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Income Tax Appellate Tribunal, VIRTUAL COURT
Before: SHRI S. RIFAUR RAHMAN, HONBLE & SHRI PAVAN KUMAR GADALE, HONBLE & Income Tax Officer -3(3)(4) v. Shri Satish Modi Shri S.N. Kabra
IN THE INCOME TAX APPELLATE TRIBUNAL (VIRTUAL COURT) “F” BENCH, MUMBAI BEFORE SHRI S. RIFAUR RAHMAN, HON'BLE ACCOUNTANT MEMBER AND SHRI PAVAN KUMAR GADALE, HON'BLE JUDICIAL MEMBER AND ITA NO. 3599/MUM/2019 (A.Y: 2014-15) Income Tax Officer -3(3)(4) v. M/s. V.K. Lalco Pvt. Ltd., Room No. 672, 6th Floor 1017/18, Dalamal Tower Aayakar Bhavan, M.K. Road 10th Floor, 211, Nariman Point Mumbai - 400020 Mumbai – 400020 PAN: AAACV9820A (Appellant) (Respondent) Assessee by : Shri Satish Modi Department by : Shri S.N. Kabra
Date of Hearing : 28.01.2022 Date of Pronouncement : 04.02.2022
O R D E R PER S. RIFAUR RAHMAN (AM) 1. This appeal is filed by the revenue against order of the Learned Commissioner of Income Tax (Appeals) – 8, Mumbai [hereinafter in short “Ld.CIT(A)”] dated 25.03.2019 for the A.Y. 2014-15.
Grounds raised by the revenue are as under: - “1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition of
2 ITA NO. 3599/MUM/2019 (A.Y: 2014-15) M/s. V.K. Lalco Pvt. Ltd., Rs.4,99,24,500/- made by the Assessing Officer on account of share premium received on issue of equity shares u/s.56(2)(viib) of the I.T.Act ignoring that the shares have been valued by taking the growth projections during the year rather than adopting the book value of the assets? 2. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was right in restricting the disallowance u/s 14A to the extent of exempt income earned by the assessee which was computed as per Rule 8D of I.T Rules 1962 on the basis of CBDT Circular No.5/2014 dated 11.02.2014 which clearly states that it is not necessary to earn exempt income in a particular year in which the disallowance is made? 3. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was right in restricting the disallowance u/s 14A to the extent of exempt income earned by the assessee which is contrary to CBDT Circular No.5/2014 which clarifies that the Rule 8D r.w.s. 14A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income?
Brief facts of the case are that, assessee filed its return of income on 20.10.2014 declaring total income of ₹.NIL after setting off unabsorbed depreciation of ₹.8,49,236/-. The case was selected for scrutiny under CASS and notice u/s. 143(2) and 142(1) of Income-tax Act, 1961 (in short “Act”) were issued and served on the assessee. In response Ld. AR of the assessee attended and filed the relevant information as called for.
The assessee company is in the business of renting of property and providing service apartments. The assessee has various immovable properties as well it holds shares of various sister concern. The said sister
3 ITA NO. 3599/MUM/2019 (A.Y: 2014-15) M/s. V.K. Lalco Pvt. Ltd., concerns also own various immovable properties and shares in other private limited company.
With regard to Ground No. 1, raised by the revenue, during the year under consideration assessee issued 2005 equity shares at the face value of ₹.100/- each with a premium of ₹.24,900/- i.e. total premium received by the assessee is of ₹.4,99,24,500/- to its sister’s concern M/s. Tyabji Estates Pvt. Ltd.,. The assessee calculated the fair market value of the shares by relying on the valuation report submitted by M/s. Dharmesh M. Kansara & Associates, Chartered Accountants. As per the valuation report submitted the fair market value was arrived at ₹.37,890/- per share. During the assessment proceedings Assessing Officer rejected the submissions made by the assessee with the following observation: - “5.5.4 As can be seen from the above balance sheet as at 01/04/2013, the book value of assets is at Rs. 70,55,78,061/-. However, the shares has been valued at the value of assets on the basis of a provisional balance sheet where it is seen that value of assets has been valued at very high value at Rs. 154,98,38,696/-. It is relevant to mention here that though the assessee has filed a provisional balance sheet to justified the premium, the assets are not revalued and the balance sheet at 31/03/2014 is prepared in the book value only. The assessee has not filed any justification with supporting evidences for the over valuing the assets, especially the immovable properties. From the above facts, it is clear that the valuation has been made to accommodate the receipt of premium received of Rs. 4,99,24,500/-. It is also seen that he shares have been valued by considering the value of assets in between the progress of the year and not its book value. In view of the facts
4 ITA NO. 3599/MUM/2019 (A.Y: 2014-15) M/s. V.K. Lalco Pvt. Ltd., mentioned above, the valuation adopted in this case is not acceptable and is hereby rejected.”
Further he rejected the provisional balance sheet and valuation report submitted by the assessee to justify the issue of shares at premium and Assessing Officer treated premium received by the assessee as income from other sources u/s. 56(2)(viib) of the Act. Aggrieved assessee preferred appeal before Ld.CIT(A) and filed detailed submissions. After considering detailed submissions Ld.CIT(A) allowed the appeal of the assessee and deleted the addition with the observations in his order vide Para No 3.2.2 to 3.2.11. Aggrieved revenue is in appeal before us.
Facts relating to Ground No. 2 and 3 raised by the revenue are relating to disallowance u/s. 14A of the Act. During this year assessee has actually received exempt income of ₹.3000/- and the Assessing Officer by invoking rule 8D of I.T. Rules disallowed ₹.2,47,000/-. Aggrieved assessee preferred an appeal before the Ld.CIT(A) and the Ld.CIT(A) restricted the disallowance to the extent of exempt income earned by the assessee. Aggrieved revenue is in appeal before us.
At the time of hearing, Ld. DR relied on the finding of the Assessing Officer and specifically supported the finding of the Assessing Officer at
5 ITA NO. 3599/MUM/2019 (A.Y: 2014-15) M/s. V.K. Lalco Pvt. Ltd., Para No. 5.5.1 to 5.5.5. He argued that Ld.CIT(A) deleted the addition made by the Assessing Officer ignoring that shares were valued by taking growth projections rather than adopting the book value of the assets.
With regard to Ground No. 2 and 3 he relied on the CBDT Circular No. 5/2014 on this issue and prayed that the addition made by the Assessing Officer may be sustained.
On the other hand, Ld. AR submitted brief written submissions before us in substantially relying on the finding of the Ld.CIT(A), for the sake of clarity it is reproduced below: -
“The Assessee relying on explanation (a)(ii) of the provisions of section 56 (2) (viib) brought to the notice of the assessing officer that as per the said explanation (a)(ii) of section 56(2)(viib) the assessee, can substantiate to the satisfaction of the assessing officer the fair market value of the shares based on the value, on the date of issue of shares, of its assets, including intangible asset. The assessee in order to substantiate the fair market value of the shares on the date of issue of shares relied upon the valuation report of the Chartered Accountant submitted during the course of assessment proceedings. The assessee brought to the notice of the assessing officer the fact that the Chartered Accountant had arrived to the value of Rs 37,890/- per share on basis of revaluation of the assets on the date of issue of shares. The assessee further brought to the notice of the assessing officer the fact that the revaluation of immoveable property was on the basis of Stamp Duty valuation as per the stamp duty ready reckoner on the date of issue of shares and shares held as investments were based on the fair market value of the shares of each of the Company on the date of issue of shares by the assessee company.
6 ITA NO. 3599/MUM/2019 (A.Y: 2014-15) M/s. V.K. Lalco Pvt. Ltd., The assessing officer without pointing out any mistakes in the method of valuation of the shares held that method adopted by the assessee was to lead to justification for the value of share premium and is not the genuine value. The assessing officer was of the opinion that there is no scientific or reasoned methodology which is adopted to arrive at the valuation ignoring the detailed valuation Report submitted and held that the assessee has also not worked out the valuation as per the Direct Cash flow method and further the method adopted by the assessee for valuation is not prescribed in the statue. The Assessing office while arriving to the said conclusion has simply ignored explanation a(ii) to section 56(2) (viib) wherein it is clearly prescribed that the fair market value of the shares could be substantiated on the basis of the value of assets held by the assessee on the day of issue of shares if such value is higher than the method prescribed as per the Income Tax Rules Le. Rule 11UA. While finalising the assessment the assessing officer held that the very provisions of section 56(2) (viib) an acceptable methodology has been prescribed in terms of Rule 11UA and revised the valuation as per Rule 11UA to arrive at a valuation of NIL as against the value per share issued by the assessee at Rs 24,900/- plus face value at Rs 100/- i.e. Rs 25,000/ and thus brought the premium received by the assessee of Rs 4,99,24,500/to tax as other sources u/s 56 (2) (viib) of the IT act, 1961. Being aggrieved by the order of the Assessing officer the assessee filed an appeal before the CIT (A). The assessee during the course of hearing before the CIT(A) filed various submissions including the valuation report and brought to the notice of the CIT(A) the fact that the asseesee had followed explanation (a)(ii) to arrive at the fair market value of the shares and as per explanation (a) (ii) of section 56 (2) (viib) has substantiated the value of the shares with the valuation report at Rs 37,890/ and that the comments of the assessing officer that assessee has not submitted any supporting evidences in respect of its adopting very high value of assets are incorrect as the assessee had submitted the Valuation Report along with supporting annexures to justify the fair market value of Shares. The CIT(A) while passing order held that the asseessee has submitted the detailed workings of fair market value of all the assets
7 ITA NO. 3599/MUM/2019 (A.Y: 2014-15) M/s. V.K. Lalco Pvt. Ltd., along with the supporting evidences such as stamp duty ready reckoner. The CIT (A) held that the assessee had as per explanation (a)(ii), submitted the valuation report; according to which the fair market value of the unquoted Shares came to Rs 37,890/- and the assessee, however, in its case had adopted a value of Rs 25,000/- only which was much less than the fair market value as per the valuation report. The CIT (A) held that it is at the option of the assessee to adopt the value as per the Explanation a(i) or a (ii) and the assessee was fully justified in adopting the Explanation a(ii). The CIT (A) was further of the view that the assessing officer has no jurisdiction to insist that the assessee should adopt only a particular method for determining the value of Shares and that the method of deriving the FMV of Shares could not be questioned as it is not open to the tax authorities to change the method of valuation, which has been applied. The CIT(A) while passing the order also took note of assessee’s contention that the primary objective of section 56(2) (viib) was to plug the routing of black money through unjustified shares premium. The CIT (A) in his order further verified the FMV of all the assets in which the adjustments were made as per the valuation report and came to the conclusion that in almost all the cases where values have been changed were immovable properties like flats, land, show room etc. and has adopted the stamp duty ready reckoner value of said immovable properties. The CIT (A) was of the opinion that it defies logic as to how the Stamp Value of the immovable properties can be disregarded as the same is also from a government department. The CIT (A) held that the FMV arrived at by the assessee was correct and thus deleted the addition of Rs 4,99,24,500/as Share premium u/s 56 (2) (viib). Being aggrieved by the order of the CIT(A) the department has filed an appeal before the Hon'ble Tribunal. The assessee at the outset submits that the object behind the introduction of section 56(2) (viib) was with an intent to deter the generation and use of unaccounted money. The said intent can be noted from the Hon’ble Finance Minister's speech and memorandum explaining the provisions of the Finance Bill, 2012. In addition to the above, there have been a series of decisions of the Tribunal, where
8 ITA NO. 3599/MUM/2019 (A.Y: 2014-15) M/s. V.K. Lalco Pvt. Ltd., the invocation of section 56(2) (viib) has been negated in view of the absence of any evidence to suggest that any unaccounted money was sought to be introduced in the transactions of issue of Shares. In the transaction of issue of Shares, in the instant case, it is an uncontroverted factual position that the Shares were issued by the assessee to its sister concern. Since the money has simply flown from sister concern to the assessee, it is not anybody's case and it cannot be that any unaccounted money has been laundered in the process. Therefore the genuineness of the entire transactions is beyond any shadow of doubt. Accordingly, a transaction between sister concern cannot be equated with generation / circulation of unaccounted money. Therefore, having regard to the intention of legislature in the assessee’s case, provisions of section 56(2) (viib) of the act cannot be invoked. Such being the case, the subsequent issues as to the determination of the valuation as per Rule 11UA and the correctness of the assessee’s valuation become academic. The assessee for the above proposition relies on the decisions of the Hon’ble Mumbai ITAT in the case of M/s Impact Retail tech Fund Pvt Itd. ITA NO 2050/Mum/2018 dated 05/03/2021, wherein the Hon’ble Tribunal in para 14 on page 66 held as under : “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 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 reinvested in the step down subsidiary company in order to revive
9 ITA NO. 3599/MUM/2019 (A.Y: 2014-15) M/s. V.K. Lalco Pvt. Ltd., the step down subsidiary in that process, the investment in such step down company is safeguarded. 15. Here is the situation, the funds intended for investment in the step down subsidiary company routed though the subsidiary company (i.e. assessee) and merely because the fair market value of the asseesse is NIL or negative, the tax authorities are invoking the deeming provisions to tax the advance towards Share Capital in the hands of the assesses merely because the deeming provisions is attracted.” The assessee submits that in the light of the above decision and the facts of the assessee’s case it can be held that the department was not justified in invoking the provisions of sections 56(2) (viib). Without prejudice to the above. The assessee states that the assessing officer was not justified in holding that the assessee has not filed any justification with supporting evidence for over valuing the assets, especially the immovable properties. The assessee submits and as acknowledged by the CIT(A) in its order the assessee had submitted the valuation report prepared by the Chartered Accountant to justify the valuation of the immovable properties. The fact that assessee had submitted the valuation report has been acknowledged even by the assessing officer in para 5.5.5, wherein he states that “from the above valuation report it can be seen”. There is an inherent contradiction in the assessment order wherein in one para the assessing officer states that no evidence was filed to justify the valuation and in the very next para he acknowledged the fact that the Valuation Report was filed hence there is a fallacy in the argument that the assessee had not submitted any evidence to support the valuation of the immovable properties. Infact the CIT (A) while passing the order has verified the said valuation report in detail [Page 16 to 35 of the Order of CIT(A)]. It can be seen from the said valuation report that the Valuer has arrived at the valuation of the immovable properties after relying upon the stamp duty ready reckoner, which value is even accepted by the department hence the department is not justified in saying that the asseesse’s Valuation is not supported by any evidence, ‘The assessee submits that the FMV arrived at by the
10 ITA NO. 3599/MUM/2019 (A.Y: 2014-15) M/s. V.K. Lalco Pvt. Ltd., assessee is correct and the same is duly justified by the Valuation Report of the Chartered Accountant. The assessee states that if the adjustment made in the valuation of the immovable properties and Shares held by the assessee as Investment is considered the adjusted value of the assets of the assessee comes to Rs 1,54,98,38,696/ and the value of the Shares after deducting the liabilities Rs 69,37,97,881/ the difference is Rs.85,60,40,815/ hence the value is issued capital Rs.22,59,200/ (22,592 Shares of Rs 100 each) Fair Market Value = Rs 37,891.30 (85,60,40,185/22,59,200 X 100) The Assessee submits that as against the fair market value of Shares at Rs 37,891.30 per shares, the assessee has issued the shares at a premium of Rs 24,900/- only therefore, no addition u/s 56(2) (viib) is called for. The assessee submits that Valuation of the Shares has to take into consideration various factors and not simply on the basis of financials. The substantiation of the true fair market value of the shares has to be first decided on the basis of the valuation done by the assessee and it cannot be decided from the lenses of rule 11UA which can be applied in case sub clause (i) of explanation (a) of section 56(2) (viib) has been exercised. The assessee state that FMV can be determined in either of the two manners whichever is higher i.e. as per Explanation (a)(i) or (a)(ii)of section 56(2)(viib) of the Act so as to demonstrate that the value of shares does not exceed the fair market value. The assessing officer cannot insist upon to follow a particular manner. In the case of the assesse, Assessing officer has insisted in following the method prescribed under rule 11UA ignoring the fact that the assessee has justified/ substantiated the valuation as per the explanation a (ii), which is higher for arriving at the Fair Market Value. The Assessee submits that it was justified in issuing the Shares as per the Fair Market Value arrived by it by following the explanation (a) (ii) to section 56(2)(viib). In view of the above the assessee submits that the fair market value of the Shares can be determined, either in accordance with the method prescribed which now has been given in Rule 11UA or as may be substantiated by the Company to the satisfaction of the assessing officer based on the value on the date of issuance of shares. The statute provides that in either of the method, whichever is higher fair market value of the Shares shall be adopted. Here in this case the assessee has substantiated the value by relying on the
11 ITA NO. 3599/MUM/2019 (A.Y: 2014-15) M/s. V.K. Lalco Pvt. Ltd., valuation report which is higher. The valuation of the assets has been arrived at by the valuer in a scientific way by relying on the stamp duty ready reckoner which is as acceptable mode of valuation by the department, hence the assessing officer was not justified in ignoring the Fair market value of the Shares as arrived by the assessee by following the method prescribed in explanation (a) (ii) of section 56(2) (viib) and insisting on relying on the method prescribed as per rule 11UA as per the explanation (a)(i) of the section 56(2) (viib) more so when the said explanation is very clear and the choice lies with the assessee to follow either of the method. Grounds of Appeal No. 2&3 As regarding ground 2 and ground 3 being the addition restricted by the Ld.CIT(A) under section 14A of the Act to Rs 3,000/- being the amount of exempt earned against the disallowance of Rs.2,47,000/- arrived at by the assessing officer as per Rule 8D, the assessee submits that it is now settled position that disallowance cannot exceed the exempt income. the assessee during the year has earned an exempt income of only Rs 3000/. Hence the Ld.CIT(A) has rightly restricted the said disallowance u/s 14(A) to the said amount of Rs.3000/-. In view of the above submissions the assessee prays that the order of the Ld.CIT(A) ought to be upheld and department’s appeal be dismissed.”
Considered the rival submissions and material placed on record, we observed from the record that assessee has issued shares at premium by obtaining valuation report from the M/s. Dharmesh M. Kansara & Associates, Chartered Accountants and the valuation report was based on the re–valuation of the assets on the date of issue of shares. The value of each shares were arrived at ₹.37,890/- per share by adopting revaluation of assets. We observed from the record that the assessee
12 ITA NO. 3599/MUM/2019 (A.Y: 2014-15) M/s. V.K. Lalco Pvt. Ltd., was having immovable property which was revalued on the basis of stamp duty valuation as per stamp duty ready reckoner on the date of issue of shares and also shares held as investment were revalued based on the fair market value as on the date of issue of shares.
On a careful perusal of the order passed by the Ld.CIT(A), we observed that assessee has submitted the detailed working of the fair market value of all the assets along with supporting documents including stamp duty ready reckoner in order to substantiate the value arrived by the valuer on the date of issue of shares. We observed that Ld.CIT(A) has accepted the method adopted by the assessee and he came to the conclusion that it is at the option of the assessee to adopt the value as per explanation (a)(i) or a(ii) of section 56(2)(viib) of the Act. Therefore, the assessee has an option to adopt explanation a(i) or a(ii) of the Act and assessee has chosen the option explanation a(ii) to value the shares. Before accepting, the Ld.CIT(A) has given an elaborate finding in his order. it is also a fact on record that Assessing Officer has not brought on record that there is any involvement of cash transaction in these transactions which goes to the main purpose of the introduction of section 56(2)(viib) of the Act and further we also noticed that shares were issued to its sister’s concern only and the transactions are between two closely
13 ITA NO. 3599/MUM/2019 (A.Y: 2014-15) M/s. V.K. Lalco Pvt. Ltd., held companies and it cannot be classified or equated to generations/circulations of unaccounted money. Therefore, we do not find any reason to interfere with the finding of the Ld.CIT(A) and accordingly we deem it fit and proper to dismiss the ground raised by the revenue.
With regard to Ground No. 2 and 3, we observed that the assessee has earned only ₹.3000/- as exempt income and Ld.CIT(A) has restricted the same to the extent of exempt income earned by the assessee. Therefore, the action of the Ld.CIT(A) is in line with the various judicial pronouncements which restricts the disallowance u/s. 14A of the Act to the extent of exempt income earned by the assessee. Therefore, we are inclined to dismiss the grounds raised by the revenue.
In the result, appeal filed by the Revenue is dismissed.
Order pronounced on 04.02.2022 as per Rule 34(4) of ITAT Rules by placing the pronouncement list in the notice board.
Sd/- Sd/- (PAVAN KUMAR GADALE) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai / Dated 04/02/2022 Giridhar, Sr.PS
14 ITA NO. 3599/MUM/2019 (A.Y: 2014-15) M/s. V.K. Lalco Pvt. Ltd., Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. The CIT(A), Mumbai. 4. CIT 5. DR, ITAT, Mumbai 6. Guard file.
//True Copy// BY ORDER
(Asstt. Registrar) ITAT, Mum