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Income Tax Appellate Tribunal, AHMEDABAD “SMC” BENCH
Before: Ms. Annapurna Gupta & Ms. Siddhartha Nautiyal
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “SMC” BENCH (Conducted Through Virtual Court) Before: Ms. Annapurna Gupta, Accountant Member And Ms. Siddhartha Nautiyal, Judicial Member ITA No. 1592/Ahd/2019 Assessment Year 2016-17
M/s. Gaurav Hotels Pvt. The Income Tax Ltd. Pratapgunj Road, Officer, Near S.T. Bus Stand, Vs Ward-1(1)(3), Vadodara-390002 Ahmedabad PAN No: AAACG7191B (Respondent) (Appellant)
Appellant by : Shri Mukund Bakshi, A.R. Respondent by : Shri Shri Rajdeep Singh, Sr. D.R. Date of hearing : 23-02-2022 Date of pronouncement : 25 -02-2022 आदेश/ORDER PER : ANNAPURNA GUPTA, ACCOUNTANT MEMBER:-
The present appeal has been filed by the Assessee against the order passed by the Commissioner of Income Tax (Appeals)-1, Vadodara, (in short referred to as CIT(A)), dated 11-09-2019, u/s. 250(6) of the Income Tax Act, 1961(hereinafter referred to as the “Act”) pertaining to Assessment Year (A.Y) 2016-17.
Ground no. 1(a) & 1(b) reads as under: 1. a) The Ld. CIT(A)-1, Vadodara has erred in law and in facts in holding that for the purpose of Sec. 56(2)(viib), the valuation of shares is to be made in accordance with Rule 11UA of the I.T. Rules on the basis of book value of the assets and that no other method can be adopted.
I.T.A No. 1592/Ahd/2019 A.Y. 2016-17 Page No 2 M/s, Gaurav Hotels Pvt. Ltd. . vs. ITO b) The Ld. CIT(A)-1, Vadodara has erred in law and in facts in upholding the action of the Ld. A.O. in the addition of an amount of Rs. 4,50,000/- held to be represented the excess premium in the issue of shares during the year.
As transpires from the order of the authorities below, the issue relates to addition made as per the provisions of Section 56(2)(viib) of the Act on account of alleged excess consideration received by the assessee for issue of shares, to the extent the consideration received exceeded the Fair Market Value of shares.
3.1 The assessee during the impugned year had allotted 60,000/- shares of the face value of Rs. 10 at a premium of Rs. 90.to its existing shareholder Shri Chintan Agrawal. The assessee was asked to justify the premium charged considering the provisions of Section 56(2)(viib) of the Act ,to which the assessee responded by filing a valuation report prepared by the C.A. following NAV( Net Asset Value) method to justify the premium charged. The valuation report was also supported by a separate valuation report justifying the market value of land and building, which values were taken into consideration while calculating the Fair Market Value(FMV) of the equity shares of the assessee company. The A.O. rejected the said valuation holding that it was the book value of these assets which ought to have been considered and not the market value ,referring to the formula prescribed by the legislature under Rule 11UA of the Income Tax rules 1961 for the purpose. He thereafter determined the fair market value of shares as per the method prescribed under Rule 11UA of the Rules taking the book value of assets and liabilities, which came to Rs. 25 per share. Since the shares were issued by the assessee for Rs. 100, the excess amounting to Rs. 75 was treated as income of the assessee from other sources as per Section 56(2)(viib) of the Act. The same was upheld by the Ld. CIT(A).
Before us, the contention of the Ld. Counsel for the assessee was that valuation submitted by the assessee of FMV of the shares was in consonance with law as
I.T.A No. 1592/Ahd/2019 A.Y. 2016-17 Page No 3 M/s, Gaurav Hotels Pvt. Ltd. . vs. ITO prescribed under Section 56(2)(viib) which prescribed two modes for calculating the fair market value. (i) as determined in accordance with the method prescribed and (ii) as determined on the basis of the value of the assets as on the date of issue as substantiated to the satisfaction of the A.O. He drew our attention to Explanation (a) to section 56(2)(viib),defining fair market value of shares as under:
56(2)(viib) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares: . . . Explanation (a).—For the purposes of this clause,— (a) the fair market value of the shares shall be the value— (i) as may be determined in accordance with such method as may be prescribed; or (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher;
Ld. Counsel for the assessee contended that since the assessee had adopted the second method, the authorities below were in error in rejecting the same and adopting only the first method as prescribed in statute. He further relied on the decision of the ITAT in the following cases:
I.T.A No. 1592/Ahd/2019 A.Y. 2016-17 Page No 4 M/s, Gaurav Hotels Pvt. Ltd. . vs. ITO 1. Decision of Hon'ble ITAT, Kolkata in the case of M/s. Bharat Elevators & Engineers Pvt. Ltd. vs. ITO in ITA No. 2646/Kol/20I9 dated 28.01.2021 2. Decision of Hon'ble IT AT, Delhi in the case of M/s. India Convention and Culture Centre Pvt. Ltd. vs. ITO in ITA No. 7262/Del/2017 dated
Ld. D.R. on the other hand relied on the orders of the authorities below.
We have heard the contentions of both the parties. The issue before us relates to the determination of the excess consideration received by the assesse on issue of shares, which as per Section 56(2)(viib) of the Act was to be treated as income of the assessee. The facts of the case are that the assessee had issued 60,000/- shares of face value 10 at the premium of Rs. 90. To justify its valuation, the assessee had submitted valuation report by C.A. in which the land and building were valued at their market value as on the date of issue of shares. The market value of land and building was also duly substantiated by a valuation report. The revenue has rejected the valuation report of the shares stating that the assessee ought to have valued the fair market value of the shares only as per the method prescribed under Rule 11UA of the Act rules of Income Tax Rules, 1961.
We are not in agreement with the same. We have gone through the provisions of Section 56(2)(viib) wherein the determination of fair market value has been prescribed in the Explanation (a) as under: Explanation (a).—For the purposes of this clause,— (a) the fair market value of the shares shall be the value— (i) as may be determined in accordance with such method as may be prescribed; or (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature,
I.T.A No. 1592/Ahd/2019 A.Y. 2016-17 Page No 5 M/s, Gaurav Hotels Pvt. Ltd. . vs. ITO
whichever is higher;
A bare reading of the above reveals the fallacy in the contention of the Revenue since the definition of fair market value clearly provides for two methods for calculating the FMV of shares (i) as prescribed in the Rules i.e. 11UA and the other (ii) on the basis of the value of the assets as on the date of issue of shares with the value being substantiated to the satisfaction of the A.O.
The contention of the revenue therefore that the assessee ought to have determined FMV as per rule 11UA of the Rules is not in consonance with law. The assessee clearly has adopted the second method prescribed by law for determining the FMV of shares by valuing its land and building at their market value as on the date of issue of shares and has substantiated the market value of land and building with the valuation report of the same also. No infirmity as such has been found by the revenue authorities in the aforesatated valuation reports. Therefore, the method adopted by the assessee for determining the FMV of shares issued during the year is held to be in accordance with law.
The decisions relied upon by the Ld.CIT(A) of the ITAT Delhi in the case of Agro Portfolio(p) Ltd.(2018) 94 taxmann.com 112 is clearly not applicable in the present case since it related to the applicability of NAV method or DCF method for valuation of shares, which is not the issue in the present case. The decision of the ITAT Hyderabad in the case of Medplus Health Services P .Ltd ITA No.871/Hyd/2015 dated 8th march 2016 has we find been incorrectly interpreted by the Ld.CIT(A) to apply to the facts of the present case since the ITAT in the said case had rejected the adoption of market value of shares as fair market value and held that the same has to be determined as provided in law.
I.T.A No. 1592/Ahd/2019 A.Y. 2016-17 Page No 6 M/s, Gaurav Hotels Pvt. Ltd. . vs. ITO 12. The addition therefore made by the revenue authorities amounting to Rs. 4,50,000/- u/s. 56(2)(viib) of the Act is be held not sustainable in law and we direct deletion of the same.
Appeal of ground no. 1(a) & 1(b) is accordingly allowed.
Ground No.2 reads as under: 2. The Ld. CIT(A)-1, Vadodara has erred in law and in facts in disallowing an amount of Rs. 38,398/- being the amount of Employees' Provident Fund paid belatedly. The disallowance of Rs. 38,398/- being bad in law and in facts is prayed to be allowed.
The issue relates to disallowance of employees contribution to Provident Fund amounting to Rs.38,398/- deposited belatedly, as per section 2(24)(x) of the Act r.w.s 36(1)(va) of the Act.
Ld. Counsel for the assessee fairly admitted that this issue was covered against the assessee by the decision of the Jurisdictional High Court in the case of Gujarat State Road Transport Corporation dated 26-12-2013, reported in (2014) 41 taxmann.com100 (Guj) .
In view of the above, the disallowance of Employees’ Provident Fund paid belatedly amounting to Rs. 38,398/ is upheld.
17.1 Ground No 2 is dismissed.
Ground no. 3 reads as under: 3. The Ld. CIT(A)-1, Vadodara has erred in law and in facts in confirming an addition of Rs. 4,58,992/- being the amount of interest relatable to the advances given computing
I.T.A No. 1592/Ahd/2019 A.Y. 2016-17 Page No 7 M/s, Gaurav Hotels Pvt. Ltd. . vs. ITO @ 13.25% per annum. The addition of Rs, 4,58,992/- being bad in law and in facts is prayed to be deleted.
18.1. The same was not pressed before us by the Ld. Counsel for the assessee.
18.2. Ground no. 3 is therefore dismissed as not pressed.
In effect, appeal of the assessee is partly allowed.
Order pronounced in the open court on 25 -02-2022 Sd/- Sd/- (SIDDHARTHA NAUTIYAL) (ANNAPURNA GUPTA) JUDICIAL MEMBER True Copy ACCOUNTANT MEMBER Ahmedabad : Dated 25/02/2022 आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से, उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद