2019 (8) TMI 1858 - AT - Income Tax

Transfer of case u/s 127 - Transfer of existing jurisdiction from Central Circle-16 (now Central Circle-20) to the ITO WardI. 21(1) New Delhi, specially when the PCIT of Central Circle-16 and ITO Ward-21(1) are different - HELD THAT - Hon ble Delhi High Court in the case of Abhishek Jain vs. ITO 2018 (6) TMI 211 - DELHI HIGH COURT Clearly held that Section 127 relates to a transfer of case from one Assessing Officer to another Assessing Officer who otherwise is not having jurisdiction as per direction of the Board u/s.120 and 124 of the Act - The aforesaid clarification by the Hon ble Jurisdictional High Court clearly clinches the issue that if the case is being transferred from one Assessing Officer having jurisdiction over the assessee to another assessing officer who otherwise was not having the jurisdiction in terms of direction of the Board u/s.120 and 124 of the Act then transfer order u/s 127 is mandatory without which the jurisdiction of the Assessing Officer cannot be conferred to pass any order. If such a statutory procedure is not followed then there would be a chaos where any Assessing Officer can pass order in the case of any assessee even when he does not have any territorial jurisdiction over that assessee. Thus we are of the opinion that an order u/s. 127 is mandatory which has to be passed by the competent authority if jurisdiction is transferred from one Assessing Officer to another Assessing Officer who otherwise does not have the jurisdiction over the assessee. In this case the Ld. CIT-DR had brought on record that there is some kind of transfer order which has been passed on 19.02.2016 vide transfer order no. 200000047799 wherein the PAN of the assessee has been transferred from Central Circle-20 to Ward-21(1) Delhi. If such an order has been passed then can it be reckoned that it is an order passed u/s.127 is not very clear? Before us no specific transfer order has been passed except for transfer order number and the transfer date from the website. Even till the conclusion of the hearing no specific order was produced before us. Under these circumstances and in order to ascertain the correct facts we are of the opinion that on this specific issue the matter is remanded back to the Assessing Officer who shall examine whether any transfer order has been passed u/s.127 or not. If vide such transfer order number and transfer date the case of the assessee has been transferred u/s 127 then assessee s contention stands rejected. Addition u/s.56(2)(viia) read with Rule 11UA - main contentions raised by the ld. counsel that the deeming provision of section 56(2)(viia) would not apply on the facts of the present case as a transaction was between the same family/group companies and therefore it cannot be deemed that it was case of money laundering of unaccounted money or colorable transaction - HELD THAT - The purposive construction can only be resorted when there is any ambiguity in the section or there is contradiction in two provisions of the same statute in that case then legislative intent can be looked into. Here no such ambiguity or contradiction is there in the provision nor has been pointed out before us. The argument of the Ld. Counsel to see the rationale while enacting the provision and examine reasonableness cannot be accepted because a Court of law has nothing to do with the reasonable or unreasonableness of a provision of a statute except that it may hold what the Legislature has stated. If the language of the statute has assigned only one meaning then it must be taken to be meant and intended to that only what has been clearly expressed. Ergo when section 56(2)(viib) has clearly provided that if a person receives after 1st day of June 2010 any property being shares of a company and if the consideration is less than aggregate Fair Market Value of the property then the amount exceeding such Fair Market Value has to be brought within the taxing net. Thus even if some hardship may have been caused by invoking this provision it cannot be held that the deeming provision will not apply. Accordingly the contention raised by the ld. counsel is rejected. Contention of the ld. counsel that the aggregate value of all the 26 companies should be taken for the purpose of construe the aggregate Fair Market Value of the property to include all the 26 companies - We are unable to subscribe to such a view or the meaning of aggregate propagated before us. Section clearly states that any property being shares of a company . The word aggregate fair market value refers to the said property only i.e. the share of a company.There is no such exception or provision where a transaction relating to purchase of shares of several companies are undertaken then the fair market value of shares of all the companies needs to be aggregated or any kind of set-off of positive and negative figure is to be given i.e. where the FMV of a share is negative or FMV is lesser than the purchase value then same is to be adjusted with transaction of shares of a company where FMV is positive. In case where purchase consideration is more than FMV then clause (viia) is not be attracted because the statute has clearly provided that this section would be invoked only when difference between the purchase consideration of Fair Market Value of a share of a company is more than Rs.50, 000/-. Thus provisions would be applicable share-wise qua the same company. Besides this reasoning given by the Ld. CIT (A) on this point as discussed above is reasonable and plausible to which we also agree. Accordingly such a contention raised by the ld. counsel is rejected. Contention that Rule 11UA is not workable for the reason that the said Rule provides that the audited balance sheets as on the valuation date should be prepared by the auditor appointed u/s.224 of the Companies Act 1956 whereas w.e.f. 01.04.2013 Companies Act 2013 has been enacted for appointment of the auditors in Section 139; at the face of it cannot be entertained - Even if corresponding amendment brought in the Companies Act 2013 has not been brought in Rule 11U that does not mean that Rule 11U has become redundant or nonoperative. As highlighted by the ld. Assessing Officer there is no difference in wordings of earlier Section 224 and new Section 139 and in fact they are pari materia. In such a case the provision of the former enactment has to be construed in the same manner as re-enacted. Accordingly the finding of the ld. Assessing Officer and Ld. CIT (A) in this regard is confirmed. Calculation errors in the valuation done by the AO as per the Rule 11UA - Since calculation error in the figures taken by the AO for the valuation has been pointed out as per the detail working submitted before therefore we find it fit that same needs to be verified by the AO. Accordingly we direct the Assessing Officer to examine the calculation as submitted by the AO and correct the figures if any after verification and rectify the error and grant consequential relief. AO and Ld. CIT(A) have erred in law and on facts in not giving any deduction of various adjustment made by the auditors in the value of assets in his report/financial statements on the date of transfer i.e. 30th March 2018 - Here in this case as culled out from the record and also as pointed out by the ld. counsel before us that the balance sheet for all the companies was drawn on the valuation date wherein the auditor of the company have drawn the balance sheet of each companies on the valuation date which included notes annexed and forming part of the accounts and in such notes the auditors have qualified the value of assets by making various adjustments which does not represent the real value of the asset. The notes along with the balance sheets have also been incorporated by the Assessing Officer in his order. Determination of FMV of unquoted shares under sub Rule 2 of Rule 11UA the balance sheet of the company includes notes annexed thereto forming part of the accounts as drawn on the valuation date which has been audited by the auditor of the company. One of the key reasons for not allowing any adjustment in the assets and liabilities by the Assessing Officer and the Ld. CIT (A) are that the balance sheet figures of relevant items for which assessee has claimed adjustment as on 30th March 2015 and 31st March 2015 are the same that is no adjustment has been made in the value of assets in the final figure of assets and liabilities. It has been clarified by the ld. counsel that though for the purpose of accounting standard and disclosure requirement under the Companies Act the figures of assets have been given in the balance sheet which may be similar to as on 30th March 2015 and 31st March 2015 however on the valuation date the balance sheet prepared contains detail notes to the accounts wherein auditors have clearly clarified and qualified certain items which does not represent the value of the assets. In the case of the real estate/construction companies certain items like construction and development expenses finance cost advances made to the suppliers contractors unamortized amount of deferred expenditure preliminary expenses and certain other items which due to method of accounting under accounting standard or under the Income Tax Act are capitalized but eventually are deferred for a period of time which either becomes part of the P L account or are written off. The fair market value of the shares has to be seen qua the real value of the underlying asset. In our opinion if there are any items which has been capitalized in the value of the asset for a time being or there is any amortized cost loaded on the asset or with any charges etc. at the year-end then same cannot represent the real value of the asset on the date of transfer. Even the Rule recognises that the balance sheet drawn on the valuation date by the auditor includes notes to the accounts annexed thereto has to be taken for the purpose of determining the fair market value under Rule 11UA (2); and the book value of the assets has to be reduced by the amount which does not represent the value of the asset. If the auditor has qualified and has clearly stated that certain amount does not represent the value of the asset then such notes has to be read in the balance sheet as per the mandate of Rule 11UA. Thus we hold that principally the book value of the asset can be reduced by an amount which does not represent the value of the asset while determining the fair market value of the shares under Rule 11UA(2). During the course of the proceedings assessee has given the communication/letters whereby the NOIDA authority have stated that the amount deposited has been forfeited and based on such event auditors have reduced the amount from the value of the asset then it cannot be held that as on the date of valuation it represents the true value of the asset even though assessee still recognized as a part of an asset in the balance sheet hoping for some future recovery or does not want to give up its claim. Thus when the factum of money forfeited is not in dispute in our opinion then such forfeited amount of earnest money/advances given to the Government Authorities reflected as asset in the books cannot be treated as amount representing the value of asset. Thus same is directed to be reduced from the value of the asset and accordingly the contention raised by the assessee is allowed. Borrowing cost / interest cost incurred for purchase/development of flats and projects - CIT (A) has rejected the said contention on the ground that the provision of Rule 11UA talks about the Fair Market Value of the asset and not property or immovable assets and the FMV of the share is determined taking into consideration book value of the asset and the book value of the liabilities - HELD THAT - We are of the opinion that any borrowed or interest cost capitalized to the value of the asset cannot represent the real value of any asset for the purpose of determining the book value so as to determine the Fair Market Value of shares. Claim of bad debts - Even if the company has not written off the bad debt but auditors have found that it is not recoverable for many years and have reduced from the value of asset then same cannot be held to represent the value of the asset on the date of valuation Simply because the amount has not been written off as on 31st March 2015 it does not mean it is to treated as part of value of asset. Accordingly AO is directed to reduce the said amount from the value of the asset while valuing the book value of asset. Coming to the electrical material tiles marbles and hardware damaged but forming part of asset - We agree with the contention of the ld. counsel that such payment for EDC and fee etc. relating to such portion of land which has been compulsorily left for public at large but is not related to any open area roads parks hospital by the resident colony etc. then such charges does form part of the asset for the project and does not represent the value of the asset. Assessing Officer is however directed to verify the contention of the ld. counsel and only reduce the payment for EDC charges and fee etc. paid to the Government Authorities pertaining to land compulsorily earmarked for used of public at large and any other business investment or stock-in-trade shown should not be reduced. Ld. counsel had also claimed deduction for investment in land for green Valley Realtors Pvt. Ltd and impairment in the value of investment in project due to continued business recession but we are the opinion that same cannot be allowed as deduction because they are part and partial of the value of the asset; and moreover nowhere it has been pointed out how the impairment in the value of the asset in the project due to continued business recession has been quantified. It is purely hypothetical which cannot be allowed. Other claims which has been rejected by the Assessing Officer and Ld. CIT (A) have not been pressed before us like impairment in value of property due to adverse court s order and statutory liabilities therefore same are not considered and otherwise also the finding of the Ld. CIT (A) and Assessing Officer in this regard are based on certain factual facts which is confirmed. Accordingly same is rejected. Thus in view of our aforesaid finding Assessing Officer is directed to value the Fair Market Value of the shares based on the principle that the book value of the asset in the balance sheet has to be reduced by the amount which does not represent the value of any asset and thereafter determine the fair market value of shares and determine the income taxable u/s.56(2)(viia).Appeal of the assessee is partly allowed.

Summary

Issues Involved:
1. Jurisdiction of the Assessing Officer under Section 127/127(2) of the Income Tax Act.
2. Validity and applicability of Section 56(2)(viia) read with Rule 11UA for the addition of Rs. 135,11,67,220.
3. Calculation errors and adjustments in the valuation of shares as per Rule 11UA.

Detailed Analysis:

1. Jurisdiction of the Assessing Officer under Section 127/127(2) of the Income Tax Act:
The assessee challenged the jurisdiction of the Assessing Officer (AO) on the grounds that no valid transfer order under Section 127 was passed for transferring jurisdiction from Central Circle-16/20 to ITO Ward-21(1), New Delhi. The assessee argued that Section 127(2)(a) mandates a reasoned order for such transfers, which was not complied with. The Revenue countered that the AO had territorial jurisdiction and cited the assessee’s participation in assessment proceedings without objection. The Tribunal noted that Section 127 mandates an order for transferring cases between AOs not subordinate to the same authority and remanded the matter to the AO to verify if such an order was passed.

2. Validity and applicability of Section 56(2)(viia) read with Rule 11UA for the addition of Rs. 135,11,67,220:
The assessee contended that the addition under Section 56(2)(viia) was not applicable as the transactions were within the same family-owned group companies, arguing that such transactions do not involve unaccounted money. The Tribunal rejected this contention, stating that the language of the statute is clear and unambiguous, and the provision applies regardless of the relationship between the parties involved. The Tribunal emphasized that the deeming provision must be given strict interpretation and cannot be circumvented based on the nature of the transaction.

The assessee also argued that the aggregate fair market value of all 26 companies should be considered, including negative valuations, which would result in no taxable amount. The Tribunal disagreed, stating that Section 56(2)(viia) applies to each share of a company individually and not cumulatively across multiple companies. The Tribunal upheld the AO's method of calculating the fair market value for each company separately.

3. Calculation errors and adjustments in the valuation of shares as per Rule 11UA:
The assessee identified calculation errors in the AO's valuation, amounting to Rs. 10,56,92,728, and provided detailed workings for correction. The Tribunal directed the AO to verify and correct these calculations.

The assessee also sought adjustments for various items not representing the true value of assets, such as forfeited earnest money, capitalized interest, bad debts, and damaged materials. The Tribunal held that adjustments are permissible under Rule 11UA for items that do not represent the real value of assets. The Tribunal directed the AO to reduce the value of assets by these amounts, provided they are substantiated and verified.

Specifically:
- Forfeited Earnest Money/Advances: The Tribunal allowed adjustments for forfeited amounts, noting that they do not represent the value of assets.
- Capitalized Interest: The Tribunal agreed that capitalized interest should be excluded from the asset value as it inflates the value artificially.
- Bad Debts: The Tribunal allowed adjustments for bad debts not recoverable as on the valuation date.
- Damaged Materials: The Tribunal directed the AO to reduce the value of assets by the cost of damaged materials if substantiated.
- Stock-in-Trade and Business Investments: The Tribunal allowed adjustments for EDC and fee payments related to land compulsorily left for public use but required verification by the AO.

The Tribunal rejected claims for impairment in asset value due to business recession and other unsubstantiated adjustments.

Conclusion:
The Tribunal partly allowed the appeal, directing the AO to verify and correct calculation errors and to make appropriate adjustments to the value of assets as per Rule 11UA, thereby determining the correct fair market value of shares and the resultant taxable income under Section 56(2)(viia). The jurisdictional issue was remanded to the AO for verification of the transfer order under Section 127.