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TMI Blog2022 (4) TMI 323X X X X Extracts X X X X X X X X Extracts X X X X ..... esent issue of preference shares falls. The method applicable in the present case is as contained in Rule 11UA(C)(c). Hence the Assessing Officer s adoption of this method does not have the sanction of law. Once it is clear that the method adopted by the Assessing Officer is not permissible in law and the method adopted by the assessee is one permissible in law which has not been cogently rebutted by the Assessing Officer. It is crystal clear that the addition in this case has been made by the Assessing Officer on whims and fancies not sustainable in law. In this view of the matter valuation obtained by the assessee is as per the mandate provided under 56(2)(vii)(b) read with rule 11UA of the Act. Assessing Officer s substitution thereof is not in accordance with law and the same is not sustainable. Hence, we do not find any infirmity in the order of learned CIT(A). Hence, we uphold the same. Addition of depreciation under section 32(1)(ii) - A.O. s action in denying depreciation on goodwill u/s. 32(1)(ii) arising to the Appellant pursuant to a scheme of amalgamation sanctioned by the Jurisdictional High Court, contending that the denial of depreciation ought to be restricted to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be done on the touchstone of the Hon ble Bombay High Court decision in the case of Reliance Utilities Power Ltd. [ 2009 (1) TMI 4 - BOMBAY HIGH COURT] and HDFC Bank Ltd.[ 2016 (3) TMI 755 - BOMBAY HIGH COURT] . As regards rule 8D(2)(iii) is concerned learned CIT(A) has directed to take average value of the investment on which no exempt income has been earned for making the computation. This view is supported by Special Bench decision of ITAT in the case of Vireet Investments[ 2017 (6) TMI 1124 - ITAT DELHI] . Hence we do not find any infirmity in the order of learned CIT(A) in this regard. Hence, we uphold the same. X X X X Extracts X X X X X X X X Extracts X X X X ..... taken dividend as appropriate measure of future cash flow as represented and certified by the management of the company. AO show caused the assessee as to why the excess amount than the share value worked out by her received should not be taxed as income under section 56(2)(viib) of the Act. 5. Assessee during the assessment proceedings submitted that, the company issued 'preference shares' not the equity shares. Preference shares are securities which can be thought of as being mid way between debt and equity. The AR submitted that the Chartered Accountant, in his valuation report prepared under Rule 11UA mentioned that for valuation of preference shares, he adopted a model similar to the Discounted Cash Flow model for arriving at the value of preference share, by considering dividend and redemption premium as the appropriate measure of future cash flows. The assessee also stated that dividend discounting model adopted by them uses the same analogy as discounted cash flow method. Assessee further, stated that the Rule 11UA of the Income Tax Rules prescribes NAV or DCF method specifically for valuation of equity shares and in Rule 11UA(1)(c)(c) which applies to 'prefere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat however, none of the above factors were considered by the valuer in his report and did not make any assumption about future growth rates in earnings. That the rate of dividend and term years have been determined on random basis, as provided by the management without taking into consideration macro and micro economic factors affecting the business. AO mentioned that the assessee never paid dividend in earlier or in subsequent years. Therefore, she concluded that the valuer did not make educated valuation of the shares by not considering past performance, growth prospects, earnings, capacity, expansion etc but merely adopted the values provided by the management. That thus, the method adopted by the valuer was not scientific and did not follow the logic and principle of the standard methods as per the technical guide on share valuation. She concluded that the assessee infringed the section 56(2) (viib) of the Act. 7. Further A.O. issued summons u/s. 131 to the Proprietor of M/s. Manish P. Jain and Associates, CA, who had done the valuation of preference shares of the assessee company. After perusing the statement on oath of Mr. Manish Jain, A.O. asked the assessee as to why the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Companies Act, 1956, Preference Shares has preferential right over equity shares in respect of dividend and repayment of capital on winding up. That further, another major difference is that Preference Share holders do not participate in the profits of the company. That following are the differences between Equity shares and Preference shares. Basis of difference Preference share Equity Share 1 Rate of dividend The rate of dividend on preference share is fixed by the issuing company/Board of the company. The rate of dividend on equity share is changed from year to year depending upon the availability of profits. 2 Payment of dividend They have a right to receive dividend before any divided is paid on equity shares Dividend on equity shares is paid, after any dividend is paid on preference shares. 3 Participation in management Preference shareholders are not entitled to participate in management. Equity share holders are entitled to participate in management. 4 Winding up On the winding up, they have a right to return of capital before the capital is returned on equity shares Equity share holders are paid only after preferences capital is paid in full. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that there is no difference between the equity shares and preference shares and there is no difference between the equity shares and preference shares in the section. 11. Thereafter learned CIT(A) referred to section 56(2)(viib) of the Act. He further referred to the Explanation a(i) thereto and the Rule 11UA pursuant thereto. Referring to the above he held as under :- "It is clear from the above table that 11UA(2) specifically lays down that for the purpose of valuation of unquoted equity shares under 56(2) (viib) Explanation (a)(i), the assessee has an option of choosing one among the NAV method or DCF method. Whereas the Rule 11UA(1) lays down the method to be followed for valuation of share for other purposes under section 56. Subclause (a) applies for quoted shares and securities. Sub-clause (b) applies for unquoted equity shares and sub-clause (c) applicable to unquoted all other shares and securities other than equity shares, which are not listed in any recognized Stock Exchange. Therefore, it is clear that the 'preference shares' issued by the assessee company which are unquoted and not listed in any recognized Stock Exchange fall under sub-clause (c) of 11UA(l)( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt the action of the AO is not justified and it is held that the assessee has got all the right to choose a method which, cannot be changed by the AO. 3.14 Now coming to the compliance with the conditions laid down under Rule 11UA(1)(c)(c). It is clear that to comply with this rule the assessee was required to obtain a certificate of a Merchant Banker or Chartered Accountant, which the assessee complied. Further, though the AO can scrutinize the valuation report, only if some arithmetical mistakes are found, he may make necessary adjustments. But if he finds the working of the C.A. or the assumptions made as erroneous or contradictory, he may suggest the necessary modification and alterations therein provided the same are based on sound reasoning and rational basis and for this purpose the AO may call for independent expert valuer's report or may also invite comment on the report furnished by the assessee's valuer as the AO is not an expert. Further in this case the valuation relates to preference shares, which depends on the terms of issue of such reference shares by the company which issued. It is seen that the valuer has valued the preference shares based on the terms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rds. We note that in the present case the issue is addition under section 56(2)(vii)(b) of the Act read with Rule 11UA, for the premium on preference shares which are unquoted. Before proceeding further we may gainfully refer to the provisions of section 56(2(vii)(b) of the Act and Rule 11UA which read as under :- Section 56(2) provides for addition in certain cases. Sub-section (viib) thereof reads as under : (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: 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 a specified fund]; or (ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf. Following second proviso shall be inserted after the existing proviso to clause (viib) of sub-sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 11UA of the Act provides for valuation. Relevant sub-rule applicable for this assessment year with regard to valuation of shares and securities read as under : 11UA(1)(c) valuation of shares and securities,- (a) the fair market value of quoted shares and securities shall be determined in the following manner, namely,- (i) if the quoted shares and securities are received by way of transaction carried out through any recognized stock exchange, the fair market value of such shares and securities shall be the transaction value as recorded in such stock exchange; (ii) if such quoted shares and securities are received by way of transaction carried out other than through any recognized stock exchange, the fair market value of such shares and securities shall be,- (a) the lowest price of such shares and securities quoted on any recognized stock exchange on the valuation date, and (b) the lowest price of such shares and securities on any recognized stock exchange on a date immediately preceding the valuation date when such shares and securities were traded on such stock exchange, in cases where on the valuation date there is no trading in such shares and securities on any rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oted equity shares for the purposes of sub-clause (i) of clause (a) of Explanation to clause (viib) of sub-section (2) of section 56 shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner under clause (a) or clause (b), at the option of the assessee, namely:- (a) the fair market value of unquoted equity shares = (A-L) x (PV) (PE) Where , A= book value of the assets in the balance-sheet as reduced by any amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act and any amount shown in the balance-sheet as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset; L= book value of liabilities shown in the balance-sheet, but not including the following amounts, namely:- (i) the paid-up capital in respect of equity shares; (ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company; (iii) reserves and surplus, by whatever na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scribed or as may be substantiated by the company to the satisfaction of the Assessing Officer based on certain aspect specified in the rule. Rule 11UA of the Act provides the necessary rule. Rule 11UA(1)(C)(c) which is the relevant here, provides that 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. Admittedly, this rule is applicable in the present case and as provided in the said rule the assessee had option to obtain fair market value on the basis of valuation done by the accountant. Now the assessee has obtained valuation of accountant. Section 56(2)(vii)(b) provides fair market value of shares to be the one as may be determined in accordance with the method as may be prescribed or as may be substantiated to the satisfaction of Assessing Officer. Hence, if the method adopted by the assessee is not in accordance with the Rules contained in Explanation (a)(i) to section 56(2)(v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hod which has been lifted from the method adopted for valuation of equity shares in Rule 11UA(c)(a). This is not at all a method prescribed for other shares and securities in which category the present issue of preference shares falls. The method applicable in the present case is as contained in Rule 11UA(C)(c). Hence the Assessing Officer's adoption of this method does not have the sanction of law. Once it is clear that the method adopted by the Assessing Officer is not permissible in law and the method adopted by the assessee is one permissible in law which has not been cogently rebutted by the Assessing Officer. It is crystal clear that the addition in this case has been made by the Assessing Officer on whims and fancies not sustainable in law. 20. In this view of the matter valuation obtained by the assessee is as per the mandate provided under 56(2)(vii)(b) read with rule 11UA of the Act. The Assessing Officer's substitution thereof is not in accordance with law and the same is not sustainable. Hence, we do not find any infirmity in the order of learned CIT(A). Hence, we uphold the same. 21. Apropos issue of addition of depreciation under section 32(1)(ii) This issue relate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y or partly by the assessee and used for the purpose of business or profession shall be eligible for depreciation according to the prescribed rates. However, the A.O. did not accept the contention of the assessee as the assessee had issued shares to VDPL, before amalgamation, at more than market value, which when stand cancelled, lead to increase of liabilities over assets, after amalgamation. A.O. held that the assessee was not able to substantiate as to what exactly the intangible assets were received by it upon merger, which could be classified as goodwill. Therefore, the goodwill created in the books of the assessee company, was considered to be fictitious and the depreciation of an amount of ₹ 2,49,51,468 claimed @ 25% on the value of Goodwill of ₹ 9,98,05,871 was disallowed u/s. 32(1)(ii) of the Act and added to e profits and gains of the business of the assessee. As the assessee claimed depreciation at 50% of 25% only, on application u/s 154 of the Act, the depreciation disallowed was reduced to ₹ 1,24,75,734 which is the amount in the ground of appeal. 23. Upon assessee's appeal learned CIT(A) noted the assessee's submission. He found the issue covered by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial right of a similar nature". The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). Consequently, "Goodwill" is an asset under Explanation 3(b) to s. 32(1) & eligible for depreciation. Though the AO held that the assessee had not "paid" anything for the goodwill, this cannot be accepted because (a) the CIT (A) & Tribunal (correctly) held that that the difference between the cost of an asset and the amount paid in the process of amalgamation constituted "goodwill" and (b) this aspect was not challenged by the department before the High Court. 4.4 The above mentioned decisions of the Hon'ble Supreme Court is squarely applicable to the facts of the appellant's case as goodwill arising on amalgamation or any merger or acquisition is eligible for depreciation under section 32(1)(ii) of the Income Tax Act, 1961. Further, to the same effect are the following decisions, wherein it has been held that the goodwill arising out of merger and acquisitions is eligible for depreciation: 1. Areva T & D India Ltd. v. DOT (Delhi High Court) 2. CIT v. Techno Shares & Stocks ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Therefore, the AO asked the assessee to provide details explaining the change of shareholding of Impetus from MHPL to NBZ Pharmna Ltd.,(the earlier name of the appellant company) along with the Financial Accounts of the IHPL. In the assessment order the AO mentioned that in reply, the assessee submitted the ledger copy of NBZ Pharma Ltd, reflecting the payment made for the purchase of shares of Impetus, along with the Bank Statement highlighting the payment and Financials of Impetus. A.O. found that assessee 100% shares of Impetus as well as of VDPL for a consideration lesser than the aggregate fair market value (FMV) of the shares. 27. AO asked the assessee to explain why the aggregate FMV of the shares of IHPL and VDPL, exceeding the consideration should not be added as Income from Other Sources u/s. 56(2)(viia) of the Act. The assessee submitted that the book value of shares Impetus Healthserve Pvt. Ltd. was negative and produced working thereof. The assessee transacted the shares at a nominal value of ₹ 10,000 which was more than book value of the shares. That therefore, it was evident that the consideration was more than the fair market value (FMV) of the shares. That ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of IHPL, the appellant acquired VDPL also for ₹ 10,000. There is dispute regarding the fact that the book value of share of IHPL was negative as on 31.03.2014, therefore, the consideration of ₹ 10,000 was paid was more than book value of shares. However, the AO did not accept the argument because she was the opinion that the shares of IHPL have underlying value of shares of VDPL. However, it is seen that the shares of Impetus are valued based on the last audited balance sheet which is 31.03.2014 as per the definition of Balance Sheet given in Rule 11U. It is also noted that Impetus acquired VDPL on 07.08.2014. In other words the VDPL was not subsidiary of Impetus as on 31.03.2014, Assessee argued that it purchased Impetus based on the last audited balance sheet dated 31.03.2014 and the AO did not accept the facts and therefore argued that as per formula, the aggregate fair market value of the Impetus has to be worked out which includes the underlying shares of VDPL. Therefore, she took balance sheet of Impetus Healthcare Pvt. Ltd as on 31.03.2014 and book value of assets and liabilities of VDPL as on 31.10.2014 as mentioned in para 6.10 of the order and assessed at &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions made for meeting liabilities, other than ascertained liabilities; (vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares; PE= total amount of paid up equity share capital as shown in the balance-sheet; PV=the paid up value of such equity shares;" 5.5 As can be seen from the method/formula applicable to the AY 2015-16, the 'A' is book value of the assets in the balance-sheet. There was as amendment by Income Tax (20th Amendment) Rules 2017 w.e.f. dated 01.04.2018, where in the 'A' in the formula is substituted with A+B+C+D to include the book value/market value of jewellery, Artwork and as stamp duty value of immovable property and Fair Market Value of shares. As already mentioned this amendment is applicable from 01.04.2018, and the amended formula cannot be applied retrospectively. Therefore, the value of shares of VDPL cannot be included in the FMV formula applicable for the AY 2015-16 under consideration. In other words, the inclusion of the assets and liabilities of VDPL is not as per the formula applicable for the year. Further, the AO mentioned that the word ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regate fair market value of such property as exceeds such consideration : Provided that this clause shall not apply to any such property received by way of a transaction not regarded as transfer under clause (via) or clause (vic) or clause (vicb) or clause (vid) or clause (vii) of section 47. Explanation.-For the purposes of this clause, "fair market value" of a property, being shares of a company not being a company in which the public are substantially interested, shall have the meaning assigned to it in the Explanation to clause (vii);] The fair market value which has been computed by the Assessing Officer is not as per the extant Rules. The Rules in this regard contained in section 11UA are already reproduced by us earlier. The same clearly provide for taking the book value of shares as in the balance sheet for the computation. The same was amended by the Income Tax Rules 2017 with effect from 1.4.2018 where instead of book value, fair market value of shares is mentioned. The Act does not provide that this amendment is retrospective. It is clearly mentioned that this amendment is with effect from 1.4.2018. Hence, Assessing Officer's adoption of fair market value for making ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the addition accordingly." 34. Against the above order Revenue is in appeal before us. 35. We have heard both the parties and perused the records. We note that as regards the disallowance under Rule 8D(ii) of the Act learned CIT(A) has given a finding that the assessee has sufficient interest free funds. The same has not been disputed by the revenue. In this view of the matter no disallowance under rule 8D(2)(ii) can be done on the touchstone of the Hon'ble Bombay High Court decision in the case of Reliance Utilities & Power Ltd. (supra) and HDFC Bank Ltd.(supra). As regards rule 8D(2)(iii) is concerned learned CIT(A) has directed to take average value of the investment on which no exempt income has been earned for making the computation. This view is supported by Special Bench decision of ITAT in the case of Vireet Investments (165 ITD 27). Hence we do not find any infirmity in the order of learned CIT(A) in this regard. Hence, we uphold the same. 36. In the result, appeal filed by the Revenue stands dismissed. Assessee's cross objection : 37. Grounds of appeal raised in cross objection are as under : "On the facts and circumstances of the case and in law, learned CIT( ..... X X X X Extracts X X X X X X X X Extracts X X X X
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