INDGLOBAL NETWORK SUPPORT PRIVATE LIMITED,MUMBAI vs. PRINCIPAL COMMISSIONER OF INCOME TAX -2, MUMBAI

Pr.CIT - 2, M/s Indglobal Network 3rd floor, Aayakar Bhavan, Support Pvt. Ltd. Mumbai 5th floor, AFL House, Lok बिधम/ Pin- Bharti Complex, Marol Vs. Maroshi Road, Andheri(east), Mumbai-400 059 स्थायीलेखासं./जीआइआरसं./PAN No. AABCI2069K (अपीलाथी/Appellant) (प्रत्यथी / Respondent) : अपीलाथीकीओरसे/ Appellant : Shri Nitesh Joshi & Ms. Sonakshi Jhunjhunwala, AR by प्रत्यथीकीओरसे/Respondentby : Shri Awangshi Gimson, DR सुनवाईकीतारीख/ : 11.09.2019 Date of Hearing घोषणाकीतारीख / : 27.09.2019 Date of Pronouncement आदेश / O R D E R

Per S. Rifaur Rahman, Accountant Member:

M/s Indglobal Network Support Pvt. Ltd.

4.1 Submission on jurisdiction of Section 263 of the Income tax Act 1961 ('the Act')

"During the course of Assessment proceedings, the Assessee had submitted the computation of income for AY 2014-15 as well as audited financials of the Company for the year ended March 31, 2014 to the Ld. AO. The Ld. AO had gone through the computation of income, audited accounts, raised queries and sought enquires in respect of all the details of Investments in shares of Dachser India Private Limited and several submissions of the assessee and made an informed decision that no adjustments to the total income was warranted. He has also considered the submissions in respect of non-applicability of section 56(2)(vijb) qf the Act in the instant case.

M/s Indglobal Network Support Pvt. Ltd. According to provisions of sub-section (1) of section 263 of the Act, the jurisdiction of revision can be exercised only if the following two conditions are satisfied:

(i.) that the order of the AO sought to be revised is erroneous; and (ii.) that it is prejudicial to the interest of the Revenue."

Relying on various judicial pronouncements as mentioned in the submission filed it is submitted that the order passed by the AO was neither erroneous nor prejudicial to the interest of the revenue since the AO has passed the order after due examination of the facts in detail.

4.2Submission in respect of valuation of shares:

The Explanation (ii) to clause (a) of section 56(2)(viib), does not refer only to those assets which appear in the books. It also does not state that the assets appearing in the books are to be taken at its book value. It only states that FMV of shares shall be the value as may be substantiated by the company to the satisfaction of the AO, based on the vaiue of its assets, in effect it permits valuation of underlying assets to arrive FMV of the shares of the Company. No method has been prescribed to value the underlying M/s Indglobal Network Support Pvt. Ltd. assets. The term Fair Market Value in relation to a capital asset is defined u/s 2(22B) of the Income Tax Act, 1961 to mean the price that the capital asset would ordinarily fetch on sale in the open market on the relevant date.

In the instant case the underlying asset was investment in shares of Dachser India Private Ltd. and its expected realizable value has been considered as its FMV and substituting FMV of these shares, FMV of the shares of the assessee Company has been arrived at. The investments held by the Company were due for encashment and therefore, the expected realizable value is considered as value for the purposes of determining the fair market value of Assessee Company (this in fact has materialized in the subsequent period). This has been permitted and prescribed u/s 56(2) (viib) of the Act.

Ultimately the final sale of shares took place in July 2014 and the assessee Company received sale proceeds of Rs. 122.35 crores. The capital gains on the same have been offered for tax for the financial year 2014-15 relevant to A.Y. 2015-16. M/s Indglobal Network Support Pvt. Ltd.

M/s Indglobal Network Support Pvt. Ltd.

1) The learned Principal Commissioner of Income Tax erred in setting aside the assessment order with a M/s Indglobal Network Support Pvt. Ltd. direction to value the shares of underlying company in accordance with the provisions contained in section 5 6(2)(viib) read with Rule 11UA of the Income Tax Rules, 1962 and revise the assessment order accordingly.

2) The learned Principal Commissioner of Income Tax erred in holding that the assessment order passed was without conducting proper enquiries and without application of mind on all perspective.

3) The learned Principal Commissioner of Income Tax erred in holding that the order passed by the Assessing Officer is an erroneous order.

4) The learned Principal Commissioner of Income Tax erred in holding that the assessment order passed u/s 143(3) is prejudicial to the interest of the revenue.

5) The learned Principal Commissioner of Income Tax ought to have consider that Section 56(2)(viib) of the Act permits any method other than net asset value or DCF as provided in Rule 11UA of Income Tax Rules, 1962. 6) The learned Principal Commissioner of Income Tax ought to have considered that the underlying investment (by way of shares in a private limited M/s Indglobal Network Support Pvt. Ltd. company) was in fact sold in July 2014 (in the subsequent year) and capital gain on the same has offered to tax in A. Y. 2015-16. 7) The Appellant craves leave to alter, amend and / or add any other ground of appeal.

9. Ld. AR submitted before us that all the information relevant to the valuation of share and investment M/s Dachser India Pvt Ltd was submitted before the AO and in support of that, he brought to our notice at page no. 6 of the paper book i.e. auditors report in point no. 18. The auditors also confirm the issue of share allotment to the parties and companies covered in the register maintained under section 301 of the Act and prices at which shares have been issued is not prejudicial to the interest of the company.

10 Further, Ld. AR brought to our notice at page no. 12 of the paper book in which the assessee company has taken unsecured loans from the shareholders to the extent of Rs. 3,66,50,195 in the previous assessment year and submitted that shares were issued to the related parties who have lent the unsecured loans to the companies. The list of the related parties are given in the M/s Indglobal Network Support Pvt. Ltd. schedule to the balance sheet. He further brought to our notice that AO has issued notice u/s 142(1) dated 16.08.16 and asked the assessee for various information relating to the issue of shares, submission of ROC in Form 2, annual returns for the relevant period and share valuation report and details of share application money allotted and paid up details. He further brought to our notice at page no. 23 of the paper book in which assessee has submitted the relevant information before the AO as per the notice u/s 142(1) and assessee has filed the details of unsecured loans before the AO, which is placed at page no. 25 of the paper book. Further, he brought to notice that the details of shareholders who were allotted shares, who are the unsecured lenders to the companies and also promoters of the company. He submitted that the details of the PAN and shareholding were submitted before AO and the same is given at page no. 37 and 38 of the paper book.

11 Ld. AR further brought to our notice that AO issued notice on 27.09.16 for information relating to share certificate, allotment of share in view of the unsecured loans has been M/s Indglobal Network Support Pvt. Ltd. converted into share application money and details of offer with relevant documents indicating therein number of shares offered for subscription, returned filed before ROC, etc. In response, the assessee has filed the relevant information on 5th Oct 2016, which is placed at page no. 42 of the paper book. Further, the assessee has filed a note on share premium on shares allotted, which is placed at page no. 46 of the paper book, in which assessee has explained the basis of arriving the share valuation only issue, the shares with premium of Rs. 11,990/-. In this regard, he brought to our notice that the assessee was in negotiation with shareholders of M/s Dachser India Pvt Ltd whereby the JV shareholders offered to buy 50% of share held by the assessee in M/s Dachser India Pvt Ltd. The expected sale price was in the range of Rs. 120 cr to Rs. 130 cr. and accordingly assessee has taken an average value of Rs. 125 crores only, the details of which, is placed at page no. 49 of the paper book.

12 Ld. AR further brought to our notice that the transfer of shares of M/s Dachser India Pvt Ltd has taken place for subsequent AY 2015-16 and assessee has offered the same to tax M/s Indglobal Network Support Pvt. Ltd. under the head capital gains. The relevant calculation is placed at page no. 55 to 56 of the paper book. Further AO has issued notice on 22.11.16 asking for confirmation from whom assessee has received share premium during the year and to furnish the details of investment made in unlisted equities and the same was furnished before the AO on 28th Nov 2016, which is placed at page no. 60 of the paper book. In the same reply, the assessee has also made submission with regard to section 56(2)(viib) of the Act and submitted that as per Explanation 1 of section 56(2)(viib), the assessee has option to arrive the fair market value of the shares as may be determined in accordance with rule 11UA or as may be substantiated by the assessee to the satisfaction of the AO based on the value on the date of issue of shares of its assets including the intangible assets, etc. whichever is higher. Therefore, assessee has option to choose between the two, whichever is higher. In the given case, assessee has adopted the second method as per which, the assessee has satisfied the AO by submitting the relevant facts and valuation of shares. As per the second method adopted by the assessee, assessee has arrived the value of 12,138/- but for issue of shares, it has M/s Indglobal Network Support Pvt. Ltd. adopted only 12000/-. All these documents were clearly explained to the AO in detail and also submitted the list of share allottees and their PAN details clearly indicating that the same was based on valuation report.

M/s Indglobal Network Support Pvt. Ltd. 14 With regard to no discussion on the issue of section 56(2)(viib) of the Act made by the AO even though the AO has made proper enquiries, the provision of section 263 cannot be invoked in the process. In this respect, he relied upon the following judgments:- i) CIT vrs. Gabriel India Ltd (1993) 71 taxmann 585 (Bombay HC) ii) CIT vrs. Nirav Modi (2016) 71 taxmann.com 272 (Bombay HC) iii) CIT vrs. Nirav Modi (2017) taxmann.com 15 (SC) iv) Moil Ltd vrs. CIT (2017) 81 taxmann.com 420 (Bombay HC)

15 Ld AR further submitted that as per the provisions of section 56(2)(viib), explanation – (A) (ii), the assessee has satisfied the AO only and this is similar to section 40A(2) in which the AO has to satisfy based on the information submitted by the assessee and there is no role for any authority except AO in this regard. In this respect, he relied upon the judgment in the M/s Indglobal Network Support Pvt. Ltd. case of Arnav Gruh Ltd. vrs. DCIT (2018) 89 taxman.com 289 (Mum-Trib).

16 On the other hand, Ld. DR submitted that Pr. CIT in para 5.5 of its order brought to our notice that AO has not made inquiries which were warranted in the facts and erroneously accepted the fair market value submitted by the assessee witout any proper documentary evidence. He further submitted that the AO did not examine any document on the date of valuation to support the price in the absence of evidence to claim the market price, the AO should have taken the valuation as per rule 11UA of investment in unlisted private limited companies. Further he brought to our notice at page no. 87 of the paper book, which indicate that assessee has issued and allotted the shares on 28.09.13, whereas assessee has entered into negotiation for transfer of shares in July 2013 and the transfer took place subsequently in the next AY. The fair market value should have been adopted on the date of transfer. 17 On the date of issue of shares, Ld. DR submitted that either assessee should have drawn up new balance sheet or in the M/s Indglobal Network Support Pvt. Ltd. absence of such, assessee should adopt previous for balance sheet in order to calculate the fair market value. Since the transfer of shares taken place in the next year which can be considered as subsequent development and it cannot be taken for valuation of fair market value. In this regard, he heavily relied upon order passed u/s 263 by Pr. CIT. 18 In the rejoinder, Ld. AR submitted that the valuation of fair market value as per rule 11UA(1), the last drawn balance sheet should be considered, whereas the assessee’s case falls under rule 11UA(2). Therefore, the submission of Ld. DR is not applicable. He further submitted that subsequent event of transfer of shares is very much relevant and such transfer taken place in the subsequent assessment year clearly indicates that the promoters of the company will definitely consider the renewed fair market value rather than present fair market value for the decision making. 19 Considering the rival submissions and material placed on record, we notice that assessee has taken a large unsecured loan from the shareholders and during this assessment year, such unsecured loans were converted into shares. The above shares M/s Indglobal Network Support Pvt. Ltd. were valued @ 12000 shares with share value of Rs. 10/- and the balance as share premium after arriving at the fair market value. Therefore, assessee has considered the proposed transfer of share of M/s Dachser India Pvt Ltd to the other joint venture partner at an expected value of Rs. 120 crores to 130 crores. The assessee has determined the proposed transfer value of Rs. 125 crores and the same was adopted to calculate fair market value of the shares. The transfer of shares has taken place in the subsequent assessment years and not as per the expected value of transfer i.e. 125 crores instead of shares were transferred to the other joint venture member at Rs. 121 crores. In the regular assessment u/s 143(3), AO has called for the relevant information and assessee has submitted all the information as called for by the AO not just one, but in three occasions and AO has called for different information relevant for allotment of shares and also relating to provision of section 56(2)(viib) of the Act. However, the AO has satisfied with the information supplied by the assessee and not made any additions and choose not to discuss anything in the assessment order. But, Pr. CIT invoked the provisions of section 263 and asked for the explanation from the assessee and assessee M/s Indglobal Network Support Pvt. Ltd. has also supplied all the relevant information before Pr.CIT and still Pr. CIT has treated the assessment as erroneous and prejudicial to the interest of revenue. 20 On careful consideration of the above facts, we are of the view that assessee followed the provisions of section 56(2)(viib) and as per the said provision, assessee has option to arrive at the fair market value of the shares i) May be determined in accordance with rule 11UA or ii) May be substantiate to the satisfaction of AO. 21 In the given case, assessee has followed the explanation and accordingly substantiated before the AO and AO has accepted the views substantiate by the assessee. Accordingly, he has not made any further additions. Once the AO called for all the information and applies his mind and does not discuss anything in the assessment year even though it amounts to making inquiries, therefore Pr. CIT cannot invoke provision u/s 263 merely because AO has not verified the share transfer to the satisfaction of Pr. CIT. Even though, view of the Pr. CIT may differ. In this context, in our view, the AO as well as Pr. CIT has divergent view. In such a situation, Pr. CIT cannot invoke the M/s Indglobal Network Support Pvt. Ltd. provisions of section 263 of the Act. We respectfully following the decision of Hon’ble Supreme Court in the case of CIT vrs. Max India Ltd. (2008) 166 taxman 188 (SC), wherein it was held as under:- Section 263, read with section 80HHC, of the Income-tax Act, 1961 -Revision -Of orders prejudicial to interests of revenue - Assessment year 1992-93 - Assessee claimed deduction under section 80HHC, which was allowed by Assessing Officer - However, Commissioner was of view that order passed by Assessing Officer was prejudicial to interest of revenue as while working out deduction under section 80HHC Assessing Officer had ignored negative profit and, accordingly, set aside order of Assessing Officer by passing order dated 5-3-1997 - Revenue's case was that 2005 amendment in section 80HHC which is clarificatory and retrospective in nature itself indicates that view taken by Assessing Officer at relevant time was unsustainable in law- Whether since two views existed on word 'profits' in proviso to section 80HHC(3), on day when Commissioner passed his order and moreover mechanics of section have become so complicated over years that two views were inherently possible, subsequent amendment in 2005 even though retrospective would not attract provision of section 263, particularly when one had to take into account position of law as it stood on date when Commissioner passed order in purported exercise of his powers under section 263 - Held, yes M/s Indglobal Network Support Pvt. Ltd.

22 Even though the AO has not discussed the issue elaborately in the assessment order, he makes inquiries similar to the inquiries made in the given case, thus the provisions of section 263 of the Act cannot be invoked and we are respectfully following the decision of jurisdictional High Court in the case of CIT vrs. Gabriel India Ltd. (1993) 71 taxman 585 (Bom), wherein it was held as under:- 14. We may now examine the facts of the present case in the light of the powers of the Commissioner set out above. The ITO in this case had made enquiries in regard to the nature of the expenditure incurred by the assessee. The assessee had given detailed explanation in that regard by a letter in writing All these are part of the record of the case. Evidently, the claim was allowed by the ITO on being satisfied with the explanation of the assessee.. Such decision of the ITO cannot be held to be 'erroneous' simply because in his order, he did not make an elaborate discussion in that regard. Moreover., in the instant case, the Commissioner himself, even after initiating proceedings for revision and hearing the assessee, could not say that the allowance, of the claim of the assessee was erroneous and that the expenditure was not revenue expenditure but an expenditure of capital nature. He simply asked the ITO to re- examine the matter that, in our opinion, is not permissible. Further inquiry and/or 'fresh .determination can be directed by the Commissioner only after coming to the conclusion that the earlier finding of the ITO was erroneous and prejudicial to the M/s Indglobal Network Support Pvt. Ltd. interests of the revenue. Without doing so, he does not get the power to set aside the assessment. In the instant case, the Commissioner did so and it is for that reason that the Tribunal did not approve his action and set aside his order. We do not find any infirmity in the above conclusion of the Tribunal.

23 As discussed above, the assessment order may be prejudicial to the interest of revenue, but it is not erroneous, since the AO has verified the relevant information submitted by the assessee during the assessment proceedings. Therefore, we set aside the order passed by Pr. CIT u/s 263 of the Act. Accordingly grounds raised by the assessee are allowed.