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TMI Blog2019 (9) TMI 553X X X X Extracts X X X X X X X X Extracts X X X X ..... In the course of scrutiny assessment, the AO inter alia noticed from the verification of the balance sheet of the assessee that the assessee has issued 1016000 shares having face value of Rs. 10/- at a premium of Rs. 23/-. The AO made inquiries with respect to the Fair Market Value (FMV) of the shares allotted having regard to the provisions of Section 56(2)(viib) of the Act for the purposes of ascertaining the correctness of premium charged. The assessee in response, submitted before the AO that the company holds certain parcels of land at Padra Dist. Vadodara and at GIDC, Dahej Dist. Bharuch, Gujarat, the FMV of which is substantially higher on the date of allotment of shares and consequently the premium charged of Rs. 23/- per share is quite commensurate that the FMV of shares allotted as contemplated in Explanation below Section 56(2)(viib) of the Act. The AO however disputed the FMV of fresh allotment of shares sought to be demonstrated by the assessee. The AO eventually applied the prescribed method of valuation as stipulated in Rule 11UA of the IT Rules to determine the FMV of the shares. For this purpose, the AO adopted the book value of the assets and liabilities including ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orities is based on the mis-appreciation of facts and mis-conception towards position of law. To begin with, the learned AR pointed out that the assessee company was originally promoted by the members of two families namely 'Rauts' & 'Voras' who contributed certain funds towards initial capital for the purposes of carrying on the business of manufacturing of and dealing in precipitated Silica. After incorporation of the company, the assessee purchased two plots of adjoining land in Taluka Padra Dist. Vadodara in the month of Jan. 2010. The aforesaid plots of land were agricultural plots and therefore the process of converting the same into non agricultural one was commenced so as to utilize the same for setting up the manufacturing facilities thereon. However, to obviate possible delay and consumption of longer time for completion of the conversion, the assessee purchased another piece of industrial land at Dahej, Dist. Bharuch and the activities of setting up necessary infrastructure thereon were commenced. Since, the setting of entire manufacturing facility required sizeable investment and since the assessee company was owned and controlled only by two families at the relevant po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... des, footwears and so on. Similarly, Mr. Vineet Luhariwala who joined as co-promoter had robust marketing expertise. The learned AR submitted that given the solid combination of marketing expertise and technical expertise together with eminence associated with the Silica project, plant at Dahej and teams capabilities, a reputed company of Tata Group namely Tata Chemicals also offered for purchase of entire plant at Rs. 34.20Crore whereby per share value would stand at Rs. 40/- per share. However, due to certain legal obstacles the proposed Tata deal could not materialize. A business transfer agreement was also signed in this regard. In December 2016, a Singapore based company has actually purchased 10% shares of the assessee company at a price of approximately Rs. 47/- per share. Reflecting the confidence of the giant groups in the technology start up, the promoters have themselves pulled in their own funds at a moderate premium of Rs. 23/- per share. It was pointed out that the aforesaid premium is not astronomical in any manner in such technical start ups. The learned AR also referred to an article as published on 10.02.2017 in newspaper The Hindu Business line revealing ongoing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that when the 'Routs' & 'Voras' negotiated the deal with the 'Luhariwalas', the basis of arriving at the FMV of the shares was inter alia the market value of the Dahej land on which the construction of factory premise was being carried out. It was the proposition of 'Routs' & 'Voras' that the jantri rate of Dahej land was fixed at Rs. 3060/- per sq.mtr. by Gujarat Government. The value of Dahej land would thus translated into its FMV in the vicinity of at Rs. 9.18 Crore as against its actual cost of acquisition at Rs. 2,31,46,397/- as incurred by the assessee and consequently, reflected as book value in the books of accounts. When the aforestated market value is factored and substituted to the book value, the net worth of the company would go up considerably and the shares price would shoot up to nearly Rs. 55/- per share i.e. far beyond the negotiated price. Upon negotiation with Luhariwala, a trade off was arrived at a price of Rs. 33/- per share coupled with a clear understanding that Routs & Voras will also infuse further funds by acquiring 1,61,000 shares each and such shares will also be issued at the same price. The learned AR pointed out that Vineet Luhariwala being a gold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the differential amount of premium as subject matter of addition under s.56(2)(viib) of the Act resulting into and addition of Rs. 2,04,82,560/- is de hors the ground realities as well as opposed to the letter as well as spirit of provision introduced. 6.9 Propping up its case, the learned AR for the assessee further referred to the assessment order concerning AY 2016-17 passed under s.143(3) of the Act wherein the AO disputed the allotment of fresh shares to Bharat Raut Group (Janay Project & Services Pvt. Ltd.) at Rs. 46/- per share and agreed for FMV at Rs. 33/- per share at which the shares were allotted to Luhariwala group. The AO in AY 2016-17 accordingly treated Rs. 13/- per share to be excess premium collected and consequently chargeable to tax under s.56(2)(viib) of the Act. The learned AR thus submitted that in the subsequent assessment year, the premium collected by the assessee on subscription made by Luhariwala Group was actually endorsed. Thus, it does not lie in the mouth of the Revenue to take a different position in the preceding assessment years in total contrast to a position duly taken. 6.10 Making reference to the decision rendered by the co-ordinate ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, 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: 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: or (ii) 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, parents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher." 8.2 A perusal of Section 56(2)(viib) of the Act quoted above seeks to enable the determ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... depart from the ostensible factual position. The market value of the land prevailing at the time of issue of shares requires to be substituted which value is duly supported by the valuation report obtained in this regard. Such valuation report has not been successfully controverted by the Revenue. 8.5 As narrated in the preceding paras, the limited question that arises for consideration is whether the value of land parcels adopted by the assessee as per the valuation report requires to be taken cognizance of for the purposes of Section 56(2)(viia) of the Act or not. At this juncture, we observe that one of the grounds taken for rejecting the basis of determination of FMV is that no accounting entry has been passed in respect of difference between the FMV of the immovable property at the relevant point of time in the books of accounts. As observed in the earlier paras, we do not see any merit in this line of reasoning adopted by the lower authorities. It is well settled that even where the assessee fails to make necessary entries in the books of accounts, it will not operate as a bar for claiming benefits by way of deduction etc. as was held by the Hon'ble Supreme Court in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue authorities are clearly guided by irrelevant consideration while holding against the assessee. The AO himself in the subsequent year has disputed the higher valuation of Rs. 46/- and unequivocally adopted Rs. 33/- as fair value. The assessee has also been able to demonstrate the arm's length transaction and unison of two different groups bringing different capabilities and expertise for the furtherance of business. The peripheral evidences in the form of interest shown by giant groups like Tata are significant and underlie the bonafides in the fair valuation for issuance of fresh shares. There is another overwhelming factor subsisting in the case to justify the fair value. The existing promoters have also subscribed at the rate similar to the rate at which shares were allotted to Luhariwala Group which further reinforces the inherent strength in the valuations of the company as represented by the value of equity shares. We thus see no valid reason whatsoever in upholding the adverse conclusion drawn by the Revenue Authorities. The order of the CIT(A) accordingly set aside and the AO is directed to delete the addition made under s.56(2)(viib) of the Act discussed above. 9. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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