ITO WARD - 24(1), NEW DELHI vs. SOLITAIRE BTN SOLAR PVT LIMITED, NEW DELHI

“4. Decision: I have considered the arguments advances by the Ld. A.R, written submissions and various decisions relied upon by them. For the sake of convenience, all the grounds of appeal have been taken together for adjudication. 4.1 Facts of the case are that during the F.Y relevant to the A.Y. 2015- 16 the appellant had allotted 1,00,000 optional convertible preference shares (OCPS) to its holding company M/s Hindustan clean Energy Ltd @ 1000/- OCPS after determining the F.M.V. in accordance with Rule11UA(1)(c)(c)/DCF Method. 4.2 Assessing Officer however, computed the F.M.V. on Net Assets Value at Rs. 639.17 per OCPS and considered the balance @ 360.83 per OCPS as excess premium and added the same u/s 56(2)(viib) of the Act. 4.3 After considering the totality of the facts and circumstances of the case, provisions of Law and decided cases, it is noticed that the facts and circumstances of the case, issues and applicable provisions of Law to the present case are covered by various cases relied upon by the appellant. 4.4 I have seen the balance sheet of the appellant and the assessment order. It is noticed that in the assessment order at page number 10 the AO has rightly taken the net asset value for shareholders, i.e. Rs. 1,77,42,664/- But denominator of 27759 number of shares is not correct. Because there are 10,000 equity shares and 17,759 OCPS, which are not equivalent. In this regard, balance sheet needs to be referred where number of shares outstanding as on 31.03.2015 are given, in point no. (d) of note 2 of the balance sheet it is cleared mentioned that every OCPS will be converted into 100 equity shares which means 1 OCPS is equivalent to 100 equity shares and vice versa. Accordingly, 10000 equity shares are equivalent to 100 (10000/100) OCPS. Therefore, for the purpose of getting actual value of OCPS, the equity has to be converted into equivalent OCPS so that correct value of shares could be calculated. Now effective number of OCPS is 17,859 (17759+100). Hence value of each OCPS is Rs.993.48 (17742664/17859). 4.5. The AO though adopted the net asset value as per the appellant. But he equated the OCPS with those of equity shares and totaled the quantities without converting them as per their weightage. When 1 OCPS was equivalent to 100 equity shares in such case totaling could be done only after applying the conversion factor. In the balance sheet of the appellant the opening allotted equity shares were 10,000, which were equivalent to 100 OCPS and Opening OCPS were 17,759 the total of these two will be equal to 17859 OCPS (17759+100) and not 27759 as taken by the AO. By dividing the net asset value of Rs. 1,77,42,664/- with 17859 OCPS would result in to Rs. 993.48 per OCPS. The appellant has allotted the 1,00,000 OCPS @Rs.1000/- per OCPS, which is quite reasonable. Thus, there is no exaggeration in the valuation of the shares/OCPS by the appellant. Therefore, the addition made by the AO deserve to be deleted. 4.6 Reliance is placed on the ITAT Delhi decision in the case of India Today Online Pvt. Ltd. vs. Income Tax Officer in & 6454/Del/2018 dated 15-03-2019 reported in [2019] 104 taxmann.com 385 (Delhi - Trib.)/[2019] 176 ITD 459 (Delhi - Trib.) wherein it was held that - "3.1 One of the cardinal principles of interpretation of fiscal statute is that they should be strictly construed and so long as the provision is free from any ambiguity, there should be no need to draw any analogy.

A deeming provision on the other hand is intended to enlarge the meaning of a particular word which includes matters which otherwise may or may not fall within the normal provision, therefore, it should be extended to the consequences and incidents which has been intended by the Legislature for a definite purpose and should not be extended beyond the mandate of the statute. Thus, deeming provisions require to be construed strictly. Here in this case the assessee has followed one of the options provided under such deeming provision and when such an option has been exercised, then same cannot be discarded to impose other option. The assessee's option has been rejected by the Ld. CIT(A) on the ground it does not stand the test of one of option, which he deems fit. Not only that valuation method adopted by the assessee to value its underlying asset, that is, Mail Today shares has been rejected on the ground that DC method applied is not correct. DCF method is a recognized method where future projections of various factors by applying hindsight view and it cannot be matched with actual performance, and what Ld. CIT(A) is trying to do is to evaluate from the actual to show that the Company was running into losses, therefore, DCF is not correct. Valuation under DCF is not exact science and can never be done with arithmetic precision, hence the valuation by a Valuer has to be accepted unless, specific discrepancy in the figures and factors taken are found. Then AO or CIT (A) may refer to the Valuer to examine the same." 4.7 As per various tribunal orders, it was held that as per Rule 11UA(2), assessee could opt for DCF method and if assessee had so opted for DCF method, AO could not discard the same and adopt other method i.e. NAV method of valuing shares. In case of M/s. Rameshwaram Strong Glass (P) Ltd. vs. The ITO [2018] 172 ITD 571 (Jaipur - Trib.), the tribunal had reproduced relevant portion of another tribunal order rendered in case of ITO vs. M/s Universal Polypack (India) Pvt. Ltd. In such case, tribunal held that if assessee had opted for DC method, AO could not challenge the same but AO was well within his rights to examine methodology adopted by assessee and underlying assumptions and if he was not satisfied, he could challenge the same and suggest necessary modifications/alterations provided same were based on sound reasoning and rationale basis. In same tribunal order, a judgment of Bombay High Court was also taken note of having been rendered in case of Vodafone M-Pesa Ltd. vs. PCIT. The projections should be based on reasonable expectations after considering macro and micro economic factors affecting the business and the same principle was followed by the management of the Company. Reliance is also placed in case of M/s. INNOVITI PAYMENT SOLUTIONS PVT. LTD. vs. The ITO, [2019] 102 taxmann.com 59 (Bangalore - Trib.), the tribunal in para 12 has held that: "the AO can scrutinize the valuation report and the if the AO is not satisfied with the explanation of the assessee, he has to record the reasons and basis for not accepting the valuation report submitted by the assessee and only thereafter, he can go for own valuation or to obtain the fresh valuation report from an independent valuer and confront the same to the assessee. But the basis has to be DCF method and he cannot change the method of valuation which has been opted by the assessee. For scrutinizing the valuation report, the facts and data available on the date of valuation only has to be considered and actual result of future cannot be a basis to decide about reliability of the projections." 4.8 In view of the above, it is clearly evident that the addition made by the AO u/s 56(2)(viib) amounting to Rs. 3,60,83,000/- is not justified and hence deleted.

5. In the end, the appeal of the appellant is partly allowed.”

6.1 The Revenue has controverted the action of the CIT(A) on the touchstone of Section 56(2)(viib) of the Act towards allotment of OCPS to the subscriber M/s. Hindustan Clean Energy Ltd. which is the existing shareholder, holding 100% of the equity shares of the assessee-company as a holding company. On facts, the defense of the assessee are three fold (a) the OCPS has been subscribed and allotted to its 100% holding co. and therefore the deeming fiction of s. 56(2)(viib) to charge the capital receipts to taxation is not applicable at the threshold (b) the compulsory convertible preference shares issued at similar premium which were to be compulsorily converted into equity shares was accepted in the completed assessment of earlier year. Such facts are a matter of record with only discernible difference this year being, the assessee in the instance has the ‘option’ available for conversion into equity shares within specified period whereas in the earlier year, the conversion was built mandatory in the issue of CCPS without any option (c) while the face value of pref. share is Rs. 10 at a premium of Rs. 990 per OCPS, however if the option is exercised, the subscriber would be entitled to 100 equity shares per OCPS and thus the number of converted equity shares to be reckoned would be 1,00,00,000 nos. instead of 10,000 shares adopted by Assessing Officer; on comparison of converted equity shares, it would be found that no premium is charged at all.

6.2 It is further case on behalf of the assessee that Rule 11UA(2) which prescribes NAV method of valuation is attributable to unquoted equity shares whereas present case relates to valuation of OCPS which falls for consideration under Rule 11UA(1)(c)(c). The OCPS being other than equity shares, the valuation done by the ‘accountant’ ( who may value the security by DCF method) is in accord the mandate of the Rule and cannot be displaced without any cogent reasons.

6.3 Without prejudice to aforesaid, it is further paddled on behalf of the assessee that even if NAV is method is seen to be applicable, the NAV is to be calculated after applying the conversion ratio to the pref shares and the NAV need to be calculated with reference to underlying equity entitled to the subscriber on conversion. The CIT(A) has duly accepted such contention of the assessee as logical in para 4.4 and 4.5 of the order (supra).

6.4 It is thus the case of the assessee that seen from any angle, the relief granted by the CIT(A) cannot be faulted.

“11.1 As per case records, it is an undisputed fact that the shares have been allotted at a premium to its 100% holding company. Thus, applicability of Section on 56(2)(viib) has to be seen in this perspective. The Co-ordinate Bench of Tribunal in DCIT vs. Ozone India Ltd. in order dated 13.04.2021 in the context of Section 56(2)(viib) has analyzed the deeming provisions of Section 56(2)(viib) of the Act threadbare and inter alia observed that the deeming clause requires to be given a schematic interpretation. The transaction of allotment of shares at a premium in the instant case is between holding company and it is subsidiary company and thus when seen holistically, there is no benefit derived by the assessee by issue of shares at certain premium notwithstanding that the share premium exceeds a fair market value in a given case. Instinctively, it is a transaction between the self, if so to say. The true purport of Section 56(2)(viib) was analyzed in Ozone case and it was observed that the objective behind the provisions of Section 56(2)(viib) is to prevent unlawful gains by issuing company in the garb of capital receipts. In the instant case, not only that the fair market value is supported by independent valuer report, the allotment has been made to the existing shareholder holding 100% equity and therefore, there is no change in the interest or control over the money by such issuance of shares. The object of deeming an unjustified premium charged on issue of share as taxable income under Section 56(2)(viib) is wholly inapplicable for transactions between holding and its subsidiary company where no income can be said to accrue to the ultimate beneficiary, i.e., holding company. The chargeability of deemed income arising from transactions between holding and subsidiary or vice versa militates against the solemn object of Section 56(2)(viib) of the Act. In this backdrop, the extent of inquiry on the purported credibility of premium charged does not really matter as no prejudice can possibly result from the outcome of such inquiry.

Thus, the condition for applicability of Section 263 for inquiry into the transactions between to interwoven holding and subsidiary company is of no consequence. We also affirmatively note the decision of SMC Bench in the case of KBC India Pvt. Ltd. vs. ITO in order dated 02.11.2022 (SMC) where it was observed that Section 56(2)(viib) could not be applied in the case of transaction between holding company and wholly owned subsidiary in the absence of any benefit occurring to any outsider.”