ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-4(1),, VISAKHAPATNAM vs. SRI Y VENKANA CHOUDARY,, VISAKHAPATNAM

IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH, VISAKHAPATNAM BEFORE SHRI V. DURGA RAO, HON’BLE JUDICIAL MEMBER & SHRI D.S. SUNDER SINGH, HON’BLE ACCOUNTANT MEMBER ITA No. 272/VIZ/2018 (Asst. Year : 2014-15) ACIT, Circle-4(1), vs. Y. Venkanna Choudary, Visakhapatnam. D.No. 1-1-2, C/o Anuradha Auto Centre, Sheela Nagar, NH-5, Visakhapatnam. PAN No. AANPY 3003 G (Appellant) (Respondent) C.O.No. 108/VIZ/2019 (Arising out of ITA No. 272/VIZ/2018) (Asst. Year : 2014-15) Y. Venkanna Choudary, vs. ACIT, Circle-4(1), D.No. 1-1-2, C/o Anuradha Visakhapatnam. Auto Centre, Sheela Nagar, NH-5, Visakhapatnam. PAN No. AANPY 3003 G (Appellant) (Respondent)

Assessee by : Shri G.V.N. Hari – Advocate. Department By : Shri D.K. Sonawal – CIT DR

Date of hearing : 29/08/2019. Date of pronouncement : 30/09/2019. O R D E R PER D.S. SUNDER SINGH, ACCOUNTANT MEMBER

This appeal by the Revenue and the cross objection by the assessee are directed against the order of Commissioner of

2 ITA No. 272/VIZ/2018 C.O.No.109/VIZ/2018 (Y. Venkanna Choudary) Income Tax (Appeals)-2, Visakhapatnam, dated 27/03/2018 for the Assessment Year 2014-15. 2. All the grounds of appeal are relating to valuation of shares invoking Rule 11UA of the Income Tax Rules, 1962 and resultant addition made u/sec. 56(2)(vii)(c)(ii) of the Act. 3. Brief facts of the case are that the assessee is an individual and the Director in M/s. Sardar Projects Pvt. Ltd., Visakhapatnam. During the previous year relevant to the assessment year under consideration, the assessee had acquired the shares of M/s.Sardar Projects Pvt. Ltd. on 05/04/2013 and 26/03/2014 as per the details given under:- Date of acquisition Number of shares Face value Purchase price 05/04/2013 4,25,000 Rs. 10 Rs. 10 26/03/2014 9,05,000 Rs. 10 Rs.10

The cost of acquisition of the shares of M/s. Sardar Projects Pvt. Ltd. appeared to be much lesser than the Fair Market Value (FMV), therefore, the Assessing Officer estimated the FMV as on 05/04/2013 and 26/03/2014 as per the previous year balance sheets of M/s. Sardar Projects Pvt. Ltd., and worked out the taxable income u/sec. 56(2)(vii)(c)(ii) of the Act, as per Rules 11U & 11UA of the IT Rules 1962 as under:-

3 ITA No. 272/VIZ/2018 C.O.No.109/VIZ/2018 (Y. Venkanna Choudary) Date No. of (A-L)* PV/PE FMV Cost of FMV Income u/s shares (Rs.) acquisitio minus 56(2)(vii)(c) n (Rs.) cost of (ii) (Rs.) acquisition 05/04/2013 4,25,000 (150169940-136039771)*10 706.51 10 696.51 29,38,91,750 200000 26/03/2014 9,05,000 (288716791-186682782)*10 12.00 10 2 18,10,000 85042600 Total 29,57,01,750

The Assessing Officer called for explanation of the assessee

as to why the equity shares of 4,25,000 acquired on 05/04/2013

should not be valued adopting the FMV of Rs. 29,81,41,750/- and

the shares of 9,05,000 equity shares acquired on 26/03/2014 at

Rs. 18,10,000/- and the resultant difference should not be

brought to tax u/sec. 56(2)(vii)(c)(ii) of the Act. In response to

the notice issued by the Assessing Officer, the assessee filed a

detailed explanation stating that FMV of the shares was computed

in terms of Rule 11U and 11UA by his CA which worked out to Rs.

13.26 per share on 05/04/2013 and Rs. 12.64 per share on

26/03/2014 and further submitted that for valuing the FMV of the

shares, the fresh allotment of shares also required to be taken in

to consideration. Accordingly, the assessee furnished the working

of valuation of shares as on 26/03/2014, 05/04/2013 &

26/03/2013 as under:-

Valuation as on 26/03/2014

A Book value of assets Fixed Assets 51,20,568 Long term Loans & advances 11,89,53,557 Current Assets 17,06,16,708 29,46,90,883

4 ITA No. 272/VIZ/2018 C.O.No.109/VIZ/2018 (Y. Venkanna Choudary) B Book value of Liabilities Long term borrowings 8,60,16,972 Short term borrowings 3,00,000 Trade Payables 54,63,241 Other current liabilities 9,52,33,527 Short term provisions 2,50,286 18,72,64,026 C NET Value (A-Business) 10,74,26,806 D Share Capital Subscribed and paid up share 8,50,42,600 capital Reserve for allotment of share application money ___________ 8,50,42,600 E No. of shares allotted to Y.V. Choudary F. Fair value of the shares: 10,74,26,806 * 1,34,00,000 8,50,42,600 = 1,69,27,036 i.e. 12.64 per share

Valuation as on 26/03/2013 A Book Value of Assets Fixed Assets 57,92,608 Current Assets 14,02,08,058 14,60,00,666 B Book Value of Liabilities Long term borrowings 7,43,36,466 Short term borrowings 8,50,000 Trade Payables 33,73,198 Other current liabilities 12,75,50,000 Short term provisions 7,21,519 9,20,36,183 C NET VALUE (A-B) 5,39,64,483 D Share Capital Subscribed and paid up share 3,85,05,600 capital Reserve for allotment of share application money 21,62,000 4,06,67,000 E No. of shares allotted to Y.V. Choudary 4,25,000 F Fair Value of the shares: 5,39,64,483 * 42,50,000 4,06,67,600 = 56,39,600 i.e. 13.26 per share

Thus, the ld.AR argued that for arriving the value of fresh allotment of shares, FMV required to be worked out as on the date of allotment of shares but not excluding the fresh allotment.

5 ITA No. 272/VIZ/2018 C.O.No.109/VIZ/2018 (Y. Venkanna Choudary) Thus, argued that FMV as on 26/03/2014 works out to Rs. 12.64 per share and Rs. 13.26 as on 26/03/2013. For the shares allotted on 05/04/2013, the ld.AR argued that as per Rule 11U valuation of shares allotted to the assessee has to be valued basing on the balance sheet as on the valuation date. The "valuation date" means the date on which the property or consideration, as the case may be, received by the assessee. Section 56(2)(vii)(c)(ii) has been brought in to the statute to address the issues consequent to abolition of gift tax where higher value is sought to be passed on from one person to another person without adequate consideration. In the instant case, the shares were allotted by the M/s. Sardar Projects Pvt., Ltd. subsequent to the adjustment of share application money, therefore argued that the balance sheet has to be taken into consideration for post allotment of shares and not prior allotment. The assessee has relied on the decision of ITAT, Mumbai in the case of Sudhir Menon (HUF) Vs. ACIT [(2013) 103 DTR 145] and also relied on the guidelines issued by the Controller and Capital Issues with regard to valuation of shares and also AS-20 dealing with the computation of earning per share (EPS). Thus, ld.AR objected for arriving at the FMV of the shares before allotment of shares and pressed for considering the FMV after including the fresh allotment of shares. However, the

6 ITA No. 272/VIZ/2018 C.O.No.109/VIZ/2018 (Y. Venkanna Choudary) explanation offered by the assessee was not impressed to the Assessing Officer, hence, rejected the contention of the assessee and applied Rule 11U and 11UA of the IT Rules and arrived at the FMV of the shares at Rs. 676.55 per share for the shares allotted on 05/04/2013 and Rs. 14.48 per shares for the shares allotted on 26/03/2014. The relevant working made in paragraphs 10.1 to 10.3 of the assessment order is as follows:-

05/04/2013 Particulars Amount Book Value of Assets (A) (Refer to Note No.1) 145,985,666 Book value of liabilities (L) (Refer to Note No.2) 132,454,763 Amount of paid up equity shares (PE) (Refer to Note No.3) 200,000 Paid up value of equity share (PV) 10 (A – L) 13,530,903 Fair market value of unquoted equity 676.55 share (A-L)/PE*PV) Note 1 – Book Value of Assets: Particulars Total Value of Assets 145,961,217 Less: Preliminary Expenses to the extent not written off 23,170 Advance Tax 0 Tax Deducted at Source / TCS 0 Differed Tax Asset -47,619 Book value of Assets 145,985,666 Note 2 – Book value of Liabilities Total value of liabilities 145,961,217 Less: Paid up share capital 200,000 Reserves & Surplus 13,306,454 Provision for Taxation 0 Amount set apart for Equity and Preference Dividend 0 Any amount representing provisions made for unascertained liabilities 0 Any amount representing Contingent liabilities 0 Different Tax Liability 0 Book value of Liabilities 132,454,763

7 ITA No. 272/VIZ/2018 C.O.No.109/VIZ/2018 (Y. Venkanna Choudary) Note No.3 – Calculation of amount of paid up of Equity shares Particulars Amount Paid up share capital 200,000 Amount of paid up share capital 200,000 10.2 From the above, the fair market value of the share of M/s. Sardar Projects Pvt. Ltd., is valued at Rs. 676.55. The difference between the fair market value (Rs. 676.55) and consideration paid (Rs.10) worked out to Rs. 666.55. Accordingly, a sum of Rs. 28,32,83,750 (Rs. 665.55 x 4,25,000) is to be treated as income of the assessee u/s 56(2)(vii)(c)(ii), in respect of shares received on 05/04/2013 Particulars Amount Book Value of Assets (A) (Refer to Note No.1) 294,190,834 Book value of liabilities (L) (Refer to Note No.2) 238,442,428 Amount of paid up equity shares (PE) (Refer to Note No.3) 38,505,600 Paid up value of equity share (PV) 10 (A – L) 55,748,406 Fair market value of unquoted equity 14.48 share (A-L)/PE*PV) Note No.1 – Book Value of Assets: Particulars Amount Total Value of Assets 295,163,548 Less: Preliminary Expenses to the extent not written off 23,170 Advance Tax 900,000 Tax Deducted at Source / TCS 0 Differed Tax Asset 49,544 Book value of Assets 294,190,834 Note 2 – Book value of Liabilities Particulars Amount Total value of liabilities 295,163,548 Less: Paid up share capital 38,505,600 Reserves & Surplus 18,215,520 Provision for Taxation 0 Amount set apart for Equity and Preference Dividend 0 Any amount representing provisions made for unascertained liabilities 0 Any amount representing Contingent liabilities 0 Different Tax Liability 0 Book value of Liabilities 238,442,428 Note No.3 – Calculation of amount of paid up of Equity shares Particulars Amount Paid up share capital 38,505,600 Amount of paid up share capital 38,505,600

8 ITA No. 272/VIZ/2018 C.O.No.109/VIZ/2018 (Y. Venkanna Choudary) Accordingly, the Assessing Officer made the addition of Rs.28,69,13,150/- (Rs. 28,32,83,750 + Rs.40,54,400/-) to the returned income of the assessee. 4. Aggrieved by the order of the Assessing Officer, the assessee went on appeal before the ld. CIT(A) and the ld. CIT(A) held that the valuation date means the date on which the shares were allotted, thus, viewed that for taking the book value and arriving the FMV, the fresh allotment of shares are also required to be considered. Similarly, the ld. CIT(A) held that valuation date refers to the date on which the property received by the assessee and for this purpose, she placed reliance on the decision in the case of Sudhir Menon (HUF) (supra). The ld. CIT(A) further observed that the difference between the book value of assets and liabilities was 1,35,30,903/- as on 05.04.2013 and the shares before allotment was 20000/-. On the same date the total number of shares were increased to 38,50,560/- on allotment of fresh shares of 3830560/-.If the share value is taken at Rs. 676.55 the total value of the assets would 3850560*676.55 works out to Rs.259.00 crores approximately against the actual value of the assets as on 05/04/2013 at Rs. 1.35 crores which leads to absurdity. When the book value of assets was Rs.1.35 crores the same cannot lead to over valuation astronomically to Rs.259.00

9 ITA No. 272/VIZ/2018 C.O.No.109/VIZ/2018 (Y. Venkanna Choudary) crores by application of the Rules which shows inconsistency. The ld. CIT(A) further viewed that interpretation of Rule which results into valuation of assets more than the book value of the assets would be contrary and inconsistent to the spirit of the intention of Legislature. Accordingly, the ld. CIT(A) worked out the FMV of the shares as on 05/04/2013 at Rs. 13.46 per share and 26/03/2014 at Rs. 12.64 per share. For the sake of convenience and clarity, the relevant part of the order of ld.CIT(A) is extracted which reads as under:-

“5.10 I have carefully considered the contentions of the both the appellant and the assessing officer. Both the appellant and the assessing officer supported their respective valuations on the basis of Rule 11UA. The short issue before me is what is the correct understanding of Rule 11UA? In this regard, it is relevant to note that the total value of shares as contained in Rule 11UA is the difference between the total book value of the assets and total book value of the liabilities. As on 05/04/2013, the Assessing Officer considered the total value of assets at 14.59 crores and the total value of liabilities at 13.24 crores. The difference between the Assets(A) and Liabilities (L) i.e. (A-L) was arrived at as Rs.1,35,30,903/-. No doubt the shares before the from allotment of shares i.e at the beginning of 05.04.2013 were only Rs.20,000/-. But on the same date the total number of shares increased to 38,50,560 on allotment of fresh shares of 38,30,560. Now adopting the value of Rs.676.55/- as calculated by the assessing officer the total value of shares would be 38,50,560*676.55 i.e. a value of Rs.259.00 crores approximately. When the total book value of Assets minus liabilities as on 05.04.20 13 is only Rs.1.35 crores how can the total value of the shares be Rs.259 crores? The interpretation of the Rule has to be consistent with the underlying concept of the Rule. The Rule provided for valuation of the shares as per BOOK VALUE of the assets only. Therefore, any such interpretation of the Rule which results in a valuation more than the book value of net assets would be contrary to the underlying

10 ITA No. 272/VIZ/2018 C.O.No.109/VIZ/2018 (Y. Venkanna Choudary) concept of the Rule. 5.11 Further, the definition of Valuation date refers to the date on which the property (shares in this case) is received. The valuation is that of shares received by the appellant. If the value adopted by the assessing officer is applied to the shares received by the appellant it would give valuation far from reality as discussed by me above. Therefore, it is appropriate to consider the capital base after the allotment of shares. I have gone through the case of Sudhir Menon (HUE) (supra). In this case the findings of the Hon'ble Tribunal are as under: "The capital asset received by the assessee (shares in the present case), It may be appreciated, are to be valued as on the date of its receipt. That is, it is only the asset received that is to be valued. In -as-much as therefore the value of the additional shares is derived - if only in part - from that of the existing shares, the decline in the value thereof cannot be excluded or ignored - though only by following the valuation method prescribed under the rules - in arriving at the property by way of additional shares received by the assessee." The assessing officer sought to distinguish this decision by observing that it was rendered in the context of issue of rights shares. However, I find that the principle enunciated in this decision is applicable in all cases. The assessing officer attributed the entire value of assets only to 20,000 shares. However, the fact remains that the total value of assets is to be shared among all the 38,50,260 shares once the shares are allotted. Therefore, it would be appropriate to value the share by considering the position after the allotment of shares. Before the allotment of shares, the shares were not received by the appellant. It is only after the allotment of shares that the appellant received the shares and valuation as per Rule 11UA is triggered only after the appellant received the shares on allotment made by the company. The guidelines issued by the Controller of Capital Issues are no longer in existence. However, the concept behind these guidelines and the objective behind the amendment to S.56 are alike. Both were intended to curb the practice of shares being allotted at a price different from the intrinsic value of the share. Therefore, the assessing officer is not justified in discarding these guidelines. The assessing officer placed reliance in the decision of hon'ble Supreme Court in the case of Bharat Hari Singhania (Supra). I find that in this decision the hon'ble apex court only said that when a Rule is prescribed in the Statute the same has to be followed. In the case before me, it is not the case of the appellant that the valuation has to be made ignoring the Rule 11UA. Therefore, this case does not have any bearing on the

11 ITA No. 272/VIZ/2018 C.O.No.109/VIZ/2018 (Y. Venkanna Choudary) issue before me. Further, the appellant brought to my notice during the course of appeal hearing the decision rendered by hon'ble Bangalore Tribunal in the case of DCIT Vs. Rajan Pai 180 TTJ 714 (Bang). In this case the hon'ble ITAT held as under: "Value of one equity share before the issue of bonus shares will be Ps. 11,000÷ 100 = Rs. 110. Value of the equity share after the issue of bonus share will be equal to Rs. 11,000 ÷ 200 = Rs. 55. If a person was having 10 equity shares of the above company with him, after the bonus shares issue, it would become 20. However value of the ten equity shares (10 x Rs. 110) is the same as value of 20 shares (20 x Rs. 55) after the bonus shares issue. This in other words would mean that there is a prorata decrease in the value of equity shares when there is an issue of bonus shares. Thus when there is an issue of bonus shares there is a detriment suffered by the recipient shareholder, through the depression in the value of the shares held by him. There is indeed a consideration flowing out which is exactly counter balanced by the value of the bonus shares received. The simple reason is that when bonus shares are issued by capitalising a portion of reserves and surplus, there is no increase in the asset value of a company, in any manner. What really happens is that the value of equity shares goes down prorata. Total value of equity shares held along with bonus shares remains the very same. Thus any profit derived by the assessee on account of receipt of bonus shares is theoretically offset by the depression in the value of the equity shares already held by him. Bonus shares does not result in recipient getting a property without consideration or for inadequate consideration." This decision reiterated the principle that the valuation of the shares has to be on the basis of post allotment of shares in as much as the valuation as contemplated in Rule 11UA is in respect of property received. 5.12 In view of the above discussion, I hold that: a) The gross value of assets as considered by the Assessing Officer is proper. b) The gross value of liabilities is to be decreased by the amount of share capital resulting out of allotment of shares and the paid up value of equity capital is to be increased by the same amount. The value of liabilities as on 05/04/2013 will get reduced by a sum of Rs. 3,83,05,600/- and the paid up value of equity capital would increase by the same amount. Similarly on 26/03/2014, the value of liabilities will get reduced by a sum of Rs. 4,65,37,000/- and the paid up value of share capital will get increased by the same amount.

12 ITA No. 272/VIZ/2018 C.O.No.109/VIZ/2018 (Y. Venkanna Choudary) c) With the above changes, the value of the share as on 05/04/2013 would be as under:-

Total assets (A) Rs. 14,59,85,666 Total Liabilities (L) Rs. 9,41,49,4163 Net value (A – L) Rs. 5,18,36,503 Paid up value of equity capital Rs. 3,85,05,600 Fair market value (A-L)*PE/PV Rs. 13.46 per share Value of 4,25,000 shares Rs. 57,20,500/- Face value of shares Rs. 42,50,000 Difference being income u/s 56 Rs. 14,70,500/- d) Similarly, the value of shares as on 26/03/2014 would be as under:- Total assets (A) Rs. 29,41,90,834/- Total Liabilities (L) Rs. 19,19,05,428/- Net value (A – L) Rs. 10,22,85,406/- Paid up value of equity capital Rs. 8,50,42,600/- Fair market value (A-L)*PE/PV Rs. 12.02/- Value of 4,25,000 shares Rs. 1,08,78,100/- Face value of shares Rs. 90,50,000/- Difference being income u/s 56 Rs. 32,98,600/- 5. Against the order of the ld. CIT(A), the Revenue is in appeal before this Tribunal and the assessee has filed the Cross objection challenging the additions confirmed by the ld. CIT(A). 6. During the appeal hearing, ld.DR argued that though valuation date means, the date of receipt of capital assets as per Rule 11U, the balance sheet relates to any company means balance sheet of such company has drawn up on the valuation date which has been audited by the auditor of the company appointed under section 224 of the Companies Act, 1956 (1 of 1956) and where the balance-sheet on the valuation date is not drawn up, the balance-sheet drawn up as on a date immediately

13 ITA No. 272/VIZ/2018 C.O.No.109/VIZ/2018 (Y. Venkanna Choudary) preceding the valuation date on which it has been approved and adopted in the annual general meeting of the shareholders of the company. Thus, argued that in the instant case, there is no balance sheet which was drawn up on 05/04/2013 i.e. the date of allotment of shares, therefore previous balance sheet which is available has to be taken. Thus, argued that the Assessing Officer rightly taken the balance sheet as on 31/03/2013 and arrived at the FMV at Rs. 676.55 per share for the shares allotted on 05/04/2013, hence, argued that there is no infirmity in the FMV adopted by the Assessing Officer, hence, requested to upheld the order of the Assessing Officer and set aside the order of the ld. CIT(A). Similarly for the shares allotted on 26/03/2014 submitted that the net assets were Rs. 5,57,48,406/- and the number of shares before allotment was 38,50,560/- and FMV works out to Rs.14.48 per share thus argued that the AO has correctly worked out the FMV of the share price as 05/04/2013 and 26/03/2014 hence the same required to be upheld. Ld.DR relied on the order of the ITAT, Bangalore Bench in the case of M/s.Kottaram Agro Foods Pvt. Ltd. Vs. ACIT in ITA No. 2852 & 2853/Bang/2018, dated 28/12/2018. 7. Per contra the ld.AR submitted that the Assessing Officer had valued the FMV of shares at Rs. 676.55 per share against the

14 ITA No. 272/VIZ/2018 C.O.No.109/VIZ/2018 (Y. Venkanna Choudary) value arrived at by the ld. CIT(A) at Rs. 13.46 per share and similarly on 26/03/2014, the FMV of shares worked out by the Assessing Officer was at Rs. 14.48 per share and the ld. CIT(A) at Rs. 12.02 per share. Ld.AR submitted that the total value of the assets as on 05/04/2013 was Rs.14,59,85,666/- out of which the liabilities were Rs.13,24,54,763/- and the net assets were Rs. 1,35,30,903/-. Before fresh allotment of shares the number of shares held by the company was 20,000 shares. Thus, FMV of shares worked out to Rs. 676.55 per share. The company on 05/04/2013, had issued 38,30,560 shares to the assessee and others, if the value of the shares is taken at Rs. 676.55, the total value of the assets would be working out to astronomical figure of Rs. 259.00 crores against the actual value of Rs. 1.35 crores and leads absurdity. Any interpretation of Rules needs to be on the basis of reality of facts, but should not lead to absurdity. Similarly, as on 26/03/2014, the total assets were Rs. 29.41 crores and total liabilities were Rs.23.84 crores and net assets were Rs. 5.57 crores. If the same rule is applied the FMV as per the Assessing Officer worked out to Rs.14.48 per share and the net assets would be Rs. 5.57 crores on 26/03/2014. Without any major change in the financial position, the net assets got decreased from Rs. 259.00 to 5.57 crores. Thus, ld.AR argued

15 ITA No. 272/VIZ/2018 C.O.No.109/VIZ/2018 (Y. Venkanna Choudary) that the interpretation of Rule should be based on the facts and as held by the Hon'ble ITAT, Bombay Tribunal in the case of Sudhir Menon (HUF) (supra) the date on which the capital assets received would be required to be considered for arriving at the FMV. Ld.AR argued that the FMV required to be worked out after including the fresh allotment of shares as on the valuation date. Accordingly, the ld.AR furnished the details of workings of comparative analysis of valuation made of the Assessing Officer and the ld. CIT(A) on two different dates which reads as under:- AS ON 05/04/2013 Particulars As per A.O As per CIT(A) Difference Remarks Number of shares 20000 20000 - No difference before allotment Fresh shares 3830560 3830560 - No difference allotted Total shares 3850560 3850560 - No difference Total assets 145985666 145985666 - No difference Total Liabilities 132454763 94149163 38305600 Face value of fresh shares allotted Net Assets (A) 13530903 51836503 38305600 Face value of fresh shares allotted Number of shares 20000 3850560 3830560 CIT(A) (PE/PV) (B) considered the position post allotment of shares Value per share 676.55 13.46 Same as above (A)/(B) AS ON 26/03/2014 Particulars As per A.O. As per CIT(A) Difference Remarks Number of shares 3850560 3850560 - No difference before allotment Fresh shares 4653700 4653700 - No difference allotted Total shares 8504260 8504260 - No difference Total assets 294190834 294190834 - No difference Total Liabilities 238442428 191305428 46537000 Face value of

16 ITA No. 272/VIZ/2018 C.O.No.109/VIZ/2018 (Y. Venkanna Choudary) fresh shares allotted Net Assets (A) 55748406 102285406 46537000 Face value of fresh shares allotted Number of shares 3850560 8504260 4653700 CIT(A) (PE/PV) (B) considered the position post allotment of shares Value per share 14.48 12.02 Same as above (A)/(B)

17 ITA No. 272/VIZ/2018 C.O.No.109/VIZ/2018 (Y. Venkanna Choudary) form of shares and the shares can be said to have become the property of the assessee only after the allotment to the assessee. For the purpose of valuation, ‗balance sheet‘ means the balance-sheet of such company (including the notes annexed thereto and forming part of the accounts) as drawn up on the valuation date which has been audited by the auditor of the company appointed under section 224 of the Companies Act, 1956 (1 of 1956) and where the balance-sheet on the valuation date is not drawn up, the balance-sheet drawn up as on a date immediately preceding the valuation date on which it has been approved and adopted in the annual general meeting of the shareholders of the company. Therefore, argued that FMV of the shares required to be considered at end of the day after the fresh allotment of shares as on the valuation date. Otherwise, it becomes the balance sheet drawn on the beginning of the day which was never drawn and it is always drawn at the end of the day. When the Balance sheet is drawn as the end of the valuation date necessary fallout is that the number of shares have to be taken including the fresh shares allotment in the respective dates. Thus, argued that the ld. CIT(A) is correctly applied the Rule 11UA and explained in a lucid manner in paragraph No.5 of the ld.CIT(A)‘s order. Ld.AR further submitted that the view taken by

18 ITA No. 272/VIZ/2018 C.O.No.109/VIZ/2018 (Y. Venkanna Choudary) the ld.CIT(A) is supported by the guidelines for valuation of equity shares issued by the Controller of Capital Issues at the time when the share prices sought to be controlled by the Government. Though the guidelines are at present not in force, the same can be applied even today for appropriate understanding of Rule 11UA. The ld.AR relied on the decision of the ITAT, Bangalore Bench in the case of DCIT Vs. Rajan Pai [48 ITR (Trib.) 170 (Bang.)].

The next proposition made by the ld.AR that in the company there are only two shareholders i.e assessee and his brother Shri Y.Ramesh Chandra before allotment of fresh shares with 50% of share holdings as per the assessment order page No.4. Both the assessee and his brother are holding 10,000 shares each. The assessee and his brother–Y.Ramesh Chandra being only the share holders the benefit on account of fresh allotment of shares is passed on to the assessee from his brother. Therefore, even if there is an excess benefit passed on to the close relatives, the same is not taxable u/sec. 56(2)(vii)(c)(ii) of the Act. Hence, ld.AR argued that even the higher value is passed on from one of the close relatives to another close relative, there is no application of sec. 56(2)(vii)(c)(ii) of the Act. In the instant case, the assessee has been allotted the shares at Rs. 10/- per share and

19 ITA No. 272/VIZ/2018 C.O.No.109/VIZ/2018 (Y. Venkanna Choudary) whatever excess consideration, the same was passed on from his own brother and the brother is covered within the meaning of relative u/sec.56(2)(vii)(c)(ii) of the Act. Thus, ld.AR argued that there is no case for taxing the excess consideration worked over and above the book value of share price in the hands of the assessee u/sec. 56(2)(vii)(c)(ii) of the Act. Ld.AR relied on the following judicial precedents:-

1) ACIT Vs. Dr. Rajan Pai [(2016) 48 ITR (Trib.) 170 (Bang.)] 2) Bharat Hari Singhania & Ors. Vs. CWT & Ors. [(1994) 207 ITR 01] 3) Sri Kumar Pappu Singh Vs. DCIT in ITA No.270/VIZ/2018, dated 07/12/2018 (ITAT, Visakhapatnam Bench) 9. Responding to the argument, the Ld DR submitted that with regard to non-application of section 56(2)(vii)(c)(ii) of the Act for close relatives the ld.DR argued that the shares were not only allotted to the assessee but also to other shareholders on both the dates. Thus, argued that the case law relied on by the assessee in the case of Sri Kumar Pappu Singh Vs. DCIT in ITA No. 270/VIZ/2018, dated 07/12/2018 has no application to the assessee‘s case. 10. We have heard both the sides and perused the material placed on record. In the instant case, the assessee has acquired

20 ITA No. 272/VIZ/2018 C.O.No.109/VIZ/2018 (Y. Venkanna Choudary) fresh allotment of shares from M/s. Sardar Projects Pvt. Ltd. The company has allotted the shares of 4,25,000 @ 10/- each on 05/04/2013 and 9,05,000 shares @ 10/- each on 26/03/2014. The net book value of the assets as on 05/04/2013 was Rs. 1.35 crores. The company had issued 38,30,560/- shares @ 10/- each to the assessee and 28 others on 05/04/2013. Similarly, on 26/03/2014, the company had issued 46,53,700 shares @ 10/- each to the assessee and 14 others. In the allotment, the assessee had been allotted 4,25,000 shares on 05/04/2013 and 9,05,000 shares on 26/03/2014. The FMV of each share was worked out by the Assessing Officer at Rs. 676.55 as on 05/04/2013 as against the book value of assets of Rs. 1,35,30,903/-. Similarly on 26/03/2014, the Assessing Officer had worked out the value of the same shares at Rs. 14.48 without any increase in the value of the assets from 05/04/2013 to 26/03/2014. The FMV of the shares has been worked out by the Assessing Officer at Rs. 676.55 on 05/04/2013 & Rs. 14.48 per shares on 26/03/2014. If the share value as on 05/04/2013 is to be adopted @ Rs. 676.55 the book value of the assets would be increase to astronomical figure of 260.00 crores for 38,50,560/- which is nowhere near the actual value of assets. According to the ld.AR, the valuation date means, the date on which the

21 ITA No. 272/VIZ/2018 C.O.No.109/VIZ/2018 (Y. Venkanna Choudary) property or consideration as the case may be received by the assessee. Thus, argued that for arriving FMV fresh allotment of shares also required to be included in the existing paid up share capital and to arrive at FMV of the shares by dividing the book value of the assets with paid up capital of the shares including fresh allotment. However, during the appeal hearing, ld.AR submitted that prior to 05/04/2013 there were only two shareholders in the company i.e. assessee and his brother Mr.Y.Ramesh Chandra, therefore argued that any excess consideration passed on by the assessee from his brother is exempt u/sec. 56(2)(viii)(c)(ii) of the Act and for this purpose, the assessee has relied on the decision in the case of Sri Kumar Pappu Singh (supra). Therefore, argued that as on 05/04/2013, section 56(2)(viii)(c)(ii) has no application to the assessee‘s case. We consider the argument of the ld.AR and find that there are only two shareholders in the company i.e. assessee and his brother Mr. Y. Ramesh Chandra in company and both the shareholders are brothers as defined in the Act under the close relatives. The transaction made between close relatives are excluded for the purpose of deeming income under section 56(2)(viii)(c)(ii) of that Act. This view is upheld by the decision of this Tribunal in the case of Sri Kumar Pappu Singh (supra). For the sake of

22 ITA No. 272/VIZ/2018 C.O.No.109/VIZ/2018 (Y. Venkanna Choudary) convenience and clarity, we extract the relevant part of the order this tribunal in para 14 which reads as under:- “14. The assessee has only applied for shares which were allotted by the company. The contention of the revenue is that since there is no relation between the company and the assessee there is no case for invoking the explanation of relative to exempt the assessee from taxing the excess fair market value under the head „income from other sources‟. Whereas, the contention of the assessee is that all the shareholders are relatives. The transaction between the close relatives is not taxable under the head „income from other sources u/s 56(2) of the Act and hence, the section 56(2)(vii)(c) has no application. We have gone through the provisions of 56(2)(vii)(c) and this provision was brought as an anti-abuse measure, seeks to tax the understatement of consideration as the income in the hands of the recipient (of the corresponding asset) as against the donor in the case of Gift Tax Act. The transactions between close the relatives are outside the scope of application of 56(2)(vii)(c). The legislature in its wisdom excluded the transaction of close relatives for the purpose of taxation under the income from other sources. Even the gifts received from the close relatives u/s 56(2)(v) are outside the scope of 56(2). Though the shares are allotted to the assessee, the entire shareholding of the company is retained by the family and no share was allotted to the outsiders. In this case, though the assessee had received the excess shares, renouncement was from the close relatives and the assessee is at liberty to transfer the shares to other relatives or shareholders at any point of time without attracting the taxation u/s 56(2)(vii)(c). Therefore, surrender of the rights of the close relatives in favour of the another close relative is covered for exemption u/s 56(2)(vii)(c) of the Act. In the decision rendered by the Hon'ble Madras High Court in the case CIT v. Kay Arr Enterprises [2008] 299 ITR 348 and in the decision of the Hon'ble Karnataka High Court in the case CIT v. R. Nagaraja Rao [2012] 21 taxmann.com 101/207 Taxman 236/[2013] 352 ITR 565 it has been categorically held that "where there are transactions involving family arrangement with respect to transfer of shares, the corporate veil of the company has to be lifted and inferred that there is no transfer of shares and accordingly capital gain tax is not exigible." From the above it is apparent that even when there are transfer of shares physically, in the event of family arrangements, the Hon'ble High Courts have held that the entire transactions have to be viewed lifting the corporate veil and treat the transaction as if there is no transfer of shares and hence capital gain tax is not attracted. The

23 ITA No. 272/VIZ/2018 C.O.No.109/VIZ/2018 (Y. Venkanna Choudary) transaction between the closer relatives should not be seen as introducing black money or evasion of the tax. Therefore, we are of the considered opinion that the transaction is within the family and close relatives and covered by the proviso to section 56(2)(vii)(c) of the Act and there is no application of the said section for taxing the income under the head „income from other sources‟. The coordinate bench of ITAT Chennai in the case of Vani Estates Pvt. Ltd. Vs. ITO, Corporate Ward-3(4), Chennai, 98 taxman.com 92 also taken the similar view in respect of excess share premium for the transactions between the relatives which required to be taxed u/s 56(2)(vii)(b) of the Act.”

24 ITA No. 272/VIZ/2018 C.O.No.109/VIZ/2018 (Y. Venkanna Choudary) 12. There is no dispute that the assessee and other shareholders are close relatives, therefore the consideration received rather excess consideration passed on from the share of his brother is exempt from taxation u/sec. 56(2)(viii)(c)(ii) of the Act. Thus, we hold that the difference in FMV of the shares and the consideration paid by the assessee is squarely covered by the exemption clause provided u/sec. 56(2)(vii) of the Act and case law relied on by the assessee in the case of Sri Kumar Pappu Singh (supra) is squarely applicable in the assessee‘s case. The Ld.DR argued that the shares were not only allotted to the assessee but also allotted to others and submitted that the case law of Kumar Pappu Singh has no application in this case. We are unable to accept the argument of the Ld.DR, since, prior to the allotment of shares on 05/04/2013 the share holders are only the assessee and his brother. In the fresh allotment apart from the assessee some applicants were allotted the shares. Therefore whatever the shares allotted to the assessee was from the interest of his brother who is a close relative. Hence, to the extent of shares allotted to the assessee the same is covered by the decision of this tribunal. Thus, we hold that there is no case for making any addition for allotment of shares allotted on 05/04 2013. Accordingly, we set

25 ITA No. 272/VIZ/2018 C.O.No.109/VIZ/2018 (Y. Venkanna Choudary) aside the orders of the authorities below on this issue and delete the addition made by the Assessing Officer. 13. The next issue is FMV of the shares allotted to the assessee on 26/03/2014. The contention of the assessee is that for arriving at the FMV of the shares, the book value of the shares required to be adopted for determination of FMV of the share. Accordingly, the Assessing Officer arrived at the value of the share at Rs. 14.48 and the ld. CIT(A) arrived at Rs. 12.02. Though, the valuation means the date of property or consideration received as per Rule 11UA. This issue is considered by the coordinate bench of ITAT, New Delhi in ITA No.1047/Del/2019 dated 16/07/2019 in Sadhvi Securities Ltd and held that in case the balance sheet was not drawn up on the date of allotment, the previous balance sheet which was approved in the AGM has to be considered for valuation of FMV of the shares. For the sake clarity we, reproduce the relevant part of the order of coordinate Bench of ITAT, New Delhi in Sadhvi Securities(supra) which reads as under: “12. We do not find any merit in the argument of the ld. counsel for the assessee. A perusal of the Rule 11U(b) as reproduced by CIT(A) at para 5.6 of his order makes it clear that the balance sheet means the balance sheet as drawn up on the balance sheet date which has been audited by the auditor of the company and where the balance sheet on the valuation date has not been drawn up the balance sheet drawn up as on a date immediately preceding the valuation date which has been approved and adopted in the AGM of the shareholders of the company. We find

26 ITA No. 272/VIZ/2018 C.O.No.109/VIZ/2018 (Y. Venkanna Choudary) in the instant case, on the date of receipt of the consideration the balance sheet of the assessee company was not drawn up as the same was drawn up only on 31st July, 2014 which is evident from the audited balance sheet filed. Clause (b) and clause (j) of Rule 11UA makes it clear that for computing fair market value of the shares the value of the assets and liabilities as stated in the audited balance sheet immediately prior to the receipt of consideration should be adopted. If, on the date of receipt of the consideration, the balance sheet was not drawn up, then, the balance sheet drawn up as on a date immediately preceding the valuation date should be adopted i.e., the balance sheet of the immediately preceding year should be adopted. We find, in the instant case, on the valuation date i.e., on 31.03.2014, the balance sheet was not drawn up by the auditor as audited financials were drawn up only on 31st July, 2014 and, therefore, we concur with the observation of the ld.CIT(A) that the valuation of assets and liabilities in the balance sheet of the immediately preceding year i.e., 31.03.2013 should have been adopted. Since the valuation done by the assessee was not in accordance with the Rule framed for valuation of unquoted shares i.e., the assessee has not taken the value of assets before introduction of share capital received through fresh allotment and since the Assessing Officer has correctly determined the valuation of the unquoted equity shares which has been upheld by the CIT(A), therefore, we do not find any infirmity in the order of the CIT(A). Accordingly, the same is upheld and the grounds raised by the assessee are dismissed.” Respectfully following the view taken by the coordinate Bench of ITAT, New Delhi we, hold that for arriving the FMV of shares previous Balance sheet which is audited and approved in the AGM has to be taken in to consideration, before the allotment of shares. Accordingly, we set aside the order of ld. CIT(A) on the shares allotted on 26/03/2014 and confirm the addition. Thus, this ground of appeal raised by the Revenue is allowed partly. 14. So far as cross objection filed by the assessee is concerned, since we have adjudicated both the issues in detail in the

27 ITA No. 272/VIZ/2018 C.O.No.109/VIZ/2018 (Y. Venkanna Choudary) Revenue‘s appeal, no separate adjudication is considered necessary. Accordingly CO filed by the assessee stands allowed partly. 15. In the result, appeal filed by the Revenue as well as the cross objection filed by the assessee are partly allowed. Order Pronounced in open Court on this 30th day of Sept., 2019.

Sd/- sd/- (V. DURGA RAO) (D.S. SUNDER SINGH) Judicial Member Accountant Member Dated: 30th September, 2019. vr/- Copy to: 1. The Assessee – Y. Venkanna Choudary, D.No. 1-1-2, C/o Anuradha Auto Centre, Sheela Nagar, NH-5, Visakhapatnam. 2. The Revenue – ACIT, Circle-4(1), Visakhapatnam. 3. The CIT-2, Visakhapatnam. 4. The CIT(A)-2, Visakhapatnam. 5. The D.R., Visakhapatnam. 6. Guard file. By order

(VUKKEM RAMBABU) Sr. Private Secretary, ITAT, Visakhapatnam.