2022 (9) TMI 102 - AT - Income Tax

Deemed dividend u/s.2(22)(e) - addition made towards the premium on redemption of the preference shares, valuation methodology of preference shares - Determination of fair market value - Scope of Rule 11UA(1)(c)(b) - HELD THAT - A combined reading of the said rule with rule 11UA(1)(c)(c) can be taken to mean that for the purpose of valuation of preference shares also the immovable properties to be considered at guideline value since the value based on the guidance note represents the economic and commercial value of the preference shares on the date of valuation. In the given case the assessee has obtained the valuation report from the Chartered Accountant (CA) which is placed on record in page 198 of the paper book thereby complying with the requirement of the rule (1)(c)(c). In the certificate, for the purpose valuation of Equity and Preference shares, the guideline value of the land and building is considered by the CA which in our view is correct. In the light of these discussions, we see no fault in the approach of the assessee in considering the guideline value of land building to arrive the fair value of preference shares that it would fetch in the open market on the valuation date and arriving at the premium value for redemption of the preference shares. Method of valuation adopted as NAV is not disputed as the TPO has also applied the same method and impugned addition has arisen only due to the value of land and building considered by the TPO for arriving at the NAV. Considering the guideline value of land and building for the purpose of valuation of preference shares under NAV method is the right. Therefore the addition made by the TPO computing the differential premium basis the book value of assets is not sustainable. Since we have held that there cannot be any addition made towards the premium on redemption of the preference shares, the addition made by the CIT(Appeals) considering the same as deemed dividend u/s.2(22)(e) also will not survive. The appeal for the assessment year 2010-11 is allowed in favour of the assessee. Excess premium paid to APFI by the assessee on redemption of preference shares cannot be taxed u/s.2(22)(d) or 2(22)(d) - AY 2009-10 - As sub-clause (d) of sec 2(22) is applicable when there is any distribution by the company to its shareholders by a company on the reduction of its capital and in order to attract clause (d), the payment should be by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares. In the given case, the payment made by the assessee towards premium of redemption of preference shares is neither towards reduction of share capital nor towards advance or loan. We are therefore in agreement with the various arguments put forth by the ld AR in this regard. We are of the considered view that the excess premium paid to APFI by the assessee on redemption of preference shares cannot be taxed u/s.2(22)(d) or 2(22)(d) and delete the addition made by the CIT(Appeals). Appeal of assessee allowed.

Summary

Issues Involved:

1. Levy of Dividend Distribution Tax (DDT) on share redemption.
2. Valuation methodology of preference shares.
3. Consideration for redemption as 'deemed dividend'.
4. Applicability of section 115O(6).
5. Alternative conclusion of deemed dividend under section 2(22)(e).
6. Jurisdiction of reassessment proceedings under section 147.

Detailed Analysis:

1. Levy of Dividend Distribution Tax (DDT) on Share Redemption:

The assessee argued that the premium paid on the redemption of preference shares should not be subjected to DDT. The CIT(Appeals) had proposed to treat the premium as deemed dividend, thus attracting DDT. The Tribunal, however, concluded that the premium on redemption should not be treated as deemed dividend under section 2(22)(e) and thus should not attract DDT.

2. Valuation Methodology of Preference Shares:

The primary contention was the method used for valuing the preference shares. The TPO had accepted the NAV method but reworked the redemption value based on the book value of assets, leading to an adjustment. The Tribunal held that the guideline value of land and building should be considered for the valuation of preference shares under the NAV method. The Tribunal found the assessee's approach of considering the guideline value correct, thereby invalidating the TPO's adjustment.

3. Consideration for Redemption as 'Deemed Dividend':

The CIT(Appeals) had treated the premium on redemption of preference shares as deemed dividend under section 2(22). The Tribunal disagreed, stating that the excess premium paid on redemption does not constitute deemed dividend under section 2(22)(e) or 2(22)(d). The Tribunal emphasized that the payment was not an advance or loan, nor was it a reduction of share capital, thus it should not be taxed as deemed dividend.

4. Applicability of Section 115O(6):

The assessee claimed exemption from DDT under section 115O(6) as it was engaged in developing, operating, and maintaining a SEZ. The Tribunal did not specifically address this issue in detail, as the primary grounds were decided in favor of the assessee, making this argument academic.

5. Alternative Conclusion of Deemed Dividend under Section 2(22)(e):

The Tribunal addressed the CIT(Appeals)'s alternative conclusion that the premium on redemption could be considered deemed dividend under section 2(22)(e). The Tribunal found that the payment was not an advance or loan and was made from securities premium, which is not part of accumulated profits. Thus, it should not be treated as deemed dividend under section 2(22)(e).

6. Jurisdiction of Reassessment Proceedings under Section 147:

For AY 2009-10, the reassessment was challenged on the grounds of jurisdiction under section 147. The AO had reopened the assessment based on the TPO's order for AY 2010-11. The Tribunal found that the reassessment was not justified as the valuation method adopted by the assessee was correct, and thus, the addition made by the AO was not sustainable.

Conclusion:

The Tribunal ruled in favor of the assessee for both AY 2009-10 and AY 2010-11. It held that the valuation of preference shares should consider the guideline value of land and building, and the premium on redemption of preference shares should not be treated as deemed dividend. Consequently, the additions made by the TPO and CIT(Appeals) were deleted, and the appeals were allowed in favor of the assessee.