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Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI
Before: SHRI DUVVURU RL REDDY & SHRI G.MANJUNATHA
This appeal filed by the assessee is directed against order of the learned CIT(A)-1, Coimbatore dated 15.03.2019 and pertains to assessment year 2013-14.
The assessee has raised the following grounds of appeal:-
1) The order of the Ld. Commissioner of Income Tax (Appeals)-1, Coimbatore is opposed to to law and facts.
2) The Ld, Commissioner of Income Tax (Appeals) has erred in simply repeating the fair market value of the shares determined by the assessing officer without appreciating the fact that your appellant had based the valuation of shares on the strength of a valuation report issued by a Chartered Engineer, who is an expert in matters relating to valuation.
3) The Ld. Commissioner of Income Tax (Appeals) has overlooked a vital fact that when a Chartered Engineers Valuation is not acceptable to the Assessing Officer as well as the Commissioner of Income Tax (Appeals) the right course would be to secure a valuation report from the District Valuation Officer of the Income Tax Department.
4) The Ld. Commissioner of Income Tax (Appeals) has thus violated the principle of Natural Justice by brushing aside the supporting material in the form of another experts opinion.
5) The Ld. Commissioner of Income Tax has also erred in coming to a unilateral conclusion that Assessing Officers Valuation was right without taking into the following factual position relating to the immovable assets owned by the Assessee and shown, at historical cost in the books of accounts. a) The company owns 36 Acres of land on Coimbatore Pollachi Main road 3 Kilometres from Pollachi town. b) 12.96 Acres of land belonging to Sri Sakthi Textiles B unit situated at Samatur Village of PollachiTaluk. c) 5 Cents of prime Land in Chennai city (on St.Maris Road) which is in close proximity to Adyar Park Hotels in Adyar whose value would be easily 5 crores per ground.
6) The Ld. Commissioner of Income Tax (Appeals) by not securing an expert opinion and disregarding Chartered
Engineers report, such action of the CIT(A) has to be set aside by the Hon’ble Income Tax Appellate Tribunal.
7) The LdCIT(A) has also overlooked the decision of the Hon’ble ITAT Kolkata Bench in the case of ASG Leather (P) Ltd. VsIncome Tax Officer in TA No.2562(KOL) of 2017 members have observed that the Fair Market value of the shares could be based on market value of assets as furnished by the assessee on the basis of a registered valuer’s report.
8) The AO has failed to consider a subtle point that any prudent businessman when allotting shares to a new party, In respect of land and buildings owned and held by theappellant company for over 5 decades, would arrive the market value of assets as on date of allotment and only after taking into account the market value of the assets the proposal to allot shares at a particular value would be adopted and in the appellants case vast stretch of industrial and situated in close proximity to Pollachi town and landin Samathur Village within PollachiTaluk and also vacant site located in Adyar, Chennai.
9) The Ld. Commissioner of Income Tax Appeals has also Failed to consider the observations of Hon’ble Mumbai Tribunal in the case of Green Infra Ltd. Vs ITO (2013)38 taxmann.com 253/ 145 lTD 240 Mum. — trib) wherein the Honble members have observed as under: “The ITAT observed that no doubt a non-est company or a zero balance company asking for a share premium of Rs. 490 per share defies all commercial prudence but at the same time the fact cannot be ignored that it & a prerogative of the Board of Directors of the company to decide the premium amount and it is the wisdom of the shareholder whether they want to subscribe to such a heavy premium The Revenue authorities cannot question the charging of such huge premium, without any premium from any legislated law of the land.”
Though this decision was rendered prior to the amendment made in 2012, the observations are very relevant as in the appellant’s case there is absolutely no doubt as to the genuineness of the transaction, identity of the party and also the payment having been received through proper banking channels only.”
Brief facts of the case are that assessee company is engaged in the business of manufacturing of yarn, filed its return of income for assessment year 20013-14 on 28.09.2019 declaring loss of ` 31,27,463/-. During the year under consideration, the assessee has issued 7,69,260 equity shares having face value of Rs.10/- at a premium of Rs.142/- per share to Graghasakthi Infraservices Pvt.Ltd. and thus, received total share premium of `10,92,34,920/-. The assessment for, impugned assessment year was completed u/s. 143(3) of the Act, on 17.03.2016 accepting returned loss. Subsequently, PCIT-1, Coimbatore had initiated revision proceedings u/s.263 of the Act, and set aside order dated 17.03.2016 to the file of Assessing Officer to redo assessment afresh after verification of the issue of taxability of share premium collected by assessee u/s.56(2)(viib) of the Income Tax Act, 1961. Consequent to 263 proceedings, Assessing Officer has taken up the case for assessment and called upon the assessee to justify issue of shares at premium of ` 142 per share/-. In response, assessee vide filed letter dated 15.11.2018 submitted that value of shares has been arrived at considering fair market value of net asset of the company for which necessary valuation report from independent Chartered Accountant as well as from statutory auditor of the company has been obtained. Further, valuation report issued by independent Chartered Accountant is supported by valuation report of Chartered Engineer in respect of immovable properties owned by company. As per said valuation report, fair market value of shares is more than value of shares issued by assesse. Hence, there is no place for invoking provisions of section 56(2)(viib) of the Act.
The Assessing Officer was not convinced with explanation furnished by the assessee and according to him, valuation certificate obtained from independent Chartered Accountant as well as from statutory auditor of the company is being submitted by the assessee for first time. Neither during the course of original assessment proceedings nor during the course of revision proceedings did assessee state that it had valuation report from Chartered Accountant in support of share price. Therefore, he opined that at the time of issue of shares at premium, neither valuation report from independent Chartered Accountant nor Chartered Engineer report in support of value of immovable property was available. Therefore, the Assessing Officer opined that assessee has failed to substantiate value of shares to the satisfaction of Assessing Officer and accordingly, rejected valuation report furnished by assessee and has adopted net asset method, as prescribed under Rule 11UA(2) to determine value of shares. Further, as per net asset value method, net value of the company was negative and therefore, opined that issue of shares at premium of Rs.142 per share, does not support asset value of the company and accordingly, made addition towards share premium of `10,92,34,920/- under section 56(2)(viib) of the Act. The relevant findings of the Assessing Officer are as under :-
“5.. Submission filed by assessee is given due consideration. 5a. the information that valuation certification was obtained from an Independent Chartered Accountant as well as, from the Statutory Auditor of the company is being submitted for the first time now. Neither during the course of original assessment proceedings, nor during the course of revision proceedings did assessee state that she also had a Valuation Report from another Chartered Accountant in the matter, other than the Statutory Auditor. If there existed any such report then, she would had furnished the same before the Pr,CIT during the course of revision proceedings itself, Assessee has not provided any e-mail communication with the Chartered Accountant, or evidence that valuation fees was paid to him through cheque for the valuation Work, or TDS deducted from the professional fees, if any, paid for the work. etc. in order to establish that such a Valuation Report was really available at the time of issue of the shares at a premium. The claim now made that she held another Valuation Report therefore is only an afterthought to wriggle out of the issue, Therefore, existence of the second Report at the time of issue of the shares at premium is reflected.
5b. Without prejudice 10 above, on examining both the Valuation Reports it is noticed that the valuation have been done on the basis of Net Asset Value. However, while adopting the value of fixed asset, the market value of certified by an engineer, is stated to be adopted. i.e. the value of Fixed asset have been taken at`. 7000 lakhs as against book value of Rs.1075 lakhs as on 31/3/12. As per Rule 11UA(2) of the IT Rule 1962, the book value of the assets have to be considered while ascertaining fair vaIue of unquoted equity shares as on a valuation date. Thus, if the method prescribed under Rule 11UA(2) is applied, the fair value, of assessees share will be below par value as worked out below; (Iakhs) Fixed asset at book value Rs. 1075.00 (+) Net Current Assets Rs552.30 Rs. 1627.30 (-) Net Current liability Rs. 649.48 Long Term Borrowings Rs. 584.01 Share Application Money Pending Rs. 940,94 Allotment Net Value (-) Rs. 547.13
Thus, it can be seen that the net worth of assessee is a negative figure. therefore. question of fair market value of the shares, at per the net asset value method, being around Rt152 does not arise. The market value at the most can be the par value of the shares. Thus, the share premium amount received by assessee is liable to be taxed under section 56(2)(vb) of Income-tax Act. 1961.
5c. When the statue prescribes certain rules and procedures to be followed, the same has to be adhered with to be eligible for claiming any benefit/ advantage/exceptions covered under the relevant section of the Act. The very purpose of having specific definitions or conditions in an Act or Rule will be defeated if they are not followed and benefit or exceptions mentioned in those Act/Rule are availed. Therefore, default in complying with the specific requirement of the relevant Section or Rule will disentitle assessee to the benefit/advantage/exceptions contained In the said Rule/Act and the general provisions of the Act would be applicable. Various judicial forums have held that where a method has been prescribed by the legislature, that method alone shall be followed. It be pertinent to mention that when the legislature in its wisdom has also given a formulae lot computation of (he fair market value it cannot be ignored or altered by the authorities below. Where the Act prescribes a rule, it has to be strictly and mandatorily followed, and further if the statute has conferred a power to do an act and has laid down the method in which that power is to be exercised, it necessarily prohibits the doing of the act in any other manner than that has been prescribed. This view is supported by he following decisions: 1. Hon’ble Supreme Court In the case of chandrakishoreJha Vs. Mahavir Prasad & Others, order dated 21/9/1999 2. Honble Supreme Court In the case of Sharat Han Singhania& Others Vs. CWT. order dated 16.2.1994, case no 1213 of 1990
In the present case the Valuation Report is not prepared by an Accountant as Rule 11UA(2)(b) of the Income-tax Rules, 1962. Also, the net assetvalue of the shares do not justify any premiium 10 the par value of the equity shares Issued as worked out at Para 5b above.. Thus, the market value of the shares issued by the assessee company during the year is neither supported with any authentic document, nor supported by net worth of the company, therefore, the face value of the share will have to be adopted/considered as the fair market value of the fresh shares issued. The premium received against the fresh shares Issued would therefore be liable ,to be taxed as per the provisions of section 56(2)(viib) of the Income-tax Act, 1961.
In view of the facts discussed above the, share premium amount of `10,92,34.920/- received during the year, is being brought to tax under section36(2)(viib) of the Income-tax Act. 1961.”
Being aggrieved by the assessment order, the assessee preferred an appeal before learned CIT(A). Before the learned CIT(A), the assessee has reiterated its submissions made before Assessing Officer and argued that when assessee issues shares at premium and issue of price of shares does not exceed fair market value of shares, then there is no place for application of provisions of section 56(2)(viib) of the Act. The assessee further contended that for the purpose of this clause, fair market value of shares shall be value as may be determined in accordance with such method, as may be prescribed or as may be substantiated by the company to the satisfaction of 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 etc. whichever is higher. Therefore, if assessee substantiates fair market value of shares with necessary evidence, then there is no scope for determination of share price in accordance with prescribed method i.e Rule 11UA of Income Tax Rules 1962.
The learned CIT(A) however, was not convinced with explanation furnished by the assessee, and according to him, when assessee has chosen one of the prescribed method as
per Rule 11UA i.e., net asset value method or determined by Chartered Accountant or merchant banker using discounted free cash flow method in accordance with Rule 11UA, then role of Chartered Accountant and his valuation report would come into play. In case, where assessee itself stated that it had resorted to net asset value method in terms of explanation (a)(ii) to Section 56(2)(viib), then valuation report of Chartered Accountant is not relevant, as valuation is not based on DCF method. The learned CIT(A) further observed that it is seen that assessee failed to substantiate valuation of shares to the satisfaction of Assessing Officer, which is primary requirement of explanation (a)(ii) to Section 56(2)(viib). It is seen that even valuation report of Chartered Accountant which is primarily relied on valuation of an Engineer did not substantiate the basis for valuation of land. It did not state as to how market value of land is arrived at. Therefore, it cannot be said that assessee has substantiated / justified on the basis of value of its assets to the satisfaction of the Assessing Officer. In such case, only option with the Assessing Officer is to determine fair market value in accordance with method prescribed under Rule 11UA of Income Tax Rules, and accordingly confirmed additions made by the Assessing Officer. Aggrieved by learned CIT(A) order, the assessee is appeal before us.
The learned A.R for the assessee submitted that learned CIT(A) has erred in simply repeating fair market value of shares determined by the Assessing Officer without appreciating the fact that assessee had based on the strength of valuation report issued shares at premium. The AR further submitted that learned CIT(A) has erred in holding that relevance of valuation report of Chartered Accountant /Engineer comes into play only when the company resorted to explanation (a)(i), ignoring the fact that as per provisions of Explanation provided under section 56(2)(viib), it is option of the assessee either to choose explanation (a)(i) or (a)(ii) and, if assessee chooses Explanation (a)(ii), then prescribed method for determination of share price i.e Rule 11UA does not applicable. The AR further submitted that it is not a case of Assessing Officer that assessee has not filed any valuation report to substantiate share price to his satisfaction. In fact, the Assessing Officer himself admitted that assessee has filed valuation report in support of share price. However, rejected such valuation report only on flimsy grounds that said report was not placed at the time of 143(3) assessment or even before learned CIT(A) at revision proceedings, ignoring the fact that even if, valuation report is obtained subsequent to the issue of shares, then it does not matter, if asset base of the company supports such valuation. The AR further submitted that valuation report issued by independent Chartered Accountant, which was supported by Chartered Engineer report clearly envisages the fact that net asset value arrived at by valuer is on the basis of huge land bank owned by the assessee and value of such land bank at current market price is worth about ` 70.00 crores . Therefore, Assessing Officer as well as learned CIT(A) were incorrect in invoking provisions of section 56(2)(viib) of the Act to bring share premium amount into tax.
The learned DR, on the other hand, submitted that it is a matter of fact, as per findings of Assessing Officer, the assessee has not filed valuation report at the time of 143(3) proceedings or proceedings before PCIT u/s. 263 of the Act. Further, Assessing Officer has not gone into valuation report filed by assessee during subsequent proceedings. Therefore, in all fairness, issue may be set aside to the file of Assessing Officer and direct him to consider valuation report filed by assessee to determine share price in accordance with Rule 11UA of Income Tax Rules, 1962.
We have heard both parties, perused materials available on record and gone through orders of the authorities below. Provisions of section 56(2)(viib) deals with cases 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 fair market value of the shares to be taxed as income of the assessee.
Further, fair market value has been explained, as per which fair market value of the shares shall be value, as may be determined in accordance with such method as may be prescribed or 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. From the reading of provisions of section 56(2)(viib) and Explanation (a)(i) and (a)(ii), it is very clear that if premium charged on issue of shares exceeds fair market value of shares, then excess amount charged for issue of shares is treated as income of the assessee. Further, to determine fair market value of shares, it is for assessee to choose either a prescribed method which is Rule 11UA of the Act, or the assessee may arrive at fair market value, but such value should be substantiated to the satisfaction of the Assessing Officer based on the value on the date of issue of shares, considering its assets including intangibles etc. In this case, assessee has chosen Explanation (a)(ii) to determine fair market value of shares and as such question of determination of share price in accordance with such method as may be prescribed does not arise and accordingly, Assessing Officer cannot go into Rule 11UA to determine share price in accordance with net asset value method. Further, when the assessee has chosen Explanation (a)(ii) and determined fair market value of shares having regard to its assets, then such fair market value should be substantiated to the satisfaction of the Assessing Officer. In this case, assessee has filed valuation report from independent Chartered Accountant as well as from statutory auditor of the company, which was further supported by valuation report of consulting civil engineer and valuer for valuation of immovable property. As per valuation report of independent Chartered Accountant, value of per equity shares has been arrived at ` 152/- per share which was further supported by valuation report issued by statutory auditor of the company. The said valuation report is on the basis of valuation of land and industrial building possessed by Assessee Company at Sengampalayam village Pollachi Taluk, Coimbatore Dist, as per which assessee company owned more than 35.65 acres of land, and the present market value of said land is about 72 crores. The said valuation report is further states that total value of asset including land, building and other assets is at Rs.77.50 crores.
From the above, it is very clear that assessee has filed necessary evidences including valuation report from independent Chartered Accountant to support fair market value of shares arrived at as on date of issue of shares as per explanation (a)(ii). Therefore, we are of the considered view that the assessee has substantiated fair market value of shares as on the date of issue of shares.
Coming back to observations of the Assessing Officer regarding valuation report. The Assessing Officer never stated that assessee has not filed valuation report in support of fair market value of shares. In fact, Assessing Officer has categorically admitted that assessee has filed valuation report from independent Chartered Accountant as well as statutory auditor of Assessee Company. But, he has ignored valuation report filed by assessee only for the reason that such reports were not filed during original assessment proceedings or even during revision proceedings. We have gone through reasons given by the Assessing Officer for rejection of valuation report and we do not ourselves subscribe to the findings recorded by Assessing Officer, because he cannot reject valuation report merely for the reason such valuation report was not filed at the time of assessment proceedings. Further, timing of filing valuation report at the time of original assessment proceedings u/s.143(3) or during revision proceedings u/s.263 of the Act is not a relevant criteria to decide whether fair market value of shares issued by assessee is substantiated to the satisfaction of Assessing Officer or not. But, what is relevant is whether valuation report supports share price determined by the assessee or not. In this case, valuation report obtained by the assessee from independent Chartered Accountant supports share price. Therefore, when the assessee has substantiated share price to the satisfaction of the AO with the help of valuation report, even if, such valuation report is obtained subsequent to the date of issue of shares, it does not alter the situation. Therefore, we are of the considered view that Assessing Officer as well as learned CIT(A) were erred in rejecting valuation report filed by assessee on this count.
Coming back to the observations of learned CIT(A). The learned CIT(A) observed that relevance of valuation report of Chartered Accountant comes into play only when assessee chooses Explanation (a)(i) to determine fair market value of shares, but not when assessee has resorted to Explanation (a)(ii) to section 56(2)(viib) of the Act. The said findings of learned CIT(A) is contrary to law and absurd, because provisions of explanation (a0(ii) of the Act is very specific, as
per which, when share price is determined in accordance with explanation (a)(ii), fair market value of share should be substantiated to the satisfaction of Assessing Officer and such satisfaction may be by way of valuation report or asset value of the company. In this case, there is no dispute of whatsoever with regard to the fact that assessee has filed valuation report to substantiate fair market value of shares to the satisfaction of the Assessing Officer. Therefore, we are of the considered view that learned CIT(A) has erred in holding that when assessee has chosen net asset value method, the relevance of valuation report from Chartered Accountant does not come into play.
We, further are of the considered view that when assessee has exercised its option given as per Explanation (a)(ii) to Section 56(2)(viib) of the Act, then he should substantiate fair market value of shares to the satisfaction of Assessing Officer based on the value as on date of issue of shares of its assets etc.
Since assessee has filed valuation report to substantiate fair market value of shares as on the date of issue and such valuation report is based on assets of the company, we are of the considered view that assessee has satisfied conditions prescribed under Explanation (a)(ii) to Section 56(2)(viib) of the Act and in such situation, there is no scope for the Assessing Officer to invoke provisions of Section 56(2)(viib) of the Act to tax share premium collected on issue of shares. The learned CIT(A) without appreciating these facts has simply confirmed additions made by Assessing Officer. Hence, we direct the Assessing Officer to delete additions made towards share premium on issue of shares u/s.56(2)(viib) of the Act.
In the result, appeal filed by assessee is allowed.
Order pronounced in the open court on 1st February, 2021