. Therefore, without controverting this basic fact that the assessee had incurred no expenditure at all on corporate guarantee given, we fail to understand how there could possibly be an error of the AO for not examining the allowability of such expenditure, which admittedly were non existent.

It is clear, therefore, vis-à-vis, the impugned issue, there is no finding of any error in the order of the AO by the Ld. Pr.CIT.

ISSUE: Non Examination of the transaction of slump sale during the year.

That as per the Ld.Pr.CIT, the manner of computation of profits earned on the same and valuation of various assets including the stock and building transferred had not been examined by the AO, as also the Business Transfer Agreement under which the transfer took place. As per the Ld.Pr.CIT there was a difference in rate at which the concern had been transferred and the rate as per the Business Transfer Agreement, showing a downward revision ,and the same had neither being questioned, nor reconciled during the assessment proceedings. That the sale having been made to a sister concern, the basis of valuation and its correctness had not been examined by the AO. For the aforesaid discrepancies, the Ld.Pr.CIT was of the view that the order of the AO warranted revision and accordingly show cause notice was issued to the assessee.

i) whether the sale falls within the definition of slump sale as defined u/s 2(42C) of the Act. He drew our attention to point No.I of para 7.3, wherein the findings of the Ld. Pr.CIT in this regard find mention as under:

“1. Whether the sale effected feel within the definition of slump sale as defined under section 2(42C). As per section 2(42C) of Income Tax Act, 1961, ‘slump sale’ means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales. ‘Slump sale’ is transfer of a whole or part of business concern as a going concern, lock stock and barrel. ‘Undertaking’ has the same meaning as in Explanation 1 to section 2(19AA) defining ‘demerger’. As per Explanation 3 to section 2(19AA), ‘undertaking’ shall include any part of an undertaking or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof nt constituting a business activity. Explanation 2 to section 2(42C) clarifies that the determination of value of an asset or liability for the payment of stamp duty, registration fees, similar taxes, etc. shall not be regarded as assignment of values to individual assets and liabilities. Thus, if value is assigned to land for stamp duty purpose, the transaction will be a qualifying slump sale under section 2(42)C). A sale in order to constitute a stamp sale must satisfy the following quick test: (a) The subject matter of slump sale shall be an undertaking of an assessee. (b) An ‘undertaking’ may be owned by a corporate entity or a non-corporate entity, including a professional firm. (c) Slump sale may be of a single undertaking or even more than one undertaking. (d) The undertaking has to be transferred as a result of sale. (e) The consideration for transfer is a lump sum consideration. This consideration should be arrived at without assigning values to individual assets and liabilities.

The consideration may be discharged in cash or by issuing shares of Transferor Company. (f) Possibility of identification of price attributable to individual items (plant, machinery and dead stock) which are sold as part of slump sale, may not entitle a transaction to be qualified as slump sale – CIT vs. Artex Manufacturing Co., [227 ITR 260 (SC)]. However, in case of slump sale which includes land/building where separate value is assigned to it under the relevant stamp duty legislation, the slump sale will not be adversely affected in the light of Explanation 2 to section 2(42C). (g) Transfer of assets without transfer of liabilities is not a slump sale.”

“2. The perusal of the assessee’s transfer agreement in respect of the MSF division shows that the assessee has transferred the undertaking around the book value of the assets and liabilities. As per the computation submitted by the assessee the net worth of the undertaking as on 01-04-2014 works out to 275.36 crores and assessee has transferred it at Rs.277 crores. The assessee was asked to specify the basis of arriving at the sale consideration for the sale effected by the assessee. The assessee has claimed that it’s as per the BTA. The BTA in clause 4.1 mentions the business transfer consideration to be 305 crores as against which the final sale consideration has taken place at Rs.277 crores. The basis of this variation has not been specified by the assessee and has not been examined by the AO. It has been claimed that the same is as per letter dated 01-04-2014. The perusal of the copy of the letter dated 01-04-2014 doesnot give any reason for the revision or basis of computation of the same, it just says that the Business Transfer Consideration has been revised to 277 crores. During the course of the 263 proceedings ample opportunity were given to the assessee to explain the reason for change in value from Rs.305 to 277 crores. No valid explanation could be given by the assessee. He was unable to explain through a valid acceptable argument as to how the value of MSF has fallen from 305 crore to 277 crores. It is not out of context to mention that the entire transaction is a related party transaction. A simple letter has been issued revising the transaction value to 277 crores without any acceptable computation or revised valuation. Keeping in view these facts the claim of the assessee that the value of sale consideration is 277 crores cannot be accepted when the BTA specifies the transaction to be at Rs.305 crores.” 47. Referring to the same he contended that the Ld. Pr.CIT had noted that despite repeated queries raised in this regard, the assessee had not specified the basis for arriving at the original sale consideration as mentioned in the BTA and revised sale consideration and also the reason for downward revision in the same. That the assessee was unable to explain how the value had fallen from Rs.305 crores to Rs.277 crores, more particularly, when the transaction was with the related party, that since the BTA specified the transaction at Rs.305 crores its downward revision to Rs.277 crores by way of a letter dated 01.04.2014 could not be accepted.

That the only requirement under law was vis-à-vis the calculation of net worth as per section 50B of the Act which had been justified to the Ld. Pr.CIT and no anomaly in the same has been pointed out. He, therefore, contended that even the aforesaid findings of the Ld. Pr.CIT at para 2 did not contain any finding regarding any error of the AO.

“3. Further, the assessee has claimed that the consideration was discharged by MSFL partly through issue of equity shares 3,84,00,000/- at Rs.10 each (issued at a premium of Rs.40 per equity shares) of Rs.167 Circumstances. And balance by way of interest bearing loan of Rs.110 Circumstances. It has not been examined by the AO where the amount of Rs.110 crores is appearing in assessee’s balance sheet and whether the interest on the loan has been accounted for by the assessee and if so what is the rate of interest and whether the interest charged is at arm’s length. During 263 proceedings it was claimed by the assessee that the interest at 13% has been received from MFSL, however, the profit and loss account does not seem to reflect that interest. It has also not been examined as to how the premium of Rs.40/- has been arrived at, as the shares of MSFL were issued to the assessee at a premium. Thus the AO has failed to examine whether the entire transaction of slump sale has occurred at arms length or not. The order of the AO is thus erroneous and prejudicial.” and referring to the same he pointed out that the Ld. Pr.CIT mentions therein that the AO had not examined whether the assessee had actually received consideration in the form of interest bearing loans of Rs.110 crores and whether it had charged interest on the same during the year or not. That the Profit & Loss Account did not “seem” to reflect the interest and the AO has also not examined how the premium of Rs.40/- has been arrived at on the shares of MSFL issued to the assessee in lieu of consideration for slump sale.

per the provisions of section 2(42C) of the Act and had also furnished computation of the capital gain earned on the same as per the relevant provisions of section 50B of the Act. Copy of No objection certificate of the AO with regard to the aforesaid transaction obtained u/s 281(1) of the Act was also filed. Even before the Ld. Pr.CIT we find the assessee had reiterated his submissions made before the AO justifying its transaction which stand reproduced at paras 7.2 and 7.3 of the order before us. We have noted from the perusal of the letters filed before the Ld. Pr.CIT that every query raised by the Ld. Pr.CIT qua the manner of computation of profit generated from the said transaction, the valuation of assets including stock and building transfer, justification of the transfer qualifying as a slump sale and variance in the value of building as reported in the financial statements and in the Income Tax Act, all were duly replied to. The assessee had, therefore, justified the transaction qualifying as slump sale as per the provisions of the Act by the Business Transfer Agreement entered into, so also the sale consideration received for the same and its downward revision in the sale consideration through a letter exchanged between two parties, he had justified the capital gain earned thereon as per the provisions of the Act and besides furnishing the computation of the same had furnished a certificate of an Accountant in this regard in Form No.3CEA. The assessee had also obtained a No objection certificate from the AO for the impugned transaction. All the aforesaid facts are not disputed, nor controverted before us. Therefore, the findings of the Ld. Pr.CIT that the AO had not examined whether the transaction qualified as slump sale, we find is not justified based on the facts before us wherein we find that repeatedly detailed justification had been filed by the assessee. The findings of the Ld. Pr.CIT that the sale consideration required to be examined further since there was a downward revision in the same and transaction had been undertaken between sister concern, we are of the view, merits no consideration. Admittedly, there was a downward revision in the sale consideration and the transaction did take place with sister concern. But, we find, the assessee had evidenced the sale consideration through Business Transfer Agreement and the subsequent letter exchanged between the two parties vis-à-vis which no discrepancy had been pointed out by the Ld. Pr.CIT. In such circumstances what occasioned further examination of the issue, we find has not been spelt out by the Ld. Pr.CIT. Merely because the transaction took place with the sister concern, the sale consideration needed to be examined, seems illogical specially when the assessee had evidenced the same with Business Transfer Agreement. Not every transaction with a sister concern needs to be looked at with suspect and there had to be more reasons for conducting further enquiry.

Further as rightly pointed out by the Ld.Counsel for the assessee the Ld. Pr.CIT has also not pointed out any provisions in law warranting the justification of the sale consideration in a transaction entered into with the sister concern. Therefore, finding of error by the Ld. Pr.CIT on account of non examination of the sale consideration also is not justified. Further as regards the non examination of the manner of receipt of sale consideration in the form of unsecured loans and shares being not examined, whether duly accounted for and the premium at which the shares were acquired by the assessee not being examined for justification, we find, do not point to any error in the order of the AO causing prejudice to the Revenue. It is not the case of the Ld. Pr.CIT that the said consideration has not been accounted for by the assessee. Further how the premium on the shares given to the assessee as consideration for the slump sale has caused any prejudice to the Revenue, is not clear from the order of the Ld. Pr.CIT. As long as the consideration has been paid to the assessee in the form of unsecured loans, and shares being given to the assessee of equivalent value, how the premium on which the shares were issued would, in any way, affect the computation of capital gain or raise any doubt on the transaction, has not been spelt out by the Ld. Pr.CIT.

Therefore, we hold that vis-à-vis the transaction of slump sale also, there is no finding of any error in the order of the AO.

ISSUE: Non Examination of Valuaton of Shares of Max Healthcare Institute Limited sold by the assessee during the year. 54. The Ld.Counsel for the assessee submitted that during the impugned year the assessee had sold shares of M/s Max Healthcare Institute Limited, which the Ld.Pr.CIT found that the AO had not examined vis a vis the valuation at which it was sold.

“For Sale of Investment in Max HealthCare Institute Limited (MHIL) Form FC-TRS dated 10.11.2014, filed by the Assessee Company with the Authorized Dealer Bank in connection with sale of shares evidencing receipt of consideration in the Bank account of the Company; 392, Vol,2. Valuation Report as on March 31,2015; 393 to 404, Vol. 2 Copy of Share Purchase Agreement between the Assessee Company. Life Healthcare International (LHI) and MHIL; 405 to 443, Vol.

2. Copy of investment schedule along with relevant demat statements/ extracts of financial statements evidencing investment in shares; 444 to 449, Vol 2 Additionally, all disclosures vis-a-vis the Gain/Loss were duly recorded and reported in Audited Financials as submitted before the AO.”

“9.2 Decision The revised valuation certificate by the assessee shows that the rate at which the unquoted shares have been transferred is subject to further verification. The valuation report of the shares needs to be examined further and the computation made by the valuer needs to be cross- verified with the balance sheet. The assessing officer has failed to examine the computation of share valuation as discussed above. The order of the assessing officer is thus prejudicial and erroneous.” the Ld.Counsel for the assessee pointed out that the Ld.

Pr.CIT has only stated that the revised Valuation Report filed by the assessee needed verification, the valuation of the shares sold needed to be examined further and had to be crosschecked with the Balance Sheet and the AO having failed to do so this exercise, the order was erroneous causing prejudice to the Revenue. The Ld.Counsel for the assessee contended that the shares were sold to an independent third party, the valuation of the same being duly evidenced by agreement entered into by the said parties and further cemented as being above board by the Valuation Report basis the DCF Method reflecting the fact that the shares were sold at above the fair market value of the said shares. The Ld.Counsel for the assessee contended that there was no requirement under law, nor any such requirement pointed out by the Ld. Pr.CIT, in the shares so sold to an independent party to be sold at its fair market value, nor was there any requirement under law in the valuation of such shares to be done at DCF Method. That such requirement was there under Statute in section 56(2)(viia) & (viib) which was applicable in different circumstances that too in the case of purchaser of shares and not the seller of the shares which the assessee was in the present case. Therefore, there was no error as such as pointed out by the Ld. Pr.CIT in the assessment order passed by the AO accepting the transaction of sale of shares of Max Healthcare Institute by the assessee.

It is not disputed also that the shares were sold at the price agreed to between the two parties. No anomaly vis-à-vis the above has been pointed out by the Ld. Pr.CIT. The only reason for holding the order of the AO erroneous was that the AO needed to verify the valuation of shares sold that too for the reason that the assessee had submitted two Valuation Reports, one as on 31.03.2015 reflecting the value of shares at Rs.45.17 per share and the other as on 31.03.2014 reflecting the value of shares at Rs.67.33 per share.

The value at which the shares were sold,therefore, appears to be fully justified, exceeding the fair market value of the shares.

ISSUE: Loss of Sale of Unquoted Investment amounting to Rs.4037.19 lacs 62. Pointing out the facts relating to the issue, the Ld.Counsel for the assessee contended that during the impugned year the assessee had sold its entire stake in Neeman Medical International BV (hereinafter referred to as ‘Neeman BV’), its wholly owned subsidiary, representing 2361 equity shares to Maprime Management B.V. for a sale consideration of Rs.20.74 lacs. The assessee company had made investments in these shares over the years amounting to Rs.4057.93 lacs and had made provision for dimunition in the value of these investments in its books of account.

The said provision amount was reversed during the impugned year pursuant to sale of shares of Neeman BV. and accordingly, book loss of Rs.4037.19 lacs (Rs.20.74 lacs – Rs.4057.93 lacs) was recorded in the books.

1) A complete disclosure of the aforesaid book loss of Rs.4037.19 lacs had been made and reported in the financial statements and the capital loss generated under the provisions of the Act had also been duly disclosed. The transaction had been evidenced by copy of sale deed pertaining to the transfer of shares.

2) Copy of Valuation Report determining the equity value of the shares as on 28.03.2015 had also been filed.

3) The loss suffered on account of the sale of said shares had been duly disclosed in the audited financial statements as also the entire transaction had also been reported in the audited financial statements.

Therefore, there was no error in the order of the AO having duly examined the said transaction and allowed the claim to the assessee. He further contended that there was no loss to the Revenue also since the provision for the diminution in the value of investment provided for in the books of account had not been allowed in the computation of income filed for assessment year 2013-14 and the said amount was reduced in accordance with clause(i) to Explanation-1 to section 115JB of the Act while computing the book profits for assessment year 2015-16. The Ld.Counsel for the assessee further contended that even before the Ld. Pr.CIT all the above facts were duly brought out and the mode of computation of loss on the sale of the said shares both as

per the books and as per the Act were duly filed. He drew our attention to the same as reproduced in the order in para 8.1 sub-para 4.1.8. He further stated that all queries raised by the Ld. Pr.CIT had also been addressed and it had been pointed out that the provisions of section 56(2) (viia) and 56(2)(viib) of the Act were applicable to the facts of the case.

The Ld.Counsel for the assessee, therefore, contended that it had been clearly demonstrated to the Ld. Pr.CIT that there was no error so as to cause prejudice to the Revenue in the order of the AO.

“8.2 The perusal of the details filed by the assessee show that it has shown investment in shares of Neeman Medial International BV (Neeman BV)- a Netherland based wholly owned subsidiary of Max India Ltd. as under Year Of Number of Cost of Face Value Sale Price per Sale Price Acquisition Shares Acquisition share during the year 1-12-2005 36 7,21,290 500 euros 878.64 33,388 31-08-2006 2 33,27,46,972 500 euros 31-03-2014 2323 7,23,24,900 500 euros 878.64 20,41,087 2361

The above table shows the adjustments made by the assesses to book both short term and long term capital loss in its books. The AO has failed to examine from whom 2323 shares with face value of 500 Euros were purchased on last day of the preceding year previous year for Rs.7,23,24,900/- and were then sold for Rs.20.41.087/- on the basis of valueation on the same day. Further as per the balance sheet for financial year 2013-14 the assessee made provision for diminution in the value of the shares purchased of its subsidiary for Rs.7,23,24,900/- on the same day thus showing that the transaction had been entered into just for the purpose of defrauding the revenue and for adjustment of capital loss against capital gains. It's also surprising how were« two shares of Neeman purchased for 33 crores during 2006. The assessing officer has failed to verify the authenticity of this transaction by calling for valuation submitted to the RBI on the basis of which foreign remittance was made for transfer of fund abroad The Assessing Officer has also failed to examine the authenticity of purchase of 2323 shares ON 31-03-2014 for Rs. 7,23,34,900/- which have been sold for Rs.20,41,087/- after a very short period. It is of importance that the shares are unquoted shares and the basis of valuation of unquoted share as per Rule 11U is to be on the basis of FMV computed on the basis of value on the valuation date as determined in the following manner (A-L)/(PE) X (PV). Rule 11U defines Valuation date as “the date on which the property or the consideration, as the case may be, is received by the assessee”. It also defines balance sheet as the audited balance sheet on the valuation date. The Income Tax Rules,

1962 does not provides for method of valuation in the assessee where the audited balance sheet is not available on the valuation date. In such cases the last audited balance sheet is to form the basis of valuation. Thus, in the instant case, the last Audited Balance Sheets for purchase and sale of shares would be same i.e. 31-03-2014. No evidence has been filed by the assessee to show that valuation of the shares of Neeman Medical International BV (Neeman BV) was done on the basis of any other date by drawing up and auditing the balance sheet on that date. The view that the valuation needs to be done on the date prescribed by the relevant provisions is upheld by the Hon'ble Madras High Court in the case of CWT Vs S Ram 147 ITR 278. One other question which arises in a few of the gift-tax references is this group relates to the choice of the balance sheet which has got to be taken as the basis for computation of the company’s net wealth as a first step in arriving at the value of unquoted shares. We may visualize the gift of unquoted shares as having occurred on the date of the company’s balance sheet. In such a case, no problem is presented because the balance sheet figures of assets and liabilities can be taken as they are, for the purpose of computing the break-up value of the company’s assets as on the date of the gift. Where however, a gift of unquoted shares takes place in between the dates of two balance sheet the question is which is the balance sheet which has got to be adopted, as the basis? The taxpayer’s view has been that only the last published balance sheet which precedes the date of the gift must be taken note of. This is a dogmatic assertion for which we find no support in principle. On the contrary, there are decisions of this court which say that the true rule would be to take into consideration not only the balance sheet immediately after the gift and find out, on some principle which would be appropriate, the value of the assets and the value of the liabilities of the company as on the date of the gift. A similar problem had arisen before this court on several occasions. In one of the judgment on the subjects in T.C.No.863 of 1977, dated December 9, 1981, CGT v. K. Ramesh (1983) 141 ITR 462 (Mad), this court preferred to adopt the figure in a balance sheet which were drawn up two or three days subsequent to the date of the gift. It may be explained that this decision was rendered by this court, not as a matter of principle but by way of avoiding as remittal order or two separated the date of the gift from the date of the balance sheet, it would be an unnecessary exercise of one’s labour not to take note of the nearest balance sheet but to go upon some other labored valuation of the company’s assets involving effort and time.

In all these cases of valuation of unquoted shares, however, the true principle is that if it were possible to draw up a precise balance sheet as on the date of the gift, that would afford quite an accurate basis and an ideal solution. But since the valuation question arises only in a shareholder’s assessment, neither the shareholder nor the Department can expect the staff and accountants of the company to oblige them by meticulously drawing up a balance sheet as on the date of the gift even assuming that the drawing up of a balance sheet on that date would be feasible or is capable of being done in a correct manner after a passage of time. In the absence of the facility of drawing up a balance sheet precisely on the date of the gift, the next best thing, both for the assessee who is the holder of the unquoted shares and the Department which is charged with the duty of evaluating the market value of the shares not to speak of the company itself, is to take to the balance sheet falling both before and after the date of the gift and arrive as near as may be at the break-up value of the assets and liabilities of the Commissioner as on the date of the gift on a time basis, or on some other basis. The Tribunal in this case and held that only the earlier published balance sheet must be taken note of. This is not a correct direction in law of how to proceed. We cannot be dogmatic about taking as the basis, either the balance sheet which falls before or the balance sheet which falls after the date of the gift. We have to take into account both. Our answers to the questions on this point raised in some of the gift-tax cases are rendered accordingly. We may also point out that the decision in CWT v. S. Ram (1984) 147 ITR 278 formed the subject matter of special leave petitions in S.L.P. © Nos.14051 to 14287of 1989 and 1116 of 1986 and the Supreme Court also upheld the view taken by this court in CWT v. S. Ram (1984) 147 ITR 278 and dismissed the special leave petitions on January 22, 1990 (vide[1990] 181 ITR (St.)227) In the case under consideration, the closest balance sheet which also incorporates the relevant transactions is the balance sheet for the period ending 31-03-2014, that is the only relevant balance sheet for the purpose of Rule 11U/11UA. Thus the value of shares has to be the same for short term capital gain and the AO also needs to examine the valuation of shares on basis of which long term capital loss has been computed. The AO has failed to examine these issues during the course of assessment.

Further, as per the sale deed the assessee has certified on oath that the issued capital was divided into 38 shares but the assessee in its books has shown purchase of 36 shares in 2005 ad 2 shares in 2006. The assessee has been the 100% holding company of the unit M/s Neeman Medial International BV. The assessee has claimed that provisions of section 56(2)(viia) of the Act are applicable on the purchaser/recipient of the shares, where the purchase price of shares is less than book net asset value (“Book NAV”) of the shares of the company. In the instant case, the Assessee Company is not the recipient or purchaser of shares but the transferor, hence, provisions of Section 56(2)(viia) are not applicable on the Assessee Commissioner with respect to both of the aforementioned subject sale transactions. However the assessee has failed to consider that the assessee has also purchased 2323 shares of M/s Neeman Medical International BV (Neeman BV) on 31-03- 2014. The AO has also failed to examine as t how two shares of the company with face value of 500 Euros were purchased for Rs.33,27,46,972/-. As per the sale agreement filed by the assessee the shares were purchased in two lots ie 38 shares on 31-08-2006 and 2323 shares on 31-03-2014 and not three lots shown by the assessee. Further, as per the sale agreement the issued capital was increased to 38 shares by notarial deed on 19th October, 2006 and thus the assessee could not have purchased 38 shares on 31-08-2006 as shown by the assessee. The AO has also similarly failed to examine the basis of determination of long term and short term capital loss. The order of the AO is thus erroneous and prejudicial to the interest of the revenue.” 66. Referring to the same she contended that the Ld.

Pr.CIT had pointed out several discrepancies from the details of the purchase and sale of the impugned shares of Neeman BV. Referring to the same, she contended that as

per the details filed by the assessee it had purchased 2323 shares with face value of 500 Euros on the last day of preceding year for Rs.7,23,24,900/- and immediately thereafter sold them off for Rs.20,41,087/-. That the assessee had also provided for diminution in the value of the shares so purchased on the same day. These were very unusual transactions since it was not possible for the shares purchased for such high value to have diminished their value the same day itself and sold off for very small consideration within a span of few days itself and the matter, therefore, needed further enquiry. She also referred to the findings of the Ld. Pr.CIT as to how two shares of Neeman BV were purchased for Rs.33 crores during 2006.

She also referred to the anomaly observed by the Ld.Pr.CIT in the share sale agreement wherein it was stated that shares were purchased in two lots while the details reflected purchase in three lots. Also that 38 shares were apparently issued even when the company was not authorized to do so since its capital was increased after the shares were issued.

She therefore contended that considering the aforesaid discrepancies noted in the impugned transaction, the non examination of the same by the AO was rightly held by the Ld.Pr.CIT to render the order of the AO erroneous so as to cause prejudice to the Revenue.

Order pronounced on 31.03.2021.