ITO -3(3)(4), MUMBAI vs. M/S V.K. LALACO PVT. LTD., MUMBAI

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 (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

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

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 (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: -

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 (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 (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

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

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.