ROBUST HOTELS P LTD. ,CHENNAI vs. DCIT CORPORATE CIRCLE 5(2), CHENNAI

Both the appeals of the assessee are directed against the common order passed by the Commissioner of Income Tax (Appeals) -3, Chennai, dated 30.06.2017, for the assessment years 2010-11 and 2014-15. Since common issue arises for consideration in both the appeals, we heard both the appeals together and disposing of the same by this common order.

Shri S. Sridhar, the Ld.counsel for the assessee, submitted that the assessee-company is engaged in the business of hotel industry. According to the Ld. counsel, the assessee has issued 13,96,000 Optionally Convertible Preference Shares of `10/- each at the premium of `205/- each. The assessee-company, in fact received `28,61,80,000/- towards share premium and taken this amount to Reserve and Surplus in the balance sheet. In fact, according to the Ld. counsel, the Optionally Convertible Preference Shares were issued to M/s GJS Hotels Limited, therefore, the identity of the investor is not in dispute. According to the Ld. counsel, M/s GJS Hotels Limited paid the money to the assessee through banking channel, therefore, the genuineness of the transaction is also not in dispute. The creditworthiness and financial strength of M/s GJS Hotels Limited was also established. The assessee also filed all the details before the Assessing Officer. Therefore, according to the Ld. counsel, the share premium cannot be taken as income in the hands of the assessee. According to the Ld. counsel, the Assessing Officer as well as the CIT(Appeals) doubt the valuation of shares at `205/- each when the face value of the share was `10/- each. According to the Ld. counsel, when the assessee received the money through banking channel and financial position and creditworthiness of M/s GJS Hotels Limited were established beyond doubt, there cannot be any addition in the hands of the assessee.

On the contrary, Shri Sriram Bharath, the Ld. Departmental Representative, submitted that during the assessment year 2010- 11, the assessee received `28,61,80,000/- from the holding company M/s GJS Hotels Limited. Similarly, during the assessment year 2014-15, the assessee received `44,35,99, 125/- from the very same holding company, namely, GJS Hotels Limited. According to the Ld. D.R., the assessee issued Operationally Convertible Preferences Shares at the estimated cost of `205/- per share as against the face value of `10/- per share. Since the face value was `10/- per share, according to the Ld. D.R., the Assessing Officer as well as the CIT(Appeals) doubted the bona fides and genuineness of the transaction. According to the Ld. D.R., the net worth of the company has to be valued either on the basis of the net asset value or at discounted cash flow method. In this case, according to the Ld. D.R., for the assessment year 2010-11, the assessee valued the net worth of the company on the basis of the net asset value. However, for the assessment year 2014-15, the assessee valued at cash flow method. Accordingly, for the assessment year 2014-15, the assessee valued the share at `22.11 per share. In respect of this, according to the Ld. D.R., the assessee has filed the valuation report from SS Kothari Mehta & Co dated 02.11.2007. Therefore, according to the Ld. D.R., there is no basis for valuing shares at `205/-. Hence, the Assessing Officer found that the amount claimed to be received from M/s GJS Hotels Limited is nothing but the assessee’s income. Therefore, according to the Ld. D.R., the same was brought to taxation under Section 68 of the Income-tax Act, 1961 (in short 'the Act').

We have considered the rival submissions on either side and perused the relevant material available on record. For both the assessment years, the Assessing Officer made addition under Section 68 of the Act in respect of the premium received by the assessee for allotment of Optionally Convertible Preferential Shares. The assessee claims that genuineness of transaction was established and identity of the company which invested in the share of the assessee-company was also established. The creditworthiness of the company was also established. Therefore, there cannot be any addition.

The CIT(Appeals) for the assessment year 2014-15, found that as per the provisions of Section 56(2)(viib) of the Act, introduced by the Finance Act, 2012 with effect from 01.04.2013, the excess fair market value for allotment of any share on premium has to be treated as income from other sources. In this case, the valuation report filed by the assessee appears to have shown that the value was `22.11 per share. The question arises for consideration is whether the share premium received by the assessee can be considered as income when the net worth of the company is not equal to the value of the share premium received by the assessee? It appears from the orders of the lower authorities that the valuation of net worth of the company was made on the basis of net asset value for the assessment year 2010-11. However, for the assessment year 2014-15, it was valued at discounted cash flow method. Therefore, there was confusion with regard to the value of the shares arrived by the assessee. This Tribunal is of the considered opinion that the net worth of the company has to be assessed either at net asset value method or at discounted cash flow method. Since the assessee is not following uniform method, this Tribunal is of the considered opinion that the matter needs to be reconsidered by the Assessing Officer. Accordingly, orders of both the authorities below are set aside and the entire issue raised by the assessee with regard to the addition made on account of share premium is remitted back to the file of the Assessing Officer. The Assessing Officer shall re-examine the matter with regard to method of valuation adopted by the assessee and find out the difference, if any, due to change of method and thereafter decide the same in accordance with law, after giving a reasonable opportunity to the assessee.

In the result, both the appeals filed by the assessee are allowed for statistical purposes. Order pronounced on 30th November, 2017 at Chennai.