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Income Tax Appellate Tribunal, MUMBAI BENCH “SMC”, MUMBAI
Before: SHRI C.N. PRASAD, HONBLE
O R D E R PER C.N. PRASAD (JM) 1. This appeal is filed by the assessee against the order of the Learned Commissioner of Income Tax (Appeals)-4, Mumbai [hereinafter in short “Ld.CIT(A)”] dated 28.03.2018 for the A.Y. 2014-15 in sustaining the difference in valuation of shares.
Briefly stated, the facts are, the Assessing Officer in the course of the assessment proceedings noticed that assessee made investment in shares of M/s. Mod Fashions & Securities Pvt. Ltd., at 1,50,000 shares at ₹.16/- per share with face value of ₹.10/- and premium of ₹.6/- for a total
(A.Y: 2014-15) M/s. Fragrance Investments Pvt. Ltd., consideration of ₹.24,00,000/-. Assessing Officer issued notice u/s.133(6) of the Act to M/s. Mod Fashions & Securities Pvt. Ltd., and obtained details along with copy of ledger accounts, balance sheet, Profit and Loss Account and valuation of shares at the time of purchase. On a perusal of the details, the Assessing Officer noticed that the book value of shares of M/s. Mod Fashions & Securities Pvt. Ltd., is found to be at ₹.19.86/- per share which is more than the allotment price of ₹.16/-. For this reason, the Assessing Officer has issued show cause notice to the assessee as to why the difference amount should not be taxed as its income u/s.56(2)(viia) of the Act. In response to the show cause notice, the assessee filed its reply stating that assessee has subscribed to shares of M/s. Mod Fashions & Securities Pvt. Ltd., at fair market value [hereinafter in short “FMV”] as determined by professional person and approved by the Board of Directors. It was also submitted that the book value as on first day of Financial Year is not the correct method of valuation. It was also submitted that provisions of section u/s. 56(2)(viia) of the Act are not applicable for subscription of shares but receipt of shares under any other mode of acquisition. Therefore, it was contented that proposed addition is not justifiable. Not convinced with the submissions of the assessee the Assessing Officer invoking the provisions of section u/s. 56(2)(viia) of the Act treated the difference in book value and subscription value i.e. ₹.19.86/- - ₹.16/- = 3.86/- per share as deemed income assessable
(A.Y: 2014-15) M/s. Fragrance Investments Pvt. Ltd., under income from other sources. On appeal Ld.CIT(A) sustained the order of the Assessing Officer observing as under:
“6.3 I have carefully considered the facts of the case, oral contentions and written submission of the assessee, discussion of the AO in the assessment order and material available on record. It is not disputed that the Fair Market Value of the shares in question have been computed by the AO as per the provision of Rule 11UA. The appellant in their submission have not disputed the application of Rule 11A per se either. The appellant have only contended that the AO has not correctly worked out the Fair Market Value of the shares as the formula, wherein, the value has to be taken at "A" has not been reduced by the Fair Market Value of the asset represented by the shares. For easy reference "A" as given in the Rule 11UA is reproduced herein under: 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 unamortized amount of deferred expenditure which does not represent the value of any asset; [Bold for emphasis] It is seen from the above value of "A", that what has to be taken as the book value of the asset 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 unamortized amount of deferred expenditure which does not represent the value of any asset. From the Plain reading of such provision it is clear that what has to be considered has as to be picked up from the balance-sheet of the assessee and what has not been mentioned in the balance-sheet of the assessee cannot at all be considered. Apart from taxes the amount that has to be reduced is "any amount shown in the balance-sheet as asset....... which does not represent the value of asset". Therefore, what has not been shown in the balance-sheet cannot be considered at all. The contention of the assessee that market value of such quoted investment were only at ₹.29,64,26,164/- and the book value was at ₹.54,16,93,725/- and therefore, the book value of the investment shown in the balance-sheet were higher by the differential amount and that should be reduced for computation of FMV as per Rule 11 UA is not found to be acceptable as there is no figure of ₹.29,64,26,164/- in the balance-sheet of the assessee. The contention of the assessee that the book value of the quoted investment did not show the actual picture to the extent of erosion in its value by ₹.24,52,67,561/- cannot be considered for the purposes of application of Rule 11UA as such amount or details do not find place or are not shown in the balance-sheet of the assessee which is the primary requirement under the Rule. Accordingly and in view of the facts and circumstances of the case and discussion herein above, the contention and submission of the assessee is not found to be acceptable and are rejected. This ground of appeal is accordingly dismissed.
Ld. Counsel for the assessee before me submitted that the assessee is an Investment company having major investment in quoted and unquoted shares. The assessee acquired 1,50,000 equity shares of (A.Y: 2014-15) M/s. Fragrance Investments Pvt. Ltd., face value of ₹.10 each of M/s. Mod Fashions & Securities Pvt. Ltd. for a consideration of ₹.24,00,000 @ ₹.16 per share. The Assessing Officer received the audited financial statements of M/s Mod Fashions and Securities Pvt. Ltd. for F.Y. 2012-13 and proceeded to determine Fair Market value under sub-rule 2 of rule 11UA. Assessing Officer determined the fair value at ₹.19.86 per share as per the working given in assessment order. Accordingly, Assessing Officer added ₹.5,79,000/- u/s.56(2)(viia) of the Act being difference of ₹.3.36/- per share on 1,50,000 shares.
Ld. Counsel for the assessee further submits that the assessee contested the addition on two grounds one is with respect to the provisions of section 56(2)(viia) do not cover the subscription made directly into the company and the Fair Market value is not correct in law and on facts and circumstances of the case.
Learned Counsel for the assessee submitted that the Assessing Officer calculated FMV under sub-rule-2 of rule 11UA which is applicable to addition u/s 56(2)(viib) of the Act. The applicable method of valuation for addition u/s 56(2)(viia) is sub clause (b) of clause (c) of sub rule -1 of Rule 11UA. Although, there is no difference in calculation of book value of shares in both sub-rules. It is submitted that while arriving at the book
(A.Y: 2014-15) M/s. Fragrance Investments Pvt. Ltd., value of assets in the formula, the Assessing Officer has not reduced the book value of any amount shown in the balance sheet which does not represent the value of any asset. This method is clearly defined in the formula given in sub-rule for the letter "A". The Counsel referred to the audited financial statements of M/s. Mod Fashions and securities Pvt. Ltd. at Page No. 8 of Paper Book wherein the book value of quoted investment is shown at ₹.54,16,93,725/- whereas market value of such quoted investment is shown at ₹.29,64,26,164/-. Therefore, it is submitted that book value of quoted investment is not represented by a value of ₹.24,52,67,561/- being erosion of its book value. Hence, formula is not correctly worked out and should have been as follows: -
A. Book Value of Assets 58,08,56,269/- Less: Advance Tax 3,96,402/- Amount not represented in book value of 24,52,67,561/- 24,56,63,963/- quoted Investment (54,16,93,725 - 29,64,26,164) L. As given in assessment order 2,33,11,675/- A-L 31,18,80,631/- PE Total Paid up equity capital 28,04,00,000/- FMV = 31,18,80,631 x10 11.12/- 28,04,00,000
Therefore, the price paid by the assessee @ ₹.16 per share is more than FMV calculated u/r 11UA. Addition u/s 56(2)(viia) is not sustainable.
Ld. Counsel for the assessee further submits that the major share in assets of M/s. Mod Fashions and Securities Pvt. Ltd. is by way of investment in shares. The valuation of such huge investment by the (A.Y: 2014-15) M/s. Fragrance Investments Pvt. Ltd., investor company has major impact on FMV of its own shares. It is submitted that the Assessing Officer cannot disregard the erosion of value of investment by ₹.24,52,67,561/- which is 45.28% of book value of quoted investment. It is submitted that the Board of Directors of assessee company decided the FMV only after considering this fact and the assessee has no option to obtain the FMV determined by merchant banker or accountant on DCF Method as he is covered u/s 56(2)(viia) and not in section 56(2)(viib).
Ld. DR vehemently supported the orders of the Assessing Officer.
Heard rival submissions, perused the orders of the authorities below. On a perusal of the order of the Ld.CIT(A), I find that the Ld.CIT(A) observed in the order that the contentions of the assessee that market value of quoted investments were only at ₹.29,64,26,164/- and the book value was at ₹.54,16,93,725/- and therefore the book value of the investment shown in the balance sheet were higher by the differential amount and that should be reduced for computation of fair market value as per Rule 11UA is not found to be acceptable as there is no figure of ₹.29,64,26,164/- in the balance sheet of the assessee. The observation of the Ld.CIT(A) that there is no figure of ₹.29,64,26,164/- in the balance sheet of the assessee is factually wrong. I notice from the balance sheet that the assessee has shown the market value of quoted shares at (A.Y: 2014-15) M/s. Fragrance Investments Pvt. Ltd., ₹.29,64,26,164/- in Note No. K of the schedule to balance sheet i.e. investments in shares. Therefore, the whole basis for rejection of the contention of the assessee is not based on factually emanating from the records. I also observed that none of the submissions of the assessee have been gone into while disposing of the appeal. In view of these facts, I am of the considered view that the issue has to be examined thoroughly with reference to the investment appearing in the balance sheet and Profit and Loss Account of both the companies and in the light of the submissions of the assessee. Hence the entire issue is restored to the file of the Assessing Officer for denovo examination, in accordance with law. Needless to say that the Assessing Officer shall give adequate opportunity of being heard to the assessee. The assessee shall cooperate in the proceedings before the Assessing Officer by furnishing necessary information to the issues.
In the result, appeal of the assessee is allowed for statistical purpose.
Order pronounced in the open court on the 31st July, 2019