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Income Tax Appellate Tribunal, “C” BENCH, MUMBAI
Before: SHRI PRASHANT MAHARISHI, AM
This appeal is filed by the assessee against the order passed under Section 263 of the Income-tax Act, 1961 (the Act) by the Pr. Commissioner of Income Tax- 14, Mumbai ( Ld. PCIT) for A.Y. 2014-15 on 31.03.2019 holding that assessment order passed under Section 143(3) of the Act by the Dy. Commissioner of Income Tax-14(2)(2), Mumbai [ the Ld AO ] dated 19th December, 2016 determining the total loss of ₹30,25,58,061/- is erroneous and prejudicial to the interest of the Revenue as Assessing Officer has failed to determine the correct fair market value of shares issued and whether any sum is assessable to tax in terms of section 56(2)(viib) of the Act.
The learned PCIT examined the record and found that during the impugned assessment year assessee has issued 7,15,500 equity shares at ₹400 per share aggregating to ₹26.82 crores to One Shri Rakesh Kumar Wadhwan. The assessee has merely submitted a share valuation report as on 31st December, 2013 which has been placed on record and ld AO has not examined to ensure whether share valuation is in accordance with the provision of section 56(2)(viib) of the Act or not. Therefore, a notice under Section 263 of the Act was issued on 12 March 2018.
Assessee submitted a reply wherein assessee submitted that shares have been issued based on valuation report of the Chartered Accountant. It is submitted that the share value as on 31st March, 2013 was derived at ₹288.70 and on 31 December 2013, valuation is ₹402.86 on Net Asset Value Method. It was further stated that during the year there is an outstanding amount of share application money, which has been included in the net worth of the company by the assessee. To support it, assessee submitted the extract of the companies Act Schedule 3, wherein share application money is to be shown under the head equity. It was further contested that share value of ₹400 per share is lower than the fair market value determined by the independent valuer at ₹569.17 per share. It relied upon several judicial precedents and thereafter, stated that there is no error in the assessment order.
The learned PCIT considered the submission of the assessee and thereafter, vide paragraph no. 4 held that the order passed by the learned Assessing Officer is erroneous and prejudicial to the interest of the Revenue as the learned Assessing Officer has not at all applied his mind to the fair market value of the shares
1. The Learned Pr. Commissioner of Income Tax - 14, Mumbai has erred in law and in facts by passing a order u/s 263 dated 31/03/2019 by setting aside the assessment order dated 19/12/2016 passed by the Assessing Office (AO) by holding that the same is erroneous and prejudicial to the interests of the revenue, the same is passed without any evident application of mind and without making any evident enquiry or verification disregarding the fact that the said assessment order was made by the Ld. AO after completely verifying the details of Appellant Company for the A.Y.2014-15.
The Learned Pr.CIT has erred in law & on facts of rejecting the calculation of net worth of Appellant Company by holding that share application money should not be included in net worth calculation done by independent valuer.
3. The Learned Pr.CIT has erred in law & on ignoring the facts that the Appellant company has prepared share valuation report for the year under consideration as per explanation (a)(ii) of section 56(2)(viib) of the IT Act, 1961.
4. The Learned Pr.CIT has erred in law & on ignoring the facts that the Appellant company has prepared share valuation report for the year under consideration as per explanation (a)(ii) of section 56(2)(viib) of the IT Act, 1961, which was being accepted for the A.Y. 2015-16 and A.Y. 2016-17.
5. The Learned Pr.CIT has erred in law that even calculation of net worth as per explanation (a)(i) of section 56(2)(viib) of the IT Act, 1961 read with prescribed method i.e. as per Rule
6. The Learned Pr.CIT has erred in law & on ignoring the facts Appellant Company has provided all the documents as required by AO on matter of valuation of share issued.
7. The learned Pr.CIT has erred in not considering the detailed submissions made by the appellant Company during the 263 proceedings and completely disregarding the case laws relied upon by the Appellant Company to meet the ends of revenue.
8. The Appellant craves leave to add to and/ or amend and/ or delete and/ or modify and/ or alter the aforesaid grounds of appeal as and when the occasion demands.
All the aforesaid grounds of appeal are independent, in the alternative and without prejudice to one another.”
Facts show that Assessee Company is engaged in the business of manufacture of distillers and distributors. In previous year assessee has issued 97,000 equity shares on 27/3/2014 to one Mr.Rakesh Wadhwan at a price of ₹ 400/– per sale having a face value of ₹ 10/– each and premium of ₹ 390/– per share. The total consideration received was ₹ 38,800,000/–. During this year itself, assessee also received share application money for 7,15,500 equity shares at a price of ₹ 400/– per share being face value of ₹ 10 each and premium of ₹ 390/– per share to the tune of ₹ 28.62 crores. These 7,15,500 equity shares were allotted on 30/3/2015. To show that the shares have been issued at fair market value, assessee submitted chartered accountants valuation report dated 20/3/2014 where he employed 3 different methods for valuation of the shares. Adopting the discounted free cash flow method, value per share was derived at ₹ 569/– per share, adopting the relative approach the valuation was derived at ₹ 228/– per share and adopting network method he valued each share at ₹ 402.86. He averaged out the valuation adopting all these above 3 methods and valued the
After hearing the assessee, the learned PCIT held that the order passed by the learned assessing officer is erroneous insofar as prejudicial to the interest of the revenue for the following reasons:-
i. Share application money is neither covered in paid-up share capital nor as a reserve and therefore share application money pending allotment should not have been considered while calculating net worth of the company. ii. The share valuation report was submitted during the assessment proceedings but no further examination of share valuation report was carried out by the learned assessing officer. Therefore it is not correct to assume that the learned assessing officer has been iii. There is no change in the financials of the company between 31/3/2013 and 31st/12/2013 and therefore there cannot be any difference in the valuation of shares is on two dates but the shares have been valued at ₹ 288.70 as on 31/3/2013 and on 31/12/2013 at ₹ 402.86 per share iv. AO has not passed any order on his satisfaction of share valuation report and therefore the share valuation cannot be said to be as may be substantiated by the company to the satisfaction of the assessing officer. v. In sum and substance there is no enquiry into the facts material to the correct determination of the fair market value of the shares issued with necessary consequences for determination of taxable income
Therefore, the learned PCIT held that the order passed by learned assessing officer is erroneous and prejudicial to the interest of revenue. Assessee is aggrieved.
During the course of hearing, the learned Authorized Representative submitted a detail written submission containing of 23 pages. He read this submission. He also filed Paper Book no. 1 containing 115 pages, which contains merely the returns and submissions made before the lower authorities. He also filed a second Paper Book containing 163 pages. He also submitted a Paper Book no. 3 containing 15 judicial precedents relied upon by him. Later on, he also submitted a written clarification containing two pages. He submitted that a. Shares were issued in subsequent years on the same value, which has been accepted by the learned Assessing Officer by making assessment under Section 143(3) of the Act. He submitted the copies of such financial statement as well as the assessment orders.
c. During the year assessee has only issued 97000 equity shares amounting in to ₹388 lacs. The 7,15,500 equity shares were not at all issued, as those were appearing as share application money amounting to ₹28,62,00,000/-. d. Learned AO enquired u/s 142 (1) on 28/8/2016 as per point number 26 which has been answered by the assessee on 20/10/2016. Copy of the share valuation report was submitted on 28/11/2016 and confirmation of Mr. Rakesh Kumar Wadhwan submitted on 15/12/2016. Therefore complete enquiry was made by learned AO with respect to the shares issued at a premium and share application money. e. Value of share issued a required to be determined in accordance with method prescribed Under rule 11 UA (2) which says that it can be discounted cash flow method wherein the valuation derived is ₹ 569.17 per share or as may be substantiated by the company to the satisfaction of the AO wherein the valuation report shows the value at ₹ 312.82 per share, whichever is higher of these two valuation should be adopted. Accordingly the value of share can be 569.17 per share. Thus there is no prejudice caused to the revenue. f. He relied upon several judicial precedents. He referred to the decision of coordinate bench in case of Deputy Commissioner of income tax versus Credtalpa 134 Taxmann.com 223 that the law does not given authority to the learned assessing officer to pick and choose one of the methods of the share valuation and make the addition. He further relied upon the decision of the honourable Bombay High Court in case of Vodafone M Pesa limited versus principal Commissioner of income tax 92 taxmann.com 73 stating that the valuation basis has to be the discounted cash flow method and AO cannot change the method of valuation. He further relied on the decision of coordinate bench in Innoviti payment g. With respect to the jurisdiction invoked by the learned PCIT for revising the order is not in accordance with law. He relied upon the decision of the honourable Bombay High Court in case of CIT versus Gabriel India Ltd 203 ITR 108, coordinate bench in case of Narayan Tatu Rane 70 taxmann.com 227, honourable Supreme Court in case of CIT prints private limited hundred and 30 taxmann.com 294 wherein it has been held that the revision powers cannot be exercised for directing a full enquiry to merely find out if the earlier view taken is erroneous particularly when a view is already taken after enquiry. AR further relied upon the decision of the coordinate bench in case of blue Dart express Ltd versus JCIT 75 ITD 414, honourable Delhi High Court in case of associated food products 280 ITR 377, honourable Andhra Pradesh High Court in 114 ITR 404 and Hon. Bombay High Court in case of CIT versus Gopal purohit 228 CTR 582. He further submitted that the AO has held that the method of valuation of share is correct and accepted accordingly this is one of the possible view in accordance with the law and therefore he relied upon decision of honourable Supreme Court in case of Malabar industrial Co Ltd versus CIT 243 ITR 83 two submitted that in such cases the revision order u/s 263 is not sustainable. To support this contention he also referred to several judicial precedents of honourable High Court is stated in his written submission. He also stated that if a query is raised during the assessment proceedings and if the AO responded to the said query, if there is no finding in the assessment order it would not lead to a conclusion that AO has not applied his mind. He submitted that this is the case of the assessee. Once again several judicial precedents of honourable High Court were relied upon. He also stated that the CIT cannot invoke provisions of Section 263 of the act for h. He also justified that that share application money should be included in the net worth calculation made by the independent valuer. He referred to the provisions of the companies act and explained to us that how the valuation of share is required to be made to compute the net worth. He stated that the rule 11 UA (2) the shares are to be valued at book value and it does not require to exclude share application money. According to him it requires to reduce book value of liabilities only. He placed reliance on the decision of the coordinate bench in case of reliance payment solutions Ltd versus PCIT to submit that revision powers u/s 263 cannot be invoked merely because AO did not give specific reasons for accepting assessee’s submissions. i. He specifically submitted that for assessment year 2014 – 15 assessee issued 97,000 shares on 27th of March 2014, in assessment year 2015 – 16 issued 9,48,135 shares on 30/3/2015 and in assessment year 2016 – 17 on 30 September 2015 issued 16,33,860 shares at the issue price of ₹ 400 per share which is been accepted by the learned assessing officer in assessment order passed u/s 143 of the income tax act and therefore the learned PCIT should not have disputed the allotment of shares during this year. j. He specifically submitted that AO was provided with complete details during the course of assessment proceedings and therefore the learned PCIT is not justified in invoking the provisions of Section 263 of the act.
9. According to him, the order passed under Section 263 of the Act is not sustainable.
The learned CIT Departmental Representative submitted that b. With respect to the share premium, he submitted that the valuation report submitted by the assessee is flawed as share application money and has been considered as part of the net book value, which is erroneous. He further referred to the decision of the coordinate bench in case of medicon leather private limited versus Asst Commissioner of income tax (2022) 135 taxmann.com 165 to support his case
c. Order of the learned Assessing Officer suffers from the twin defects. Firstly, the valuation report is accepted without examining the valuation report and secondly, valuation made by the assessee is itself erroneous.
He therefore submitted that there is no infirmity in the order of the learned PCIT.
We have carefully considered the rival contentions and perused the orders of the lower authorities. We have also carefully considered all the submissions made by the assessee along with the host of judicial precedents cited by the learned authorised representative. We have also considered the judicial precedents mentioned by the learned departmental representative.
Facts of case have already been narrated. The only issue required to be examined is whether order passed by learned principal Commissioner of income tax u/s 263 of The Income Tax Act is proper or not.
The first claim made by the learned authorised representative is that during the course of assessment proceedings the learned assessing Officer has completely examined issue of shares at a premium. The first notice u/s 142 (1) of the act was issued by the learned assessing officer on 22/8/2016 which is placed at
Now we come to the claim of the assessee that share application money is also required to be considered in the net worth of the assessee. As per valuation report dated 20 March 2014, the assessee is extracted the audited accounts as on 31st of March 2013 and on audited accounts as on 31st of December 2013. The valuation of share has been made as Under:-
( In lakhs)
31st serial Particulars As at of As at 31 number March 2013 December 2013 (audited) (9 months on audited) 1 Shareholders’ fund Equity share capital 317.86 317.86 Reserve and surplus 8859.55 9625.18 Share application money [ 0 2862 715500 shares @ Rs 400/- each ] Net worth (shareholders 9177.41 12,805.04 funds 2 Number of equity shares 31,78,550 31,78,550 3 Value per share 288.73 402.86
On examination of the above working, the learned principal Commissioner of income tax was of the view that despite there is no substantial change in the business of the assessee the share valuation has gone up from ₹ 288.73 to ₹ 402.86. This is only because of the reason that while valuing the shares as on 31
31st serial Particulars As at of As at 31 number March 2013 December 2013 (audited) (9 months on audited) 1 Shareholders’ fund Equity share capital 317.86 317.86 Reserve and surplus 8859.55 9625.18 Share application money 0 2862 [ 715500 equity shares of Rs 400/- each] Net worth (shareholders 9177.41 12,805.04 funds 2 Number of equity shares 31,78,550 38,94,050 3 Value per share 288.73 328.84
Explanation to section 56 (2) (viib) defines what is fair market value of unquoted equity shares of a company in which public are not substantially interested. It defines :-
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;
However, in present case, the valuation made by the assessee is not in accordance with Rule 11UA , as assessee tried to increase the valuation by inclusion of share application money in net worth or consequently not increasing the total issued capital. Thus, it did not satisfy Clause (i) of above explanation. Further clause (ii) was not at all looked by AO with respect to other valuation, so there is no question of reaching at any satisfaction by LD AO.
Nothing was shown to us that on the issue of inclusion of share application money in net worth of the assessee and not increasing the number of shares or equity share capital by that amount while preparing valuation of shares can have two opinions. Therefore, even on that count argument of Assessee fails.
We find that several judicial precedents cited by the ld AR does not apply to the facts of the case as we have dealt with the various issues on which the case laws were relied up on.
Therefore, we find the ld PCIT has correctly held that order passed u/s 143 (3) of The Act by the ld AO is erroneous so far as prejudicial to the interest of revenue in [1] not at all examining the issue of share premium , [2] even otherwise, accepting share valuation report as it is without examining it [3] even otherwise, accepting flawed valuation of share by net asset method by allowing inclusion of share application money pending allotment in net worth . Thus, we up hold the order of LD PCIT passed u/s 263 of the Act dismissing all grounds of appeal.
In the result, appeal is dismissed.
Order pronounced in the open court on 26.07.2022.