JAYA HIND INDUSTRIES PRIVATE LIMITED (SUCCESSOR TO DHANNA ENGINEERING PVT LTD),PUNE vs. ACIT, CIR-8, PUNE, PUNE

2025 of the Ld. CIT(A) / NFAC, Delhi relating to assessment year 2016-17. 2. Facts of the case, in brief, are that the assessee is a company engaged in the business of manufacturing and sale of automobile components. It filed its return of income on 30.09.2016 declaring total income of Rs.29,42,300/-. The case was picked up for limited scrutiny under ITBA Module in order to verify "whether tax aspects related to unlisted equities have been considered in the return of income, whether the funds received in the form of share premium are from disclosed

During the course of assessment proceedings the Assessing Officer noted that the assessee company was incorporated on 19" February 1992. The assessee has claimed its business as manufacturing and sale of automobile components. It was submitted that the company is making efforts to undertake suitable engineering activities. The Assessing Officer observed from the available record that the assessee company has not yet commenced its business since inception. It has no operational income during any of the years which is apparent from the returns available in system from AY 2007-08 till assessment year 2016-17. 4. The Assessing Officer noted that the authorized capital of the assessee company, M/s Dhanna Engineering Pvt Ltd as on 31.03.2015 was only 10,000 shares at face value of Rs.10 each. This share capital of the assessee company was increased by 5,90,000 shares by issuance of right issue. Thus the Company's Authorised Share Capital was increased and total shares authorized at 6,00,000 nos. of Equity shares of Rs.10/- each. He noted that the shareholding pattern of the assessee company as on various dates is as under:

The Assessing Officer further noted that the assessee company, M/s. Dhanna

The Assessing Officer noted that the shareholding pattern of the company M/s. Jaya Hind Investments Pvt. Ltd. is as under:

He observed that immediately on receipt of this amount in the bank, on 8" October 2015, the company transferred its funds towards Foreign Direct Investment in shares of a Foreign Company namely Rivulis Irrigation Limited, Israel. The Assessee Company invested Rs.195,89,65,714/- (U 30 million) for 2,500 number of Equity shares of NIS 0.01 each fully paid representing 20% stake in Rivulis Israel. The Investment was claimed to be done as per the Reserve Bank of India guidelines for Overseas Direct Investment under the Automatic route. The assessee submitted the outward remittance request dated 24" September 2015

He noted that the valuation certificate for Valuation of shares of Rivulis

The Assessing Officer further noted that the share valuation of M/s. Rivulis Israel has been carried out by M/s. Ernest & Young based on DCF method. In the Value Estimation paragraph, M/s. E&Y have stated as under:

1 On perusal of the said circular, it is clear that a NBFC shall not make investment in any foreign entities without obtaining prior approval in writing from the Reserve Bank of India. Investment in non-financial service sectors shall not be permitted for NBFCs. Investments will be permitted only in those entities having their “core activity” regulated by a “financial sector” regulator in the host juri iction. The overseas investment in a single entity, including its step-down subsidiaries, by way of equity or fund-based commitment shall not be more than 15% of the NBFC's owned funds. The total assets of the NBFC, M/s. Jai Hind as on 31 st March 2016 was at Rs.669.20 crores and during the year investment made Outside India ‘through the assessee company’ was at Rs.195.89 Crores, which was 29.27% of the total assets of the NBFC company. This would certainly have attracted prohibition, had the company Jai Hind (NBFC) invested directly abroad apart from general prohibition on investment in sector other than Financial. The appellant company has contended that the entire transaction was authorised by the RBI Authorities. The appellant has not submitted the entire documents filed before the RBI authorities to show case that the scheme of bringing huge premium from a NBFC to the appellant company and then immediately investing in the foreign entity was brought to the notice of RBI authorities.

2 In view of the above discussion, the claim of the appellant that there is no violation of guidelines and violation under Income Tax Act, is not correct because, when the person is violating some law of the land, cognizance of the same is required to be taken by the AO under Income Tax Act when if it comes to his knowledge that the entire transaction was a colourable device to circumvent the provision of the RBI Act.

8 It is further observed that the authorized capital of the appellant company, M/s. Dhanna Engineering Pvt. Ltd. as on 31.03.2015 was only 10,000 shares at face value of Rs.10 each. Thereafter, the appellant company had issued 5,90,000 shares on face value of Rs.10 and premium of Rs.3,646/- and therefore, receipt shares capital/share premium of Rs.2,15,70,40,000/- during the year under consideration. However, total of the assets of the company as on date of its share valuation (18.09.2015) was Rs.4,43,33,602/- which primarily include receipts from sale of quoted investments. The net asset value of the company, as on date of share valuation, was Rs.4,43,33,602/-. It was evident that the appellant company was having no business activity since its inception and had been holding to its investments in few quoted and unquoted shares. The valuation done immediately after sale of its quoted shares which was one time transaction can't be said to be realistic. In these circumstances, the value derived by Book Valuation Method was not realistic. The 5,90,000 rights shares are issued to M/s. Jay Hind Investments Pvt. Ltd. at a Premium of Rs.3,646/- per share. This Premium value came to Rs.215,11,40,000/-. This Premium was credited to Securities Premium Reserve and Rs.59,00,000 received against share capital on face value of Rs.10 was credited to Paid Up Capital. The huge share premium and capital totaling to Rs.215,70,40,000/- was received in the company to acquire 98.33% stake for total value of the company of Rs.4,43,33,602/-. The receipt of such a huge premium on right issue shares, when the appellant company was having a small value in terms of assets and particularly so when the appellant company was also doing no business activity, was unjustifiable to any prudent business sense.

9 It is also found that the appellant company M/s. Dhanna Engineering has received substantial funds of Rs.215,70,40,000/- from Jai Hind Investments Pvt. Ltd. (NBFC) and the fund was immediately invested in a Foreign Company Rivulis Israel to acquire its 20% stake and also in a domestic company Rivulis India in which the foreign company was also a 51% stakeholder. Subsequent to this transaction, the Investor company of the appellant company namely Mis. Jai Hind Investment Pvt. Ltd. was also amalgamated along with appellant company into a third related party M/s. Jai Hind Industries Ltd. From the overall transactions it was clear that appellant company has been used as, merely a vehicle to make an Investment in a foreign company, which otherwise was Prohibited to a NBFC. Once the object was served, the appellant company and Investor Company were again consolidated into a “Amalgamation Scheme” in a third entity which is also a related concern. The whole transaction of share investment by valuing shares and bringing in the share premium are merely a facade created to give the transaction a legitimate color. It was therefore important to go into the “substance of the transaction” and ‘not the form’. The form had been merely arranged in such a way as to look the transaction as genuine, however the facts on records prove that the whole transaction was carried out having an intension to make investment abroad in Rivulis Israel and its related domestic company, Rivulis India which is very evident from the report of the “Ernst & Young” .

10 It is also important to highlight that during the assessment year, the appellant company had income from quoted investments alone which were lying in books for years and had been totally liquidated before making valuation of its shares as on 18/09/2015. The investments include various shares of Public Limited and Private Limited companies amounting Rs.20,33,081/- as on 31/03/2015. The total assets as on 31/03/2015 stands at Rs.55,18,972/-. The assessee had paid up share capital of Rs.1,00,000/- being 10,000 equity shares of Face Value of Rs.10 each. The Book Value of its shares comes to Rs.550/- per share as on 318t March 2015. For the A.Y.2015-16, the assessee had received income from other sources being Rs.9,10,825/- and Net Income shown before tax was Rs.8,60,931/-.

11 Further, it is stated that the complete transaction of issue of shares is basically driven by intent to make an investment abroad in Rivulis Israel and its related domestic company Rivulis India. The appellant company had tried to give “form” to this transaction as issue of shares to M/s. Jai Hind Investment Pvt. Ltd. (NBFC). The real “substance of the transaction” was of making an investment in Rivulis Israel and also Rivulis, India both of which are into Micro Irrigation/ Agriculture Sector. The investor company Mis. Jai Hind Investment Pvt. Ltd., being an NBFC, had limitations over direct foreign Investment in an entity abroad in ‘a sector other than Finance’ and also over 15% of its owned funds. Therefore, the appellant company was chosen as a vehicle and share was valued unrealistically by manipulating the DCF method and also making unrealistic valuation under BVM by selling off its investment midyear. The total assets of the accompany as on date of share valuation was Rs.4,43,33,602/-. The stake of 98.33% of this value of Rs.4.43 Crores was purchased by M/s. Jai Hind Investment Pvt. Ltd. at Rs.215,70,40,000/-, which itself is far from any realistic valuation. Based on the facts and circumstances in this case, it is clearly observed that the share value was manipulated to suit the investment look like genuine and then on the same day funds were invested in Rivulis Israel. The share valuation of the appellant company was, therefore, rejected as being unrealistic and unreliable for the facts mentioned supra by the AO. Therefore, the value of shares was taken at Face Value of Rs.10 and the total excess of the amount received in the garb of share premium is treated as income of the assessee “under other sources” u/s.56(2)(viib) was rightly treated by the AO.

12 It is important to also note that the Jai Hind was not a share holder in the appellant company as on 18 September 2015. Right to subscribe to the shares were issued to the existing shareholders, but the same were denied immediately by the existing shareholders in favour of Jai Hind and the Jai Hind immediately invested Rs.215,70,40,000/- by subscribing 100 % of the new shares issued (None of the existing shareholders subscribed even 1 shares out of new allotment at huge premium) leading to 98.33 % shareholding in the appellant company. New fund coming to the appellant company was immediately invested in foreign entity and also its Indian entity.

13 In a third-party scenario and in a comparable transaction, no person or entity would have invested in the shares of such a non-operational and non- income generating company.

14 It is also noted that even though the appellant company has received huge sum of premium from a related NBFC and the same amount has been immediately invested in foreign & Indian entity to circumvent the provisions of the RBI Act, the true character of the transaction has to be judged by looking at the reality after removing or piercing the veil of these transactions since the circumstances of the case justify such 2n exercise.

15 _ In view of the above discussion, it is mention here that the case law relied by the appellant does not applicable due to different facts and circumstances. Therefore, it can be concluded that the excess share premium of Rs.215,11,40,000/- was rightly treated as income of the assessee and rightly added to total income of the assessee under the head Other Sources u/s.56(2)(viib) by the AO while passing the assessment order.

16 In this regard, it is relevant to mention here the landmark decision of the Hon’ble Supreme Court in the case of Mc Dowell & Company Limited vs The Commercial Tax Officer on 17 April, 1985, wherein the Hon’ble Apex Court has held that tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.

1 Further, in another decision of the Hon’ble Supreme Court in the case of wherein the Hon'ble Apex has held as under:-

2 Similarly, in another decision of the Hon’ble Suprems Court in the case of Sumati Dayal Vs. CIT (1995) 214 ITR 801 (SC), wherein the Hon'ble Apex has held that the Income Tax authorities are not bound to accept the form of a transaction and can look into the real substance of the transaction. This case is often cited when discussing the concept of “colourable devices” as it stresses that a transaction, though appearing genuine, may be disallowed if its real motive is to evade taxes.

3 Further, the Hon’ble Supreme Court in the case of Union of India Vs. Azadi Bachao Andolan (2004) 10 SSC 1, wherein the Hon'ble Apex has held as under:-

4 Further, the Hon’ble Supreme Court in another decision in the case of CIT P. Krishna Warrier (1995) 216 ITR 91 (SC), wherein the Hon'ble Apex has observed as under:-

5 Further, the Hon’ble Supreme Court in another decision in the case of, CIT Vs. Durga Prasad More (1971) 82 ITR 540 (SC), wherein the Hon'ble Apex has held that the Income Tax Department has the right to look at the “real nature” of a transaction, and if it is found to be a “colourable device” designed to evade tax, it can be disregarded.

6 Further, reliance is placed on the decision of the Hon’ble ITAT, Delhi in the case of Young Indian vs. ACIT(E)*, [2022] 137 taxmann.com 12 (Delhi - Trib.) [31-03-2022], wherein the Hon'ble Tribunal has held as under:-

17 Further, reliance is also placed on the recent decision of the Hon’ble ITAT, of Income-tax* [2024] 169 taxmann.com 87 (Ahmedabad - Trib.) dated 21.11.2024, wherein the Hon'ble Tribunal had decided the appeal in favour of the revenue on the similar. The head note of the said decision is as under:-

1 Further, reliance is placed on the decision of the Hon’ble ITAT, Kerala in the case of Income-tax Officer vs. LNB Renewable Energy (P.) Ltd.*, [2022] 145 taxmann.com 269 (Kolkata - Trib.) dated 30.11.2022, wherein the Hon'ble Tribunal has held as under:-

2 Further, reliance is also placed on the recent decision of the Hon’ble ITAT, Delhi in the case of Sagitarius Securities (P.) Ltd. vs. Income-tax Officer’, [2023] 148 taxmann.com 335 (Delhi - Trib.) dated 05.01.2023 wherein the Hon'ble Tribunal had decided the appeal in favour of the revenue on the similar. The head note of the said decision is as under:-

18 In view of the above factual discussion and legal matrix of the case and reason set out in the assessment order as well as remand reports, the addition made by the AO is found justified, hence confirmed. Thus, the grounds of appeal no. 1(a) to (e) are dismissed.

The ground of appeal no. 1(f) & 2 are against the initiation of penalty proceedings u/s.271(1)(c), 271BA & 271AA of the Act, being premature are not entertained and are dismissed.

The ground of appeal no. 3 is general in nature, hence dismissed.

Aggrieved with such order of the Ld. CIT(A) / NFAC the assessee is in appeal before the Tribunal by raising the following grounds:

The Ld. Counsel for the assessee submitted that the assessee had an option to choose the method for determining the valuation of its shares under Rule 11UA of IT Rules and once such option is exercised by the assessee, it is not open for the Assessing Officer and the CIT(A) to determine the valuation of such share by any other method. He submitted that the assessee had exercised the option of valuing its shares as per the NAV Method prescribed under Rule 11UA(2)(a) of the IT Rules. To arrive at the fair market value, the assessee had prepared its Audited Financial Statements as on 18" September 2015 and the same were duly audited by the Statutory Auditors of the assessee. Based on the Audited Financial Statements

The Ld. Counsel for the assessee submitted that the Assessing Officer also did not dispute the computation of fair market value by the assessee vis-a-vis the crisp and clear formula, prescribed under Rule 11UA(2)(a) of the IT Rules. Once the option prescribed under Rule 11UA of the IT Rules was chosen and applied by the assessee, the Assessing Officer / CIT(A) had no right to change the NAV Method. He submitted that in the present case, the Assessing Officer / CIT(A) did not consider any method viz. NAV Method or DCF Method and rather, simply held that, the calculations/computations as per the NAV Method are unrealistic. He submitted that the Assessing Officer / CIT(A) had no right to say as to whether the NAV method of computation prescribed under the IT Act and the IT Rules is realistic or unrealistic. This is so because, once the NAV Method is adopted as per the provisions of the IT Act and the IT Rules, the only aspect to be checked by the Assessing Officer / CIT(A) is whether the computations are correctly made as per

So far as the applicability of the method prescribed in Rule 11UA(2) of the Rules is concerned, he submitted that the same is as per the option to be exercised by the assessee and once the assessee has exercised the option, the Assessing Officer even during the regular course of assessment could not have questioned the applicability and computation of the fair market value as per either of the methods and therefore, there is no question of forming a reason to believe that as the valuation is less in one method and the assessee has adopted the method having higher valuation method, then there is escapement of income. He emphasized that neither the Assessing Officer nor the Ld. CIT(A) / NFAC has authority under the provisions of the Income Tax Act or Income Tax Rules to question the choice of method adopted for valuing the shares by the assessee. For the above proposition, he relied on the following decisions:

The Ld. Counsel for the assessee further submitted that the Assessing Officer and the Ld. CIT(A) / NFAC have both to spell out and explain as to what is the tax benefit that the assessee has received by issuing right shares. He submitted that the assessee had multiple options to raise the funds to make further investments which included to issue share or to borrow funds. Both the options are valid under the IT Act without any income-tax implications. The assessee is free to choose whichever option it thinks is appropriate to raise the funds and that there is no bar under the IT Act read with IT Rules. Accordingly, the Board of Directors of the assessee in their own wi om decided to raise the funds vide issuance of right shares. For such purpose, the assessee within the bounds of Rule 11UA of IT Rules opted to determine the fair market value of its shares by adopting the NAV Method. For this, the books of accounts were duly prepared and the same were audited by Statutory Auditors of the assessee. Further, certificate from an independent Chartered Accountant was obtained to certify the fair market value as per the NAV Method. Therefore, all the computation as prescribed by the IT Act read with IT Rules were diligently carried out and undertaken by the assessee. He further submitted that the object behind the introduction of provisions of section 56(2)(viib) of the Act was to bring to tax only those cases of issue of shares where unaccounted income was sought to be introduced into the books in the guise of premium for issue of shares. For the above proposition, he relied on the following

He accordingly submitted that the Ld. CIT(A) / NFAC is not justified in confirming the addition made by the Assessing Officer as per the provisions of section 56(2)(viib) of the IT Act read with Rule 11UA of the IT Rules, 1962. 28. The Ld. Counsel for the assessee submitted that the Assessing Officer and the CIT(A) had alleged that, the issuance of shares were undertaken by the assessee to circumvent the FEMA provisions and that, Jai Hind Investments Private Limited, being a non-banking financial company (NBFC) could not have invested in Rivulis Irrigation Limited, Israel directly and Jai Hind Investments Private Limited by investing in the Appellant (being a CIC) had tried to circumvent the FEMA provisions. He submitted that there is no violation of any FEMA provisions. He submitted that the Assessing Officer and the CIT(A) had no juri iction to travel beyond the provisions of the IT Act, the IT Rules and the computation as per the NAV Method. The Assessing Officer and the CIT(A) had no right whatsoever to adjudicate upon the FEMA provisions and to further check/comment on the correctness of the investment by Jai Hind Investments Private Limited into the assessee. Their juri iction is limited to adjudicate upon the matters only as per the provisions of the IT Act and IT Rules.

He submitted that in the present case, the observations of the Assessing Officer and the CIT(A) regarding FEMA provisions and Reserve Bank of India ("RBI") are completely misplaced and irrelevant to the issue at hand, i.e. the valuation of shares as per the provisions of Rule 11UA of the IT Rules.

He submitted that even otherwise, the RBI through its Authorized Dealer had approved the investment by the assessee in Rivulis Irrigation Limited, Israel and allotted the Unique Identification Number: BYJAZ20151030 for the said tii) | ACIT vs. Navdeep Co-op Bank Ltd (1992) 43 ITD 697 (Ahmedabad - Trib) — Trib.) vi) ACIT vs. Small is Beautiful (2013) 38 taxmann.com 310 (Hyderabad — Trib.)

He accordingly submitted that the order of the Ld. CIT(A) / NFAC being not in accordance with law should be set aside and the addition made by the Assessing

The Ld. DR on the other hand heavily relied on the orders of the Assessing

We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and Ld. CIT(A) / NFAC and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the assessee in the instant case is a company registered under the Companies Act, 1956 having its registered office at Mumbai Pune Road, Akurdi, Pune. During the impugned assessment year the assessee sold certain shares of Bajaj Group through Bombay Stock Exchange and National Stock Exchange for a total consideration of Rs.3,97,43,927/-. For the purpose of investing further in Rivulis Irrigation Limited, Israel and Rivulis Irrigation India Private Limited, the assessee decided to raise additional resources by issuing 5,90,000 equity shares of Rs.10 each on right basis at a premium of Rs.3,646/- per equity share. The assessee prepared the audited financial statements for the period from 01.04.2015 to 18.09.2015 which were placed before the Board of Directors of the assessee and were approved by the Board. The assessee undertook the valuation from an independent Chartered Accountant for computing the fair market

We find the Assessing Officer in the order passed u/s 143(3) made addition of Rs.215,40,82,300/- to the total income of the assessee on the ground that the NAV method adopted by the assessee as per the provisions of the IT Act and IT Rules was unrealistic. The issuance of rights shares by the assessee was not genuine and it was merely a facade created to give the transaction a legitimate colour. Further, he held that the entire transaction was carried out to circumvent FEMA provisions. In appeal, the Ld. CIT(A) / NFAC upheld the action of the Assessing Officer, the reasons of which have already been reproduced in the preceding paragraphs. It is the submission of the Ld. Counsel for the assessee that the assessee had an option to choose the method for determining the valuation of its shares under Rule 11UA of IT Rules and once such option is exercised by the assessee, it is not open for the Assessing Officer and the CIT(A) to determine the valuation of such share by any other method. It is his submission that the assessee in the instant case to arrive at the fair market value had prepared its Audited Financial Statements as on 18.09.2015 and the same were duly audited by the Statutory Auditors of the assessee. It is his submission that based on the Audited Financial Statements as on 18.09.2015, the fair market value of Rs.3,656/- per equity share of the assessee was arrived at and though not required, was certified by an independent Chartered Accountant. The Assessing Officer neither rejected nor disputed the Audited Financial Statements as on 18.09.2015 nor rejected/disputed the NAV Method calculation. It is his submission that the Assessing Officer also did not find any irregularities or inconsistencies in the computation as per the NAV Method and the fair market value of Rs.3,656/- per equity share of the assessee is undisputed and unqualified by the Assessing Officer

So far as the allegation of the Assessing Officer and the Ld. CIT(A) / NFAC that issuance of shares were undertaken by the assessee to circumvent the FEMA provisions and that Jai Hind Investments Private Limited, being a non-banking financial company (NBFC) could not have invested in Rivulis Irrigation Limited, Israel directly and Jai Hind Investments Private Limited by investing in the assessee had tried to circumvent the FEMA provisions is concerned, it is his submission that there is no violation of any FEMA provisions. It is also his submission that the Assessing Officer and the Ld. CIT(A) / NFAC had no juri iction to travel beyond the provisions of the IT Act, the IT Rules and the computation as per the NAV Method.

So far as the allegation of the Assessing Officer and the Ld. CIT(A) / NFAC that the issuance of right shares by the assessee was not genuine and it was merely a facade created to give the transaction a legitimate colour is concerned, it is his submission that neither the Assessing Officer nor the Ld. CIT(A) / NFAC has pointed out as to what is the tax benefit that the Appellant had received by issuing

We find sufficient force in the above arguments of the Ld. Counsel for the assessee. In the instant case we find the assessee had exercised the option of valuing its shares as per NAV method prescribed under Rule 11UA(2)(a). The assessee had prepared its audited financial statements as on 18.09.2015 and the fair market value of equity shares was determined at Rs.3,656/- per equity share. Neither the Assessing Officer nor the Ld. CIT(A) / NFAC found any irregularities or inconsistencies in the computation as per the NAV Method and the fair market value of Rs.3,656 per equity share of the assessee is undisputed and unqualified. In our opinion, once the option prescribed under Rule 11UA(2)(a) was chosen and applied by the assessee neither the Assessing Officer nor the Ld. CIT(A) / NFAC has the right to change the NAV method adopted by the assessee. They cannot say as to whether NAV method of computation prescribed under the IT Act and the IT Rules is realistic or unrealistic.

We find the Hon’ble Bombay High Court in the case of Vodafone M-Pesa The relevant observations of the Hon’ble High Court read as under:

Now the impugned order dated 23rd February, 2018 has been passed by Commissioner of Income Tax. The fundamental basis of the petitioners application for stay before the Commissioner of Income Tax was that the Assessment order dated 21st December, 2017 of the Assessing Officer raising the demand of Rs.62.38 crores was without juri iction. This demand was raised on account of the fair market value of the shares which had been issued at a premium to its holding Company for purposes of Section 56(2)(viib) of the Act. This for the reason that the Assessing Officer had for purposes of determining the fair market value of the shares issued to its holding Company substituted the Discounted Cash Flow (DLF) method by the Net Asset Value (NAV) method.

This was contrary to Rule 11UA of the Income Tax Rules, 1902 (Rules) as it provides an option to the Assessee to arrive at a fair market value of the shares either by the method as prescribed in Rule 11UAG)ta) of the Rules Le. NAV Method or in terms of Rule 11(2) (b) of the Rules Le. DCF Method.

We note that, the Commissioner of Income Tax in the impugned order dated 23rd February, 2018 does not deal with the primary grievance of the petitioner. This, even after he concedes with the method of valuation namely, NAV Method or the DCF Method to determine the fair market value of shares has to be done/adopted at the Assessee's option, Nevertheless, he does not deal with the change in the method of valuation by the Assessing Officer which has resulted in the demand. There is certainly no immunity from scrutiny of the valuation report submitted by the Assessee. Therefore, the Assessing Officer is undoubtedly entitled to scrutinise the valuation report and determine a fresh valuation either by himself or by calling for a final determination from an independent valuer to confront the petitioner. However, the basis has to be the DCF Method and it is not open to him to change the method of valuation which has been opted for by the Assessee."

On the other hand, Ld. Counsel for the assessee submitted that the AO has not accepted the method of valuation which was furnished by the assessee. The valuer computed the FMV by averaging the valuation as per PECV method as well as net asset value method. He submitted that when the legislation has conferred an option on the assessee to choose a particular method of the valuation, the AO cannot find fault in the said recognized method and adopting the method of his own choice. In support of this, he relied on the decision of the Hon'ble Juri ictional High Court in the case of Vodafone M-Pesa Ltd. v PCIT (2018) 164 DTR 257/ 256 Taxman 240 (Bom)(HC). As far as the worth of food division is concerned, the Ld. Counsel for the assessee submitted that assessee has followed the method prescribed under section 50B(3) of the Act alongwith Explanation (2). He submitted that in the net worth computed by the assessee and in the AO, there is only one difference. It was submitted that the assessee following the Explanation-2 below section 50B(3) of the Act has adopted written down value of the block asset in case of the depreciable asset as per the proviso to section 43 of the Act, which the AO has omitted.

We have heard rival submissions on the issue in dispute and perused the material on record. We find that computation of LTCG on the transfer of undertaking as the slump sale consists of two components. First component is sale consideration and the second component is the net worth or cost of acquisition. When the net worth of division is subtracted from the sale consideration, which results into LTCG on the slump sale. In the case of the assessee, the AO has taken FMV at Rs. 7,20,32,509/- which was worked out by the valuer following the PECV method, whereas the assessee has followed average value of PECV method as well as NAV method to justify the sale consideration actually received. We are of the opinion that Id Assessing Officer has not carried out valuation by an independent valuer and merely chosen a part of the valuation report submitted by the assessee. Therefore, we restore back the issue to the AO for referring the matter to a valuation expert by way of the issue of commission and _ thereafter, determining the FMV of the undertaking of the food division of the assessee."

Proceeding along similar lines, the Hyderabad Bench of the ITAT in Joint Commissioner of Income Tax vs. M/s MLR Auto Limited12 had held as follows:-

A more detailed discussion on the issue which confronts us in this appeal is relevant parts whereof are reproduced hereunder:-

Thus, the fair market value of the share shall be higher of the value as determined in accordance with the provisions of rule 11 UA or any other method, which can be substantiated by the assessee before the Assessing Officer. For the purpose of determining "fair (2022) 94 ITR (Trib) 596 market value" of unquoted shares provisions of rule 11 UA (2) applies which gives an option to the assessee to either value the shares as per prescribed formula given in clause (a) or clause (b) which provides for the determination of the fair market value based on discounted cash flow method as valued by a merchant banker or a chartered accountant (till 24th of May 2018). In the present case the assessee has valued the shares according to one of the "options" available to assessee by adopting discounted cash flow method. Therefore, such an option given to the assessee cannot be withdrawn or taken away by the learned Assessing Officer by adopting different method of valuation i.e., net asset value method. The method of valuation is always the option of the assessee. The learned Assessing Officer is authorised to examine whether assessee has adopted one of the available options properly or not. In the present case, the learned Assessing Officer has thrust upon the assessee, net asset value method rejecting discounted cash flow method for only reason that there is a deviation in the actual figures from the projected figures. It is an established fact that discounted cash flow method is always based on future projections adopting certain parameters such as expected generation of cash flow, the discounted rate of return and cost of capital. In hindsight, on availability of the actual figures, if the future projections are not met, it cannot be said that the projections were wrong. To prove that the projections were unreliable, the learned Assessing Officer must examine how the valuation has been done. In a case future cash flow projections do not meet the actual figures, rejection of discounted cash flow method is not proper. If projected future cash flow and actual result matches, such situation would always be rare. For projecting the future cash flow certain assumptions are required to be made, there needs to be tested and then such exemptions becomes the base of estimation of such projected future cash flows. If there are no assumptions, there cannot be an estimate of future projected cash flows and then discounted cash flow method becomes redundant. For exercise of valuation, assumption made by the valuer and information available at the time of the valuation date are relevant. As the exercise of valuation must be viewed as on the date of the valuation looking forward and cannot be reviewed in retrospect. Further, the valuation is always made based on review of historical data and projected financial information provided by the management. Further report of expert will always include limitation and responsibilities but that does not make his report incorrect. Of course, if there are errors in the working of projected cash flow, estimating the projected revenue and projected expenditure as well as in adoption of cost of equity and discount factor, the learned Assessing Officer is within his right to correct it after questioning the same to the assessee. The learned Assessing Officer can also question the basic assumptions made by the valuer. If they are unreasonable or not based on historical data coupled with the management expectation, the learned Assessing Officer has every right to question it and adjust the valuation so derived at. However, if he does not find any error in those workings, he could not have rejected the same. Further the reason given by the learned Assessing Officer that the net asset value method and the discounted cash flow method for valuation of the shares of the company gives a wide variation between them, we do not find any reason to find fault with the assessee in such cases. Both these methods have different approaches and methodologies therefore there are bound to be differences, but it does not give any authority to the learned Assessing Officer to pick and choose one of the method and make the addition. It is the assessee who has to exercise one of the options available under the provisions of the law for valuing the shares. The learned Assessing Officer needs to examine that method. Naturally, if the discounted cash flow method and net asset value method gives the same result, where would have been the need to prescribe the two methods in the law. In view of above facts, we do not find any infirmity in the order of the learned Commissioner of Income-tax (Appeals) in deleting the addition of Rs. 69,000,000 made by the learned assessing officer u/s 56 (2) (viib) of the act. Accordingly, ground Nos. 3 and 4 of the appeal of the learned Assessing Officer are dismissed."

We find the Hon’ble Delhi High Court in the case of PCIT vs. Cinestaan Entertainment Pvt. Ltd (supra) at para 13 of the order has observed as under:

It held that the right to select the method of valuation (NAV or DCF), is vested with the assessee, and the Assessing Officer erred in substituting the assessee's method of valuation, i.e DCF, with his own method of valuation, i.e. NAV method, and had acted completely beyond his juri iction.

..

Also, both the Tribunal and the CIT(Appeals) have held that the Assessing Officer had no juri iction to substitute the NAV method of assessing the valuation of shares, once the assessee had exercised option of a DCF valuation method as per Rule 11UA(2) of the Income Tax Rules.

We agree with the reasoning adopted by the CIT(Appeals) confirmed by the ITAT on all aspects and find that no substantial questions of law arise in this appeal for consideration by this Court."

We have considered the rival contentions as well as the relevant material on record. There is no dispute that the assessee has issued the shares to M/s Jasmine Pyt. Ltd., during the year under consideration. Further, the fair market value as per the provision of section 56(2)(vii)(b) has to be determined in accordance with the method prescribed under Rule 11UA of the IT Rules and as per sub-Rule (2) of

Rule 11UA, discounted cash flow method is one of the prescribed method. Therefore, it is the option of the assessee to adopt any of the prescribed method under Rule 11UA(2) of the IT Rules Section 56(2)(vii)(b) read with Explanation has specifically provided that the fair market value of the unquoted shares shall be determined as per the prescribed methods and shall be taken whichever is higher fair market value by comparing the value based on the asset of the company...

1 In view of the statutory provisions giving options to assessee to adopt any of the methods which can be compared with the Net Asset Value Method and the 40 shall adopt the value whichever is higher. In the case of the assessee the Fair Market Value determined as per the discounted cash flow method at Rs. 54 98 per share which is higher than the valuation adopted by the AO as per the Net Asset Value at Rs. 26.69 per share. Therefore, the share allotted at Rs. 40 per share is within the fair market value as determined by adopting the discounted cash flow method. The Assessing Officer has not found any serious defect in the facts and details used in determining the fair market value under discounted cash flow method. Hence, we do not find any error or illegality in the impugned order of the Ld. CIT (A) qua this issue.”

"B.S O.cccseee It appears that the authorities below have ignored Explanation (a) below S. 56(2)(viib). The said Explanation provides that the fair market value of the shares shall be the value (i) as may be determined in accordance with such method at may be prescribed i.e. u/r 11UA: or (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the valve, 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. Accordingly. the value computed under the Rule at Rs. 95.90 per share is higher than Rs. 65.31 or Rs. 32.76 per share and therefore, the higher valuation has to be adopted. Moreover, it is only the Explanation (a)(ii) speaks of the satisfaction of the AO but there appears, no such condition in the Explanation (a)(i) which therefore AO is not permitted to interfere in the valuation, once done in accordance with the method prescribed in the Rule 11UA(2). For the reasons stated above, we find no justification behind rejecting the declared valuation of the shares and in the impugned addition made by the AO but partly sustained by the CIT (A), which is hereby deleted."

In view of the above decisions, we hold that the Assessing Officer and the Ld. CIT(A) / NFAC had no authority under the provisions of the Income Tax Act

Now coming to the second objection of the Assessing Officer that the assessee has violated the provisions of FEMA i.e. issuance of shares undertaken by the assessee to circumvent the FEMA provisions and that Jai Hind Investments Private Limited, being a non-banking financial company (NBFC) could not have invested in Rivulis Irrigation Limited, Israel directly and Jai Hind Investments Private Limited by investing in the Appellant (being a CIC) had tried to circumvent the FEMA provisions is concerned, we are of the considered opinion that neither the Assessing Officer nor the Ld. CIT(A) / NFAC has the juri iction to travel beyond the provisions of the IT Act and the IT Rules and the computation as per the NAV method. They have no right whatsoever to adjudicate upon the FEMA provisions and to further check/comment on the correctness of the investment by Jai Hind Investments Private Limited into the assessee.

We find the RBI through its Authorized Dealer had approved the investment by the assessee in Rivulis Irrigation Limited, Israel and allotted the Unique Identification Number : BYJAZ20151030 for the said subscription of the shares by the company in Rivulis Irrigation Limited, Israel. In our opinion, the Assessing Officer and the Ld. CIT(A) / NFAC have travelled beyond their respective juri ictions while alleging that the assessee has issued shares to circumvent the FEMA provisions especially when the subsequent transaction was approved and there has been no allegation by RBI or any other governmental authority under the FEMA provisions.

We find the Hon’ble Bombay High Court in the case of PCIT vs. Milestone Real Estate Fund (supra) has held that the PCIT cannot arbitrarily use its revisionary power u/s 263 of the Act to deny the venture capital exemptions simply by substituting its subjective views for the Assessing Officers. The relevant observations of the Hon’ble High Court read as under:

The ITAT held that though the learned PCIT has observed that the Assessee has violated the conditions imposed under the SEBI Regulations by investing in mutual funds, she has not specified which provision of the SEBI Act or Regulations have been violated. The ITAT held that on carefully going through the VCF Regulations, the ITAT was unable to locate any restriction/condition imposed therein prohibiting the Assessee from investing in mutual fund units. The ITAT further referred to the clarification issued by SEBI, wherein it was specifically stated that there is no prohibition in investing surplus funds available with the VCF in short term liquid mutual funds.

The ITAT has further observed that the allegation of breach/violation of SEBI Regulation had originated from the PCIT whereas there is no such allegation of violation from SEBI, which is the competent authority (to look into any violation), neither the registration certificate granted has been withdrawn by SEBI, nor any action has been taken against the Assessee for any violation alleged by the learned PCIT. The ITAT, accordingly, held that the reasoning of the learned PCIT that the Assessee has violated SEBI Regulations, and hence is not eligible to avail of exemption under Section 10(23FB) of the Act was unsustainable.

Finally, the ITAT came to the conclusion that the Assessing Officer, while accepting the Assessee's claim of exemption under Section 10(23FB) of the Act. has made an extensive enquiry and applied the law correctly to the facts brought on record, and the assessment order passed can neither be held to be erroneous nor prejudicial to the interests of Revenue, and the Assessee is therefore bound to succeed on both, lack of juri iction to exercise powers under Section 263 of the Act, as well as on merits."

We find the Hon’ble Bombay High Court in the case of CIT (Exemptions), under:

However, in the AO, the ITO appears to have proceeded on the basis that the Assessee had erroneously excluded the Doctor's fees whilst computing its gross billing and, as a result, held that there was a shortfall on its part in transferring the requisite 2 percent amount to the Account. On this premise, the ITO held that the Assessee's character ceased to be charitable in nature and he has accordingly, denied exemption to the Assessee under Section I] of the Act and taxed the surplus amount of Rs.6,81,70,680/- whilst initiating separate proceedings for computation of penalty thereon.

In his order dated 7th November 2016, the CIT also recorded a further finding that the question as to whether the Assessee (charitable hospital) has to deduct 2 percent of the amount of doctor's fees also, as held by the ITO, whilst computing it's gross billing amount and credit such amount into the Account, cannot be referred to its earlier decision passed in the Assessee's own case wherein, after analysing the similar set of facts in the previous year, they had held that in law. the ITO could not have usurped the role of the Charity Commissioner and declare that the Assessee had breached the Scheme, more so when, there was no evidence produced, which stated otherwise. The ITAT also was impressed with the fact that the ITO could not have gone into this issue and recorded such an erroneous finding in the absence of any evidence before him that the Assessee's status of a charitable trust registered under the Bombay Public Trusts Act, 1950 being revoked by the Charity Commissioner. As a result, the ITAT dismissed the Appeal filed by the Revenue.

Considering the above position, we are of the considered opinion that the ITAT has neither committed any perversity nor applied incorrect principles to the given facts. In fact, it would not be out of place to mention that no such ground of perversity of findings made in the impugned order has also been raised in the Memo of Appeal filed by the Appellant-Revenue. In the circumstances, we are of the considered view that the present Income Tax Appeal does not raise any substantial question of lire."

We find the Ahmedabad Bench of the Tribunal in the case of ACIT vs. Navdeep Co.Op. Bank Ltd. (supra) has held that if irregularities exist or existed, there are other competent authorities to deal with it and the powers of the Revenue

Similar view has been taken by the various Benches of the Tribunals and the Hon’ble High Courts which are placed in the paper book. We, therefore, are of the considered opinion that the juri iction of the Assessing Officer and the Ld. CIT(A) / NFAC under the IT Act is limited to adjudicate upon the matters only as per the provisions of IT Act and not FEMA and therefore addition cannot be made

So far as the allegation of the Revenue that issuance of right shares by the assessee was not genuine and it was merely a facade created to give transaction a legitimate colour is concerned, we find neither the Assessing Officer nor the Ld. CIT(A) / NFAC has spelled out and explained as to what is the tax benefit that the assessee had received by issuing the right shares.

We find force in the argument of the Ld. Counsel for the assessee that the assessee had multiple options to raise funds to make further investments which included to issue shares or to borrow funds. Both the options are valid under the IT Act without any income-tax implications. The assessee is free to choose whichever option it thinks is appropriate to raise the funds and that there is no bar under the IT Act read with IT Rules. We find the Board of Directors of the assessee company in the instant case in their own wi om decided to raise the funds vide issuance of right shares. For such purpose, the assessee within the bounds of Rule 11UA of IT Rules opted to determine the fair market value of its shares by adopting the NAV Method and due procedures were followed. We, therefore, are of the opinion that the Assessing Officer as well as the Ld. CIT(A) / NFAC have grossly erred in assuming and alleging that the assessee had received

We find the Chennai Bench of the Tribunal in the case of Ambattur Developers (P.) Ltd. vs ITO reported in (2025) 180 taxmann.com 751 (Chennai —

We find the Chennai Bench of the Tribunal in the case of Asirvad Micro Finance Ltd. vs DCIT reported in (2026) 184 taxmann.com 430 (Chennai — Trib.) has observed as under:

From the above observations of the Hon'ble Finance Minister it is clear that the intention behind introduction of section 56(2)(viib) is to discourage the generation and use of unaccounted money....."

We find the Mumbai Bench of the Tribunal in the case of M/s. Impact Retail Tech Fund Pvt Ltd. vs. ITO vide ITA No.2050/Mum/2018 has observed as under:

At this stage, we notice that AO invoked the provision of section 56(2)(vib) merely because the fair market value of the shares are NIL and the advances received towards share capital over above the fair market value is taxable under section 56(2)(vib) The argument of the tax authorities are that no prudent investor will invest more than fair market value. Yes, we agree that no prudent investor will invest but prudent businessman will invest in order to safeguard the investment in the subsidiary or to revive the subsidiary company. The tax authorities invoked the provision u/s 56(2)(viib) without bringing on record whether the investment received by the assessee are genuine or not. We notice that the provision introduced by the legislature in order to curb the practice of generation and circulation of unaccounted money. In the current case, the tax authorities have not brought on record any generation or circulation of unaccounted money. Rather they acknowledged that the funds were invested by the holding company and received by the subsidiary company as advance towards share capital. It is not disputed that the net worth of the company is NIL because of investment in step down subsidiary company (due to provision towards revaluation of investment). It is also not disputed that the funds were moved from the holding company to the assessee and the funds were re-invested in the step down subsidiary company in order to revive the step down subsidiary in that process, the investment in such step down company is safeguarded."

In view of the above discussion and respectfully following the various decisions cited (supra), we hold that the Ld. CIT(A) / NFAC erred in confirming the addition of Rs.215,40,82,300/- made by the Assessing Officer as per the provisions of section 56(2)(viib) of the Act read with Rule 11UA of the IT Rules. The various decisions relied on by the Ld. CIT(A) / NFAC are distinguishable and not applicable to the facts of the present case. We, therefore, set aside the order of the Ld. CIT(A) / NFAC and direct the Assessing Officer to delete the addition.

The ground No.2 is premature at this juncture, therefore, the same is not being adjudicated. Ground of appeal No.3 being general in nature is dismissed.

In the result, the appeal filed by the assessee is allowed.

TS WIST / Guard file.