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TMI Blog2022 (9) TMI 929X X X X Extracts X X X X X X X X Extracts X X X X ..... share by the assessee is not as per the method prescribed under Rule 11UA of the I.T.Rules. 4. Facts of the case, in brief, are that the assessee is a company and engaged in the business of investment. It filed its return of income on 27.09.2016 declaring loss of Rs.1,93,66,158/- under normal provisions and book loss u/s. 115JB at Rs.1,93,45,628/-. During the course of assessment proceedings the AO, on verification of the financials observed from the balance sheet that the assessee company has received share premium to the extent of Rs.23,98,74,430/- during the financial year under consideration. In order to verify the same and examine the applicability of section 56(2)(viib) of the IT Act, he asked the assessee to provide the details of parties from whom share premium was received along with details of the mode of receipt and to explain why the provisions of section 56(2)(viib) of the Act should not be applied. 5. In response to the same, the assessee submitted that it has issued 12,62,497 shares @Rs.200/- per share (with face value of Rs.10/ - per share and premium of Rs.190/ - per share) to four parties the details of which are as under: Name of the company PAN No.of sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee does not substantiate its claim of the value of share premium received by it and is not in conformity with the valuation which must be done as per Rule 11 UA, as per the Act. He therefore confronted the same to the assessee. From the various details furnished by the assessee, he noted that the assessee company could not substantiate its claim of issue of share at a premium to his satisfaction. The assessee has no independent business activity, but has valued its price per equity at a premium of Rs.190/-. The valuation report of CallHelath provided is based on unsubstantiated DCF method, which is not in tandem as visualized as per rule 11UA and required by the provisions of the Act under explanation given defining fair market value as per section 56(2)(viiib). Moreover the valuation given is based on valuation of assessee company's holding in M/s. Call Health Services, which are based on the fair value of each share. However, the valuation of the subsidiary company could not be substantiated with proper justification as per prescribed method. Further, the definition of fair market value clearly requires the valuation of the company's assets as enlisted. He noted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors including investors from abroad at a cost of Rs.200 per equity share (Rs.10 face value and Rs.190 premium). The assessee company has also invested into the equity shares of Call Health Services Pvt. Ltd., at a cost of Rs.200 per equity share in-turn, the assessee company has received investments from its investors at the same value i.e., Rs.200 per equity share. Accordingly, during the financial year 2015-16, the assessee Company has received an equity share subscription amount of Rs.25,24,99,400/-, representing share capital amount of Rs.1,26,24,970/- and share premium amount of Rs.23,98,74,430/- and against the said share subscription, equity shares of 12,62,497 were allotted by the assessee company at a face value of Rs.10 per share and at a premium of Rs.190/- per equity share to the investors. The entire share subscription money received by the assessee Company from its investors had been invested into its subsidiary company i.e., Call Health Services Pvt. Ltd., as equity shares at a value of Rs.200/- per equity share. Since, the underlying value of the Appellant Company investments are valued at Rs.200 per equity share, the equity shares were allotted to its investors at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the AO is concerned, it was submitted that the assessee company has determined the Fair Market Value of shares issued at premium on basis of Discounted Cash Flow method in accordance with rule 11UA(2)(b) read with section 56(2)(viib) and valuation report was prepared as per guidelines given by ICAI and no fault was found in same. Therefore, the Assessing Officer was not justified in changing method of valuation of shares to Net Asset Value method. 11. Referring to the decision of the Jaipur Bench of the Tribunal in the case of Rameshwaram Strong Glass Pvt.Ltd vs ITO in ITA No.884/Jp/2016, order dated 12.07.2018, the assessee submitted that it is not open for the AO to challenge or change the method of valuation, once opted by the assessee and to modify the figures as per his own whims and fancies. Alternatively, it was argued that the underling assets i.e. Shares in subsidiary company at the same value justifies the premium in assessee company's hands which argument AO has not considered at all. It was submitted that the NAV method, if correctly adopted, will justify the premium received as such on the valuation date. 12. Relying on various decisions, the assessee submitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quoted equity shares would be the value, on the allotment date, of such unquoted equity shares as determined as per the method provided or Net Asset Value whichever was higher. Since DCF value is more, the higher of the two has to be considered. Hence the addition made by AO on net asset value is not according to the provisions of the Act. d) Without prejudice to the above, the AO has taken the valuation date as on 31-032015, whereas the rule provides for adoption of valuation date as on the day of allotment of shares. In that way also the working of the AO is not according to the Provisions/Rule. e) It was held in the case of Assistant Commissioner of Income-tax, Circle-2, Alwar. vs. Safe Decore (P.) Ltd. 169 ITO 328 (Jaipur) it was held that the fair market value as per the provision of section 56(2)(viib) has to be determined in accordance with the method prescribed under rule 11 UA of the IT Rules and as per sub-rule (2) of rule 11 UA, discounted cash flow method is one of the prescribed method. Therefore, it is the option of the appellant to adopt any of the prescribed method under rule 11UA(2) of the 1962 rules. Section 56(2)(viib) read with Explanation has specifically ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch shares as exceeds the FMV of the shares shall be the income of the issuer company. i) The statute provides that the fair market value of the shares can be determined, either in accordance with method prescribed, which now has been given in rules 11 U and 11 UA; or as may be substantiated by the company to the satisfaction of the Assessing Officer based on the value on the date of issuance of shares. The statute provides that in either of the method, whichever is the higher fair market value of the shares shall be adopted. Here in this case, appellant has submitted the value substantiated by the company to the satisfaction of the Assessing Officer under DCF method. Further, the entire share capital received by the Appellant had been invested into the equity shares of its Subsidiary company i.e., Call Health Services Pvt. Ltd., at a cost of RS.200 per equity share. Considering the underlying value of its investments, the Appellant Company value is arrived at Rs 200 per equity share. j) The AO has not doubted the substantiation of the value of the shares and the valuation method, except disbelieving the report on the disclaimers made by CA which are general in nature. It is su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the orders of the AO and ld.CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the AO in the instant case made addition of Rs.23,98,74,430/- u/s. 56(2)(viib) of the I.T.Act, on the ground that assessee could not substantiate to his satisfaction regarding the receipt of share premium at Rs.190/- per share on the face value of Rs10/- on issue of 12,62,497 equity shares. We find the ld.CIT(A) allowed the claim of the assessee, the reasons of which have already been reproduced in the preceding paragraph. It is the grievance of the revenue that the ld.CIT(A), without appreciating the method adopted for determination of FMV of the equity shares by the assessee, deleted the addition which is not as per the method prescribed under Rule 11UA of the I.T.Rules. 17.1 We find sufficient force in the arguments advanced by the ld.DR on this issue. We find the ld.CIT(A) basically allowed the claim of the assessee on the ground that AO has not doubted the substantiation of the value of the shares and the valuation method, except disbelieving the report on the disclaimers made by CA which according to him are general in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents may materially affect our valuation analysis/results. Accordingly, we assume no responsibility for any errors omissions or mistakes in the above information furnished by the company and their impact on the present exercise. Also, we assume no responsibility for technical information furnished by the company and believe it to be reliable. We express no opinion on the achievability of the forecasts given to us. The assumptions used in their preparation, as we have been explained, are based on the managements present expectation of both-the most likely set of future business events and circumstances, and the management's course of action related to them. It is usually the case that some events and circumstances do not occur as expected or are not anticipated. Therefore, actual results during the forecast period may differ from the forecast and such differences may be material. Our report being provided solely for the use of the Company, its management and shall be treated in strict confidence and shall not confer any rights or remedies upon any person therein. The report is meant to provide guidance to management in its discussion with various investors domestic and overseas. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat there is no commercial expediency for charging lower interest rate on loans advanced than the rate at which funds are borrowed? 19. Facts of the case, in brief, are that the AO during the course of assessment proceedings noted from the profit and loss account that the assessee has admitted interest income on loan to subsidiary of Rs.1,77,53,424/- and interest income on fixed deposits of Rs.1,78,807/-. The assessee has claimed total expenditure of Rs.3,72,77,857/-, which consist of Professional Fee of Rs.14,54,134/- interest on ICD of Rs.3,55,97920/- and other expenses of Rs.1,43,061/-, Rates and taxes Rs.31,244/-, Auditor's remuneration of Rs.51,500/- and preliminary expenses u/s. 35D of Rs.20,530/-. Accordingly, the assessee computed business loss of Rs.1,93,66,158/-. According to the AO, since the assessee has no business activity during the year under consideration and the various expenditure claimed by the assessee against the interest income has not been incurred exclusively for the purpose of earning interest income, the AO proposed to disallow the expenditure claimed by the assessee from such interest income and disallowed the business loss of Rs.1,93,66,158/-. The AO a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve and it is the endeavor of the group as a whole to carry on the business without interruptions. In the instant case, the fact that the appellant has taken loans on which interest is being charged whereas the appellant has advanced amounts to subsidiary company is not in dispute. The amount is used by subsidiary company for its business is also not in dispute. The details of the ICDs were examined by the AO in detail. Applying the ratio laid down by the Hon'ble Supreme court in the case of S.A.Builders Ltd.(supra), it is held that no disallowance is called for an the addition made by the AO is deleted. As a result, the grounds raised in this regard are allowed." 21. Aggrieved with such order of the ld.CIT(A), the revenue is in appeal before the Tribunal. 21.1 The ld. DR strongly challenged the order of the ld.CIT(A) in allowing the loss claimed by the assessee without appreciating that there is no basis for charging less interest on loan advance by taking loan at a higher rate of interest. He submitted that the justification given by the ld.CIT(A) is contrary to facts and therefore, the same should be reversed and that of the order of the AO be restored. 22. The ld. Counsel for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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