GATEWAY OFFICE PARKS PRIOVATE LIMITEDI,CHENNAI vs. ACIT, CORPORATE CICLE-6(1), CHENNAI

Years: 2015-16 Gateway Office Parks Private Limited, Asst. Commissioner of Income Tax, Block No.A6, Ground Floor, Corporate Circle-6(1), No.16, GST Road, Chennai. Perungalathur, Chennai-600 063. [PAN: AAJCS8198P] (प्रत्यर्थी/Respondent) (अपीलार्थी/Appellant) अपीलार्थी की ओर से/ Assessee by : Shri S.Ananthan, Advocate (Virtual). प्रत्यर्थी की ओर से /Revenue by : Shri Nilay Baran Som, CIT सुिवाई की तारीख/Date of Hearing : 22.01.2025 घोर्णा की तारीख /Date of Pronouncement : 19.02.2025 आदेश / O R D E R PER AMITABH SHUKLA, A.M :

This appeal is filed by the assessee against the order bearing DIN & Order No.ITBA/APL/M/250/2022-23/1050825008(1) dated 16.03.2023 for the assessment years 2015-16. Through the aforesaid appeal the assesse has challenged order u/s 250 dated 16.03.2023 passed by CIT(A), Chennai. 2.0 Ground of appeal No.1 has been found to be general in nature and hence not worthy of any meritorious adjudication.

Page - 1 - of 14 3.0 The first issue seminal to the ground of appeal

No.2 is regarding an addition of Rs.11,67,14,298/- made by the Ld. AO invoking provisions of section 56(2)(viib). The Ld. Counsel for the assessee inviting our attention to the brief factual matrix of the case informed that the assessee company engaged in real estate and infrastructure development had filed its return of income declaring loss of Rs.29,69,90,473/-. During the year under consideration the assessee company had issued rights share of Rs.27,14,286 shares each to its two holding companies namely M/s.Shriram Properties Pvt Ltd and Sun Apollo investment Holding LLC, and consequently earned share premium of Rs.32,57,14,320/-. The Ld. AO had queried about feasibility of invocation of Rule

11. UA(2) of the Income Tax Rule in the case. The assessee had applied discounted tax flow method – a prescribed method for valuation of the company under Rule 11UA. The assessee had informed the Ld. AO that one of the company namely Sun Apollo Investment Holding LLC was a non-resident company. The Ld. AO rejected assessee’s arguments holding that projections are only a method of sampling which should always be closure to reality and that the calculation of the assessee are based upon surmises and guess work. Consequently he proceeded to reject the calculations made by the assessee under DCF method and applied ratio

Page - 2 - of 14 laid down in Rule 11UA(2) viz-a-viz the NAV method. The addition of Rs.11,67,14,298/- was seminal to said assumptions of the Ld. AO. 3.1 The Ld. Counsel for the assessee submitted that the Ld. First Appellate Authority has confirmed the findings of the Ld.AO by pointing deficiencies and insufficiencies in the valuation given by the assessee. He concluded that the valuation done by the assessee’s valuer is based upon unverifiable facts and therefore cannot be accepted. The Ld. Counsel submitted that the Ld. CIT(A) directed the Ld.AO to adopt fair value of shares but under the DCF method. It is the case of the assessee that the action of the Ld. CIT(A) is not supported by facts on record and that consequently the decision to confirm the addition is incorrect. The Ld. Counsel for the assessee invited our attention to the decision of Hon’ble Delhi High Court in the case of FIS payment solutions and services India Pvt Ltd dated 29.07.2024 in respect of WP(C) 10289/2024 and CM APPL 42097 / 2024 to support his arguments that there is no element of profit embedded in the assessee and its Holding company. It was argued that the department has accepted the above decision. The Ld. Counsel has also invited our attention to the CBDT circular. The Ld. Counsel informed that the valuation report in this case was drawn by the registered valuer prior to the execution of shares deal. It was also argued that as per Reserve Bank of India stipulations, qua issue of share to non-

Page - 3 - of 14 residents, the assessee was bound to follow the DCF method. The Ld. Counsel also submitted that the CBDT circular prescribes that section 56(2)(viib) is not applicable in case of applicability of issue of rights share. The Ld. DR would like to make us believe on the correctness of the order of lower authorities. Reliance was placed on the decision of Hon’ble Kolkata Tribunal in ITA No.513/Kol/2017. It was argued that CBDT circular is applicable for startup only. It was simultaneously requested that the matter be set aside to the Ld. AO for re adjudication of the issue 4.0 We have heard rival submissions in the light of material available on records. It is an admitted fact of the case that the valuation of the shares through the registered valuer was done prior to the execution of sale deed and therefore a presumption qua valuation made after the transactions and thus casting a doubt on its accuracy cannot be drawn. On the issue as to why the appellant assessee had adopted DCF method as against the NAV, we find force in the argument of the assessee that it was bound by the instructions of the RBI mandating adoption of DCF method when shares are issued to overseas entities. The action of the assessee therefore cannot be faulted.

4.1 We have also noted another dimension of the impugned controversy. However, before examining the same it is necessary to extract the relevant provisions of section 56 (2)(viib) and Rule 11UA reproduced hereunder:-. Page - 4 - of 14 Section 56(2) in The Income Tax Act, 1961 “….(2) In particular, and without prejudice to the generality of the provisions of sub- section (1), the following incomes, shall be chargeable to income-tax under the head "Income from other sources", namely :— --------------------------------------------------------------------- (viib) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares: Provided that this clause shall not apply where the consideration for issue of shares is received— (i) by a venture capital undertaking from a venture capital company or a venture capital fund or a specified fund; or (ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf: Provided further that where the provisions of this clause have not been applied to a company on account of fulfilment of conditions specified in the notification issued under clause (ii) of the first proviso and such company fails to comply with any of those conditions, then, any consideration received for issue of share that exceeds the fair market value of such share shall be deemed to be the income of that company chargeable to income-tax for the previous year in which such failure has taken place and, it shall also be deemed that the company has under reported the said income in consequence of the misreporting referred to in sub-section (8) and sub-section (9) of section 270A for the said previous year. 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, licenses, franchises or any other business or commercial rights of similar nature, whichever is higher; (aa)….”

4.2 Further Rule 11 UA (2) of IT Rules prescribes as under:- “…..Notwithstanding anything contained in sub-clause (b) of clause (c) of sub-rule (1), the fair market value of unquoted equity shares for the purposes of sub-clause (i) of clause (a) of Explanation to clause (viib) of sub-section (2) of section 56 shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner under clause (a) or clause (b), at the option of the assessee, namely:- (a) The fair market value of unquoted equity shares =| (A-L)(PE)| x (PV) where,

Page - 5 - of 14 A=book value of the assets in the balance-sheet as reduced by any amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act and any amount shown in the balance-sheet as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset; L=book value of liabilities shown in the balance-sheet, but not including the following amounts, namely:- (i) the paid-up capital in respect of equity shares; (ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company; (iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation; (iv) any amount representing provision for taxation, other than amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto; (v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities; (vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares; PE=total amount of paid up equity share capital as shown in the balance-sheet; PV=the paid up value of such equity shares; or (b) the fair market value of the unquoted equity shares determined by a merchant banker [*] [Words ] as per the Discounted Free Cash Flow method….” 4.3 A perusal of the above alludes provisions of section 56 (2)(viib) that the law, by way a deeming provision, postulates inclusion of income in the hands of a taxpayer in situations where a company receives from any person – being a resident any consideration for issue of shares that exceeds the face market value of such shares. The exclusions are angel investors or the venture capital undertaking. This is the charging section for this transaction. The machinery provisions for the section have been prescribed in Rule 11UA(2)(b) which gives the assessee option to value its shares either by way of a discounted cash flow(DCF) method or net asset value(NAV) method. The stipulation in section 56 (2)(viib) is primarily conceived to arrest black money or unaccounted transactions, however even if assuming that the same would be applicable in the case of transactions as the one taken by the assessee it would be Page - 6 - of 14 seen that the charging provision of section 56 (2)(viib) deems a composite transaction or one single activity. It does not conceives split transactions i.e. it does not presumes the situation in which one part of the transaction is to be valued by one procedure and other part by another procedure. Similarly Rule 11UA(2)(b) clearly provides that the assessee as the option to either adopt DCF method or the NAV method. At the outset it is to be noted that this is a benefit given to the taxpayer and cannot be unilaterally taken away by the tax authorities. It is further seen that there is nothing in the rule which provides that one part of the transaction is to be valued by one procedure and other part by another method. 4.4 It is in the above background that the present controversy as a unique dimension. The appellant assessee has issued rights shares to two of its holding companies, in equal proportions, one of which is a non-resident company. As per the undisputed facts of the present case the assessing officer of Revenue has split the transaction in two parts for one part it applies DCF method and for another part it applies NAV method. The Ld. First Appellate Authority directs adoption of DCF method but on the basis of valuation of the Ld. AO done by NAV method. The question that arises is whether for a composite transaction, the extant law provides two opposite treatment. In view of the fact that the RBI guidelines mandate adoption of DCF method in share transactions concerning non-resident companies and also that Rule 11UA(2)(b) provides and option, we do not find any fault in action of the assessee to adopt valuation as per DCF method. We have also noted that there is nothing in law which mandates the Revenue would have the option of applying two different method of accounting in case of a solitary composite transaction. Thus, we find sufficient force in the argument of the assessee forwarded by Ld. Counsel for the appellant assessee.

Page - 7 - of 14 4.5 We have also noted that the Hon’ble Delhi High Court in the case of FIS payment solutions and services India Pvt Ltd vide its order dated 29.07.2024 in respect of WP(C) 10289/2024 and CM APPL 42097 / 2024 has mandated as under:-

“… 1. This writ petition has been preferred seeking the following reliefs:- a) Issuance of declaration that Section 56(2)(viib) of the Income-Tax Act,1961, inserted vide Finance act, 2012, is ultra vires being violative of Article 14 of Constitution of India, 1950; b) In the alternative to prayer (a). this Hon'ble Court may read down the provision as being applicable in situations where any unaccounted income or money can possibly be involved and would not apply to issuance of shares by a wholly owned subsidiary to its holding company; and c) In addition to Prayer (a) or (b), issuance of a writ of Certiorari quashing the impugned directions dated 29.06.2024 issued by the This is a digitally signed order. The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 09/08/2024 at 22:30:50 Ld. DRP to the extent of the addition arising out of Section 56(2)(viib) of the Income Tax Act, 1961. d) In the alternative to prayer (c), issuance of a writ of Mandamus or any other appropriate writ order or direction directing the Assessing Officer to not make the addition arising out of Section 56(2)(viib)of the Income-tax Act, 1961 while passing the final assessment order. e) For ad-interim reliefs as the Court may deem fit; and f) For the costs of this Petition; g) Pass any other further order (s) / direction (s) as this Hon'ble Court may deem fit and proper in the fact and circumstances of the case.

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Page - 10 - of 14 Coordinate Bench of Delhi Tribunal in the case of BLP Vayu (Project-1) Ltd on the impugned issue. Further the Hon’ble High Court also considered another decision of Hon’ble Coordinate Bench of Delhi Tribunal in the case of Kissandhan Agri Financial Services Pvt Ltd wherein, analysing share transfer between a holding and subsidiary company, it was held that Section 56(2)(viib) is a deeming provision where a legal fiction has been created to artificially tax a capital receipt. The idea is to tax unaccounted money and consequently its application cannot be extended to tax premium received by subsidiary from its Holding company. It was submitted that the department has accepted the order of Hon’ble Delhi High court in FIS payment solutions and services India Pvt Ltd supra.

4.7 We have also noted that the action of the Ld. CIT(A) in adopting a different valuation without giving an opportunity to the assessee is also against the principle of natural justice. It is seen that he has merely adopted his presumptions for valuations which is violation of assessee’s right of natural justice. Further, it is noted that Rule 11UA gives an option to the assessee of choosing DCF or NAV method. Accordingly, in the light of discussions herein above, we are therefore of the considered view that no benefit accrues to an assessee on issue of shares between Holding company and Subsidiary and hence application

Page - 11 - of 14 of section 56(2)(viib) is not warranted per se. Respectful deference in this regard is made to the decision of Hon’ble Delhi High court in the case of FIS payment solutions and services India Pvt Ltd supra, we hold the view that provisions of section 56(2)(viib) are not applicable in the present case and hence set aside the order of lower authorities. Accordingly we direct the Ld. AO to delete the addition of Rs.11,67,14,298/-. The ground of appeal No.2 raised by the assessee is therefore allowed.

5.0 The next issue raised by the assessee through ground no.3 is regarding an addition made by the Ld. AO of Rs.1,03,95,911/- on account of prior period expenses. The Ld. Counsel for the assessee submitted that the Ld. AO noted that the assessee had claimed even amount on account of accumulated depreciation as on 01.04.2011. The Ld. AO made the impugned addition on the premise that as the impugned expenditure does not pertains to the year under consideration therefore the same cannot be allowed as a deduction. The Ld. CIT(A) confirmed the findings of the Ld. AO holding that the additional depreciation has been claimed by the assessee on account of reclassification of assets in accordance with the provisions of Company Act 2013. The Ld. CIT(A) held that the assessee is entitled to depreciation as permissible under the Page - 12 - of 14 section 32 of the act and which has been allowed. The Ld. DR placed full reliance on the order of lower authorities.

5.1 We have heard rival submissions in the light of material available on records. The Ld. Counsel for the assessee has submitted that the Ld. AO has made the addition without appreciating and analysing full facts of the case. It was stated that the assessee had offered the income subsequently and hence a case of double taxation was made out. The Ld. CIT(A) is also reported to have sustained the addition including made under section 115JB on erroneous consideration of facts. We have noted that the Ld.AO apart from relying upon judicial pronouncements has not analysed the issue by bringing proper facts on records. We therefore hold the view that interest of justice would be met if the Ld.AO is given another opportunity to readjudicate the disallowance made by him of Rs.1,03,95,911/-. We therefore set aside the order of the lower authorities and direct the Ld. AO to readjudicate the matter de novo, after giving due opportunity of being heard and by passing a speaking order. The assessee shall comply with all the statutory notices of the Ld.AO and any non-compliance shall be viewed adversely. Accordingly the ground of appeal no.3 raised by the assessee is allowed for statistical purposes.

Page - 13 - of 14 6.0 The ground of appeal no.4 is regarding charging of interest u/s 234B of the act. The charging of interest under the Income Tax Act is consequential in nature. The ground of appeal no.4 is raised by the assessee is therefore dismissed.

7.0 In the result, the appeal of the assessee is partly allowed.

Order pronounced on 19th , February-2025 at Chennai. Sd/- Sd/- ( एबी टी. वकी) (अयिताभ शुक्ला) (ABY T VARKEY) (AMITABH SHUKLA) न्यानयक सदस्य / Judicial Member लेखा सदस्य /Accountant Member चेन्नई/Chennai, नदिांक/Dated: 19th , February-2025. KB/- आदेश की प्रतितिति अग्रेतिि/Copy to: 1. अिीिार्थी/Appellant 2. प्रत्यर्थी/Respondent 3. आयकर आयुक्त/CIT - Chennai 4. तिभागीय प्रतितिति/DR 5. गार्ड फाईि/GF

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