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Income Tax Appellate Tribunal, “C”
Before: SHRI S. RIFAUR RAHMAN, AM& SHRI RAM LAL NEGI, JM
DCIT 13(3)(1), M/s R. Raheja Properties Room No.229, 2ndfloor, Pvt. Ltd. Aayakar Bhavan, M.K. 1st floor, Rahejas, Corner बिधम/ Road, Mumbai-400 020 of Main Avenu & VP Vs. Road, Santacruz (w), Mumbai-400 054 स्थायीलेखासं./जीआइआरसं./PAN No. AAACG3913H (अपीलाथी/Appellant) (प्रत्यथी / Respondent) : अपीलाथीकीओरसे/ Appellant : Shri Mayur Kisnadwala & Shri Vinay Sinha, AR by प्रत्यथीकीओरसे/Respondentby : Shri Awangshi Gimson, DR सुनवाईकीतारीख/ : 09.09.2019 Date of Hearing घोषणाकीतारीख / : 30.10.2019 Date of Pronouncement आदेश / O R D E R
Per S. Rifaur Rahman, Accountant Member:
The present Appeal has been filed by the assessee against the order of Ld. Commissioner of Income Tax (Appeals) - 21 in M/s R. Raheja Properties Pvt. Ltd.
short referred as ‘Ld. CIT(A)’, Mumbai, dated 24.05.16 for Assessment Year (in short AY) 2013-14.
The brief facts of the case are that assessee filed its return of income for the assessment year 2013-14 on 28th Sept 2013 declaring total income of Rs. NIL. Subsequently the case was selected for a scrutiny and accordingly notices under section 143(2) and 142(1) were issued and served on the assessee. The AR of the assessee filed relevant information as called for.
During the assessment proceedings, Assessing Officer noticed that assessee incurred long-term capital loss from sale of listed securities of M/s Futura Polymers Ltd at Rs. 6,87,83,211/- and from sale of Unlisted securities of M/s ING financial services Pvt. Ltd (IFSPL) at Rs. 31,88,54,438/- aggregating to Rs. 38,76,37,649/-. Therefore, there is a reduction in reserves and surplus as compared to previous year. Assessing officer observed that with regard to ING financial services Ltd, assessee purchase the shares at Rs. 10 per share on various dates, as per the chart given below where as the assessee sold these shares at Rs. 5.32 per share on 14thAugust 2012.
M/s R. Raheja Properties Pvt. Ltd.
Sale date No, of Sale cost Purchase Purchase Index cost Capisal Lass Sate Purchase shares price date cost price per wiih share Indesatiiw per share 14.08.2012 4965000 5.32 26413800 28.03.2007 6.0236 29907 174 49096329 (22682529) 14.08.2012 20294022 5.32 107964197 29.05.2007 10 202940220 313802500 (205838103) 14.08.2012 4953000 5.32 26349960 08.10.2008 10 49530060 72507835 (46157875) 14.08.2012 390000 5.32 2074800 17.06.2009 10 390000 5257595 (3182795) 14.08.2012 1731820 5.32 9213282 19,01,2010 10 17318200 23346687 (14133405) 14.08.2012 2292739 5.32 12197371 25.03.2010 10 22927390 30908443 (18711072) 14.08.2012 1472604 5.32 7834253 17.06.2011 14726040 15982912 (8148659) 10 Total 36099185 192047664 341249024 510902101 (318854437)
When the assessee was called upon to explain the reasons for selling the shares to its sister concern at Rs. 5.32 per share instead of Rs. 10 per share as issued by ING Financial Services in the Rights issue. In response, assessee filed the following reasons which is reproduced as below:-
''This is with reference to the query regarding the sale of investments held by us in ING Financial Services P. Ltd. (IFSPL) @ 5.32 per share to our associate concern. During the F.Y. ended 31.03.2013 IFSPL proposed to further increase its capital by way of a Rights Issue.
M/s R. Raheja Properties Pvt. Ltd.
It is to be noted that as per the Companies Act, no Company can issue shares at lesser than its Face Value (i.e. at a Discount).
Since our funds were locked up in other investments, we were not in a position to subscribe for the same. As such we proposed to sell the said shares to one of our associate companies. Hence, we obtained a valuation report from M/s, G. M. Kapadia & Co., CAs. The said firm, after scrutinizing the records and after proper evaluation arrived at the Fair Value Price of Rs.5.32 per share as per accepted valuation methodology. The copy of the valuation report is enclosed for your reference and record.
We have incurred a Long Term Capital Loss of Rs.31.88 Crores (after indexation) on this transaction. We have neither got set off of the said loss in the current assessment year nor claimed any set off in subsequent assessment years till date.
Considering, the aforesaid and the fact that shares have been sold at a price determined by an independent valuer you are requested to accept the sale price @ Rs. 5.32/- Per share."
After considering the submissions of the assessee, AO rejected the contention of the assessee and observed that the loss suffered by the ING financial services over the years are M/s R. Raheja Properties Pvt. Ltd.
declining, therefore the value determined by the assessee based on the loss-making company may not be proper. Further, he observed that the shares were sold to its sister concern and assessee has taken a plea that it was a management decision and a strategic decision. He observed that the strategic decision does not mean selling the shares at loss. Further he observed that the investee company has issued fresh shares at Rs. 10 each to other existing shareholders therefore assessee cannot sell the shares to its related concern at a loss. Accordingly, he valued the shares at Rs. 36,09,91,850/- (@Rs.10/- per share).
With regard to sale of listed securities of Future Polyester Ltd, assessing officer observed that assessee has purchased the shares ranging between Rs. 5 per share to Rs. 18.25 per share on various dates as per below chart (Face Value of Rs. 10 per share):-
Sale date No. of Sale Sale cost Purchase date Purchase Purchase Index, cost Capital cost shares price price per cost with per share indexation share 07.01.2013 1500080 2.90 4350232 08.04.2005 18.25 27376010 46930303 42580071 07.01.2013 1140000 2.90 3306000 26.09,2011 5.01 5711400 6198870 2892870 07.01.2013 1310000 2.90 3799000 26.09,2011 5.01 6563100 7123262 3324262
M/s R. Raheja Properties Pvt. Ltd.
07.01.2013 5307311 2.90 15391202 26.09,2011 5.039 26743401 29025959 13634757 07.01.2013 1985106 2.90 5756807 26.09,2011 5.6198 224924294 12108057 6351250 Total 11242497 32603241 9138205 101386451 68783210
Assessing officer observed that value of shares as per BSE on the date of sale i.e. on 7.01.2013 at the rate Rs. 3.52 per share, whereas assessee had sold at rupees 2.90 per share. When the reason was called, the assessee replied as below
With regard to valuation of shares of Futura Polysters Ltd., the company is a listed company and traded on the BSE and there is no requirement for a valuation report for a listed security. The assessee wished to sell a large quantity of shares (1.12 crore shares) of Futura Polyesters Ltd. The volume of shares traded on the stock exchanges for the said shares is very low (Less than 25000 shares per day). As such it was decided to do so by way an off market deal with an independent third party buyer and the price was negotiated at Rs.2.90 per share. The actual transaction was completed on 7thJanuary, 2013. The copies of the letters exchanged with the buyer have already been submitted to you. If the entire lot would have been sold in the market it would have taken over 450 days to sell the same and price too would have fallen because of daily selling pressure, in M/s R. Raheja Properties Pvt. Ltd. the market. Copy of Futura Polysters Share Price on BSE is enclosed."
Assessing officer rejected the contention of the assessee and valued the sale price at Rs. 3.52 per share, rejecting the actual sale price of Rs. 2.90 per share.
9. Aggrieved with the above order, assessee preferred an appeal before Ld. CIT(A) by raising various grounds. Before Ld. CIT(A), assessee made similar submissions before Ld. CIT(A) in support of its contention. After considering the submissions of the assessee, Ld. CIT(A) observed that the share capital is held by Mr Rajan Raheja and four group companies and assessee has received unsecured loans from Raheja family. The assessee has repaid the unsecured loan during this year. Ld CIT(A) expressed his opinion that assessee has sold entire unlisted shares and listed shares and utilize the proceeds to repay the unsecured loans to the promoter family. According to him, assessee instead of selling these shares, the family could have taken the funds directly from group company M/s Hathaway Investments Private Limited instead of selling the shares in loss.
M/s R. Raheja Properties Pvt. Ltd.
With regard to sale of Unlisted shares, according to Ld. CIT(A), assessee has valued the shares by applying DCF methodology and the data was supplied by the assessee itself. According to him, there is no independent research was carried out by the valuer, accordingly he agreed with the addition made by the assessing officer and sustained the addition.
11. With regard to the sale of listed shares of Futura Polyesters Limited, Ld. CIT(A) opined that assessee in need of funds and sold the same at lower than market rate, he observed that the assessee has not routed this transaction through stock exchange accordingly, he confirmed the action of the assessing officer and accordingly he sustained addition made by the assessing officer.
Aggrieved with the above order, assessee is in appeal before us rising following grounds of appeal.
1. The learned CIT(A) erred in not deleting the disallowance of loss of Rs. 16,89,44,1867- incurred by the appellant on sale of shares of ING Financial Services Pvt. Ltd. @5.32 per shares which had been purchased @10/- per share.
M/s R. Raheja Properties Pvt. Ltd.
2. The learned CIT(A) erred in not appreciating that the unlisted shares of ING Financial Services P. Ltd. (IPS P. Ltd.) had been sold to Hathway Investment P. Ltd (HIP Ltd) @ 5.32 per share only on the basis of report of independent valuer.
3. The learned CIT(A) erred in holding in para 10 of his order that appellant company could have avoided the loss in sale of shares to HIP Ltd. by borrowing the required funds from HIP Ltd. in place of selling the shares. The appellant submits that whether to borrow funds or to dispose off the investments, is left to its discretion and the learned CIT (A) should not be sitting in the decision making by the appellant.
4. The learned CIT(A) erred in giving adverse findings with regard to the valuation report obtained by the appellant from an independent valuer by making general remarks about the valuation methodology used therein without any basis to support his findings. The appellant submits that the learned CIT(A) could not have rejected the valuation report without due compliance of the provisions of the Act.
5. The learned CIT (A) erred in observing that since the Investee Company issued shares at Rs. 107-per share, during the year, what is the justification in offering shares at Rs. 5.32 per share by the Appellant. The learned CIT (A) failed to understand that as per the Companies Act, the Investee Company cannot Issue shares at Lower than the M/s R. Raheja Properties Pvt. Ltd.
Face Value and hence had to Issue fresh share capital at the Face Value of Rs. 10 per share. Whereas the appellant has obtained a Valuation Report from an approved Valuer and since it was a Loss making Company the Valuation obtained is below par and the Appellant has carried out the transaction at the price as determined by the Valuation Report.
6. The learned CIT(A) erred in holding in para 12 of his order the said sale transaction as manipulated and contrived to generate loss without bringing in any facts to support his conclusion. The appellant submits that it had bonafide reason for the sale of the aforesaid investment and the learned CIT (A) failed to bring in any support for his finding as to why the appellant wanted to generate loss. The appellant submits that the aforesaid loss remains unabsorbed even till date and there was no necessity for the appellant to "generate loss" as alleged by the learned CIT (A).
7. The learned CIT(A) erred in not deleting the disallowance of loss of Rs. 69,70,3487- out of the loss of Rs. 6,87,83,2117- incurred by the appellant on sale of listed shares of M/s. Futura Polyesters Ltd., at Rs. 2.90 per shares.
8. The learned CIT(A) erred in not appreciating the reason for sale of listed shares of M/s. Futura Polyesters Ltd. @ 2.90 per share in place of Rs. 3.52 per share was that appellant
M/s R. Raheja Properties Pvt. Ltd. was in need of funds and as many as 1,12,42,497 number of shares could be sold at very short notice only by means of negotiations at fixed price and at the price fixed on the date of negotiations. The learned CIT (A) also failed to appreciate that even assuming that the appellant were able to sell the shares on the stock market, considering the quantity of the shares, the price of the share would have crashed and the appellant would not have been able to realize the price that it has got. The learned CIT (A) also failed to appreciate that the transaction was with an independent third party and no adjustment to the loss figure could have been done in the absence of any such provision in the Act.
It is prayed that the disallowances of loss made by the Assessing Officer on Sale of Shares of the two companies may be deleted.
10 The appellant submits that each of the above grounds of appeal are independent & without prejudice to each other.
The appellant craves liberty to add, amend, alter, and / or withdraw any of the above grounds of appeal.
13. Ld. AR brought to our notice that the findings of the assessing officer and conclusion reached by Ld. CIT(A) in para 9 and para 13 of the CIT(A) order. He brought to our notice page 6 of paper book in which assessee has submitted before the assessing officer the details of financial position of ING
M/s R. Raheja Properties Pvt. Ltd.
Financial Services Private Limited and it was submitted that during the financial year 2012 – 13, the ING company issued fresh right shares to the shareholders and assessee was not in a position to infuse more funds in the company as the funds were locked in other investment. The company proposed to sell the ING shares to an associate company M/s Hathaway investments private limited after obtaining a valuation report from the firm of Chartered Accountants and on the basis of the said valuation report and fair market value that is Rs. 5.32 per share and he brought to our notice the copy of the Valuation report along with the letter submitted before AO. It was also brought to the notice that subsequent to the sale of M/s ING company continued to incur substantial loss as per the chart enclosed by the assessee in the paper book. He brought to our notice the valuation report which is placed on the record in page 15 of paper book. Further he objected to the observation of the Ld. CIT(A) that assessee has supplied the relevant information to the valuer, he brought to notice page 32 of the paper book in which the information were collected from ING and the same was forwarded to the valuer. Further he submitted that ING has issued a right shares to its M/s R. Raheja Properties Pvt. Ltd. shareholders at the rate of Rs. 10/-, it is not necessary that in the secondary market also, the shares should be sold at Rs. 10/-. He submitted that in the secondary market the shares can be sold only based on fair market value, accordingly the assessee had sought for valuation report and sold the shares. In this regard, he relied in the ITAT decision in the case of Morality Textiles Ltd (ITA no 1979/Mum/2009), the facts in this case are, assessing officer substituted the sale price and worked out the capital gains. He submitted that honorable ITAT held that the assessing officer does not have power under the income tax act to substitute the market value for actual value of consideration. The same view was upheld by the Honorable jurisdictional High Court of Bombay in the same case.
Ld. AR submitted that on sale of listed shares of M/s. Futura Polyesters Ltd. @ 2.90 per share in place of Rs. 3.52 per share that assessee was in need of funds and as many as 1,12,42,497/- number of shares could not be sold at very short notice, only by means of negotiations the price was fixed off market. He further submitted that in order to sell these shares
M/s R. Raheja Properties Pvt. Ltd. only in stock market, it would have taken more than 400 days to liquidate or sell all the shares. There are chances of share value may further go down. In this situation, assessee was prudent enough to sell these shares in one go by selling the shares off market.
Further he submitted that where capital gains computed under section 48, full value of consideration has to be taken and not the fair market value, in this regard he relied on the following cases:-
1.CIT (C)-4 v. M/s. B. Arunkumar & Co., (Bom)
2.Mrs. Madhu Sarda v. ITO- 19(4), (ITAT Mumbai)
3. M/s. Asara Sales and Investments Pvt. Ltd. v. 1TO- 1(1), PUN/2014 (ITAT Pune)
M/s R. Raheja Properties Pvt. Ltd.
He further submitted that assessee has to decide how best to protect his own interest, for that proposition he relied on the following case law:-
1.CIT v. Dhanrajgirji Raja Narasingirji [1973] 91 ITR 544 (SC) 2.CIT v. Gobald Motor Service (P.) Ltd. [1975] 100 ITR 240 (Mad) 3.CIT v. Dalmia Cement (B.) Ltd. [2002] 254 ITR 377 (Del) 4.Amarjothi Pictures v. CIT [1968] 69 ITR 755 (Mad)
On the other hand, learned DR submitted that assessee is co-promoter of the ING Financial Services Private Limited (IFSPL). He brought to our notice page 6 of paper book, in which assessee itself confirms the above facts and further submitted that assessee has sold the shares to its sister concern at a loss and the reasons submitted by the assessee are not acceptable. Further, he submitted that assesse has valued the shares with the valuer by giving the data to prepare the valuation report. This information seems supplied by the assessee itself in order to tweak the cash flow, in order to suit the above transactions. Further, he brought
M/s R. Raheja Properties Pvt. Ltd. to our notice at page no. 16 of the paper book, in which, the valuer itself submitted that all the information were furnished by the management of the assessee and finally, he submitted that the valuer taken a liquidity adjustment of 20% on the valuation of shares, which seems to be too high. He relied upon the order passed by the revenue authorities.
Considering the rival submission and material placed on record, we notice from the balance sheet submitted by the assessee that majority of investment are made in shares and securities, therefore assessee is an investment company. During this assessment year, assessee was holding majority shares in listed and unlisted shares. with regard to sale of unlisted shares of IFSPL, we observe that assessee was holding substantial shares and it is also co-promoter. As per the chart tabulated by the AO, assessee has purchased 49,65,000 shares @ 6.0236 per share and it is pertinent to note here that assessee has purchased those shares from the secondary market not directly from IFSPL. Further IFSPL offered right shares to the shareholders in the financial years 2007-08 to 2010-11 and all
M/s R. Raheja Properties Pvt. Ltd. those years, assessee has subscribed to the right issue and purchased further shares on various dates as below:-
Sale date Sale value Index cost No. of Sale Purchase Purchase Purchase Capital loss shares date cost price price per with share indexation per share 14.08.12 4965000 5.32 26413800 28.03.07 6.0236 29907174 49096329 (22682529) 14.08.12 20494022 5.32 107964197 29.05.07 10 202940220 313802300 (205838103) 14.08.12 4953000 5.32 23349960 08.10.08 10 49530000 72507835 (46157875) 14.08.12 390000 5.32 2074800 17.06.09 10 3900000 5257595 (3182795) 14.08.12 1731820 5.32 9213282 19.01.10 10 17318200 23346687 (14133405) 14.08.12 2292739 5.32 12197371 25.03.10 10 22927390 30908443 (18711072) 14.08.12 1472604 5.32 7834253 17.06.11 10 14726040 15982912 (8148659) Total 192047664 341249024 510902101 (318854437)
From the above, it is clear that assessee not only purchased the shares from the secondary market and also purchased directly from IFSPL on right issue. During this year, assessee transferred shares to its group concern namely M/s Hathway Investment Pvt. Ltd. in order to hold control over the IFSPL. Since IFSPL is incurring continuous loss and net assets of the company are only Rs. 6,95,55,000/- and most of the capital is M/s R. Raheja Properties Pvt. Ltd.
eroded due to incurring of continuous loss over the years. The assessee transferred all these shares to its group concern. Accordingly, assessee made the valuation of shares based on the DCF method and collected the information from IFSPL in the normal course of business and the same was given to the valuer to value the shares. In our considered view that assessee has sold these shares to its group concern and it has taken conscious decision to value the shares instead of selling at a nominal price or adopting adhoc value. We notice that AO has compared the sale value of the shares, which is in fact based on valuation of shares, with right issue of shares by IFSPL to its shareholders. It is also pertinent to note here that assessee has not subscribed to the above right issue. IFSPL issued right shares to its shareholders only in its nominal value of shares i.e. at Rs. 10/-, however it can also issue at discount only with the prior approval under the Companies Act. However, in this case, this right issue was sold to its shareholders at a nominal value of shares. It is not necessary that the value of shares adopted by the IFSPL for right issue should match with the actual fair market value of its shares. In the given case, as per the balance sheet available on record,
M/s R. Raheja Properties Pvt. Ltd. most of the capital is eroded in IFSPL due to continuous incurring of losses. Since assessee is a co-promoter of IFSPL, it intend to retain its control over the company and it has decided to sell to its group concern and valued the same with an independent valuer who had valued shares at Rs. 5.32 per share with the information supplied by the assessee which assessee has collected from IFSPL. It is also pertinent to note that initially assessee has purchased shares from the secondary market and the same was sold in the secondary market. In our considered view, even the assessee intend to sell these shares to third party, would have valued shares as per the method adopted by the assessee. Therefore, in our considered view, method adopted by the assessee to value the shares and then sold the shares to its group concern is proper and in accordance with normal course of business.
Further we notice that Ld. DR submitted that valuation adopted by the valuer with the liquidity discount of 20% is too high. In this regard, Ld. AR submitted that the valuation criteria as per which, there is a gap between value of shares of listed
M/s R. Raheja Properties Pvt. Ltd. company as well as unlisted company, wherever there is valuation of unlisted shares, there has to be a liquidation discount between these shares. In our view, it may be subjective, but the valuer is an expert in this line of business and he has proposed discount of 20% which is in accordance with method prescribed in valuation of unquoted equity shares in the Wealth Tax Act in Schedule III of the Act. Therefore, grounds 2 to 6 are allowed.
With regard to sale of listed shares, as explained, assessee is an investment company and it cannot sell all the shares in the stock market as the quantity of trading of the listed shares of this case are limited i.e., it cannot trade more than 25000 shares a day and it will take long time to exit. It is the decision of the company in order to encash and proceed with utilization of the funds. In case, it takes long time to exit, the investors/company will incur financial cost. It is the decision of the investor and they know when to enter and to exit and also aware of associated cost involved in this transaction. Therefore, in our view, it is decision of the assessee to exit and sell the shares at Rs. 2.90 instead of market rate. In this situation, the prudent businessman would
M/s R. Raheja Properties Pvt. Ltd.