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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
O R D E R आदेश आदेश राजेश कुमार, लेखा सद"य / PER RAJESH KUMAR, AM: These are appeals by the assessee directed against respective orders of learned CIT(A) pertaining to Assessment Year 2014-15.
The Ground raised by the assessee are as under: - “APPEAL BEFORE THE HON’BLE INCOME TAX APPELLATE TRIBUNAL, MUMBAI 2 | P a g e Suryoday Small Finance Bank Ltd. AGAINST THE ORDER PASSED BY THE HON’BLE COMMISSIONER OF INCOME TAX (APPEALS)-24, MUMBAI [“THE CIT(A)”] UNDER SECTION 250 OF THE INCOME TAX ACT, 1961 (“THE ACT”)
1.1. On the facts and circumstances of the case and in law, Hon’ble CIT(A) erred in upholding the action of the Deputy Commissioner of Income Tax, ward 15(3)(2), Mumbai ("Ld. AO) in making addition of Rs. 5,50,00,011 under section 56(2)(viib) of the Act on the alleged ground that the (air market value of shares adopted by the Appellant was not the prescribed method under section 56(2)(vii)(b) of the Act.
1.2 On the facts and in the circumstances of the case. Hon’ble CIT(A) erred in ignoring the fact that the their market value of shares adopted by the Appellant was covered within the scope of clause (a) of the Explanation to section 56(2)(viib).
1.3 On the facts and in the circumstances of the ease. Hon’ble CIT(A) erred in confirming the action of the AO that the issue price of shares adopted by 3 | P a g e Suryoday Small Finance Bank Ltd. the Appellant exceeded the ('air market value of shares.
1.4 The Appellant prays that the Ld.AO be directed to delete the addition of Rs 5,50,00,011/- being the difference between the issue price of shares and the fair market value adopted by the AO, made u/s 56(2)(viib) of the Act.
GROUND II: DISALLOWANCE UNDER SECTION 36(1)(va) OF THE ACT - RS. 37,56,872:
2.1. On the lads and circumstances of the case and in law, the Hon’ble CIT(A) erred in upholding the action of the AO of disallowing a sum of Rs. 37,56,872/- paid towards employees contribution towards provident fund and employees state insurance corporation on the alleged ground that Appellant's contentions are not substantiated with documentary evidence without giving an opportunity' to the Appellant to produce such documentary evidences.
2.2. The Appellant therefore prays that the Ld.AO be directed to delete the 4 | P a g e Suryoday Small Finance Bank Ltd. aforesaid disallowance of Rs.37,56,872 under section 36(1)(va) of the Act.
Ground No. III: Disallowance on account of corporate social responsibility expenses under explanation to 2 section 3&(1) of the Act- ₹46,054:
3.1 On the facts and circumstances of the case and in law, the Hon’ble CIT(A) erred in confirming the action of the Ld. AO of disallowing Corporate Social Responsibility (CSR) expenses voluntarily incurred by the Appellant by purportedly treating the same as application of income and further alleging that the Appellant did not produce evidence to establish the exact nature of expense without giving an opportunity to the appellant to produce such evidence.
3.2 The appellant prays that expense of ₹46,054 incurred by the Appellant on corporate social responsibility be allowed under section 37(1) of the Act.
Ground No. IV: Disallowance under section 14A of the Act – ₹4,35,905 4.1 On the facts and circumstances of the case bad in law, Hon’ble CIT(A) erred 5 | P a g e Suryoday Small Finance Bank Ltd. in confirming the action of the AO of disallowing a sum of ₹4,35,905 as expense incurred towards exempt income under section 14A of the Act read with Rule 8D of the Rules.
4.2 The Appellant prays that the Ld. AO be directed to delete the disallowance made under section 14A read with Rule 8D.
4.3 Without prejudice to 2 above, the Appellant prays that the disallowance under section 14A be appropriately reduce the same.
Ground No.V: Addition of disallowance under section 14A r.w.r. 8D to the computation of book profits under section 115Jb of the Act ₹4,35,905:
5.1 On the facts and circumstances of the case and in law, the Hon’ble CIT(A) erred in confirming the action of the AO of making addition of ₹4,35,905 computed under section 14A r.w.r. 8D for the purpose of computing book profit under section 115Jb of the Act despite absence of any enabling provision under the Explanation to section 115JB(2).
6 | P a g e Suryoday Small Finance Bank Ltd. 5.2 The appellant prays that the aforesaid addition made to the book profit under section 115JB of the Act be deleted.”
The issue arising in Ground No. 1 is against the confirmation of addition of ₹5,50,00,011/- by CIT(A) by upholding the order of DCIT made under section 56(2)(viib) of the Act. The facts in brief are that the assessee is a Micro Finance & Non NBFC MFI sector providing services of Micro financing in semi-urban and rural areas. During the year under consideration, the assessee issued 33,33,334 equity shares at an issue price of ₹45 per share comprising face value of ₹10 and share premium of ₹35, thereby raising money to the tune of ₹15,30,00,033/-. For the purpose of said issue of shares, assessee obtained a Valuation Report from an independent Valuer, a Chartered Accountant, in which the price was determined at ₹45 per share by applying market price/ book value method after taking into consideration the trading multiple of certain listed companies or comparables companies in similar industries as that of the assessee to the book value of the assessee company. According to the Assessing Officer, there was a difference in the valuation of shares as the share was issued at a price of ₹45, whereas the book value of share was ₹28.50 and thus, the difference of ₹5,50,000,11/- was added under section 56(2)(viib) of the Act after issuing show cause notice as to why why consideration per share received in excess of face value of the shares as calculated by applying the method as prescribed under Rule 11UA clause 1(c)(b) of the Act should 7 | P a g e Suryoday Small Finance Bank Ltd. not be charged to tax under the head income from other sources. The response of the assessee has been reproduced at page Nos. 4 to 10 of the assessment order.
In the appellate proceedings, the learned CIT(A) upheld the addition by affirming the order of the AO on the ground that assessee has not followed any prescribed method under the Act for valuation of shares and thus justified the addition by observing and holding as under:-
“2.4.1 Ground No. 1- Addition made under section 56(2)(viib) of ₹5,50,00,011 On a careful reading of the judgments discussed above, it is seen that the Cowls have held that where a method has been prescribed by the legislature, that method alone shall be followed for computation of the fair market value. Recently, the Hyderabad tribunal in the case of Medplus Health Services Private Limited has reaffirmed the principle that where a method has been prescribed by the law for computing the FMV. that method alone shall be followed In this case Rule 11UA clearly lays down the valuation methodology to be adopted by the assessee for the purposes of section 56(2)(viib) of the Act As 8 | P a g e Suryoday Small Finance Bank Ltd. mentioned above, since the valuation mechanism is prescribed the same should be followed Accordingly, the value of the shares of the assessee as per Rule 11 UA of Rs 28 per share would be the correct price. As the assessee has issued the same at the rate of Rs.45 per share, the difference of Rsl6 per share amounting to Rs. 5,50,00,O11 has been added by the AO to the total income.
Having considered all of the above. I am of the considered view that the AU has rightly added the difference between the valuation as per Rule 11 UA and method adopted by the assessee and the same does not call for any interference. Accordingly, this ground of appeal is dismissed.”
The learned AR submitted that the method used by assessee for valuing shares was based upon market price / book value multiple based on data of comparable companies and such method was not accepted by the AO. The learned AR also took the Bench through the provision of section 56(2)(viib) of the Act and explained how the market value of the share shall should be determined. The learned AR submitted that explanation (a) provides for the mode of computation of fair market value of shares and it provides that fair market value of 9 | P a g e Suryoday Small Finance Bank Ltd. shares may be determined in accordance with the method prescribed or as may be substantiated by assessee to the satisfaction of AO based on the value, on 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. According to the learned AR, explanation
(a) to section 56(2)(viib) of the Act defines the fair market value as the higher of the two. The learned AR submitted that assessee has followed the same and valued those shares in accordance with clause (ii) of explanation (a) to section 56(2)(viib) of the Act. The learned AR then presented before the bench, various reasons by which the AO rejected the method adopted by the assessee and also apprised the bench of rebuttal of assessee to the same. The learned AR also submitted that AO cannot reject the method adopted by the assessee and if at all the method is rejected for any reasons, the AO should have corrected the same and derived the value of shares. The learned AR stated that if AO was not in agreement with the assessee on the comparable companies selected by the assessee or believed that there are some other good comparables, he ought to have selected such comparable and should have arrived at fair market value of the shares. In defence, the learned AR relied on the decision of Rameshwaram Strong Glass (P.) Ltd. v. ITO (2018) 172 ITD 571 (Jaipur) (Trib.), wherein the Tribunal has held that AO was not justified in changing method of valuation adopted by the assessee. The learned AR stated that the comparable selected by the assessee 10 | P a g e Suryoday Small Finance Bank Ltd. was rejected on mere assumption and surmises without coming- up with comparable that may be considered to be correct and as per law. The AO has also not commented on discounting factor to be applied in the Valuation Report, whereas, the valuation made by the assessee is based on well recognized principle of valuation and has been conducted by an expert.
The learned AR, therefore, submitted that reason provided by the AO is baseless, not on merit and against the judgement of expert in this field. The learned AR also submitted that the AO not only rejected the method adopted by the assessee but also mechanically applied NAV value method which is erroneous since section 56(2)(viib) read with rule 11AU of the Rules gives an option to the assessee for valuing its shares. The learned AR also referred to Rule 11UA sub rule 2 of the Rules and submitted that AO should have given an opportunity to the assessee to conduct valuation under DCF method as prescribed in Rule 11UA or himself should have conducted the same before mechanically proceeding with the NAV method.
The learned AR argued that AO should have adopted the value higher of such DCF valuation or NAV as per Rule 11 UA of the Rules.
Per contra, the learned DR submitted that the comparable companies selected by the assessee are not comparable as they are much bigger in size and the valuation method adopted by the assessee did not consider the value of intangible assets such as, goodwill, etc. which may not have been recorded in the books of account and, therefore, order of CIT(A) affirming the 11 | P a g e Suryoday Small Finance Bank Ltd. order of AO is as per law and may kindly be affirmed. In response, the learned AR submitted that size of the comparable company does not matter since the assessee has considered P/BV multiple. This multiple may remain consistent irrespective of the size of the company. The learned AR further contended that assessee has discounting factor to discount higher size of comparable companies and thus, it adequately establishes that size of the company does not make any difference to the method adopted by assessee. The learned AR presented an example to justify his arguments on the issue that value of goodwill, etc., which may not have been recorded in the books of accounts, was considered in the Valuation Report. The learned AR submitted that value of intangible assets, if considered for deriving the NAV of shares, will result in increasing the fair value of the shares and thus, it will result in increasing the value of shares. The learned AR submitted that NAV of the shares would have been higher than ₹28.5 has already been accepted the department. The learned AR finally submitted that the method adopted by the assessee is in accordance with the Act and may kindly be accepted. The assessee also made without prejudice submissions that assessee has also obtained a Valuation Report under DCF method as prescribed under Rule 11UA of the Rules and submitted that same may kindly be admitted as additional evidence in support of the market value of the shares. The learned AR submitted that if the Bench is not satisfied with the view taken by the assessee then, aforesaid Valuation Report may be admitted as additional evidence and such value, as per 12 | P a g e Suryoday Small Finance Bank Ltd. DCF, should be considered and compared with NAV as already admitted. The higher of these two may kindly be considered for addition under section 56(2)(viib) of the Act.
After hearing both the parties and perusing the record, we observe that in this case the assessee has issued 33,33,334 shares at an issue price of ` 45 per share which comprised face value of `10 and share premium of ` 35. According to the Assessing Officer, assessee has not followed any of the prescribed method to determine the market value of shares and computed the book value at `28.50 per share and added the difference of 5,50,00,011/- under section 56(2)(viib) of the Act. At this stage, we would like to note that provision of section 56(2)(viib) of the Act provides that where a company (other than a company in which public are substantially interested) receives any consideration for issue of share which exceeds the face value of such shares, the aggregate of the consideration received by the assessee in such year which exceeds the fair market value of the shares shall be added under this section. Now, the only issue in appeal is whether the assessee has received consideration for issue of equity shares which is over and above the fair market value of shares. Thus, the determination of market value of share assumes significance only for the purpose of calculating the consideration received by the assessee which is in excess of fair market value of the shares. In the present case, the assessee valued the equity shares on the basis of Valuation Report from an independent Valuer who is a qualified Chartered Accountant and the said valuation is arrived at after considering comparable companies 13 | P a g e Suryoday Small Finance Bank Ltd. in the said industry. During the course of hearing, we have examined the Valuation Report and also the method of discounting the valuation. Though the AO did not accept the same on the ground that it is not in accordance with method prescribed under the Act, he has not bothered to obtain his own independent valuation. He has just determined the book value of the shares on the basis of books of accounts of the assessee at ₹28.50 and computed the excess of share consideration over fair market value and added a sum of ₹5,55,00,011/- to the income of the assessee under section 56(2)(viib) of the Act. The learned CIT(A) sustained the addition merely on the point that the method prescribed under the Act ought to have been followed for determining the value of share by the assessee. The approach of the authorities below cannot be accepted on the ground that when the assessee has not followed any of the prescribed methods, the AO or CIT(A) is duty bound to determine the market value of the shares in accordance with the method as prescribed under the Act. However, they have proceeded to calculate excess consideration on the basis of book value of the shares which was Rs. 28.50 by making surmises an assumption that assessee’s valuation is wrong and cannot be accepted. The fair market value as calculated by the AO is also not a representative of fair market value and if, we consider the arguments of the learned DR, the value of goodwill which is not recorded in the books of account is not considered. Then, find the merits in the arguments of the learned AR that the price as calculated by the AO would certainly be higher than`28.50 paise and would result in lesser addition. We have 14 | P a g e Suryoday Small Finance Bank Ltd. also examined the additional evidence i.e report under DCF method as per rule 11UA of the Rules filed by the assessee. In the present case before us , neither the assessee nor the AO has applied the method as approved under rule 11UA of the Rules. Therefore it would be in the fairness of the things to give one more opportunity to the AO to apply the approved method on the basis of additional evidence in the form of report under DCF method filed by the assessee. We are inclined to admit the same, though the learned DR opposed the admission of that additional evidence at this stage. We are of the view that let the AO consider both the valuation as per DCF method as well as NAV as already admitted and higher of this two value may be considered for the purpose of addition under section 56(vii)(b) of the Act. Accordingly, we set aside the issue to the file of the AO to decide the same afresh after examining the report as filed by the assessee under DCF method and decide the issue as per law. Accordingly, without prejudice, prayer made by the assessee is accepted and this ground of the assessee is allowed for statistical purposes.
The next Issue raised in ground no. 2 is against confirmation of disallowance of Rs.37,57,872 as made by the Assessing Officer under Section 36(1)(va) of the Act comprising of contribution towards Provident Fund and Employees State Insurance on the ground that assessee has not proved payment of said amount. Facts in brief are that the Assessing Officer during the course of assessment proceedings observed that assessee has not deposited the employer contribution within the time under the relevant Act and came to the conclusion that the 15 | P a g e Suryoday Small Finance Bank Ltd. provisions of section 43B of the Act are not applicable to the assessee and added a sum of Rs.37,57,872 to the income of assessee. The learned CIT(A) sustained the order of Assessing Officer on this issue.
After hearing both the parties and perusing the material on record, we observe that in this case undisputedly the payments toward contribution for employees Provident Fund and ESIC were made within their due dates. We have gone through the payment details at page 226 to 229 of the Paper Book and find that contribution towards employee provident fund of Rs. 35,32,026/- and ESIC of Rs. 2,24,846/- were paid before filing of return as is apparent from the details of payment filed by the assessee before the Bench. The case is squarely covered by the decision of Hon'ble Bombay High Court in the case of PCIT vs. Hind Filter Ltd. (2018) 90 taxmann.com 51 (Bombay), wherein the Hon'ble Court has held that the second proviso to section 43B of the Act was deleted w.e.f. 01.04.2009 by the Finance Act (2003) and the first provision was also amended simultaneously to allow the benefit of payment under Section 43B of the Act if they are paid within due date of filing of return as contemplated by the first proviso to section 43B of the Act. The ground raised by the assessee is allowed.
In Ground no. 3, the learned Counsel for the assessee conceded that the assessee is not interested in prosecuting this ground and hence, the same is dismissed as not pressed.
Ground no. 4 is against the confirmation of disallowance of Rs. 4,35,905/- by learned CIT(A) of the addition made by 16 | P a g e Suryoday Small Finance Bank Ltd. Assessing Officer under Section 14A r.w.r. 8D of the Income Tax Rules, 1962. The facts in brief are that the Assessing Officer during the course of assessment proceedings observed that assessee has earned exempt income during the year and made corresponding disallowance of expenses of Rs. 8,93,781/- in the computation of income, which was also reported in Form 3CD. The exempt income during the year was Rs.58,75,573/-. The assessee invested in short term mutual fund/liquid fund ranging from 1-7 days which was purely entered into to do short term liquidity management and was not in the nature of investments. The reply of the assessee did not find favour with the Assessing Officer and he came to the conclusion that the provisions of Rule 8D r.w.s. 14A of the Act were applicable to the assessee’s case. The Assessing Officer calculated disallowance of Rs.13,29,686/- as relating to earning of exempt income comprising of Rs.12,54,097/- under Rule 8D(2)(ii) and Rs.75,589/- under Rule 8D(2)(iii) and after allowing reduction of suo motto disallowance by the assessee from the disallowance calculated by the AO, net addition of Rs.4,53,905/- was made to the total income of the assessee and corresponding addition was made to the book profit under Section 115JB of the Act. The learned CIT(A) sustained the order of Assessing Officer on this issue by holding that Rule 8D of the Rules is to be followed for the purpose of computing the disallowance and no deviation can be made therefrom and justified the addition.
After hearing the parties and perusing the records, particularly the Balance-sheet as filed at page 41 of the Paper 17 | P a g e Suryoday Small Finance Bank Ltd. Book, we observe that the assessee has its own interest-free fund in the form of share capital and reserves and surplus to the tune of Rs.87,19,84,598/- whereas the investments are only Rs.88,35,570/-. Thus, we find that the investment was far below the assessee’s own fund in the form of share capital and reserves and surplus. The case of the assessee is squarely covered by the decision of Hon'ble Bombay High Court in the case of HDFC Bank Ltd. vs. DCIT (2016) 67 taxman.42 (Bom) wherein it has been held that where assessee has sufficient own funds than the investments made in shares and securities, then the presumption is that the assessee has made investments out of own funds. Accordingly, we set-aside the order of CIT(A) and direct the Assessing Officer to delete disallowance of Rs. 4,35,905/-.
The issue raised in ground no. 5 is that similar disallowance was also made to the book profit as provided under Section 115JB of the Act.
After hearing both the sides and perusing the material on record, we find that the issue is squarely covered by the decision of the Special Bench in the case of ACIT Vs. Vireet Investment (P) Ltd. (2017) 82 taxmann.com 415(Delhi-tri)(SB) wherein the Special Bench has held that the computation of book profit clause (f) of Explanation 1 to Section 115JB(2) of the Act is to be made without resorting to computation as made under Section 14A r.w.r. 8D of the Rules. Accordingly, the addition made under Section 14A of the Act cannot be added. In the present case, this is not the scenario as 18 | P a g e Suryoday Small Finance Bank Ltd. disallowance made by the AO is deleted in para 14 hereinabove. Therefore, the ground is infructuous and needs no adjudication.
In the result, appeal of the assessee is partly allowed.