MUKUND SUMI METAL PROCESSING LIMITED,MUMBAI vs. PRINCIPAL COMMISSIONER OF INCOME TAX - 3, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL “I” BENCH, MUMBAI BEFORE SHRI SHAMIM YAHYA, AM AND SHRI RAM LAL NEGI, JM I.T.A. No.3505/Mum/2018 (Assessment Year: 20113-14)

Mukand Sumi Metal Processing Limited The Principal Commissioner of 3rd Floor, Bajaj Bhavan, Jamanlal Bajaj Income Tax-3, Room No. 612, 6th Floor, Marg, Mumbai-400 021 Vs. Aayakar Bhavan, M. K. Road, Mumbai-400 020 PAN/GIR No. (Appellant) : (Respondent)

Shri Kirit Kamdar/ Appellant by : Shri Gajendra Jain & Shri Parth Achwal Respondent by : Shri Abhakala Chanda

Date of Hearing : 08.08.2018 Date of Pronouncement : 22.10.2018

O R D E R Per Shamim Yahya, A. M.: This appeal by the assessee is directed against the order by the Pr. Commissioner of Income Tax -3, Mumbai (‘ld.CIT for short) dated 19.03.2018 and pertains to the assessment year (A.Y.) 2013-14.

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March 2016 passed under section 143(3) of the Act is erroneous in so far as it is prejudicial to the interests of the revenue. Direction to the Assessing Officer to make enquiry and verification in respect of valuation of premium on the shares issued by the appellant: 3} On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax erred in directing the Assessing Officer to make enquiry and verification in respect of the valuation of premium on the shares issued by the appellant. 4) On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax erred in not appreciating that once the provisions of section 56(2)(viib) of the Act have been held as not applicable in the order dated 19 March 2018, there is no requirement of making any enquiry or verification in respect of the valuation of premium on issue of shares. Each of the above grounds of appeal are without prejudice to one another. The appellant hereby reserves the right to add to, alter or amplify the above grounds of appeal. I, A.M. Kulkarni, Director, Mukand Sumi Meta! Processing Limited, the appellant, do hereby declare that what is stated above is true to the best of my information and belief.

Corporation, Japan formed a joint venture for the manufacture of bright bars and wires in

India. That during the year the assessee has allotted equity shares of Rs.10 each at a

premium of Rs.90 each. Some of these shares were also allotted to M/s. Mukand Limited,

a resident company. The ld. CIT noted that the valuation report in this regard was not

based on dependable facts. That the improbable high valuation seemed to camouflage

unpalatable device to introduce monies. That shares at premium has also been issued to

companies who claimed to be non-resident but their status has not been established

before the assessing officer. Further, the ld. CIT referred to the provisions of section

56(2)(viib). Accordingly, notice under section 263 was issued with assessee as under:

'From the case records, it is evident that M/s Mukand Limited and M/s Sumitomo Corporation. Japan, have formed a joint venture for the manufacture of bright bars and wires in India Mukund Ltd and Sumitomo. Japan will carry out the business

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through the assessee company i.e M/s Mukand Sumi Metal Processing Ltd a joint venture company. As per the joint venture agreement dated 29/10/2012. various conditions were laid down for the start of business which included transfer of land at Lonad The assessee company has not carried out any business activity during the year under consideration which has been elaborately discussed and proven by the AO in para 5 of his assessment order u/s 143(3) dated 31/3/2016 while disallowing the claim of depreciation made by the assessee. 2.1. During the year under consideration, the company had authorized equity shares of 3,00,00.000/-. It is also seen that the company had allotted 1.99.30,000 fully paid up equity shares © Rs. 10 each/- at a premium of Rs. 90/- per share . Out of the 1.99.30.000 shares, the company had issued 1.19,68,000 equity shares to Mukand Ltd. a resident company. 2.2. On peruse: of the valuation report submitted by the Assessoe doted 10/8/2012. it is seen that the valuer M/s SSPA & Co. Chartered Accountants, had followed the OCF method to work out the equity value o( Rs. 2497 million. The said valuation is not justifiable or acceptable considering the fact that the company is incorporated only on 1/8/2012. It is not probable that within 10 days of creation of the company,, without any business activity or assets, this valuation could he made. Further, the assessee company could not have provided the Balance sheet's required for preparation of the valuation report on 10/8/2012. The basis and presumptions for Balance Sheet/s and the assumptions and presumptions for values adopted for DCFarc neither stated nor explained. Bank A/cs copies have also not been furnished. Further, it is found that assets were transferred to the assessee company on 25/1/2013 which is after 5 months of submission of the valuation report. From the above, it is clear that the assessee company had no assets on the valuation date and no business activity was being carried out till the date of valuation. Therefore, it is clear that the valuation report by the valuer M/s SSPA & CO. CA is not based on dependable facts and evidences and prima facie not acceptable. This improbable high valuation also seems a camouflage and colourable device adopted to introduce monies/cash into the company. 2.3. Such shares at premium hove also been issued to Sumitomo Corporation: Japan and Sumitomo Corporation Asia Pie Ltd. Singapore stating these two companies to be non-resident vshereas this status has not been established before the AO nor was it enquired into by the AQ. 3. Additionally please refer !o Section 56(2)(viib) of the income Tax Act, 1961, which reads as under 'Income from other sources : .... 2. in particular and without prejudice to the generality of the provisions of sub-section (1). the following incomes shall be chargeable to income tax under the head "income from other sources" namely - (viib) where o 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

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aggregate consideration received for such shores exceeds the fair market value of the shares : Provided that this clause shall not apply where the consideration for issue of shares is received — a) By a venture capital undertaking from a venture capital company or a venture capital fund or b) By a company from a class or classes of persons as may be notified by the Central Government on this behalf Explanation - 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 me value, on the date of issue of shares, of its assets, including intangible assets being good will, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature whichever is higher. 3 1, From the facts of the case and from the simplistic unsigned reply without any details whatsoever submitted by the assessee company during assessment proceedings, it is clear that the valuation and the premium charged is not justifiable and the premium received needs to be brought under the purview of Sec 56(2)(viib) of the Act on this account. It is also evident from case records that detailed verification and scrutiny of this valuation per share by DCF method adopted by you has not been furnished by you and has not been enquired into or verified by the Assessing Officer. Accordingly the order is passed by AO without making inquires or verification which should have been made. Additionally, in view of provision of Sec 56(2)(viib). there is an under assessment in this case of Rs.1,78,92,00.000/- (Rs.90/- * 1,99,30,000 (no of shares Issued to Mukund Ltd & others)).”

applicable to the assessee as the company was to be treated as a company in which public

it was substantially interested. Further the point was response was submitting that the

issues raised by the learned CIT- have already been dealt with by the assessing officer.

The reply in detail as re-produced in the learned CIT-'s order is as under:

3.1 In the aforesaid notice, it has been mentioned that the premium received bit Mukand Sumi for issue of shares, ought to be taxed under section 56(2)(viib) of the Act.

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3.2 In this regard, attention is invited to section 56(2)(viib), which reads as under: ''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" (emphasis supplied) 3.3 Thus, for section 56(2)(viib) to apply, all the following conditions should be met: (a) Shares should be issued by a company, not being a company in which the public are substantially interested; (b) The shares are issued to a person who is a resident; (c) Such consideration exceeds the fair market value of the shares. 3.4 Thus, the first condition for section 56(2)(viib) to apply is that the issuer company should not be a company in which the public are substantially interested. 3.5 The term ''company in which the public are substantially interested" is defined in section 2(18) of the Act. The said definition includes a company in which shares carrying not less than 50% of the voting power due held by a listed company. 3.6 It may be noted that Mukand Limited (a listed company) holds more than 50% of voting power in Mukand Surni. In this regard, attention is invited to Note 1 of the Notes to Account forming part of the Annual Report for FY 2012-13 (please refer Pacje No. 56) which evidences the fact that Mukand Siitiri is a subsidiary of Mukand Limited, which is a listed, company. 3. 7 Accordingly, Mukand Surni qualifies as a "company in which the public are substantially interested'' as per The provisions of section 2(18} of the Apt, and hence the provisions of section 56(2)(uiib) are not applicable. 4 Other observations made in the notice issued under section 263: 4.1 Further to the above submissions, Mukund Surni objects to certain observations made in the notice dated 5 February 2018 issued under section 263, which are discussed below: Para No. in Observations made in the notice Remarks the notice 2 The assessee company has not carried out any At the outset, Mukand Sumi objects to business the finding in the assessment order that activity during the year under consideration no business activity has been carried which has been elaborately discussed and out during the year under proven by the AO m para 5 of his assessment consideration. In this regard, Mukand order while disallowing the claim of Sumi has filed an appeal against the depreciation made by ihe assessee. assessment order which is pending for disposal with the Commissioner (Appeals). 2.1 "It is also seen that the company has In this regard, it is submitted that out allotted 1,99,30,000 fully paid equity shares (a. of the 1,99,30,000 shares issued during R's.10 each at a premium of Rs, 90 per the year, 40.000 shares issued on 28

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share." September 2012 have been issued at face value. 2.2 "'On the perusal of the valuation In this regard, it is submitted that report submitted by the Assessee though the assessee company was dated 10/8/2012, it is seen that the valuer M/s. fanned during the year under SSPA & Co,. Chartered Accountants, had consideration, the valuation was made followed the DCF method to work out the in respect of the business of bright bars equity value at Rs.2497 million. The said and wires which was transferred from valuation is not justifiable or acceptable Mukand Limited to Mukand Sumi, considering the fact that The company The said business has been carried out is incorporated only on 1.8.2012. It is not by Mukand Limited since 1990 and probable that within 10 days of creation commands a good value in the market. of company, without any : business The valuation of shares of Mukand activity or assets, I this valuation could be Sumi is primarily on account of the made. Further. the assessee said business of bright bars and wires company could not have provide the which is now held by Mukand Sumi. Balance sheets ; required for preparation of the . valuation report on 10.8.2012. The basis and presumptions -for Balance Sheet and the assumptions and presumptions for values adopted for DCF are neither; stated nor explained. Bank a/cs. copies have also not been furnished. Further, it is found that assets were transferred to the assessee company on 25.01.02013 whis is after 5 months of submissions of the valuation report. From the above, it is clear that he assessee company had no assets on the valuation date and no business activity was being earned out till the date of valuation." 2.3 "Such shares at premium have also been issued It is very clear from the Annual to Sumitomv Corporation. Japan arid Report, of Mukand Sumi that the said Sumitorn.o Corporation Asia Pie. Ltd., companies of the Sumitomo group are Singapore stating these two companies to be companies registered in Japan and non-resident whereas the status lias not been Singapore respectively. These established before the AO nor was it enquired companies are dearly non-residents in into by the AO." India for tax purposes, In this regard, dining the course of the assessment proceedings, Mukancl Sumi had also submitted copies of FC-GPR filed for issue of shares to foreign investors, which clearly s}iow that the said investors are registered in Japan and Singapore respectively. (Copies of FC- GPR are enclosed at Page Nos.30-43). It is further submitted that the provisions of section 56(2)(viib) do not apply to shares issued to non-residents.

3.1 "It is also evident from the case records that It is submitted that Mukand Sumi had detailed scrutiny and verification of this submitted a copy of the valuation

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valuation per share by DCRF method adopted report (determined using DCF method) by yon has not been furnished by you and has during the course of the assessment not been, enquired into or verified by the proceedings. Further, the Assessing Assessing Officer.'' Officer had also asked to file details/justification for the premium received on issue of shares. Note/submission in this regard was filed by Mukand Sumi vide letter dated 15 March 2016. Thus, the relevant details have been filed by Mukand Sumi and the same have been verified by the Assessing Officer during the course the assessment proceedings.

56(2)(viib) cannot be applied on the facts of the present case as the assessee falls under

the definition of companies in which public are substantially interested as per section

2(18) of the I. T. Act. Despite observing so, the learned CIT- proceeded to remark that

the assessing officer has not carried out any examination of the valuation made and he

has not made specific enquiries on the issue of valuation. The learned CIT- held as under:

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order dated 31/03/2016 for A Y 2013-14 u/s 143(3) of the Income Tax Act 1961 to that extent and direct The AO to enquire, verify, analyse and evaluate and work out the valuation after giving sufficient opportunities to the assessee company to represent its case and pass the order accordingly. 6. Against the above order, the assessee is in appeal before us.

from the detailed submission hereinabove, the provisions of section 56(2)(viib) invoked

in the notice u/s. 263 by the ld. CIT is not applicable to the assessee company. As the

assessee company was falling under section 2(18) of the Income Tax Act, 1961 being a

company in which public are substantially interested. This fact has subsequently been

duly accepted by the learned CIT- himself in the aforesaid order. Despite that he has held

that assessing officer has not made detailed enquiry on the valuation of shares and he had

set aside the matter to the file of assessing officer. We find that learned CIT is passing

contradictory order when learned CIT- accepts that provisions of section 56(2)(viib) are

not applicable to the assesses as this section provides for addition as income from other

sources of share premium not properly explained in the hands of companies in which

Public are not substantially interested. When the addition itself is not permissible what

point will be served by the assessing officer’s enquiries in this regard is beyond

comprehension. Further, the A.O .has dealt with the issue. He has been provided with the

valuation report. In these circumstances further enquiry as directed by the learned CIT-

will not only be a futile exercise, it would serve no purpose whatsoever. We also note that

the proviso to section 68 in this regard is also not applicable to company in which public

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are substantially interested. This proviso mandates that the companies to whom inter alia

shares at premium are issued should also satisfy the A.O.

Hence, we are of the opinion that the directions of the ld. CIT(A) can neither

remove any error from the A.O.’s order nor cure any prejudice or loss to revenue.

CIT is quashed.

(Ram Lal Negi) (Shamim Yahya) Judicial Member Accountant Member Mumbai; Dated : 22.10.2018 Roshani, Sr. PS Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. The CIT(A) 4. CIT - concerned 5. DR, ITAT, Mumbai 6. Guard File BY ORDER,

(Dy./Asstt. Registrar) ITAT, Mumbai