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TMI Blog2018 (5) TMI 503X X X X Extracts X X X X X X X X Extracts X X X X ..... our opinion the order of the FAA does not suffer from any factual or legal infirmity. As in the earlier assessment year, the AO had, while completing scrutiny assessment, accepted the valuation of same shares at ₹ 25, 500/-. But, during the year under appeal why did he not follow the earlier year’s order is not known. As per the basic principles of taxation, the AO's are not governed by the principles of res judicata and every assessment is a fresh assessment. But, it is also equally accepted that the AO's should not deviate from the earlier years’ decisions without assigning any concrete and justifiable reasons. Tax determination cannot be left to whims and fancies of a person. Thus AO should have given some reasons for not accepting the valuation for the year under consideration whereas for the earlier year he had accepted the valuation. It is a clear violation of principle of consistency. - Decided in favour of assessee Expenditure incurred for maintaining corporate entity - Disallowance as business expenses - as per AO assessee had not carried out any business activity for the year under appeal - Held that:- While making the disallowance he forgot the basic fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee, the AO held that there was no business activity carried out during the year, that the premium received by the assessee was disproportionate to the business activities, that the purported nature of business was not undertaken, that the profit projections even for the first year were astronomical, that the applicability of DCF method was for limited period of only five years, that it had made projection of profits without any calculation or cash flow for 15 years from the date of valuation, that the method adopted by the assessee was deeply flawed, that the valuers had not done any germination of historical financial statement/prospective results to make an unbiased evaluation, that the projections made by the assessee had been incorporated in toto in the valuation report, that the valuer had not applied his mind independently. While completing the assessment, the AO adopted the NAV method and valued one share at ₹ 26. 4 as against ₹ 25, 749/-for a township project on 1000 acres. He determined the value of the project at ₹ 4. 70crores and made an addition of ₹ 4. 99 crores, under the head excess premium received. 3 . Aggrieved by the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of business activities. 3.1.1. The FAA, after considering the submissions of the assessee and the assessment order, held that the AO had made the addition on the ground that no business activity was carried out during the year under appeal, that he had held that NAV method was preferable to DCF method. He referred to the provisions of section 56(viib)of the Act and Rule 11UA (2) (b) and held that the assessee had liberty to exercise the option of valuing the shares as per the DCF method, that during the AY. 2012-13, the assessee had issued 17, 801 shares at a premium of ₹ 25, 550/- to SPL, that while completing the assessment u/s. 143(3)of the Act, the AO had accepted the valuation, that the shares in that year were valued as per DCF method, that the AO had verified the valuation report. Finally, he held that as per the provisions of Rule 11UA of the Rules the selection of the method for valuation of shares was at the option of the assessee, that the AO had no right to deviate from the method selected by the assessee, that there was no justification for making the addition of ₹ 4. 99 crores to the income of the assessee. 4. Before us, the Departmental Represen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alue of the shares : Provided that this clause shall not apply where the consideration for issue of shares is received- (i) by a venture capital undertaking from a venture capital company or a venture capital fund ; or(ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf. Explanation For the purposes of this clause, - ( a) the fair market value of the shares shall be the value- ( i) as may be determined in accordance with such method as may be prescribed ; as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher ( b) venture capital company , venture capital fund and venture capital undertaking shall have the meanings respectively assigned to them in clause (a), clause (b) and clause ( c) of Explanation to clause (23FB) of section 10 ; Rule 11UA For the purposes of section 56 of the Act, the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. 1. In our opinion, the valuation has been left to the discretion of the assessee. In other words the AO cannot adopt a method of his choice. In the case under consideration the whole controversy has arisen because of the AO has rejected the method adopted by the assessee. We find that in the case of Medplus Health Services P. Ltd. (supra)similar issue was deliberated upon and decided. We are reproducing the relevant portion of the order which reads as under: 3. During the assessment proceedings u/s 143(3) of the Act, AO observed that the assessee company is a wholesale supplier of goods mainly to its group company M/s. Optival Health Solutions P. Ltd. , which in turn is engaged in retail business of pharmaceuticals and general goods and further that both the companies have more than 67% common shareholdings. It was observed that during the F. Y. 2010-11, a major restructuring of the group had taken place wherein almost all the shares of M/s. Optival Health Solutions P. Ltd. , were taken-over by the assessee company and the wholesale operations from the assessee were taken-over by M/s. Optival Health Solutions P. Ltd. , resulting in the assessee company becoming the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fact as to what value the property would fetch if sold in the open market and since in the assessee's own case there are certain transactions to clearly establish market value of the shares sold, resorting to estimation/calculation of market value of the unlisted shares as per the formula under Rule 11UA of I. T. Rules does not arise. He observed that as per the computation of fair market value under Rule 11UA(c)(b) of I. T. Rules, the value of M/s. Optival Health Solutions P. Ltd. , was (-) ₹ 64. 48 ps (i. e. , the value of M/s. Optival share is at negative figure) whereas, assessee has paid Re. 1 per share and the basis for adopting Re. 1 per share by the assessee is not provided. He further observed that one of the shareholders Mr. Kalyana Bhaskara sold his shares in Optival to Mr. Madhukar Reddy at ₹ 63. 79 ps per share and the basis for adopting this rate is also not known but since it was much more than what is claimed by the assessee at Re. 1 per share, he held that it was so shown to defraud the Revenue by transacting at abnormally low price. He therefore, held that the provision of deemed gift under section 56(2)(viia) of the I. T. Act is applicable. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Dr. Shashi Kant Garg v. CIT [2006] 285 ITR 158/ 152 Taxman 308 in support of his contention that a prescribed method has to be strictly followed. He has also placed reliance upon the following other judgments in support of his contention : xxxx 5. The Ld. D. R. on the other hand, supported the orders of the authorities below and submitted that where the market price of the shares at which the assessee has purchased the shares on the very same day is available, the A. O. has rightly adopted the same instead of resorting to the valuation of the fair market value of the shares under Rule 11UA of the I. T. Act. Thus, according to him, the assessment order is to be upheld. 6. Having regard to the rival contentions and the material on record, we find that ground No. 1 is general in nature and hence needs no adjudication. With regard to ground No. 2, we find that though the assessee has raised this ground of appeal before the Ld. CIT(A), it was rejected on the ground that the assessee did not press the said ground of appeal. Even before us, the assessee did not advance any arguments on this issue at the time of hearing. In view of the same, ground No. 2 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... related parties and both the companies are companies in which the public are not substantially interested, we are of the opinion that the AO was justified in examining the applicability of the provisions of section 56(2)(viia) of the Act to the transaction of transfer of shares. 9. The next step for application of this provision is to arrive at the fair market value of the shares before comparing it with the consideration at which the shares are purchased by the assessee to examine if it was less than the aggregate fair market value of the property exceeding ₹ 50, 000. In the case before us, the AO had adopted the price at which the assessee has purchased the shares from two of the shareholders at a higher price of ₹ 75. 49 ps as the fair market value of the share. The question before us is, whether this is valid and as prescribed under the Act? Clause (b) of the explanation to clause (vii) to section 56(2) defines 'fair market value' to be the value as computed under the prescribed rule i. e. , rule 11UA. According to the ld counsel for the assessee, where the Act prescribes a rule, it has to be strictly and mandatorily followed and further if the statute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n sustainable had the section provided that the FMV of an unquoted share shall be the value computed in accordance with the rule or the actual market value, if any, whichever is higher. But as can be seen from the Act and the rules provided thereunder, no such provision has been made. In fact, under the Wealth Tax Act, Section 7(1) defines the expression value of an asset as the price which in the opinion of the WTO it would fetch if sold in the open market on the valuation date but in the relevant provisions the definition of fair market value is given in the Act and method has also been prescribed thereunder. 11. On a careful reading of the judgments discussed above, it is seen that the Courts have held that where a method has been prescribed by the legislature, that method alone shall be followed for computation of the fair market value. The A. O. and the Ld. CIT(A) have not followed the relevant provisions for adopting or computing the fair market value of the shares, but have adopted the market value at which some of the shares have been purchased by the assessee as FMV. This, in our opinion, is not correct. As held by the Courts in the above judgments, the A. O. has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ures were to be redeemed at the face value of ₹ 100. Two subscribers gave their letter of acceptance opting for payment of interest upfront and were accordingly paid interest in sums of ₹ 2, 72, 25, 000/and ₹ 55 lakhs, respectively, in the accounting years 1995-96 and 1996-97, respectively. It showed the upfront payment of interest on debentures as deferred revenue expenditure in the accounts to be written off over a period of five years. However, in its returns for the AY. s 1996-97 and 1997-98, it claimed the entire upfront interest payment as fully deductible expenditure. The AO denied the assessee s claim and instead, spread the deduction over a period of five years thereby giving deduction only to the extent of one-fifth in each of the respective assessment years. The FAA, Tribunal and the High Court maintained the method of deduction adopted by the AO. Allowing the appeal, the Hon ble Supreme Court held as under: . . the disallowance of the deduction on the ground that the debentures were issued for a period of five years was clearly not tenable. Two methods of payment of interest were stipulated in the debenture issued. By allowing only one-fifth o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... io of Taparia Tools(supra), we hold that the AO had tampered with the provisions of the Act. Section 56 allows the assessees to adopt one of the methods of their choice. But, the AO held that the assessee should have adopted only one method for determining the value of the shares. In our opinion, it was beyond the jurisdiction of the AO to insist upon a particular system, especially the Act allows to choose one of the two methods. Until and unless the legislature amends the provision of the Act and prescribes only one method for valuation of the shares, the assessees are free to adopt any one of the methods. Therefore, in our opinion the order of the FAA does not suffer from any factual or legal infirmity. 5.3. We also find that in the earlier assessment year, the AO had, while completing scrutiny assessment, accepted the valuation of same shares at ₹ 25, 500/-. But, during the year under appeal why did he not follow the earlier year s order is not known. As per the basic principles of taxation, the AO. s are not governed by the principles of res judicata and every assessment is a fresh assessment. But, it is also equally accepted that the AO. s should not deviate f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rlier order ought not to be disturbed unless there was any material to justify the Department to take a different view of the matter. In respect of the earlier assessment year, 2005-06, the Department had accepted the decision of the Appellate Tribunal that the trade amount due to the trade creditors in the books of account of the assessee could not be added to the income of the assessee. There was nothing on record to show that any appeal had been filed by the Department against that order, which had become conclusive. In the case of Galileo Nederland BV, (367ITR319), the Hon ble Delhi High Court has held as under: Decision on an issue or question taken in earlier years though not binding should be followed and not ignored unless there are good and sufficient reasons to take a different view. Said principle is based upon rules of certainty and that a decision taken after due application of mind should be followed consistently as this lead to certainty, unless there are valid and good reasons for deviating and not accepting earlier decision. The Hon ble Bombay High Court in the matter of Aroni Commercials Ltd. (362 ITR 403) has dealt the issue of consistency as foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tivities, that the assessee had paid legal and professional fee for the purpose of obtaining valuation report of shares, that all the expenses were required to carry out the business for the year under consideration, that the FAA had rightly deleted the addition made by the AO. He referred to the cases of Multi-Act Reality Private Ltd. (ITA/7274/Mum/2011, dated 28/08/2015), Premiums Investment And Finance Ltd. (ITA/4879/ Mum/2012, dated 13/05/2015) Rampur Timber and Turnery Co. Ltd. (129 ITR 58). 7.3. We find that the AO had made the disallowance on the ground that assessee had not carried out any business activity for the year under appeal. While making the disallowance he forgot the basic fact that assessee is a corporate entity. For maintaining the corporate status assessee has two incur certain expenditure and same could not be disallowed in absence of earning profit in a particular year. If we analyse the expenses incurred by the assessee, as mentioned by the AR, we find that the expenditure incurred by the assessee was of a routine nature and was essential to run the business for the year under consideration. In the case of Preimus Investment And Finance Ltd. , the tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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