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2018 (2) TMI 1693 - AT - Income TaxDeemed income u/s 56(2) - consideration for issue of shares that exceeds the face value of such shares - redeemable non-cumulative preference shares (RNCPS) - fair market value - Liquidity crunch leading to default in contractual obligation by the assessee in the future years - Held that - The argument of the assessee that RNCPS is a quasi-debt and that it was not the intention of the legislature to bring such instruments within the ambit of this Section, is devoid of merit. - RNCPS cannot be excluded from the ambit of Section 56(2)(viib) of the Act. When the assessee s outflow by way of dividend is 0.1 per cent on RNCPS, the requirement of having huge cash inflows does not arise specifically when the assessee is an investment company. The contention of the assessee that the current market value of its investments in equity shares of M/s.Manga Fincorp Ltd. is ₹ 595.76 Crores and that he can, any day sell these investment and redeem the preference shares amounting to ₹ 41 Crores only, has force and the conclusion of the Assessing Officer on the issue of liquidity, possible cash crunch resulting in reduction of credit rating etc. is wrong on facts and hence devoid of merit. Thus this finding of the Assessing Officer and arguments of the ld. DR, is rejected. AO has taken contradictory stand on this issue. On the one hand he held that the assessee is a possible defaulter and on the other hand determined the premium chargeable on RCPS at ₹ 1,270/- per share of ₹ 10/-. There is no gain saying that a defaulter cannot command a premium on its shares. In fact from an investors perspective, no investment would be made in such cases. In this case an unrelated 3rd partly also invested. It can be assumed that such investments are done after due diligence. Hence this contention of the assessee is accepted. Whether while determining the rate of return Income Tax payable has to be factored or not? - Investor, when he has to make a choice as to whether he should invest in a debt instrument or in equity shares, the tax factor is necessarily considered, as what is crucial is the take home return on investment. Growth in value of investments, safety and other factors are also the basis of decision making. Dividend on equity shares does not attract any tax and whereas interest on debt instruments and even interest on fixed deposits, do attract Income Tax. Thus, the arguments that Income Tax should not be factored while considering the rate of return from debt instruments while comparing the same with the rate of return on equity instruments is devoid of merit. In our view, tax has to be factored while determining the net rate of return on investments. Whether home loan interest rate has to be taken for the purpose of bench marking, we are of the view that it would not be correct to do so on the facts of this case. Home loans can be given by Banks and other NBFCs which are in the business of giving loans and advances and which have taken regulatory approvals to do so. Home loans are generally secured loans. A choice of investment can be a fixed deposit or bonds issued by the Government or the Reserve Bank of India or debentures issued by various companies, when the investor seeks to invest in debt instruments. In equity shares or preference shares etc. in case he chooses to invest in equity. Thus taking home loan interest rates for the purpose of bench marking, in our view is highly erroneous as the investor has no choice or possibility of advancing housing loan. Rate of return that has to be bench marked in this case - the discount factor arrived at by the Assessing Officer, in our view is not based on relevant material. The objections of the Assessing Officer to valuers report are devoid of merit as pointed out by us in the earlier paragraphs of this order. The ld. CIT(A) s view is an ad-hoc view and has to be necessarily rejected. We also give weightage to the fact that an unrelated independent investor has invested in these RNCPS on the terms and conditions, at this Fair Market Value of ₹ 2,000/- per share. Thus this rate of ₹ 2,000/- per share is the Arms Length Price, on the facts of this case. Hence, we have to hold that these RNCPS, were issued at a fair market value. Hence we uphold the fair market value determined by the valuer and vacate the valuation arrived at by the Assessing Officer as well as the ld. CIT(A). Thus the addition made u/s 56(2)(viib). Disallowance u/s 14A - Held that - AO has recorded a specific finding that he is not satisfied with the correctness of the claim of the assessee on the disallowance u/s 14A of the Act. Thus, this argument of the assessee that no satisfaction is recorded by the Assessing Officer in not factually correct. Hence this argument of the ld. Counsel for the assessee is rejected. We find that the ld. CIT(A) has set aside the issue of qualification of disallowance u/s 14A to the Assessing Officer, with certain directions. The Ld. CIT(A) has no power to set aside any issue or the appeal itself after the amendment to Section 251 of the Act, w.e.f. 01/06/2001. In any event, the issue has to be considered afresh by the Assessing Officer as all relevant factors have not been considered as pointed out by the ld. CIT(A). No expenditure was allowed against earning of interest income.
Issues Involved:
1. Applicability of Section 56(2)(viib) of the Income Tax Act, 1961 to Redeemable Non-Cumulative Preference Shares (RNCPS). 2. Validity of the valuation report provided by the assessee. 3. Determination of the fair market value of RNCPS. 4. Disallowance under Section 14A of the Income Tax Act, 1961. Issue-wise Detailed Analysis: 1. Applicability of Section 56(2)(viib) of the Income Tax Act, 1961 to RNCPS: The assessee argued that RNCPS are quasi-debt instruments and not equity shares, hence Section 56(2)(viib) should not apply. The Tribunal held that the term "shares" in Section 56(2)(viib) includes all types of shares, including preference shares. The argument that RNCPS should be excluded from the ambit of this section was rejected. The Tribunal concluded that RNCPS fall within the scope of Section 56(2)(viib) of the Act. 2. Validity of the Valuation Report Provided by the Assessee: The assessee contended that the valuation report by a Chartered Accountant should not be interfered with by the Assessing Officer (AO). The Tribunal referred to the Supreme Court's decision in Duncans Industries Ltd. vs. State of U.P. and Ors, stating that if the valuation is not based on relevant material, the adjudicating authority can interfere. The Tribunal found that the AO has the right and duty to examine the valuation report and adjudicate upon all aspects affecting the income of the assessee. The Tribunal rejected the argument that the AO cannot interfere with the valuation done by an expert. 3. Determination of the Fair Market Value of RNCPS: The Tribunal considered the differences between the assessee and the Revenue on the determination of the fair market value of RNCPS. The Tribunal found that the AO did not consider the market value of investments held by the assessee, which had significantly grown. The Tribunal rejected the AO's conclusions regarding the liquidity crunch and potential default by the assessee as they were based on assumptions and not facts. The Tribunal also rejected the AO's use of home loan interest rates as a benchmark for the rate of return, stating that such rates are not relevant for an investor's perspective. The Tribunal upheld the valuer's decision to use a 10% discount factor, as it was based on proper comparables and relevant material. The Tribunal concluded that the RNCPS were issued at a fair market value of ?2,000 per share and vacated the valuation determined by the AO and the CIT(A). 4. Disallowance under Section 14A of the Income Tax Act, 1961: The Tribunal found that the AO recorded a specific finding of dissatisfaction with the assessee's claim on the disallowance under Section 14A. The Tribunal noted that the CIT(A) had set aside the issue to the AO with certain directions, which was beyond his powers after the amendment to Section 251 of the Act. The Tribunal set aside the issue to the AO for fresh adjudication de novo, in accordance with the law, without being influenced by the CIT(A)'s directions. Conclusion: The Tribunal allowed the appeal of the assessee in part and dismissed the appeal of the revenue. The addition of ?14,64,90,950 under Section 56(2)(viib) was deleted, and the issue of disallowance under Section 14A was remanded to the AO for fresh consideration.
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