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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI S. RIFAUR RAHMAN, AM
IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH, MUMBAI BEFORE SHR AMIT SHUKLA, JM & SHRI S. RIFAUR RAHMAN, AM आयकरअपीलसं./ I.T.A. No.4266/Mum/2017 (निर्धारणवर्ा / Assessment Year: 2011-12) Income Tax Officer- M/s. Mystical Infaratech Pvt. Ltd., 12(3)(4),Room No.147A, 1st बिधम/ Ground Floor, D. B.House,, Floor ,Ayankar Bhavan, Vs. Gen A.K.Vaidya Marg, M.K.Road, Mumbai-400 Mumbai-400 063. 020. स्थायीलेखासं./जीआइआरसं./ PAN No. AAGCM1049J (अपीलाथी/Appellant) (प्रत्यथी / Respondent) : अपीलाथीकीओरसे/ Appellant by : Shri. Nimesh Yadav( CIT DR) प्रत्यथीकीओरसे/Respondent by : Shri. A.K.Ghosh , Pooja Ramder , Ld. AR सुनवाईकीतारीख/ : 22.06.2022 Date of Hearing घोषणाकीतारीख / : 19.09.2022 Date of Pronouncement आदेश / O R D E R Per Amit Shukla, Judicial Member: The aforesaid appeal has been filed by the revenue against order dated 30.03.2017, passed by CIT (Appeals)-20 Mumbai for the quantum of assessment passed u/s 143(3) for AY 2011-12. The revenue has raised the following grounds:-
2 I.T.A. No. 4266/Mum/2017 M/s. Mystical Infaratech Pvt. Ltd 1. On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in deleting the addition of Rs.12,74,34,70,000/- u/s. 56 (2) (viia) of the Act made by the Assessing Officer being the difference in the consideration paid towards receipt of the shares of M/s. D.B. Projects Pvt. Ltd. and M/s. SLS Energy Pvt. Ltd. by the assessee and Fair Market Value of the equity shares of such investee companies as per Rule 11Ua of the I.T. Rules ,1962. 2. On the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in holding that provisions of Sec.56(2)(viia) are not attracted to the case of assessee company without appreciating that during the relevant previous year, the assessee company had received shares of M/s. D. B. Projects Pvt. Ltd. and M/s. SLS Energy Pvt. Ltd. for a consideration which was less than the aggregate Fair Market -Value (FMV) of the equity shares of each such investee company by an amount exceeding fifty thousand rupees. 3. The appellant prays that the order of the CIT(A) on the above ground be set aside and that of the Assessing Officer be restored.
The facts in brief are that, Assessee Company is engaged in the business of construction work and during the year, have not reported any revenue activity. During the course of assessment proceedings, the AO noted that Assessee Company has made investment by way of purchasing shares of group concerns at a
3 I.T.A. No. 4266/Mum/2017 M/s. Mystical Infaratech Pvt. Ltd lesser then the fair market value (FMV). The Ld. AO had proposed the FMV of the shares as per rule 11UA in the following manner:-
No Particulars M/s. SLS Energy M/s. DB Project Pvt Pvt. Lt. Ltd. 09.07.2010 & 09.07.2010 & 1 Date of allotment or investment or 13.07.2010 13.07.2010 payment made towards the shares 2 No. of Equity shares Invested 6,80,000 6,95,000 3 No. of Preferential Shares Invested 68,00,000 68,50,000 4 Face value per Equity share 10 10 5 Premium charged per Equity share 0 0 6 Face value per Preferential share 1 1 7 Premium charged per Preferential 999 999 share 8 Fair Market Value of share as on 8,832 9,856 31.03.2010 as worked out U/r. llUA of IT Rules 1962. 9 Difference between Fair Market Value 8,822 9,846 and purchase price of Equity share per share 10 Difference between Fair Market Value 7,843 8,856 ! and purchase price of Preference share per share
Accordingly, the AO issued the show cause notice to make proposed additions u/s 56(2)(viia).
4 I.T.A. No. 4266/Mum/2017 M/s. Mystical Infaratech Pvt. Ltd 3. In response, assessee had filed a detail reply before the AO which has been incorporated at page 4 to 12 of the assessment order. In sum and substance, the assessee’s contention was that firstly, the provision of section 56(2)(viia) does not apply to other allotment of equity /preference shares; secondly, the equity shares in SLS and DBPPL were acquired by the assessee company on 30th July 2010, therefore the valuation dated of transfer of equity shares is to be taken as on 30th July 2010; thirdly, the detail working of the valuation as per 11UA was also given; fourthly, it was stated that the valuation date cannot be taken as on 31st March 2010 but on the date of transfer/ allotment; and lastly, it was stated that the liabilities as appearing in the balance sheet as on 30th July 2010 should be reduced from the book value for which the details were also given.
However, the Ld. AO held that assessee is not disputed the value arrived in the show cause notice as on 31st March 2010 of the share of both the parties and rejected the assessee’s working of valuation of shares. He has also noted the chronology of events for
5 I.T.A. No. 4266/Mum/2017 M/s. Mystical Infaratech Pvt. Ltd redemption /transfer /allotment of shares in both the companies which are as under:- Chronology of events in case of SLS Sr. No. Date Event/Particulars Proof Submitted 1 09-07-10 Allotment of 6,80,000 Equity Shares to Form No.2 Mystical. 2 13-07-10 Redemption of 68,00,000 Preference Shares Board Resolution to Dynamix Balwas Infrastructure Pvt. Ltd at dated 13/7/2010 Premium.
3 30-07-10 Purchase of 90,000 Equity Shares by Demat Statement Mystical from Dynamix Balwas & Share Infrastructure Pvt. Ltd. Certificate 4. 03-08-10 Allotment of 68,00,000 Preference Shares to Board Minutes the assessee. dated 3/8/10
Chronology of events in case of DBPPL
Sr. No. Date Event/Particulars Proof Submitted 1 09-07-10 Allotment of 6,85,000 Equity Shares to Form No.2 Mystical 2 13-07-10 Redemption of 68,50,000 Preference Shares to Board Resolution Dynamix Balwas Infrastructure Pvt Ltd at dated 13/7/2010 Premium. 3 30-7-10 Purchase of 10,000 Equity Shares by Demat Statement Mystical from Dynamix Balwas & Share Infrastructure Pvt Ltd. Certificate
6 I.T.A. No. 4266/Mum/2017 M/s. Mystical Infaratech Pvt. Ltd 5. Ld. AO himself acknowledged that the shares were allotted to both the companies on 09/07/10. On the issue of valuation date, Ld. AO has made following observations:- As regards the "Valuation Date" the assessee placed reliance on Rule 11U(b) of IT rules 1962. A perusal of the said rule shows that the sub-clause (b) defines the balance sheet for the purpose of valuation of the shares as per the companies act. The said rule nowhere specifies the 'valuation date' as a particular date as claimed by the assessee in this case being 30.07.2010. The fair market value of the property being share as specified under section 56(2)(vii)(viiia) of the IT act is always has to be determined with reference to the date of allotment of share and not the purchase of the share by the recipient. In this instant case the date of receipt of shares of SLS is 09-07-2010(Equity] & 03-08-2010[Preference) and DBPPL is 09-07-2010CEquity) & 03- 08-2010(Preference) respectively. Therefore the valuation has to be done in these cases with reference to the about date and not 30.07.2010 as claimed by the assessee. In the valuation submitted by the assessee has reduced the amounts redeemed on account of the preference shares to the investors of the above companies to arrive at the value as on 30.07.2010. This method adopted by the assessee is not correct and the valuation is required to be done on09-07-2010 & 03-08- 2010.
7 I.T.A. No. 4266/Mum/2017 M/s. Mystical Infaratech Pvt. Ltd 6. Accordingly, AO computed the valuation of shares in respect of the 2 companies by applying net asset value method (NAV). For SLS shares, he computed the fair market value per equity shares at Rs. 8,832 and for DBPPL shares, he worked out the fair market value at Rs. 9,856 per share and accordingly, he computed the difference between the FMV and purchase price of equity astronomical figure of Rs. 1274,34,70,000/- and taxed the same u/s 56(2)(viia).
Ld. CIT (A) held that, firstly, for invoking the provision u/s 56(2)(viia), mere receipt is not sufficient. Secondly, he held that assessee has submitted the valuation of shares as on 09.07.2017 to be Rs. 10 per share after taking into account the liability outstanding in the books of the investee company towards the redemption of the premium of preference shares outstanding in the books of the account. The computation of FMV as done by AO was not in conformity with rule 11U and 11UA because AO has not taken the liability on account of redemption of preference share standing in the books of Investee Company. He further noted that assessee had submitted the valuation report of the shares from B. B. Jain and Associates which supported this view. His relevant
8 I.T.A. No. 4266/Mum/2017 M/s. Mystical Infaratech Pvt. Ltd observation for deleting the entire addition made by the AO reads as under:- 5.7 The. Section 56(2)(viia) applies to a purchase of shares by a person from another person who had held the shares, prior to their transfer. In the present case the appellant had subscribed to the shares of the group concerns which came into existence or were created in the closely held company due to fresh allotment. It is not a case of transfer of shares from a third party below the market value of shares as on date of transfer. It is noted in the instant case the appellant had subscribed to the share capital of two group companies i.e. D B Projects Pvt. Ltd. and SLS Energy Pvt. Ltd. on 09.07.2010. It is noted the appellant has submitted the valuation of shares as on 09.07.2017 to be Rs. 10/share after taking into account the liability outstanding in the books of the investee companies towards the redemption of the premium on preference shares outstanding in their books of accounts. The AO had not accepted this valuation and had proceeded to make addition of Rs.12,74,34,70,000 M/s 56(2)(viiia). It is noted that the computation of Fair Market Value of shares of D B Projects Pvt. Ltd. and SLS Energy Pvt. Ltd. done by Assessing Officer is found not to be in confirmation with Rule 11U & 11UA since the liability or account of the redemption of preference shares standing in the books of these investee companies was not considered by the AO while arriving at the fair market value of the share of investee companies as on the date of investment
9 I.T.A. No. 4266/Mum/2017 M/s. Mystical Infaratech Pvt. Ltd made by the appellant. It is not a case of the AO that the appellant was transacting in the shares at different rates and that this arrangement had been done to defraud the revenue its taxes by transacting at abnormally low prices. The appellant had submitted valuation report of the shares from B.B. 3ain & Associates which supports this vie The value of shares as per valuation report on the date of transfer was Rs.10/share after considering the existing liabilities of the investee companies whereas valuation arrived by learned Assessing officer without considering these was very much on the higher side at Rs.8832 in case of SLS and Rs.9856 in case of DBPP against the issue price and the value of shares as per valuation report which rightly valued the shares at Rs. 10 per share. It is seen that the Rule 11UA prescribes that the fair market value of unquoted equity shares shall be the value, on the valuation date, of such unquoted equity shares as determined by considering the book value of both assets and liabilities. The AO in the present case has ignored the liabilities outstanding in the balance sheets of the two investee companies i.e. D B Projects Pvt. Ltd. and SLS Energy Pvt. Ltd. which has resulted in a much skewed valuation figure for the FMV of the shares of these two companies, which is found not to be in confirmation with the method as prescribed by Rule 11UA. Having regard to the full facts of the case it is noted that in the present case provisions of section 56(2) (viia) are not attracted and the AO has also wrongly applied the Rule 11UA. In view of this discussion the addition made by the AO of Rs.
10 I.T.A. No. 4266/Mum/2017 M/s. Mystical Infaratech Pvt. Ltd 12,74,34,70,000/-, u/s 56(2)(viia) cannot be sustained in appeal and is,- directed to be deleted. Accordingly these grounds of appeal are allowed.
Before us, Ld. DR strongly referred and relied on the order of AO and submitted that the AO has threadbare analyzed the assessee’s explanation and has taken the valuation as per the net asset value method as on 09.07.10 which is in accordance with rule 11/11UA.
On the other hand, Ld. Counsel for the assessee strongly relied on the order of Ld. CIT (A) and drew our attention to the copy of balance sheet of both the companies as on 09.07.10 which are appearing in the paper book at page 213 and 218 and pointed out that there was a clear cut liability on account of redemption of preference shares which AO has not taken into account as provided specifically under rule 11UA(2).
We have heard the rival submission and perused the relevant findings and material placed on record. From the discussion as made above, the short controversy which involves is, whether the valuation was done by the AO is in accordance with rule 11U and
11 I.T.A. No. 4266/Mum/2017 M/s. Mystical Infaratech Pvt. Ltd rule 11UA or not. The AO in his detail order has nowhere made any whisper about liabilities outstanding in the balance sheet as on 09.07.10 which is the date on which shares were transferred/ allotted. Rule 11U clearly provides that ‘Valuation Date’ means, the date on which property or consideration, as the case may be, received by the assessee. Here in this case, the valuation date is to be reckoned on the date on which shares were allotted. The assessee had subscribed to the share capital of its two companies D. B. Project Pvt. Ltd. and SLS Energy Pvt. Ltd. on 09.07.10 and it was submitted that the valuation of the shares as on 09.07.10 as per NAV worked out to Rs. 10 per share after taking into account the liability outstanding in the books of the investee company. The balance sheet as on 09.07.10 in the case of D. B. Projects Pvt. Ltd. and SLS Energy Pvt. Ltd. are as under:-
D. B. Projects LIABILITIES Amount (Rs.) Amount (Rs.) ASSETS Amount (Rs.) Amount (Rs.) CAPITAL ACCOUNT 6,950,000.00 FIXED ASSETS Pre 4,258,463.00 4258,463.00 Operating Expenses Equity Share Capital Pending Capitalisation 68,50,0000.01% ' Optionally Convertible Cumulative Preference 6,850,000.00 13,800,000.00 CURRENT ASSETS 1 shares of Rs. 1 /-each 4,400,000.00 LOAN(UABIUTY)
12 I.T.A. No. 4266/Mum/2017 M/s. Mystical Infaratech Pvt. Ltd
CURRENT Loans & Advances 6,856,850,000. LIABILITIES (Asset) 00 Sundry Creditors (11,030.00) Cash-In-Hand 10,605.00 Payable to Dynamix Balwas infrastructure Private Limited on 6,843,150,000. 6,843,138,970. Sank Accounts 219,902.00 6,857,080,507 account of premium on 00 00 redemption of ( DBDPL )
Total 6,861,338,970. Total 6,861,338,970. 00
SLS Energy Pvt. Ltd. LIABILITIES Amount (Rs.) Amount (Rs.) ASSETS Amount (Rs.) Amount (Rs.) CAPITAL ACCOUNT FIXED ASSETS Equity Share Capital 7,700,000.00 Pre Operating Expenses Fending Capitalization 9,236,895.78 9,236,895
68,00,000 0.01% Optionally Convertible Cumulative 'reference 6,800,000.00 14500,000.00 Shares of Re I/- each (Due for Redemption) 48,500,000.00 LOAN (LIABILITY) CURRENT ASSETS 6,846,800,000 Deposits .cans & 40,000,000.00 CURRENT Advances 6,806,800,000. (11,030.00) LIABILITIES Sundry 00 Creditors
Payable to Dynamix Bahvas Infrastructure 6,793,188,970. 6,793,200,000. Private Limited on 00 Cash-In-Hand Bank 00 15,011.00 account of premium on Accounts 152,074.22 137,063.22 redemption of (DBffL)
Total 6,856,188,970 Total 6,856,188,970
13 I.T.A. No. 4266/Mum/2017 M/s. Mystical Infaratech Pvt. Ltd 11. From perusal of the same, it is fairly evident that under the head liabilities, there was a clear cut liability disclosed in the balance sheet in the form of redemption of preference shares. Section 11UA provides that the book value of the liability shown in the balance sheet has to be reduced for the purpose of valuation and determination of FMV of unquoted equity shares. The AO has erroneously taken the balance sheet as on 31st March 2010 without taking note of the fact that the balance sheet as on the date of valuation date, i.e,. the date on which shares were transferred or received by the assessee. The liability was reflected in the balance sheet post dated 31st March 2010. If the liability as on the date of allotment is taken into consideration, then the valuation submitted by the assessee is correct and therefore, the AO has completely erred in law and on facts not taking into consideration. The liability disclosed in the balance sheet as noted above while valuing the FMV of the shares of both the companies has to be reduced and accordingly, Ld. CIT (A) has rightly deleted the additions made by the AO. Therefore, the order of Ld. CIT(A) is confirmed and the addition of Rs. 1274,34,70,000/- is directed to be deleted.
14 I.T.A. No. 4266/Mum/2017 M/s. Mystical Infaratech Pvt. Ltd 12. In the net result, the appeal filed by the revenue stands dismissed. Orders pronounced in the open court on 19th September, 2022. Sd/- Sd/- S. Rifaur Rahman) (Amit Shukla) Accountant Member Judicial Member मुंबई Mumbai;ददनांक Dated : 19.09.2022 Sr.PS. Dhananjay आदेशकीप्रनिनिनिअग्रेनर्ि/Copy of the Order forwarded to : 1. अपीलाथी/ The Appellant 2. प्रत्यथी/ The Respondent 3. आयकरआयुक्त(अपील) / The CIT(A) 4. आयकरआयुक्त/ CIT- concerned 5. दवभागीयप्रदतदनदध, आयकरअपीलीयअदधकरण, मुंबई/ DR, ITAT, Mumbai 6. गार्डफाईल / Guard File आदेशधिुसधर/ BY ORDER, .उि/सहधयकिंजीकधर (Dy./Asstt.Registrar) आयकरअिीिीयअनर्करण, मुंबई/ ITAT, Mumbai