2019 (11) TMI 1355 - AT - Income Tax

Addition u/s 56(2)(viia) - valuation of purchasing the shares of foreign company from its directors - HELD THAT - In view of the fact that the Rule specifically provides that balance sheet as on the date of valuation i.e 11.2.2015 should be considered for valuation. Rule 11 U defines valuation data as the date on which the property or consideration as the case may be is received by the assessee. Since the shares were acquired by the assessee company on 11.2.2015 (being the valuation date) the valuation arrived at by the ld AO relying on financial statements as on 31.12.2014 deserves to be ignored and disregarded as not being in consonance with the Rule. Provisions of section 56(2)(viia) cannot apply to a foreign company as the relevant Rule 11U which defines balance sheet was not applicable to a foreign company. We find that the amendment in this regard was brought in Rule 11U with effect from 1.4.19 under Rule 11U(b)(ii) of the Rules. This amendment is only prospective in nature and cannot apply to the year under appeal. No method was prescribed earlier for valuation of shares of a foreign company i.e KNP Industries Pte Ltd prior to Asst Year 2019-20 which mischief was sought to be rectified by way of an amendment made in the rules under Rule 11U(b)(ii) of the Rules w.e.f. 1.4.19 having prospective applicability. As we have already held supra that the legislature had sought to rectify the mischief hitherto prevailing upto Asst Year 2018-19 in the statute / rule and had accordingly brought an amendment effective from Asst Year 2019-20 onwards to curb the loophole available in the Act / Rules hence we hold that the pre-amended definition of balance sheet cannot include foreign company therein. DR later filed the comments dated 26.6.2019 received from the AO before the bench. We have gone through the same and we find that the same is nothing but reiteration of the findings already recorded in the assessment order which had already been dealt by us hereinabove. DR that the issue needs to be remanded back to the file of ld CITA for fresh adjudication to decide in the light of pre-amended rule as it would tantamount to giving a premium to the revenue to improve its case which cannot be entertained by us as the tribunal exercises only appellate jurisdiction. We direct the ld AO to delete the addition made u/s 56(2)(viia) of the Act. Accordingly the grounds raised by the assessee are allowed.

Summary

Issues Involved:
1. Validity of assessment under Section 143(3) without issuing a notice under Section 143(2) after the filing of a revised return.
2. Addition of ?107,40,00,000/- under Section 56(2)(viia) of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Validity of Assessment under Section 143(3):
The assessee challenged the validity of the assessment framed under Section 143(3) on the grounds that no notice under Section 143(2) was issued/served after the filing of the revised return. Initially, the assessee raised multiple grounds and arguments, but eventually, the senior counsel chose to argue the issue on merits. Consequently, the grounds related to this issue were treated as not pressed.

2. Addition under Section 56(2)(viia):
The primary issue was the addition of ?107,40,00,000/- under Section 56(2)(viia) of the Act. The facts are as follows:

- The assessee, a company engaged in manufacturing and distribution of essential oils, filed its original return declaring a loss of ?44,457/-. A revised return was later filed with the same loss figure but included an omitted investment of ?1,36,00,000/- in KNP Industries Pte Ltd, Singapore.
- The shares were purchased from the company's directors at ?34 per share based on a valuation using the Discounted Cash Flow (DCF) method.
- The Assessing Officer (AO) questioned the valuation method and issued a show cause notice, proposing to reject the DCF valuation and adopt the book value per Rule 11UA.

Assessee's Arguments:
- The transaction was a restructuring to comply with legal requirements, not to create gains.
- The AO erred in disregarding the DCF valuation based on variations between actual performance and projections.
- Rule 11UA is not applicable to foreign company shares.
- The AO incorrectly invoked Rule 11UA(2) which applies to Section 56(2)(viib), not Section 56(2)(viia).

AO's Observations:
- The AO found discrepancies between the projections and actual performance, leading to a rejection of the DCF method.
- The AO adopted the book value per Rule 11UA, resulting in an addition of ?107,40,00,000/-.

Tribunal's Findings:
- The Tribunal noted that the shares were acquired to comply with RBI/FEMA regulations, not for gains.
- The DCF method is a recognized valuation method, and the independent valuer had considered all relevant factors.
- The AO's reliance on actual performance post-valuation date was incorrect.
- The Tribunal highlighted that the provisions of Rule 11UA and Section 56(2)(viia) were not applicable to foreign company shares before the amendment effective from April 1, 2019.
- The balance sheet used for valuation should be as on the valuation date and audited by an auditor appointed under the Indian Companies Act, which was not done by the AO.

Conclusion:
The Tribunal concluded that the rejection of the DCF method by the AO was improper. The valuation report by the independent valuer was accepted as just and fair. The Tribunal directed the AO to delete the addition of ?107,40,00,000/- under Section 56(2)(viia) of the Act, allowing the assessee's appeal.

Order Pronouncement:
The appeal of the assessee was allowed, and the order was pronounced in the open court on October 16, 2019.