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Income Tax Appellate Tribunal, “A” BENCH, KOLKATA
Before: SHRI SANJAY GARG, HON’BLE & SHRI GIRISH AGRAWAL, HON’BLE
O R D E R
PER GIRISH AGRAWAL, ACCOUNTANT MEMBER:
This appeal by the revenue is directed against the order passed by the Ld. CIT(A)- Siliguri vide Appeal no. – 62/CIT(A)/SLG/2017-18 dated 24/09/2020 for A.Y. 2015-16 against the assessment order passed u/s 143(3) of the Income- tax Act, 1961 (hereinafter referred to as ‘the Act’) passed by DCIT, Circle – 3(2), Gangtok, dated 30/12/2017. 2. The grounds taken by the revenue are reproduced as under:-
1. Whether on the facts and in the circumstances of the case the Commissioner of Income Tax (appeals) was justified in law and in fact in stating that Rule 11 UA of the I.T Rules. 1962, applies to valuation of market value of unquoted equity shares and not to redeemable preference shares whether such conclusion is otherwise unreasonable and perverse? 2. Whether on the facts and circumstances of the case the Ld.CIT(A) was justified in ignoring the fact that as per section 56(2)(vii)(b) there is no difference Assessment Years: 2015-16 M/s. Rodic Sikkim Project Pvt. Ltd. between preferential shares or equity shares and that the language of the section uses the word 'Shares which would also include preference shares.
Whether on the facts and circumstances of the case the Ld. CIT(A) was justified in assuming that Rule 11UA is not applicable in cases other than equity shares whereas the said Rule 11UA is applicable in all kinds of shares under Rules 11UA (1)(c)(c) of the IT Rules which is applicable for section 56 and lays down the procedure for determination of market value of property including valuation of shares and security.
Whether on the facts and circumstances of the case the Ld. CIT(A) had erroneously concluded that the provisions of sec 56 (2)(vii)(b) and Rule 11UA are not applicable in the case of the assessee whereas the facts and circumstances shows that the said provisions of the Act and Rules are applicable in the case of the assessee.
That the applicant craves leave to add, amend or alter the grounds of appeal
, if any.”
3. From the perusal of the above grounds, the moot point in the present appeal relates to application of Rule 11UA of the Income-tax Rules, 1962 (hereinafter referred to as “the Rules”) to the valuation of FMV of redeemable preference shares for making addition u/s 56(2)(viib) of the Act.
4. Brief facts of the case as culled out from the record are that assessee is a Private Limited Company engaged in the business of manufacturing and supply of stone chips. Return of income was filed on 29/09/2015 reporting a loss of Rs.38,19,183/-. Case of the assessee was selected for limited scrutiny on the issue of “Large share premium received during the year (verify applicability of Sec 56(2)(viib))”. The statutory notices were issue and served upon the assessee which were duly complied with in the course of assessment proceedings. In the course of assessment, assessee submitted its memorandum of association, audit report and bank statements including other documents and explanations called for by the ld. Assessing Officer. Ld. Assessing Officer noted that assessee had issued, subscribed and paid up capital of Rs.24,50,000/- and security premium Assessment Years: 2015-16 M/s. Rodic Sikkim Project Pvt. Ltd. of Rs.2,64,50,000/-. The details of capital raised by the assessee is tabulated as under:- “List of Equity Share Holder. Name of No. of Equity Nominal Nominal Share Total Total Share Share issued Price per Value of Premium Per Equity Value of Applicant (B) Equity Equity Equity Share Share Equity (A) Share € Share (D) € Premium Capital (F) Share (G)[D+F] 1. Dhruba 75,000 10 7,50,000 26.33 19,74,000 27,24,000 Tewari 2. Reena 1,60,000 10 16,00,000 26.33 42,12,800 58,12,800 Chhetri 3. Remuna 10,000 10 1,00,000 26.33 2,63,200 3,63,200 Chhetri Total (A) 2,45,000 24,50,000 64,50,000 89,00,000 List of Preference Share Holder. Name of Share No. of Nominal Nominal Share Total Total Applicant (A) Share Price per Value of Premium Per Preference Value of issued (B) Preference Preference Preference Share Preference Share € Share (D) Share € Premium Capital (F) Share (G) [D+F] Raghuvansh 4,00,000 10 40,00,000 50 2,00,00,000 2,40,00,000 Agrofarms Limited Total (B) 4,00,000 40,00,000 2,00,00,000 2,40,00,000 Total Capital 64,50,000 2,64,50,000 3,29,00,000 Raised (A+B)
5. Ld. Assessing Officer called for explanation in respect of the issue of cumulative redeemable preference shares issued by the assessee at a premium of Rs.50/- per share. Notice u/s 133(6) of the Act was issued to the shareholder M/s. Raghuvansh Agrofarms Limited, who had subscribed for the cumulative redeemable preference shares. Ld. Assessing Officer in para 6 of the impugned order noted that M/s. Raghuvansh Agrofarms Limited, has confirmed that they have subscribed a total of 4,00,000 shares at a premium of Rs.50/- per share. In Assessment Years: 2015-16 M/s. Rodic Sikkim Project Pvt. Ltd. their reply in response to notice u/s 133(6) of the Act, copy of the share certificate duly signed by the Director of the assessee company and its bank statements were also furnished. Ld. Assessing Officer showcaused the assessee for calculation of fair market value (FMV) of the cumulative redeemable preference share as per Rule 11U and Rule 11UA of the Rules. 5.1. Ld. Assessing Officer arrived at a value of (-)5.91/- as the FMV of the said shares and considered it as Rs. Nil. By considering the FMV as Nil of these preference shares, ld. Assessing Officer again showcaused the assessee to explain why the difference between the FMV and the share premium received amounting to Rs.3,29,00,000/- be added as income from other sources u/s 56(2)(viib) of the Act. Assessee made its submissions and contended that Rule 11UA(1)(c) of the Rules stipulates valuation method in case of issue of shares other than equity shares for which the FMV shall be estimated to be the price fetched if sold in the open market on the valuation date and for this the assessee may obtain a report from a merchant banker or an accountant for such valuation. Ld. Assessing Officer concluded the assessment by making addition of Rs. 3,29,00,000/- by treating it as income from other sources u/s 56(2)(viib) of the Act read with Rule 11UA of the Rules, by observing that the assessee has failed to provide the FMV as per Rule 11U & Rule 11UA of the Rules and submitting a valuation report thereon.
6. Aggrieved, assessee went in appeal before the ld. CIT(A). Before the ld. CIT(A), assessee made detailed submission on which remand report was called from the ld. Assessing Officer. In the remand report, ld. Assessing Officer did not address the contention of the assessee in respect of non-applicability of Rule 11UA of the Rules read with Section 56(2)(viib) of the Act on the valuation of cumulative redeemable preference shares. Assessee submitted its rejoinder to the remand report and reiterated its submission that Rule 11UA of the Rules Assessment Years: 2015-16 M/s. Rodic Sikkim Project Pvt. Ltd. does not apply to the valuation of preference shares but only for the valuation of equity shares. 6.1. Ld. CIT(A) after considering the submissions placed on record, observed that Rule 11UA of the Rules applies to valuation of FMV of unquoted equity shares and not to redeemable preference shares. He also observed that preference shareholders are not entitled to receive dividends out of the profits of the company and are also not entitled to participate in the management of the company and are on different footing as compared to the equity shareholders and thus, allowed the appeal of the assessee.
7. Aggrieved, assessee is in appeal before the Tribunal. 8. Before us, Shri Manish Tiwari, FCA, represented the assessee and Shri Vijay Kumar, Addl. CIT, represented the department. 9. Before us, ld. Sr. D/R contended that assessee did not get the valuation done from the merchant banker or the Chartered Accountant as required under Rule 11UA of the Rules and thus, ld. Assessing Officer has rightly made the addition. He further submitted that the impugned year is the first year of operation of the assessee and does not justify charging of such a high share premium. He thus submitted that, ld. CIT(A) has wrongly concluded on the applicability of Rule 11UA of the Rules which ought to be reversed. 10. Per contra, ld. Counsel for the assessee reiterated the facts narrated above which are not repeated for the sake of brevity. Ld. Counsel for the assessee submitted that ld. Assessing Officer has failed to appreciate the difference between the equity shares and preference shares and has mechanically applied the provisions of Rule 11UA of the Rules for resorting to the addition made in the present case.
Assessment Years: 2015-16 M/s. Rodic Sikkim Project Pvt. Ltd.
Before adverting on the issue, let us apprise ourselves with the relevant provisions of the Act and the Rules. The relevant provisions of Section 56 of the Act are reproduced as under:- “56. (1) ********************** (2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head "Income from other sources", namely :— (viib) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares: Provided that this clause shall not apply where the consideration for issue of shares is received— (i) by a venture capital undertaking from a venture capital company or a venture capital fund [or a specified fund]; or (ii) by a company from a class or classes of persons as may be notifiedby the Central Government in this behalf: [Provided further that where the provisions of this clause have not been applied to a company on account of fulfilment of conditions specified in the notification issued under clause (ii) of the first proviso and such company fails to comply with any of those conditions, then, any consideration received for issue of share that exceeds the fair market value of such share shall be deemed to be the income of that company chargeable to income-tax for the previous year in which such failure has taken place and, it shall also be deemed that the company has under reported the said income in consequence of the misreporting referred to in sub-section (8) and sub-section (9) of section 270A for the said previous year.] Explanation.—For the purposes of this clause,— (a) the fair market value of the shares shall be the value— (i) as may be determined in accordance with such method as may be prescribed; or (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher; [(aa) "specified fund" means a fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which has been granted a certificate of registration as a Category I or a Category II Alternative Investment Assessment Years: 2015-16 M/s. Rodic Sikkim Project Pvt. Ltd. Fund and is regulated under the Securities and Exchange Board of India (Alternative Investment Fund) Regulations, 2012 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992)[or regulated under the International Financial Services Centres Authority Act, 2019 (50 of 2019)]; (ab) "trust" means a trust established under the Indian Trusts Act, 1882 (2 of 1882) or under any other law for the time being in force;] (b) "venture capital company", "venture capital fund" and "venture capital undertaking" shall have the meanings respectively assigned to them in clause (a), clause (b) and clause (c) of [Explanation] to clause (23FB) of section 10;] 11.1. From the above provision, we note that the explanation refers to FMV of the shares which may be determined in accordance with such method as prescribed. The method prescribed are under Rules 11U & 11UA of the Rules.
Rule 11UA(2) relevant in the present case is extracted 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) the fair market value of unquoted equity shares = (A–L) × (PV), (PE) where, A = book value of the assets in the balance sheet as reduced by any amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income- tax Act and any amount shown in the balance sheet as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset; L = book value of liabilities shown in the balance sheet, but not including the following amounts, namely:— (i) the paid-up capital in respect of equity shares; (ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company; (iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation; Assessment Years: 2015-16 M/s. Rodic Sikkim Project Pvt. Ltd. (iv) any amount representing provision for taxation, other than amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto; (v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities; (vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares; PE = total amount of paid-up equity share capital as shown in the balance sheet; PV = the paid-up value of such equity shares; or (b) the fair market value of the unquoted equity shares determined by a merchant banker 34[***] as per the Discounted Free Cash Flow method.] 12.1. From perusal of the above Rule, it is noted that it deals with the valuation of unquoted equity shares both in Clause (a) as well as in Clause (b).
Further, the relevant extract of Rule 11UA(1)(c)(c) are as under:- “[(1)] For the purposes of section 56 of the Act, the fair market value of a property, other than immovable property, shall be determined in the following manner, namely,— (a) ******************************************* (b) ******************************************* (c)**************************************** (c) the fair market value of unquoted shares and securities other than equity shares in a company which are not listed in any recognized stock exchange shall be estimated to be price it would fetch if sold in the open market on the valuation date and the assessee may obtain a report from a merchant banker or an accountant in respect of such valuation.]” 13.1. This above sub-clause (c) deals with the valuation of unquoted shares and securities other than equity shares which is based on a report from the merchant banker or an accountant.
We note that Ld. Assessing Officer had called for a valuation report in the course of assessment proceedings which the assessee could not produce, leading to adverse view by the ld. Assessing Officer. However, the same was produced before the ld. CIT(A) who took cognizance of the same and called for Assessment Years: 2015-16 M/s. Rodic Sikkim Project Pvt. Ltd. a remand report from the ld. Assessing Officer who did not deal with it for expression of his views on the same. Before us, ld. Counsel for the assessee referred to the valuation report issued by Pallavi Prasad & Associates, Chartered Accountants, dtd. 04/04/2014, wherein, valuation of preference shares has been arrived at a value of Rs.60.21. The relevant extract from the valuation report is reproduced as under:-
14.1. From the perusal of documents placed on record and the applicable provisions of the Act and the relevant Rules, we note that sub-Rule (2) of Rule 11UA deals valuation in respect of unquoted equity shares only and does not refer to valuation of preference shares in any manner, whatsoever. The sub- Clause (c) of Rule 11UA(1), deals with the valuation of unquoted shares and securities other than equity shares which is based on a report from a merchant Assessment Years: 2015-16 M/s. Rodic Sikkim Project Pvt. Ltd. banker or an accountant. In compliance to this sub-clause, a valuation report has been furnished by the assesse which justifies the premium charged by the assessee on the issue of cumulative redeemable preference shares and accordingly, no addition is called for under Section 56(2)(viib) of the Act by treating it as income from other sources. The valuation arrived at by the ld. Assessing Officer is a negative figure of Rs. (-)5.91/- and thereby considering the FMV is at Nil, is not in accordance with the relevant provisions of the Act and the Rules stated above. Accordingly, we uphold the findings of the ld. CIT(A) and set aside the addition made by the ld. Assessing Officer. Accordingly, grounds taken by the revenue in this respect are dismissed.
In the result, appeal of the revenue is dismissed.
Order pronounced in the open court on 20.01.2023.