RAJ SHEELA GROWTH FUND (P) LTD.,NEW DELHI vs. ITO, WARD- 21(1), NEW DELHI

PER AMIT SHUKLA, JUDICIAL MEMBER: The aforesaid appeal has been filed by the assessee against the impugned order dated 26.12.2018 passed by Commissioner of Income Tax (Appeals)-VII, New Delhi for the quantum of assessment passed u/s.143(3) for the Assessment Year 2015-16. In the grounds of appeal, the assessee has raised following grounds:- “1. That under the facts and circumstances the impugned A.O. being ITO Ward-21(1) New Delhi who framed the asstt. was having no legally valid jurisdiction to frame the asstt. in the absence of complying with the mandatory requirements of Sec. 127/127(2) of the I.T. Act for transfer of existing jurisdiction from Central Circle-16 (now Central Circle-20) to the ITO Ward-

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21(1), New Delhi, specially when the PCIT of Central Circle-16 and ITO Ward-21(1) are different. 2. That under the facts and circumstances, both the lower authorities grossly erred in law as well as on merits in making and confirming the addition of Rs. 135,11,67,220/- u/s.56 (2) (viia) r/w Rule- 11UA. 2.1 That under the facts and circumstances, both the lower authorities exceeded the scope of this limited scrutiny asstt. by extending his examination towards applicability of sec.56 (2) (viia) r/w Rule-11UA against examination correctly to be done only u/s.68 of the I.T. Act, thus the examination and addition u/s.56 (2) (viia) since not permitted by Pr. CIT, as mandated by instructions, has been done without jurisdiction, consequently the resultant addition being without jurisdiction needs to be deleted threshold. 2.2 That under the facts and circumstances, the provisions of sec.56 (2) (viia) r/w Rule-11UA is not applicable at all. 2.3 That without prejudice, since the workings u/s.56 (2) (viia) r/w Rule-11UA is not possible, more so on account of not possible to get the audited balance sheet as on the valuation date by the auditor of the company appointed u/s.224 of the Companies Act, 1956 as sec.224 of Companies Act, 1956 was not in-force at the relevant time, therefore being a case of performance impossibility, the calculations as per Rule-11UA cannot be resorted to for the purposes of sec.56 (2) (viia). 2.4 That without prejudice, both the lower authorities further erred in not adopting the valuation as per Rule-11UA at Rs.(-) 1,89,24,97,835/-, as furnished by the assessee during asstt. and further erred in law and on merits in not adjusting the book value of assets and liabilities as per the audited balance sheet, as provided in Rule-11UA (b) of the I.T. Rules. 2.5 That without prejudice, the impugned transactions should not be deemed to have taken place in A.Y.2015-16 in view of Rule-11U (j), as per the definition of valuation date therein, therefore the resort to the application of sec.56 (2) (viia) r/w Rule-11UA is unwarranted in this year.

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2.6 That without prejudice, in any case, the calculations adopted for the purposes of Rule-11UA are incorrect and erroneous. 2.7 That without prejudice, no proper and reasonable opportunity has been provided before finalizing the issue and the complete exercise has been done in a great haste, in a hurried manner, towards the fag end of the limitation period by violating all principles of natural justice.”

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S.No. Name Script in which invest made No. of share Purchase @ Total amount of purchased per share investment (Rs.)

Ambience buildcon Pvt Ltd 3,01,211 3012110 1 10 Aman hospitality Pvt Ltd' 48266526 482665260 2 10 3 Ambience IT Developers Pvt Ltd 2,500 25000 10 4 Greenline developers Pvt Ltd 2,81,492 2814920 10 5 R.S.G. Housing and finance Pvt ltd. 4,97,500 10 4975000 Senator developers Pvt. Ltd. 2,54,130 10 2541300 6 7 Sara estates Pvt. Ltd. 4,62,335 10 4623350

Ambience highway developers Pvt. 6,25,000 10 6250000 8 Ltd. 9 Ambience towers Pvt Ltd 2,21,368 12.21 2702903.28

Ambience homes Pvt Ltd 2,47,550 10 2475500 10 Ambience power projects Pvt Ltd 12,500 10 125000 11 Ambience home developers Pvt Ltd 2500 25000 12 10 13 Prime commercial Pvt Ltd 268225 2682250 10 14 Green vally realtors Pvt Ltd 2593 25930 10 15 Arman buildcon Pvt Ltd 625000 6250000 10 Indus sorurja Pvt Ltd 623457 40.88 25486922.16 16 17 Alankar apartments Pvt Ltd 47000 4700000 100 Ambience infracon Pvt Ltd 124415 12441500 18 100 19 Aldoka exporters Pvt Ltd 625000 6250000 10 Ambience sez developers pvt. Ltd. 2500 25000 20 10 Ambience Infrastructure Developers 6250000 62500000 21 10 PvtLtd Ambience Pvt Ltd 43602756 4.95 216030610 22 23' Ambience Developers&Infrastructure 2404440 240444000 100 Pvt Ltd. 24 Ambience Commercial DevelopersPvt 23620099 499788490 21.16 Ltd 25 Tropical Infradevelopers Pvt Ltd. 17068 696.57 11889056.76

Sky valley Buildcon Put lAd.. 625000 10 6250000 26 160,69,99,102.2 Total

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as on the date of transfer, i.e., 30th March, 2015, which were reduced by: (a) Amount of bad debts, (b) Business investments made in projects, (c) Borrowing cost included in the fixed assets, (d) Earnest money/advances given by the companies, (e) Cost of damages of various items forming part of the assets. The contention of the assessee was that these items did not represent the true value of the assets as they are fictitious asset value.

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the assessee in detail and rejected the same on various counts as per his discussion in the order, which shall be dealt with in the later part of this order. Finally, he computed the excess of Fair Market Value under Rule 11UA over and above the consideration shown by the assessee in respect of investments made by the assessee company in the shares of different companies and worked out the aggregate difference of Rs.135,11,59,300/- in respect of 22 Companies and same was added u/s.56(2)(viia) of the Income Tax Act.

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call for any information which is relevant to determine the correct income and one of the point for selection of case on scrutiny was to verify the source of investment as well as compliance of the conditions as given in Section 56(2)(viia). On the objection of the assessee that, since auditors were appointed u/s.224 of the Companies Act, 1956 which was amended by the new Companies Act, 2013 wherein the appointment of auditors are in terms of Section 139; therefore, determination of a Fair Market Value based on auditor’s report under Rule 11U/11UA made under earlier provision cannot be made. Ld. CIT(A) held that Assessing Officer in a very detailed manner has compared the earlier provision of Section 224 of the Companies Act, 1956 with the current provision of Section 139 of Companies Act, 2013 and has found that the provisions are pari materia, hence the audited financial by the auditors can be taken into consideration for the purpose of computing the fair market value of the shares as if they were appointed u/s.139. The provision of Rule 11UA provides that Fair Market Value of the shares should be computed as per the audited balance-sheet of the company as on the date of valuation/transfer and the balance-sheet based on which the value is to be computed should be audited by the auditors of the same company. Simply because of the language of the provisions under Rule 11UA(b)(ii) has not been amended consequent to the introduction of new Companies Act, 2013, that does not mean that the said provision itself has become unworkable for

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computing the Fair Market Value of the shares.

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Market Value and actual purchase consideration was in negative specifically in the case of following four companies:-

Aman Hospitality Pvt. Ltd. Rs. (-) 497890274/- Ambience Infrastructure Developers Pvt. Ltd. Rs. (-) 376688/- Ambience Commercial Developers Pvt. Ltd. Rs. (-) 379459820/- Rs. (-) 1089082677/- Indus Sor Urja Pvt. Ltd. Rs. (-) 1966809459/- Total

Thus, Assessing Officer could not have ignored the negative investment in the above investments and should have taken into consideration the aggregate value of all the companies if such a negative difference is taken then no amount would be taxable under Section 56(2)(viia).

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Assessing Officer has done certain arithmetical error and the value of Fair Market Value determined by the Assessing Officer was factually incorrect and it was pointed out that Fair Market Value computed to the extent of Rs.10,56,92,728/- should be deleted. However, the ld. CIT(A) held that nowhere assessee could explain the difference of Rs.10,56,92,728/-.

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forfeited by the NOIDA authority was still appearing in the books of Ambience Pvt. Ltd.

 Secondly, as regards interest cost incurred for purchase /development of plots/land/projects which as per the assessee is a fictitious cost capitalized in the value of assets, the Ld. CIT(A) held that under the provision of Rule 11UA, only the Fair Market Value of the shares is determined and not the property or immovable assets. The Fair Market Value of the shares is determined taking into account book value of the asset and book value of liabilities. He further observed that Assessing Officer in the assessment order has held that as per the provision of Section 36(1)(iii) interest cost incurred on purchase or acquisition of the business asset is to be capitalized till the date asset is put to use; and section 43(1) wherein actual cost of asset has been defined read with Explanation-8 provides that any amount which is paid or payable as interest in connection with acquisition of an asset interest relatable to the period after such period is first put to use same shall be not included in the actual cost of the asset. Meaning thereby the interest cost incurred till the date of asset is put to use is to be treated as part of the actual cost of the asset. Further, if these companies have not incurred the interest cost then they could not have acquired or purchased the business asset.

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 As regards the claim for bad debts to be removed from the value of the asset, specifically debtors amount to Rs.4,08,45,945/- in case of M/s. Ambience Developers and Infrastructure Pvt. Ltd. which represents the old outstanding rents which have become bad debts, the Assessing Officer has observed that on the date of valuation, i.e., 30.03.2015 same was shown as good and recoverable debtor in the balance-sheet, and even same has not been claimed as bad debt in the audited balance sheet as on 31th March, 2015.

 On the issue of cost of land falling under green areas, roads and common areas, the Ld. CIT(A) held that no working or documentary evidence has been brought by the assessee to show that how the said area has been worked out and the proportionate cost worked out by the assessee and same is not supported by any documentary evidences. He further held that whenever a township is developed then the surrounding amenities in the form of roads, common area, parks, green area etc. were also developed which forms an important part of the project and the cost pertaining to the same is embedded in the total cost of the project and the sale price of the unit of the township are determined accordingly, which are recovered from the buyers.

 Regarding the cost of damage electrical material, tiles, marbles and hardware etc., the same was rejected on the

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ground that there was no corroborative evidence filed by the assessee and even otherwise also if it is assumed that said cost incurred actually represents the cost of damaged goods then also no reduction/adjustment can be allowed because same represents the normal loss borne out by the company.

 Regarding impairment in the value of property due to adverse court order, etc., Ld. CIT(A) held that nowhere any suit has been filed before any Court and no facts have been mentioned and how the judgment of the Court impacts the value of the asset as on 30.03.2015.

 Lastly, with regard to the adjustment for statutory liability, Ld. CIT(A) held that assessee has not mentioned any figure of adjustment or the name of the company in the valuation of which the said adjustment is sought for.

Contention of the Assessee on Legal Issue u/s 127

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Circle-20, New Delhi. All the earlier assessment order u/s.143(3) were passed right from the Assessment Year 2008- 09 to 2010-11 by Central Circle-16 and the Income Tax Return for Assessment Year 2014-15 and 2015-16 was also filed before Central Circle-20. The assessee received notice u/s.143(2) dated 21.03.2016 from ITO, Ward-21(1) and even the final assessment order has also been framed by the same officer. He submitted that no order u/s.127 (2)(a) has been passed for transferring of jurisdiction from Central Circle-16/ 20 to ITO, Ward-21(1). He submitted that Section 127(2)(a) mandates that where the Assessing Officer from whom the case is to be transferred and the Assessing Officer of the transferee ward are not subordinate to same Pr. CIT, then such transfer can be done only after the valid jurisdiction order u/s.127 has been passed. In this case, no such order has been passed nor any reason or communication was given for transfer of jurisdiction from Central Circle-16/20 to ITO, Ward-21(1). Thus, the present Assessing Officer could not have assumed the valid jurisdiction. He submitted that this issue was raised before the Ld. CIT(A) also vide ground no.2, which has been dismissed by him on the ground that no such objection was made before the Assessing Officer. He submitted that being a legal issue which goes to the very root of the jurisdiction, same can be challenged at any stage and once it is found that there is an inherent lack of jurisdiction of the Assessing Officer, then in absence of any transfer order the assessment order passed by such AO cannot be

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sustained. In support, he relied upon following judgment:-

i) KUSUM GOYAL 329 ITR283 (CAL.) Held that - In case of transfer within the same city, locality or place the opportunity of hearing as postulated in Sec. 127 (1) and (2) is dispensed with, other statutory formalities which include issuing an order are required to be complied with and in the absence of the same the Asstt. is to be treated as illegal.

ii) AJANTHA INDUSTRIES AND ORS. VS. ABDT & ORS. 102 ITR 281 (SC) Held that - The requirement of recording reasons U/s. 127 (1) for transfer of a case from one AO to another is a mandatory direction and non - communication thereof to the assessee is not saved by showing that the reasons exist in the file although not communicated to the assessee. iii) RISHABH BUILDCON (P) LTD. VS. CIT & ORS. (2011) 57 DTR (DEL.) 252 On a reading of the provisions of S. 127 three aspects emerge: (i) a show-cause notice has to be issued and a reply has to be called for; (ii) the assessee has to be afforded opportunity of hearing; (iii) the authority concerned has to pass a reasoned order. The provision requires reasons shall be given by the authority. The reasons are to be cogent and germane having nexus to the facts of the case. iv) ITO VS. KRISHAN KUMAR GUPTA (2008) 16 DTR (DEL.) (TRIB.) 1 Held “Moreover, ITO Ward-33 (2) exercised jurisdiction merely on the basis of information given by ITO, Ward-25(4) and transfer of fde by the said ITO, and the case was not transferred to him by any order passed u/s. 127 by any competent authority - therefore reassessment made by ITO Ward-33 (2) is invalid.” v) DGP IIINODAY INDS. LTD. (2007) 13 SOT 733 (MUM.). Held “...Whether for transfer of case u/s. 127 not only reasons are to be

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recorded prior to transfer of records but also communicated to person concerned — held, yes.” vi) Sh. Harish Chand Pandey Vs. ITO ITA No.l727/Del/2018 Order Dtd.07.06.18 by Delhi ITAT ‘C’ Bench. The notice issued and assessment completed by non jurisdictional A.O. It could not' be shown by the revenue as to how the ITO who framed the asstt. got the jurisdiction over the assessee in the absence of order u/s. 127.”

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u/s.127 and other related points and in response to such RTI Application, no such information was provided. Thereafter, assessee had filed a First Appeal and the First Appellate Authority has directed the CPIO to provide the information within 15 days from the date of the order, i.e., 26.04.2019 which was not made available till the first date of hearing.

Contention by the Revenue on the issue of Jurisdiction

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competent authority u/s.127 for transferring the case from Central Circle-20 to ITO, Ward-21(1). In response, the ld. CIT- DR had submitted a screen shot from the Department website which shows that PAN of the assessee has been transferred from Central Circle-20, Delhi to Ward-21(1), Delhi on 19.02.2016 by transfer order no. 200000047799. Thus, he submitted that there was a valid transfer order for transferring the case from one Circle to another and since transfer of the case is within the same city, therefore, no opportunity was required to be given to the assessee. Thus, on the facts as well as in law such an objection raised by the ld. counsel is not tenable.

Decision on Jurisdictional issue u/s 127

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u/s.127, we find that the Ld. CIT (A) has dismissed the assessee’ appeal on the ground that no such protest was registered by the assessee under assessment stage before the Assessing Officer despite due opportunity of hearing was provided. Section 127 provides the power to transfer of case by various senior authorities from one or more Assessing Officers sub-ordinate to them whether with or without concurrent jurisdiction to any other Assessing Officer also subordinate to them. In case, the Assessing Officer from whom the case is transferred to the transferee Assessing Officer are not subordinate to the same authority then such a transfer has to be done after giving reasonable opportunity of being heard in the matter and after recording the reason before passing the order. However, if transfer is from Assessing Officer to another Assessing Officer situated in the same city then no opportunity is required to be given. Thus, it is mandatory under the law that, if case of an assessee is transferred to one Assessing Officer to another, then order u/s 127 has to be passed and without such order jurisdiction cannot be conferred on the transferee Assessing Officer. On the other hand, Section 124 is applicable only when there is a direction or an order issued u/s.120(1) or 120(2) vesting the Assessing Officer with a jurisdiction of an area, i.e., where there is an assignment of the jurisdiction of an Assessing Officer. Sub section (1) of Section 124 assigns Assessing Officer’s jurisdiction linked with the territory. Sub Section (2) of Section 124 provides that assessee may raise objection

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regarding the correctness of the jurisdiction with respect to territorial jurisdiction u/s. 124(1). Sub Section (3) of section 124 provides for time limit for raising such objection. Here, it is not a case where assessee is challenging the territorial jurisdiction of the Assessing Officer albeit what has been challenged before us is that, Assessing Officer inherently lacked jurisdiction due to non passing of mandatory order u/s.127(2)(a) by the competent authority. It is now well- established principle of law that there is a distinction between lack of jurisdiction and irregular exercise of jurisdiction. The proceedings render void ab initio when the authority taking it has no power to have succinic over the cases.

“18. S.S. Ahluwalia (supra), examines several decisions which were relied upon by the assessee in the said case and were held to be not germane and applicable. This decision also explains provisions of Section 127 of the Act and scope and ambit of the said power, to observe that the section does not speak of the transfer of jurisdiction but transfer of case as defined in Section 127. Expression "concurrent jurisdiction" is mentioned in sub-section (3) to Section 127 of the Act. Elucidating the legal effect of Sections 120, 124 and 127 of the Act, it was observed in S.S. Ahluwalia (supra) :— "(13) The provisions indicate that Sections120, 124 and 127 of the

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Act recognizes flexibility and choice, both with the assessee and the authorities i.e. the Assessing Office before whom return of income could be filed and assessment could be made. The Assessing Officer within whose area an assessee was carrying on business, resided or otherwise income had accrued or arisen (in the last case, subject to the limitation noticed above) has jurisdiction. Similarly, the Assessing Officer also has authority due to class of income or nature and type of business. The Act, therefore, recognized multiple or concurrent jurisdictions. Provisions of Section 124 ensure and prevent two assessments by different assessing officers, having or enforcing concurrent jurisdiction. There cannot be and the Act does not envisage two assessments for the same year by different officers. (Reassessment order can be by a different officer)."

Further, the Hon’ble High Court held that:

“Section 127 relates to transfer of case from one Assessing

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Officer having jurisdiction to another Assessing Officer, who is otherwise not having jurisdiction as per directions of the Board under Section 120 and Section 124 of the Act. Under sub-section (1), transfer order under Section 127 can be passed by the Director General, Chief Commissioner or Commissioners from one Assessing Officer to another Assessing Officer subordinated to them. Sub-section (2) applies where the Assessing Officer to whom the case is to be transferred is not subordinated to the same Director General, Chief Commissioner or Commissioners of the Assessing Officer from whom the case is to be transferred. This is not a case of a transfer under Section 127 of the Act. This is a case in which the assessee had raised an objection stating that the Income-Tax Officer, Ward-1 (1), Noida should not continue with the assessment as the petitioner-assessee was regularly filing returns with the Income-Tax Officer, Ward-58 (2), Delhi. Objection as raised were treated as made in terms of sub-section (3) to Section 124, notwithstanding the fact that there was delay and non-compliance. The Income-Tax Officer, Ward-1 (1), Noida accepted the request/prayer of the petitioner and had transferred pending proceeding to the Assessing Officer, Ward-58 (2), Delhi. Therefore, there was no need to invoke and follow the procedure mentioned in sub-section (2) to Section 127 of the Act. Section 127 of the Act would come into play when the case is to be transferred from the Assessing Officer having jurisdiction to a third officer not

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having jurisdiction over an assessee (a case) in terms of the directions of the Board under section 120 of the Act. Section 127 of the Act could also apply when the department wants transfer of a case, and Sections 120 and 124 of the Act are not attracted.”

Thus, the Hon’ble High Court has clearly held that Section 127 relates to a transfer of case from one Assessing Officer to another Assessing Officer who otherwise is not having jurisdiction as per direction of the Board u/s.120 and 124 of the Act. In that case, their Lordships have clearly found that it was not a case of transfer u/s.127 albeit this was a case the assessee has raised an objection stating that ITO, Ward-1(1) should not continue assessment as a petitioner assessee was filing returns with ITO, Ward-21(1) Delhi. Objection as raised were treated made in terms of Section 124(3) despite that there was a delay in non-compliance by the assessee. The ITO, Ward-1(1), NOIDA accepted such a request/prayer of the assessee and has transferred the pending proceedings to the Assessing Officer Ward-58(2) Delhi. It was on these facts; their Lordships held that there was no need to invoke or to follow the proceedings mentioned in Section 127. Further, it was clearly held and observed that, “Section 127 would come into play when the case is to be transferred from Assessing Officer who having jurisdiction to the 3rd officer and not having jurisdiction over an assessee in terms of direction of Board u/s.120 of the Act. Further Section 127 would also apply when the Department

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wants transfer of the case and in that case Section 120 and Section 124 are not attracted.” The aforesaid clarification by the Hon’ble Jurisdictional High Court clearly clinches the issue that if the case is being transferred from one Assessing Officer having jurisdiction over the assessee to another assessing officer who otherwise was not having the jurisdiction in terms of direction of the Board u/s.120 and 124 of the Act, then transfer order u/s 127 is mandatory, without which the jurisdiction of the Assessing Officer cannot be conferred to pass any order. If such a statutory procedure is not followed then there would be a chaos where any Assessing Officer can pass order in the case of any assessee even when he does not have any territorial jurisdiction over that assessee. Thus, we are of the opinion that an order u/s. 127 is mandatory which has to be passed by the competent authority if jurisdiction is transferred from one Assessing Officer to another Assessing Officer who otherwise does not have the jurisdiction over the assessee.

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the conclusion of the hearing, no specific order was produced before us. Under these circumstances and in order to ascertain the correct facts, we are of the opinion that on this specific issue the matter is remanded back to the Assessing Officer, who shall examine whether any transfer order has been passed u/s.127 or not. If vide such transfer order number and transfer date the case of the assessee has been transferred u/s 127, then assessee’s contention stands rejected.

Contention of the Assessee on merits

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shares was Rs.160,69,97,277/-. The Assessing Officer has calculated the Fair Market Value of these shares of only 22 companies out of 26 companies and thereby calculated the differential value of shares of 22 companies as per the Rule 11UA at Rs.135,11,67,220/-. He submitted that Assessing Officer had erred in not considering the balance 4 companies for the purpose of determining the Fair Market Value of shares as per the Rule and all are considered cumulatively, then the overall valuation would be negative.

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be situation of abuse of provision of law to avoid tax liability including any laundering of unaccounted income. Further, it was purely a bona fide transaction and there is no allegation of the Department that the transaction is being done for tax evasion or for money laundering purpose or for getting the benefit of such mischief. Thus, if there is a bona fide transaction, the said provision cannot be invoked and in support he relied upon the following Tribunal decisions: (i) ACIT vs. Shri Subodh Menon Bombay ITAT dated 07.12.2018 (ii) Vaani Estate Pvt. Ltd. vs. ITO (ITAT Chennai) dated 27.8.2018 (iii) ACIT vs. Bhagwati Prasad Bajoria, 137 Taxman 75 (Gau) (MAG) (iv) Rajendra Suryavanshi vs. ACIT (2011) 56 DTR (PUNE) (Trib.)

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per Rule 11UA and clause (ii) of the Section clearly provides that ‘aggregate fair market value of the property’ and ‘aggregate fair market value of such property as exceeds such consideration’ use of word ‘aggregate’ at two places in clause (ii) clearly provides that it is only the aggregate of such property being the share is a subject matter of consideration for this issue, and therefore, aggregate Fair Market Value of the total property purchased in the year has to be compared, otherwise Legislature would not have used the word ‘aggregate’ twice in clause (ii) and therefore it clearly shows that the aggregate value of Fair Market Value of the shares has to be taken.

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calculation errors of Rs.10,56,92,728/-, the working of which was given before the Assessing Officer and also given in the paper book from pages 132 to 150 of the paper book. Thus, he submitted that such a mistake should be directed to be corrected as AO has not correctly taken the figures and the amount of Rs.10,56,92,728/- should be reduced.

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documents furnished by the assessee are not sufficient to prove the said adjustments. (iii) The reasoning of the A.O. and-CIT (A) that the bal. sheets figure as on 30.03.15 and 31.03.15 are same therefore no adjustment is required, is legally incorrect. Rule- 11UA(1)(c)(b) clearly provides for making adjustments in the figures of bal. sheet by considering the notes annexed to the bal. sheets as on the valuation date. (iv) The following deductions in the value of assets was claimed for calculating FMV of shares:- a) For earnest money / advance against properties non- refundable/ forfeited: Company Details Amount Ambiance Pvt. Ltd. 77,89,59,157/- Earnest money / advance (formerly known as against plot No.SLC-3/1 Ambiance Projects & Alpha H SLC 4/1 Beta Infrastructure Ltd.) Second SLC 4/1 Beta II SLC 3/FI Alpha II 76,18,79,750/- Earnest money / advance against plot No.SY. Nos.421, 427 Bit 1 at Vishakhapatnam 1,06,91,24.800/- Earnest money / advance against plot No. GHP 001, Sector-115 Noida. 260,98,63,707/ Total -

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Details of the claim was given before the AO and CIT(A) and also as per sheet attached in the audited balance sheet as on 30.0.15, by way of notes. Rs.347,81,67,504/- has been shown as non-recoverable which includes Rs. 260,98,63,707/- for earnest money and advance and balance Rs.86,83,03,797/- for borrowing cost being interest. The nature of this amt. is that, due to defaults of the assessee in payment / long and continued delayed in payments / non observing and non-complying with the mandatory terms and conditions of the contracts, the amounts gets forfeited by the authorities. Necessary evidences showing that the money will be forfeited in case of such defaults were available with the assessee. Now, the audited balance sheet has to be considered and applied by giving effect with the notes appended therein. At times, the amount forfeited is not given as a fact in the financial accounts since in that case any hope / claim for the same gets vanished. b) For interest cost incurred for purchase / development of plots / land / projects capitalized / work in progress. Name of the company Amount Ambiance Pvt. Ltd. 86,83,03,797/- 52,37,48,009/- Ambiance Developer & Infrastructure Pvt. Ltd. Ambiance Tower Pvt. Ltd. 38,63,12,000/- Tropical Infradevelopers Pvt. Ltd. 97,52,270/- Alankar Apartments Pvt. Ltd. 5,63,59,323/- 184,44,75,399/ Total -

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The amounts as above have been given in the notes of the audited balance sheet as on 30.03.15. Nature of this amount was explained that, for the purchase of properties, the funds are borrowed on interest and this interest cost is either capitalized or included in the work-in- progress. The capitalized cost of such properties is shown in the balance sheet and as work-in-progress, as the case may be. This borrowing cost could had been, otherwise, shown and claimed in P&L A/c year to year. In that case, the value of the asset in the balance sheet will appear at the original purchase cost. Similarly, in such case the work in progress amount in balance sheet will appear at a figure which is without including the interest cost since the interest already stands claimed in the P&L A/c. Now, the real cost / actual cost of the asset in the balance sheet is appearing at an inflated figure by the amount of interest capitalized. The amounts of interest capitalized do not represent the real / true value / correct value of the asset. For the purposes of calculating FMV U/R- 11UA, the true / correct value of the asset has to be taken; therefore the capitalized interest portion needs to be deducted from the asset value as appearing in the balance sheet. To understand, if a land is purchased by X for Rs.100/- out of his own funds, in his balance sheet it will appeared at Rs. 100/. However same land if purchased by Y for Rs.100/- but on borrowed funds, then interest, if capitalized @12% per annum, after 02 years, in the balance sheet of Y it will appeared at Rs.124/-.

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Now the asset is same. It has been acquired at the same value, therefore, its value for calculating FMV cannot be different for two different persons. In the financial accounts, the interest has to be capitalized in view of requirement of Sec. 36(l)(iii) and Sec.43(l). Hence the said treatment is for a limited purpose, i.e., to comply with the requirements of above mentioned two sections. This treatment therefore cannot enhance the actual value of the asset. Similar is the position in respect of enhanced work in progress, on account of the interest portion debited in work in progress. Thus, deduction for the borrowing cost should be allowed for calculating FMV as per Rule-11UA. Further, the A.O. nowhere disputes that the amounts claimed as a deduction in above accounts stands capitalized and / or included in work in progress, he simply claims that the amt. is not deductible, which is not correct.

c) Bad debts: Name of the company Amount Ambiance Developers & 4,08,45,945/- Infrastructure Pvt. Ltd. This claim is appearing in the notes to audited balance sheet as on 30.03.15.

Nature of this amount represent non recoverable lease / rents from the tenants of Ambiance Mall at Gurgaon. This amt. already stands written off in books, in parts, and finally upto A.Y.18-19. Since this amt. is upto 30.03.15,

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i.e., the date of audited bal. sheet, therefore this amount should be allowed. More so, this amount stands reported in the notes of the audited balance sheet.

Contention by the Revenue on Merits

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and Fair Market Value of a company more than Rs.50,000/-. Thus, it shows that the provision would be applicable share- wise and it does not allow to include those transactions where purchase consideration is more than the Fair Market Value of company. Thus, where share value is negative and purchase consideration is more, then the deeming provision is not triggered.

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used in the section. There is no ambiguity under the provision for which any purposive construction has to be done. Finance Minister’s speech cannot be treated as a law laid down by the legislature. He has also distinguished the judgment relied upon by the ld. counsel.

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a big loss in that particular year. So these expenses are spread out over a few years. For example, preliminary expenses. These are expenses incurred at the time of starting the business. If the entire amount of preliminary expenses is assigned to the first year only, it would result in a huge loss in the first year itself. So instead of treating the entire amount of preliminary expenses as an expense of the first year, these expenses would be spread out over a few accounting years. For example, say preliminary expenses are Rs.100/-. So what the firm may do is spread it over a period of say 5 years. So in the first year, only Rs.20/- (Rs.100 divided by 5) would be considered as preliminary expenses and balance Rs.80/- would be shown as an asset (fictitious asset) in the first year. During the second year, again Rs.20/~ will be considered as preliminary expenses and balance Rs.60/- would be shown as an asset (fictitious) in the second year, so on and so forth. Thus, such expenses are spread out over a period of accounting years. Fictitious assets are not assets at all, however, they are shown as assets in the financial statements only for the time being. In fact, they are expenses & losses which for some reason couldn’t be written off during the accounting period of their incidence. They are written off against the firm’s earnings in more than one accounting period. Basically, they are amortized over a period of time. They are recorded as assets in financial statements only to be written off in a future period. Examples of Fictitious Assets • Promotional expenses of a business • Preliminary expenses • Discount allowed on issue of shares

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• Loss incurred on issue of debentures They are shown in the balance sheet on the asset side under the head “Miscellaneous Expenditure”. (To the extent not written off or adjusted) Liabilities Amt Assets Amt Capital & Reserves Current Assets Add - Net Profit Cash at Bank Less – Drawings Cash in Hand Reserves & Surplus Sundry Debtors B/R Long Term Liabilities Stock Loans Non-Current Assets Land and Building Plant and Machinery Current Liabilities Furniture Sundry Creditors B/P Investments Outstanding expenses Misc. Expenditure Discount on Issue if Shares Total Total

The amount not written-off in the current accounting period is shown in the balance sheet. This is an example of fictitious asset. 9. Fictitious assets are shown in the balance sheet itself and while computing the net worth of a firm, such fictitious asset are reduced from the value of assets. Such fictitious assets are to be computed as per the provisions of the Companies Act. It cannot be left open at the whims and fancies of persons. In fact, the items have been listed which are to be excluded from the liabilities while computing FMV under Rule 11UA. As fictitious assets may be shown under different heads/names in the

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balance sheet, the Rule 11UA has only mentioned the term “any amount shown in the balance sheet including the unamortized amount of deferred expenditure which does not represent the value of any asset." The said amount is known as fictitious asset’ in accounting method. 10. In the Guidance Note issued by ICAI (page no. 103 of Revenue’s paper book), the fictitious assets have been defined as under - “6.02 Fictitious Asset- Item grouped under assets in a balance sheet which has no real value (e.g. the debit balance of the profit and loss statement.)” 11. The assessee has claimed different items in the garb of ‘fictitious assets’ which are not allowable as per accounting norms. The AO and CIT (A) as rejected such claims by way of various adjustment made by the assessee in the value of assets submitted before the AO. It is pertinent to mention that the figures appearing in the balance sheet on the date of valuation in terms of Rule 11UA have to be taken, particularly when the date of valuation is 30.03.2015 and in the balance sheet on 31.03.2015 the said adjustments claimed by the assessee are not reflected in the valuation of assets as on 31.03.2015. It is relevant to note that notes to balance sheet are in the nature of clarifications of the figures mentioned in the balance sheet. It can never be considered as “fictitious assets” unless it is in tune with the prescribed accounting norms. It cannot be the case where the figures appearing in the balance sheet can be negated or substituted by the notes to the balance sheet. 12. The adjustments from the value of assets can be of the nature of unamortized amount of deferred expenditure for

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example misc. expenditure and losses not written off etc. The adjustments claimed by the assessee are way beyond the scope of Rule 11UA(1)(b). The assessee has not filed any certificate from the Accountant’ in respect of admissibility of such adjustments in terms of Rule 11UA(1)(b). 13. On perusal of the claim of the adjustments against the value of assets, it appears that the assessee has made unsubstantiated claims. The AO can very well examine the claim of the assessee in respect of FMV of shares purchased. The assessee has claimed adjustment in the value of assets on following grounds- 1. Earnest money/advance against plots/land forfeited The CIT(A) has examined this issue in para 5.23 on page 20-21 of his order and has given the finding that the assessee has not submitted any documentary evidence to substantiate its claim. In the paper book of the assessee also, no supporting document is filed. The assessee is making claim of adjustment only on the basis of notes to balance sheet. Onus is on the assessee to substantiate that its claim falls under Rule 11UA and then it has to be established that the claim is genuine. The assessee has fail to discharge the onus. 2. Interest Cost incurred for purchase/development plots/land/projects The CIT(A) has examined the above claim in para 5.23 on page 21-23. And has given the finding that the claim is bereft of merit. 3. Bad debts The CIT(A) has examined the above claimed in para 5.24 on page 23 of his order. The CIT(A) has held that no evidence has

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been filed by the assessee in respect of claim of bad debts. 4. Cost of land falling under green area, roads and common area The CIT(A) has examined the above claim on page 23-25 of his order. It is the claim of the assessee that area being used for parks, roads, green area, common area in townships developed by the companies, whose shares were purchased by the assessee during the year, should be reduced on account of unsalable area. The CIT(A) has given the finding that the assessee has not submitted the working of the said area. Further, the CIT(A) has given the finding that the roads, common area parks, green area are integral part of the township projects and are generally included while working super built up area of a unit. The CIT(A) has rejected the claim of the assessee. 5. Damaged electrical material, tiles, marble, hardware etc. The CIT(A) has examined this issue in para 5.28 on page 25-26 the order. The assessee has submitted copy of ledger accounts of ALANKAR APPARTMENTS PVT. LTD. and has claimed that an amount of Rs. 3.58 crores was the cost of damaged material. The assessee did not furnish any supporting document. Moreover this claim appears to be too far fetched to be allowed under Rule 11UA. 6 Impairment in the value of property due to adverse court order etc. This issue has been examined by the CIT(A) in para 5.29 on page 26 of the order. The CIT(A) has given the finding that the judgement dated 21.07.2017 of the Delhi High Court has been relied upon by the assessee in respect of value of assets of Ambience Homes Pvt. Ltd. in respect of valuation of shares as on

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30.03.2015. The claim of the assessee is therefore not relevant for valuation of shares as on 30.03.2015. 7. Statutory Liabilities The CIT(A) has discussed this issue in para 5.30 on page 26 of the order. The CIT(A) has mentioned that the assessee has not mentioned any figure of adjustment or the name of the company in respect of valuation of which claim is made. 14. It is pertinent to mention that in the balance sheet as on 31.03.2014 and balance sheet as on 31.03.2015 no such adjustment or decrease in the value of assets has been claimed. In Rule 11UA, no such adjustment is admissible. It is surprising to note that the so-called assets whose value was shown as inflated as on 30.03.2015 was not shown so in the balance sheets of those companies as on 31.03.2015. Further, no such observations of the statutory auditors of the said companies are there in the audited financial accounts as on 31.03.2015. Therefore, the claim of the assessee is self-contradictory. The purpose of the assessed" is to reduce the FMV of shares by claiming the lesser value of assets.”

Decision on Merits

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deemed that it was case of money laundering of unaccounted money or colorable transaction. Here, in this case, it is a matter of fact that all the companies belonged to/owned by the same family having the registered office at the same place and owned by the same group. The deeming provision of Section 56(2)(viia) was brought in the statute as ‘anti abuse’ provision to prevent practice of transferring the unlisted shares price much below the Fair Market Value. The relevant section brought by the Finance Act, 2008, w.e.f. 01.06.2010 reads as under:

“(viia) where a firm or a company not being a company in which the public are substantially interested, receives, in any previous year, from any person or persons, on or after the 1st day of June, 2010, any property, being shares of a company not being a company in which the public are substantially interested,-- (i) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property; (ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration: Provided that this clause shall not apply to any such property received by way of a transaction not regarded as transfer under clause (via) or clause (vic) or clause (vicb) or clause (vid) or clause (vii) of section 47. Explanation-- For the purposes of this clause, "fair market value" of a property, being shares of a company not being a company in which the public are substantially interested, shall have the meaning assigned to it in the Explanation to clause (vii);]

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Courts cannot invent something which do not matches with the words of the text. It is only where the language of the statute in its ordinary meaning and grammatical construction, leads to a manifest contradiction of the apparent purpose of the enactment, or to some inconvenience or absurdity or hardship or injustice, presumably not intended, then a construction may be put upon it which modifies the meaning of the words and even the structure of the sentence, then the Courts probably can go what was the purpose of bringing that legislation and resort to purposive construction. Otherwise, general rule is that literal construction has to be given and no one is entitled to add something more than what is stated in the statute by way of supposed intention of the Legislature or go behind the Finance Minister’s speech while introducing the section. A deeming provision has to be given strict interpretation and where words of such provisions are clear and unambiguous with regard to its applicability, recourse should not be taken to look behind the object or aid with some other words to interpret the statute other than literal rule. Even if the literal interpretation results in hardship or inconvenience in taxing statute, then also it has to be followed in letter and spirit. The purposive construction can only be resorted when there is any ambiguity in the section or there is contradiction in two provisions of the same statute, in that case then, legislative intent can be looked into. Here, no such ambiguity or contradiction is there in the provision nor has been pointed

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out before us. The argument of the Ld. Counsel to see the rationale while enacting the provision and examine reasonableness cannot be accepted, because, a Court of law has nothing to do with the reasonable or unreasonableness of a provision of a statute except that it may hold what the Legislature has stated. If the language of the statute has assigned only one meaning then it must be taken to be meant and intended to that only what has been clearly expressed. Ergo, when section 56(2)(viib) has clearly provided that, if a person receives after 1st day of June 2010 any property being shares of a company and if the consideration is less than aggregate Fair Market Value of the property, then the amount exceeding such Fair Market Value has to be brought within the taxing net. Thus, even if some hardship may have been caused by invoking this provision, it cannot be held that the deeming provision will not apply. Accordingly, the contention raised by the ld. counsel is rejected.

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same has to be taxed. The word ‘aggregate’ used in the section refers to shares of a company and cannot lead to an inference that aggregate value of transaction of shares of various companies should be taken cumulatively for computing the FMV. This word has been used to see the aggregate value of the shares of a particular company and not to infer to aggregate or club all the transaction of transfer of shares of different companies. There is no such exception or provision where a transaction relating to purchase of shares of several companies are undertaken then the fair market value of shares of all the companies needs to be aggregated or any kind of set-off of positive and negative figure is to be given, i.e., where the FMV of a share is negative or FMV is lesser than the purchase value, then same is to be adjusted with transaction of shares of a company where FMV is positive. In case where purchase consideration is more than FMV, then clause (viia) is not be attracted, because the statute has clearly provided that this section would be invoked only when difference between the purchase consideration of Fair Market Value of a share of a company is more than Rs.50,000/-. Thus, provisions would be applicable share-wise qua the same company. Besides this, reasoning given by the Ld. CIT (A) on this point as discussed above is reasonable and plausible to which we also agree. Accordingly, such a contention raised by the ld. counsel is rejected.

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provides that the audited balance sheets as on the valuation date should be prepared by the auditor appointed u/s.224 of the Companies Act, 1956, whereas, w.e.f. 01.04.2013 Companies Act, 2013 has been enacted for appointment of the auditors in Section 139; at the face of it cannot be entertained. Because, Section 8 of the ‘General Clauses Act, 1897’ provides as under:

(1) “Where this Act, or any [Central Act] or Regulation made after the commencement of this Act, repeals and re-enacts, with or without modification, any provision of a former enactment, then references in any other enactment or in any instrument to the provision so repealed shall, unless a different intention appears, be construed as references to the provision so re-enacted.”

Thus, even if corresponding amendment brought in the Companies Act, 2013 has not been brought in Rule 11U, that does not mean that Rule 11U has become redundant or non- operative. As highlighted by the ld. Assessing Officer, there is no difference in wordings of earlier Section 224 and new Section 139 and in fact they are pari materia. In such a case the provision of the former enactment has to be construed in the same manner as re-enacted. Accordingly, the finding of the ld. Assessing Officer and Ld. CIT (A) in this regard is confirmed.

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Officer has not the correctly taken the Fair Market Value per share as per the balance sheet which has been considered by him and if the correct calculation is done even as per the method adopted by the Assessing Officer for calculation of Fair Market Value, then the correct valuation would be Rs.124,54,66,572/- and therefore, difference amount of Rs.10,56,92,728/- is to be corrected. In support he has given the company wise value of the shares as per the balance sheet taken by the Assessing Officer which gives the figures of assets and liabilities and has worked out the aggregate excess/short Fair Market Value. Accordingly, he submitted that the Ld. CIT (A) and Assessing Officer have wrongly made this addition instead of verifying and correcting the same. Since calculation error in the figures taken by the AO for the valuation has been pointed out as per the detail working submitted before, therefore, we find it fit that same needs to be verified by the AO. Accordingly, we direct the Assessing Officer to examine the calculation as submitted by the AO and correct the figures if any after verification and rectify the error and grant consequential relief.

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before us that the balance sheet for all the companies was drawn on the valuation date, wherein the auditor of the company have drawn the balance sheet of each companies on the valuation date which included notes annexed and forming part of the accounts and in such notes, the auditors have qualified the value of assets by making various adjustments which does not represent the real value of the asset. The notes along with the balance sheets have also been incorporated by the Assessing Officer in his order. The Rule 11U defines the balance sheet in relation to any company for the purpose of Rule 11UA in the following manner: “(b) “balance sheet’ in relation to any company, means – (i) For the purposes of sub-rule (2) of rule 11UA, 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 (including the notes annexed thereto and forming part of the accounts) drawn up as on a date immediately preceding the valuation date which has been approved and adopted in the annual general meeting of the shareholders of the company; and (ii) In any other case, 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 appointed under section 224 of the Companies Act, 1956 (1 of 1956)”

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Thus, the aforesaid definition provides that for the purpose of determination of FMV of unquoted shares under sub Rule 2 of Rule 11UA, the balance sheet of the company includes notes annexed thereto forming part of the accounts as drawn on the valuation date which has been audited by the auditor of the company. One of the key reasons for not allowing any adjustment in the assets and liabilities by the Assessing Officer and the Ld. CIT (A) are that the balance sheet figures of relevant items for which assessee has claimed adjustment as on 30th March, 2015 and 31st March, 2015 are the same, that is no adjustment has been made in the value of assets in the final figure of assets and liabilities. It has been clarified by the ld. counsel that though for the purpose of accounting standard and disclosure requirement under the Companies Act, the figures of assets have been given in the balance sheet which may be similar to as on 30th March, 2015 and 31st March, 2015, however on the valuation date the balance sheet prepared contains detail notes to the accounts wherein auditors have clearly clarified and qualified certain items which does not represent the value of the assets. Most of these items broadly have been following: - (i) Borrowed interest on assets which has been capitalized as per the accounting standard and requirement of the Income Tax Act. (ii) Work in progress. (iii) Bad debts. (iv) Earnest money/advance forfeited against the plots.

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(v) Various materials which are though part of assets but have been damaged; and for certain payment in respect of EDC charges, statutory charges, licensing fee, etc. paid to the Government Authorities for acquiring the land.

Note Valuation as Excess taken by Name of Valuation as No. of per A.O. S.No. Remarks Amount (in RS) Company per assessee Balan Assessment (A-B) ce Order/AO (A) Sheet Tropical Interest Capitalised 95,58,038 Note 1 27,10,740 2,71,812 24,38,928 Infradevelopers No. D Work in Progress 1,94,232 Pvt. Ltd. 97,52,270

4,08,45,945 Note Bad Debts No. 14 Ambience Business Investment 40,13,58,397 Note Developers & (Assets) No. 12 2 28,33,39,210 54,85,784 27,78,53,426 Infrastructure Borrowing cost Pvt Ltd Note included in fixed 52,37,48,010 assets which do not No. 8 represent the value of assets 96,59,52,352

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Earnest Money/Advances against plot No. SLC- 77,88,59,157 3/1 Alpha-II, SLC-4/J, Beta-II, SLC-4/I, Beta-ll &, SLC-3/H, Alpha-ll

Earnest Ambience Money/Advances Pvt. Ltd. 76,18,79,750 against plot Sl. Nos. (previously Note 421,27 bit-l at 3 Ambience 64,75,00,927 5,40,94,248 59,34,06,679 No. 12 Vishakhapatnam Projects & Infrastructu Earnest re Ltd) Money/Advances 1,06,91,24,800 against plot No. GHP- 001 Sec-115, Noida

Borrowing Cost which do not represent value of 86,83,03,797 assets

3,47,81,67,504

Electrical material, 3,58,22,688 tiles, marbles & hardware etc. Alankar Note Borrowing cost 4 Apartments 2,33,91,430 3,43,147 2,30,48,283 No. 7 included in tangible 5,63,59,323 Pvt. Ltd. asset do not represent the value 9,21,82,011

Greenvalley Note Realtors Pvt. 5 Investment in LAND 76,64,000 No. 6 19,34,482 14,700 19,19,782 Ltd.

Prime Stock in Trade Note 6 25,91,80,200 6,55,05,910 7,10,760 6,47,95,150 Commercial (Inventories)- Assets No. 7 Pvt. Ltd.

Impairment in the Ambience Note value of investment 7 18,62,10,000 4,73,36,511 7,80,957 4,65,55,554 in project due to Homes Pvt. Ltd. No. 6 continued business recession

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Borrowing Cost included in trade Ambience 24,04,31,291 Note No. 8 Towers Pvt. investment in 9,69,59,184 3,62,776 9,65,96,408 9 Ltd. Shalimar Bagh Project which is not relisable

Borrowing Cost included in trade 14,58,80,709 investment in Rohini Project which is not relisable

38,63,12,000

Sara Estate Stock in Trade 19,63,58,841 Note No. 9 5,05,23,969 14,33,155 4,90,90,814 Pvt. Ltd. (Inventories)- Assets 5

23,68,42,716 Senator Stock in Trade Note No. 10 Developers Pvt. 5,96,69,724 4,57,774 5,92,11,950 (Inventories)- Assets 6 Ltd. »

Greenline Stock in Trade 24,74,18,000 Note No. 11 Developers Pvt. 6,24,49,000 5,91,794 6,18,57,206 (Inventories)- Assets 6 Ltd.

Total 1,34,13,21,085 6,45,46,907 1,27,67,74,178

Regarding the nature of stock-in-trade and business investment, the ld. counsel had clarified that these amounts appear in the balance sheet of these companies in a different nomenclature, however the nature of these claim in all the five companies are the same. These amounts in fact represent the payment for EDC and Licence Fee etc. paid to Govt. authorities, relating to such lands which have to be left compulsorily for use by public at large as earmarked in

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published Master Plan. Only EDC and Fee etc. has been claimed for deduction and not on the amount paid on the value of the land for development. Further, the EDC and fee etc. paid for open area, parks, roads, amenities, facilities and services useable by the residents of the colony / complex is not claimed as a deduction. In the case of Ambience Developers & Infrastructure Pvt. Ltd. it is shown in the balance sheet under the head "business investment" for the only reason that the project of said company is jointly with another company. In case of other 4 companies, since those are their independent projects, therefore, such expenses are shown in their balance-sheets as stock-in-trade. In the audited balance sheets of all the 5 companies as on the relevant date, the auditor, by way of a note has mentioned that the amounts to this extent do not represent the value of said assets. Ld. Assessing Officer and Ld. CIT(A) have rejected such claim of the assessee mainly on the ground that either the assessee has not been able to substantiate; and secondly, there is no provision in the statute/ rules to reduce the value of the asset as shown in the books.

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“(b) the fair market value of unquoted equity shares shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner, namely:— the fair market value of unquoted equity shares = (A-L) X (PV) (PE) where 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;

The aforesaid method provides that the fair market value of unquoted shares shall be the value on the valuation date

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as determined by applying the aforesaid formula. The book value of the assets in the balance sheet has been defined. The manner in which the book value of the asset in the balance sheet has to be determined is given under the head ‘A’ which has following limbs: - Firstly, the book value of the asset in the balance sheet is to be 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  Secondly, any amount shown in the balance sheet as asset which does not represent the value of any asset including unamortized amount of deferred expenditure.

Ergo, if any amount is shown in the balance sheet which do not represent the value of the asset has to be reduced.

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value. Fictitious assets are not assets at all; however, they are shown as assets in the financial statements only for the time being. In fact, they are expenses & losses which for some reason couldn’t be written off during the accounting period of their incidence. They are written off against the company’s earnings in more than one accounting period. Basically, they are amortized over a period of time and are recorded as assets in financial statements only to be written off in a future period. Fictitious assets are shown in the balance sheet itself and while computing the net worth of a firm, such fictitious assets are reduced from the value of assets. Here in this case auditor has qualified and also quantified such items in the notes annexed to the accounts which do represent the value of the asset.

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loaded on the asset or with any charges etc., at the year-end, then same cannot represent the real value of the asset on the date of transfer. Even the Rule recognises that the balance sheet drawn on the valuation date by the auditor includes notes to the accounts annexed thereto has to be taken for the purpose of determining the fair market value under Rule 11UA (2); and the book value of the assets has to be reduced by the amount which does not represent the value of the asset. If the auditor has qualified and has clearly stated that certain amount does not represent the value of the asset, then such notes has to be read in the balance sheet as per the mandate of Rule 11UA. Thus, we hold that principally the book value of the asset can be reduced by an amount which does not represent the value of the asset while determining the fair market value of the shares under Rule 11UA(2).

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Government Authority. In support, the assessee has also filed a letter from NOIDA Authority wherein the authority has stated that the company has failed to deposit installment of Rs. 38.9 crore on stipulated time, therefore, the allotment has been cancelled and the amount already deposited has been forfeited. Ld. CIT (A) has rejected the assessee’s contention on the ground that no documentary evidences and terms and condition of forfeiture has been given and moreover the payment of Rs.106,91,24,800/- still being reflected as assets in the books. Further, for the balance amount assessee has again not given any evidence of forfeiture. First of all, if any earnest money or advance has been given for the purchase of plot/ land in auction and has been forfeited by the Government Authority and as on the date of valuation and allotment has not been revived, then such an amount reflected as an asset in the books cannot be reckoned as representing the real value of the asset on the date of transfer. The auditors based on the material on record have stated as under: “Inventories includes amount of Rs.347,81,67,504/- paid towards earnest money and advances against purchase of plots being non recoverable due to cancellation/non payment of demand raised by the respective authorities and amount incurred towards overheads not representing the value of the assets. ”

During the course of the proceedings assessee has given the communication/letters whereby the NOIDA authority have stated that the amount deposited has been forfeited and based on such event auditors have reduced the amount from

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the value of the asset, then it cannot be held that as on the date of valuation, it represents the true value of the asset even though assessee still recognized as a part of an asset in the balance sheet hoping for some future recovery or does not want to give up its claim. Thus, when the factum of money forfeited is not in dispute, in our opinion then such forfeited amount of earnest money/advances given to the Government Authorities reflected as asset in the books cannot be treated as amount representing the value of asset. Thus, same is directed to be reduced from the value of the asset and accordingly, the contention raised by the assessee is allowed.

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book value of the asset and the book value of the liabilities. Another contention of the Revenue is that, as per provision of Section 36(1)(iii) interest cost on any business asset is to be capitalized till the date asset is put to use and have also referred to provision of Section 43(1) read with Explanation 8 that the interest relatable to the period after such asset is first put to use same shall not be included in actual cost of the asset. However, nowhere the Assessing Officer was Ld. CIT (A) has found that these assets have been put to use on the date of the valuation. The borrowed cost or interest as per the accounting standard and the provisions of law has to be capitalized to the value of the asset and thus, there is a fictitious increase in the value on such asset. Though, Rule 11UA is only prescribed to determine Fair Market Value of the share, but the value of the shares determined upon the underlying assets as reduced by the liabilities. The provision as stated above clearly provides for reduction of the amount shown in the balance sheet as asset which does not represent the value of the asset. Further, as an instance, the rule provides that an amortized amount of deferred expenditure also does not represent the value of the asset. Thus, the interest cost capitalized goes to enhance the value of asset which cannot be treated as representing the correct or fair market value of the asset. For example, if a person has bought an asset being land at a market value of Rs.100/- from the borrowed funds and has incurred borrowed cost like interest or any other cost for acquisition, say Rs. 50/-, then

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said amount is capitalized in the books and the value of assets in the books will reflect Rs. 150/-. Then such enhancement of cost is purely fictitious. A person buying the asset at a market rate will not value the asset for the amount which has been capitalized in the books. Simply for the purpose of accounting standard or provision of the law if the interest cost has been capitalized to the asset and later on when the asset is put to use, and interest capitalized is deferred to be claimed over the period of time or becomes part of the Profit and Loss account, then can it be held to the value of the asset. Even Explanation 8 to section 43 provides that, where any amount is paid or is payable as interest in connection with the acquisition of an asset, and so much of such amount as is relatable to any period after such asset is put to use is never deemed to have been included in the actual cost of the asset. If interest cost after the asset is put to use is not reckoned as part of acquisition of asset, then can it be said that before the asset is put to use, the interest though capitalized in books represent the real value of the asset. We are of the opinion that any borrowed or interest cost capitalized to the value of the asset cannot represent the real value of any asset for the purpose of determining the book value so as to determine the Fair Market Value of shares.

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had been reduced from the value of the asset by the auditors treating that debtors of that amount are not recoverable as on date. This outstanding rent is pending from last many years even though they have not claimed that as bad debt in the P&L account by writing it off in the books of account. Even if the company has not written off the bad debt, but auditors have found that it is not recoverable for many years and have reduced from the value of asset, then same cannot be held to represent the value of the asset on the date of valuation, Simply because the amount has not been written off as on 31st March, 2015, it does not mean it is to treated as part of value of asset. Accordingly, Assessing Officer is directed to reduce the said amount from the value of the asset while valuing the book value of asset..

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allowed as deduction, because they are part and partial of the value of the asset; and moreover nowhere it has been pointed out how the impairment in the value of the asset in the project due to continued business recession has been quantified. It is purely hypothetical which cannot be allowed.

Sd/- Sd/- [L.P. SAHU] [AMIT SHUKLA] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 9th August, 2019