2024 (7) TMI 393 - AT - Income Tax

Disallowance u/s 56(2)(viib) - shares have been allotted on premium on the basis of valuation report which was not supported by the documentary evidences -assessee opted for valuation as per the DCF method and the auditor arrived at the fair market value of Rs. 735 per share - CIT(A) deleted addition - HELD THAT - As per the provisions of section 56(2)(viib) of the Act, if the consideration received for the issue of shares of a company in which the public is not substantially interested exceeds the fair value of such shares, the aggregate consideration as exceeds the fair market value shall be chargeable to income tax under the head income from other sources . AO neither accepted the valuation report as furnished by the assessee to arrive at the fair market value of the shares on the basis of the DCF method nor pointed out any mistake in the valuation report so furnished by the assessee. Rather, in the present case, the AO treated the value of the premium on the shares at Rs. Nil without following any of the methods prescribed under the relevant Rules. It is evident from the record that the AO by comparing the financials of the assessee and Projected Summarised Financials in the valuation report noted that the assessee has in fact incurred loss during the assessment year 2018-19. As decided in Cinestaan Entertainment Pvt. Ltd., 2021 (3) TMI 239 - DELHI HIGH COURT that the valuer makes a forecast of approximation based on the potential value of business, while the underline facts and assumptions can undergo change over a period of time. The Hon ble High Court further held that valuation is not an exact science, and therefore cannot be done with arithmetic precision. Undoubtedly, section 56(2)(viib) of the Act is an anti-abuse provision brought in the statute to prevent the practice of transferring shares of specified company for no or inadequate consideration. As pertinent to note that in the present case, the shares of the assessee were subscribed not by a sister concern or any closely related person but by an outside investor. Further, as noted by the learned CIT(A), by no less than a corporate giant called Shapoorji Pallonji group, whose identity, creditworthiness, and genuineness are not doubted by the Revenue. Therefore, we find no infirmity in the impugned order passed by CIT(A) on this issue deleting the addition as share premium under section 56(2)(viib) of the Act. Accordingly, grounds raised in Revenue s appeal are dismissed. Disallowance made u/s 36(1)(iii) on a pro-rata basis - assessee has made new investments in subsidiary company and an investment in zero coupon redeemable non-convertible secured debentures of PNP Infra Projects Private Limited - As per the AO, the total interest-bearing funds constitute 79% of the total funds available with the assessee - HELD THAT - As per the assessee, it has recognised the profit arising out of the said transfer agreement in the statement of profit and loss account. From the perusal of the financial statement of the assessee, we find that the assessee made the declaration in respect of transfer of assets and liabilities to PNP Infra Projects Pvt. Ltd. It is evident from the record that after considering the declaration in financial statement of the assessee, the learned CIT(A) deleted the disallowance of interest expenditure under section 36(1)(iii) of the Act in respect of zero coupon debentures - we find no infirmity in the aforesaid findings of the CIT(A) as zero coupon debentures are not an investment by the assessee instead the same is a consideration for the transfer of assets and liabilities to PNP Infra Projects Pvt. Ltd. Accordingly, grounds raised in Revenue s appeal are dismissed. Interest-free deposit - Since zero coupon debenture received from PNP Infra Projects Pvt. Ltd. has already been found to be sale consideration instead of investment as claimed by the Revenue, therefore it is evident that the assessee had sufficient own funds for giving interest-free deposit to M/s Dharmatar Infrastructure Private Limited. We find that in CIT v/s Reliance Utilities Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT held that if funds are available with the assessee, which are sufficient to meet the investment, then presumption would arise that the investment is made out of funds so available with the assessee and, therefore, no disallowance under section 36(1)(iii) can be made. In view of the above, respectfully following the aforesaid decision, we direct the AO to delete the disallowance made under section 36(1)(iii) of the Act in respect of interest-free advances given to M/s Dharmatar Infrastructure Private Limited. Accordingly, grounds no. 1-3 raised in assessee s appeal are allowed.

Summary

Issues Involved:
1. Deletion of disallowance under section 56(2)(viib) of the Income Tax Act.
2. Disallowance under section 36(1)(iii) of the Income Tax Act.
3. Initiation of penalty proceedings under section 274 read with section 271(1)(c) of the Income Tax Act.
4. Levy of interest under section 234B and 234C of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance under Section 56(2)(viib) of the Income Tax Act:
The Revenue contested the deletion of disallowance made under section 56(2)(viib) concerning the premium received on the issue of shares. The assessee issued shares at a premium of Rs. 590 per share based on a valuation report using the Discounted Cash Flow (DCF) method. The Assessing Officer (AO) disallowed the premium, arguing the valuation was unsupported by documentary evidence and the company incurred losses in subsequent years.

The Commissioner of Income Tax (Appeals) [CIT(A)] allowed the appeal, noting the AO did not provide a valid reason for rejecting the DCF valuation method. The CIT(A) emphasized that the shares were issued to a reputable company, Shapoorji Pallonji Company Private Limited, which conducted due diligence before investing. The valuation report indicated a fair market value higher than the issued price, thus justifying the premium.

The Tribunal upheld the CIT(A)'s decision, noting the AO failed to follow any prescribed valuation methods and did not substantiate the rejection of the DCF method. The Tribunal cited the jurisdictional High Court's stance that valuation is not an exact science and cannot be done with arithmetic precision. Consequently, the Tribunal dismissed the Revenue's appeal on this issue.

2. Disallowance under Section 36(1)(iii) of the Income Tax Act:
The Revenue and the assessee both contested the disallowance of interest expenses under section 36(1)(iii). The AO disallowed interest on the grounds that borrowed funds were used for non-business purposes, including investments in zero-coupon debentures and advances to related parties.

The CIT(A) partially upheld the AO's decision, deleting the disallowance related to zero-coupon debentures but sustaining the disallowance for advances to a subsidiary. The CIT(A) reasoned that the investment in debentures was a consideration for asset transfer and not an investment per se. However, the CIT(A) applied a pro-rata disallowance for advances given to the subsidiary.

The Tribunal found that the assessee had sufficient own funds to cover the advances, citing the jurisdictional High Court's decision in Reliance Utilities & Power Ltd., which presumes that investments are made from available own funds if sufficient. The Tribunal directed the AO to delete the disallowance related to advances, thereby allowing the assessee's appeal on this issue.

3. Initiation of Penalty Proceedings under Section 274 read with Section 271(1)(c) of the Income Tax Act:
The assessee contested the initiation of penalty proceedings under section 274 read with section 271(1)(c). The Tribunal dismissed this ground as premature, indicating that it requires separate adjudication at an appropriate stage.

4. Levy of Interest under Section 234B and 234C of the Income Tax Act:
The assessee also contested the levy of interest under sections 234B and 234C. The Tribunal noted that this issue is consequential to the primary issues adjudicated and hence requires no separate adjudication.

Conclusion:
The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal, providing relief on the disallowance under section 36(1)(iii) and maintaining the deletion of disallowance under section 56(2)(viib). The initiation of penalty proceedings was deemed premature, and the levy of interest was considered consequential. The order was pronounced on 19/12/2023.