2022 (9) TMI 929 - AT - Income Tax

Addition u/s. 56(2)(viib) - Whether method adopted for determination of FMV of the equity share by the assessee is not as per the method prescribed under Rule 11UA of the I.T.Rules? - HELD THAT - Qualifications in the report by the auditors while valuing the shares it can be safely said that it is only a piece of paper with no evidentiary value - This is a colorable device applied by the assessee for inflating the value of its share. The valuation of the company in our opinion should be done based on the basis of fundamentals and economic conditions of the assessee and must be in accordance with the method prescribed for that purpose. It should be independently done as the valuation of holding company shares done on the basis of DCF method cannot be yardstick to determine the valuation of shares of assessee company. Valuation made by the assessee of NAV method is not in accordance with law. Neither market value of shares of the sister concern had been taken into consideration nor the valuation of sister concerns had been independently examined by the ld.CIT(A). Hence the same is required to be rejected. Therefore the approach of ld.CIT(A) is incorrect and contrary to law laid down in the case of CIT vs. Durga Prasad More 1971 (8) TMI 17 - SUPREME COURT - It cannot be said that no fault was found in such valuation report by the AO or that the AO has not found any defect in the valuation of shares arrived at by the assessee. We find the CIT(A) in the instant case without properly understanding the facts of the case was merely carried away by the submissions of the assessee and deleted the additions which in our opinion is not justified under the facts and circumstances of the instant case. The various decisions relied on by the CIT(A) are not applicable in the facts of the present case. Since the AO has given valid reasons while making the addition therefore the order of CIT(A) which is contrary to facts cannot be upheld. We therefore set aside the order of the CIT(A) on this issue and the grounds raised by the revenue is allowed. Loss claimed by the assessee - Whether no commercial expediency for charging lower interest rate on loans advanced than the rate at which funds are borrowed? - HELD THAT - In the instant case disallowed the interest expenses on the ground that assessee has borrowed funds at a higher rate and used the same for advancing loans and making investment in its subsidiary company and charged lesser rate of interest. CIT(A) deleted the disallowance the reasons of which have already been reproduced in the preceding paragraph - assessee that the interest paid and received are at the same rate i.e at the @12% p.a and the difference arose due to the holding period only. It is the submission of assessee that the funds are kept in fixed deposits till they are advanced as ICD s. Interest income from fixed deposits are also offered to tax. In our opinion the matter requires a revisit to the file of the AO to verify as to whether the assessee has charged the interest at the same rate at which it has obtained loans. If the interest paid on borrowed funds and charged from the subsidiary are at the same rate and the difference is only due to the period of holding only then the AO is directed to allow such interest expenditure from such interest income. The ground raised by the revenue is accordingly allowed for statistical purposes.

Summary

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Deletion of addition made under Section 56(2)(viib) of the Income Tax Act.
3. Allowance of loss claimed by the assessee due to interest rate discrepancy on loans.

Issue-wise Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:
The appeal filed by the revenue had a delay of one day. The revenue filed a condonation application explaining the reasons for the delay. After considering the contents of the condonation application and hearing both sides, the delay in filing the appeal was condoned.

2. Deletion of Addition Made Under Section 56(2)(viib) of the Income Tax Act:
The primary issue was whether the CIT(A) was right in deleting the addition made under Section 56(2)(viib) of the Act. The AO observed that the assessee received a share premium of Rs.23,98,74,430/- and questioned the valuation method used for determining the Fair Market Value (FMV) of the equity shares. The assessee used the Discounted Cash Flow (DCF) method for valuation, which the AO rejected, opting instead for the Net Asset Value (NAV) method, leading to an addition of Rs.23,94,89,308/- to the total income.

The CIT(A) deleted the addition, stating:
- The AO did not find any defects in the DCF method used by the assessee, except for the disclaimers by the Chartered Accountant.
- The DCF method is one of the prescribed methods under Rule 11UA, and the assessee is allowed to choose this method.
- The AO's valuation date was incorrect, and the valuation should be based on the date of allotment of shares.
- The AO's rejection of the DCF method was not justified as the projections were based on reasonable assumptions.

The Tribunal, however, found that:
- The AO had valid reasons for rejecting the DCF method as the valuation was based on mere projections without any scientific basis, especially since the company had not started its business operations.
- The qualifications in the auditor's report indicated that the valuation was not reliable.
- The CIT(A) did not properly consider the facts and was carried away by the assessee's submissions.

Thus, the Tribunal set aside the order of the CIT(A) and restored the addition made by the AO.

3. Allowance of Loss Claimed by the Assessee Due to Interest Rate Discrepancy on Loans:
The AO disallowed the interest expenses claimed by the assessee on the grounds that the interest charged on loans to the subsidiary was lower than the interest paid on borrowed funds. The CIT(A) allowed the claim, citing commercial expediency and referencing the Supreme Court decision in S.A. Builders Ltd.

The Tribunal found that:
- The matter required verification to determine if the interest rates on borrowed funds and loans to the subsidiary were the same.
- If the interest rates were the same and the discrepancy was due to the holding period, the AO should allow the interest expenditure.

Thus, the Tribunal remanded the matter back to the AO for verification and allowed the ground raised by the revenue for statistical purposes.

Conclusion:
The Tribunal allowed the appeal filed by the revenue for statistical purposes, setting aside the order of the CIT(A) on the addition made under Section 56(2)(viib) and remanding the issue of interest rate discrepancy back to the AO for verification.