2019 (7) TMI 920 - AT - Income Tax

Addition of share premium u/s addition 56(2)(viib) r.w. Rule 11UA - Income from other sources - excess amount received by the assessee over and above the FMV of preference shares - HELD THAT - As gone through the provisions of section 56(2)(viib) and it dosen t make any distinction between equity shares and preference shares and therefore, the first contention of the AR cannot be accepted. Regarding the valuation of the preference shares, the valuation should be determined as per Rule 11UA(1)(c) which requires the assessee to obtain a report from a merchant banker or a Chartered Accountant to determine the price which preference shares will fetch if sold in the open market on the valuation date. Revenue has not disputed the adoption of the NAV method by the assessee. Therefore, once the NAV method has been accepted, what has to be determined is the valuation of the preference shares based on net asset value as on the date of issue of such preference shares. The valuation date thus has to be the date of issuance of preference shares and not as per the last balance sheet date as has been adopted currently. The net asset value is determined by applying the formula where difference between the total assets and total liabilities as on the date of issuance of shares is divided by total amount of paid up capital of the company and multiplied by paid up value of new shares. In the instant case, given that there are existing equity and preference share capital, paid capital in respect of both of these category of shares shall be considered for determining total paid up capital of the company. In the result, we set-aside the matter to the file of the AO who shall determine the value of the preference shares as per the NAV method based on formula discussed above and such valuation has to be determined as on the date of issuance of such preference shares. Rate of depreciation - SLM or WDV - housing colony for accommodation of staff involved in the power project - HELD THAT - The rates of depreciation on all such assets of the undertaking engaged in the power projects thus have to be computed on SLM basis and the assessee cannot pick and choose certain assets and claim depreciation on SLM and on other assets, claim depreciation on WDV basis. The housing colony is very much part of the business assets of the undertaking involved in the power projects and thus, depreciation thereon has to be computed on SLM Basis. As far as rate of depreciation is concerned, the housing colony will fall in the residuary category (vi)- others under clause (d) Buildings and civil engineering works of permanent nature and the rate of depreciation which has been prescribed is 3.02%. In light of the same, the AO is directed to compute the depreciation on housing colony at the rate of 3.02% on SLM Basis. In the result, the ground of appeal no. 4 is dismissed and ground no. 5 is allowed.

Summary

Issues Involved:
1. Addition of ?99,22,000/- for issuing preference shares at a price higher than fair market value.
2. Determination of Net Asset Value (NAV) for preference shares.
3. Validity of Chartered Accountant's valuation report.
4. Disallowance of ?2,85,835/- depreciation claimed on residential building.
5. Appropriate method and rate for calculating depreciation on residential building.

Detailed Analysis:

1. Addition of ?99,22,000/- for Issuing Preference Shares at a Price Higher than Fair Market Value:
The assessee issued 2,00,000 preference shares at ?100 each with a premium of ?100 per share. The Assessing Officer (AO) determined the fair market value at ?150.39 per share, invoking Section 56(2)(viib) of the Income-tax Act read with Rule 11UA. The excess amount of ?99,22,000/- was taxed as "Income from other sources." The CIT(A) upheld this addition, noting that the AO correctly excluded the preference share capital from the NAV calculation.

2. Determination of Net Asset Value (NAV) for Preference Shares:
The CIT(A) and AO valued the shares on an NAV basis but differed from the Chartered Accountant's valuation, which included a 3-4% discount. The CIT(A) emphasized that preferred shares are akin to debt, reducing equity value to common shareholders. The Tribunal noted that the NAV method was accepted, but the valuation date should be the issuance date of the preference shares, not the last balance sheet date. The case was remanded to the AO to re-determine the NAV based on this principle.

3. Validity of Chartered Accountant's Valuation Report:
The Chartered Accountant's report valued the preference shares at ?200/- each, using a combination of redemption value and conversion rights. The Tribunal highlighted that the valuation should consider both redemption after 12 years and conversion into equity shares. The Tribunal directed the AO to re-evaluate the valuation using the NAV method as of the issuance date, considering both equity and preference share capital.

4. Disallowance of ?2,85,835/- Depreciation Claimed on Residential Building:
The assessee claimed depreciation on a residential building at 5% on a Written Down Value (WDV) basis, while the AO allowed only 3.02% on a Straight Line Method (SLM) basis. The Tribunal noted that assets of an undertaking engaged in power generation should follow SLM as per Section 32(1)(i). The residential building, being part of the business assets, should also follow SLM at the prescribed rate of 3.02%.

5. Appropriate Method and Rate for Calculating Depreciation on Residential Building:
The Tribunal clarified that the housing colony falls under the residuary category for buildings and civil engineering works of permanent nature, thus attracting a depreciation rate of 3.02% on an SLM basis. The AO was directed to compute depreciation accordingly.

Conclusion:
The Tribunal set aside the matter of preference share valuation to the AO for re-determination based on the NAV method as of the issuance date. The appeal regarding the depreciation rate was partly allowed, directing the AO to apply a 3.02% rate on an SLM basis for the residential building. The other grounds of appeal were dismissed. The order was pronounced on 02/05/2019.