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TMI Blog2018 (2) TMI 1693X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Assessing Officer on the issue of liquidity, possible cash crunch resulting in reduction of credit rating etc. is wrong on facts and hence devoid of merit. Thus this finding of the Assessing Officer and arguments of the ld. DR, is rejected. AO has taken contradictory stand on this issue. On the one hand he held that the assessee is a possible defaulter and on the other hand determined the premium chargeable on RCPS at ₹ 1,270/- per share of ₹ 10/-. There is no gain saying that a defaulter cannot command a premium on its shares. In fact from an investors perspective, no investment would be made in such cases. In this case an unrelated 3rd partly also invested. It can be assumed that such investments are done after due diligence. Hence this contention of the assessee is accepted. Whether while determining the rate of return Income Tax payable has to be factored or not? - Investor, when he has to make a choice as to whether he should invest in a debt instrument or in equity shares, the tax factor is necessarily considered, as what is crucial is the take home return on investment. Growth in value of investments, safety and other factors are also the basis of de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce u/s 14A of the Act. Thus, this argument of the assessee that no satisfaction is recorded by the Assessing Officer in not factually correct. Hence this argument of the ld. Counsel for the assessee is rejected. We find that the ld. CIT(A) has set aside the issue of qualification of disallowance u/s 14A to the Assessing Officer, with certain directions. The Ld. CIT(A) has no power to set aside any issue or the appeal itself after the amendment to Section 251 of the Act, w.e.f. 01/06/2001. In any event, the issue has to be considered afresh by the Assessing Officer as all relevant factors have not been considered as pointed out by the ld. CIT(A). No expenditure was allowed against earning of interest income. - I.T.A. No. 513/Kol/2017 And I.T.A. No. 963/Kol/2017 - - - Dated:- 30-11-2017 - Sri J. Sudhakar Reddy, Accountant Member Sri Aby T. Varkey, Judicial Member For the Assessee : Shri S.K. Tulsiyan, Advocate For the Revenue : Shri Md. Usman, CIT, DR ORDER Per J. Sudhakar Reddy :- This cross appeal is directed against the order of the ld. Commissioner of Income Tax (Appeals)-3, Kolkata (hereinafter the ld. CIT (A) ), passed u/s 250 of the Income Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is through dividend, which is in turn contingent on the performance of the companies in which the assessee has made investments. d) The valuer has erred in adopting discount rate of 10 per cent by taking post tax return of 9 per cent and pre-tax return of 12 to 13 per cent on debt instruments. The burden of dividend distribution tax is minimal on the assessee and the taxation rate in the hands of the assessee is required to be considered and not of the investor. e) The prime lending rate of housing finance companies may be taken as a bench mark and this has to be taken as the average return on preference shares. Thus, a discounted rate of 15 per cent should be applied. The Assessing Officer made an addition of ₹ 14,64,90,950/-, u/s 56(2)(viib) of the Income Tax Act, 1961. 2.1.1. The ld. Assessing Officer further held that the disallowance made by the assessee u/s 14A is inadequate. He computed the disallowance at ₹ 11,88,000/- as against ₹ 2.46 Lacs, disallowed by the assessee. Aggrieved the assessee carried the matter in appeal. 2.1.2 Before the ld. First Appellate Authority, the assessee submitted that no opportunity was given to it by the Assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ease in employment of the country. Thus, he submits that purposive and liberal interpretation has to be given to the Section and in cases where the company is to return the money it received by way of RNCPS, the Section itself should not be applied. 3.1. The second contention of the ld. Counsel for the assessee is that the statute read with the Rules provide that, the fair market value of the RNCPS should be supported by report from a Merchant Banker or an Accountant, who are experts in that field. He submits that the Chartered Accountant, who is an expert in the field of valuation of shares has given a detailed report and that the Assessing Officer, who is not an expert in the matter, cannot interfere and tamper with the fair market value as determined by the valuer. He contends that in case the Assessing Officer does not agree with the valuation made by the expert, the only alternative would be to refer the matter to an expert. For the proposition that the Assessing Officer cannot interfere with the valuation made by a valuer, who is an expert, he relied on the decision of the Hon ble Supreme Court in the case of Dr. Mrs. Renuka Datla Vs. Solvay Pharmaceutical (2004) 265 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operty etc. and cannot be compared with the outlook of an investor. He further submitted that housing loans are given at floating rates and the assesse has no chance of investing in housing loans as they are regulated by National Housing Bank and Reserve Bank of India. He argued that the rate of return on preference shares should be higher than the post tax return on debt instruments. He pointed out that the prevailing rate of return on debt instruments was 12 to 13 per cent pre tax and after factoring taxation the net rate of return would be 8.12 per cent to 8.78 per cent. He submitted that the assessee has issue RNCPS, which gives a rate of return in excess of 8.2 per cent to 8.78 per cent. He further pointed out that the floating rate on home loans is around 12 to 13 per cent and without prejudice to his arguments, he submitted that this rate may be taken and if tax is factored, the post rate return would be around 10.13 per cent and that this is the rate taken by the assessee. 3.3. The ld. Counsel for the assessee submitted that the Assessing Officer has wrongly rejected the valuation done by an independent accountant. He further submitted that the Assessing Officer has igno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o refer valuation of shares to another expert by the Assessing Officer for valuation. He submitted that when valuation report contains errors and ignores relevant facts, the Assessing Officer can interfere in the same. He submitted that the case-law relied upon by the assessee on this issue, in fact support this view. 5.1. The ld. DR submitted that the issue was regarding RNCPS, wherein the annual dividend payable is only 0.1 per cent of the face value. He submitted that this rate of return by way of annual dividend is ridiculously low and no prudent investor would make investment for such a return. He further submitted that the assumptions made by the valuer in his report are fundamentally wrong as it was assumed that there would be an assured cash flow in the future. He pointed out that this assumption is not based on facts, as the profit earned by the assessee demonstrates that it does not have an assured and ascertainable cash flow in the future. He relied on the observations of the Assessing Officer and submitted that the assessee would have cash flow issues in the future and such liquidity crunch would affect the credit rating of the assessee and consequently the valuation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade at market value, which was at Arms Length. 8. Rival contentions heard. On a careful consideration of the facts and circumstances of the case and a perusal of the papers on record, orders of the Authorities below as well as the case-law cited, we hold as follows:- 8.1. Section 56(2)(viib) of the Act, reads as follows:- (viib) Where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares: 8.2. Rule 11UA (1)(c)(c), reads as follows:- (c) the fair market value of unquoted shares and securities other than equity shares in a company which are not listed in any recognized stock exchange shall be estimated to be price it would fetch if sold in the open market on the valuation date and the assessee may obtain a report from a merchant banker or an accountant in respect of which such valuation. 9. A perusal of Section 56(2)(viib) of the Act, takes us to a conclusion that all types of shares are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an interfere with the same. In the case of Dr. Mrs. Renuka Datla Vs. Solvay Pharmaceutical (supra), relied upon by the ld. Counsel for the assessee, there is no finding that the Assessing Officer cannot interfere with the valuation done by the valuer. In this case valuation was done in a dispute between shareholders holding controlling interests and the minority interest and this valuation report was examined and found to be correct. The Court observed as follows:- We do not think that the valuation in the instant case runs counter to the principles laid down therein. As seen from enclosures 6.1 and 6.2 to the valuation report, the valuer had arrived at market based valuation in addition to the other modes of valuation and observed that the recommended value is the higher of the intrinsic value or the market based value. Thus, the petitioners had the benefit of higher valuation. The first principle laid down in the above decision has been kept in view. Moreover, the profit-earning method which has been referred to in the above decisions in the context of valuation of shares of a public limited company has also been applied, though future earnings based valuation has not been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r suits and proceedings mentioned in the memorandum of settlement shall stand dismissed as withdrawn. Accordingly, the SLPs are disposed of. No order as to costs. ( emphasis ours ) 9.1.2. The above shows that the valuation done by an expert was upheld on merits. A specific observation is made that the Principles of valuation have been followed and relevant material considered. Hence, this argument is rejected as devoid of merit. The contention of the ld. Counsel for the assessee that in case the Assessing Officer is not satisfied with the value determined by the expert valuer then the only option is to get it done by another expert valuer is also devoid of merit. The Assessing Officer can replace the irrelevant material, if any, considered by the valuer with relevant material and modified the value in a fictitious manner. Thus this argument is hereby rejected. In our view the Assessing Officer has not only a right but he is also duty bound to examine the valuation report evaluate it and record his findings on the same. Such finding should be based on relevant material and rational view taken in a judicious manner. 10. As far as the argument of the ld. Counsel for the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preference shares amounting to ₹ 41 Crores only, has force and the conclusion of the Assessing Officer on the issue of liquidity, possible cash crunch resulting in reduction of credit rating etc. is wrong on facts and hence devoid of merit. Thus this finding of the Assessing Officer and arguments of the ld. DR, is rejected. We also find that the Assessing Officer has taken contradictory stand on this issue. On the one hand he held that the assessee is a possible defaulter and on the other hand determined the premium chargeable on RCPS at ₹ 1,270/- per share of ₹ 10/-. There is no gain saying that a defaulter cannot command a premium on its shares. In fact from an investors perspective, no investment would be made in such cases. In this case an unrelated 3rd partly also invested. It can be assumed that such investments are done after due diligence. Hence this contention of the assessee is accepted. 12. This brings us to the issue as to whether while determining the rate of return Income Tax payable has to be factored or not. An investor, when he has to make a choice as to whether he should invest in a debt instrument or in equity shares, the tax factor is neces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14.1. In the case on hand, the Assessing Officer has not disputed the fact that on the facts of the case the assesse is entitled to issue RNCPS at a huge premium. The only dispute is the quantum of premium. The Assessing Officer was of the view that 15 per cent discount factor which gives a fair market value of ₹ 1285.41 per share be adopted and whereas the valuer determined the fair market value at ₹ 2,000/- per share by adopting 10 per cent discount factor. The ld. CIT(A), in an arbitrary manner placed the discount factor at 12.5 per cent. The ld. CIT(A), has not given any material or reason for arriving at this rate of discount. In our view the conclusion of the valuer that 10 per cent discount factor is appropriate in the case on hand is upheld as it is based on proper comparable for bench marking. 14.1.1. As already discussed the discount factor arrived at by the Assessing Officer, in our view is not based on relevant material. The objections of the Assessing Officer to valuers report are devoid of merit as pointed out by us in the earlier paragraphs of this order. The ld. CIT(A) s view is an ad-hoc view and has to be necessarily rejected. We also give weightag ..... X X X X Extracts X X X X X X X X Extracts X X X X
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