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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 ..... T(A). Hence, the same is required to be rejected. Therefore, the approach of ld.CIT(A) is incorrect and contrary to law laid down in the case of CIT vs. Durga Prasad More [ 1971 (8) TMI 17 - SUPREME COURT ] - It cannot be said that no fault was found in such valuation report by the AO or that the AO has not found any defect in the valuation of shares arrived at by the assessee. We find the CIT(A) in the instant case without properly understanding the facts of the case was merely carried away by the submissions of the assessee and deleted the additions, which in our opinion is not justified under the facts and circumstances of the instant case. The various decisions relied on by the CIT(A) are not applicable in the facts of the present case. Since, the AO has given valid reasons while making the addition, therefore, the order of CIT(A) which is contrary to facts cannot be upheld. We therefore set aside the order of the CIT(A) on this issue and the grounds raised by the revenue is allowed. Loss claimed by the assessee - Whether no commercial expediency for charging lower interest rate on loans advanced than the rate at which funds are borrowed? - HELD THAT:- In the instant ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness 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 shares issued Share premium (in Rs.) Total amount of subscription(including share premium) in Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted any operations. The AO further noted that the valuation has been done keeping in mind the value of the subsidiary company, and does not reflect the value of the assessee company's equity value per share. Further, as per the provisions of the Act, the valuation of the shares must be done as per rule 11 UA prescribed. The valuation report submitted 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 ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices Pvt Ltd. became the subsidiary of the assessee company. It was further submitted that the assessee company does not have any other assets other than the Investments in Call Health Services Pvt Ltd. i.e. the value of the assessee company is lying in the underlying value of Equity Shares of Call Health Services Pvt Ltd., held by the appellant company as its investments. It was argued that Call Health Services Pvt. Ltd., has received investments from various investors 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 v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equity share with a certificate issued by a chartered accountant using DCF method which is an approved method as prescribed by RBI/ICAI. The assessee s valuation is discredited by the AO on the reason that the valuer has made many disclaimers and has relied on management data without verifying the same. However, AO has not disputed the Assumption made or the data relied or projections made in the valuation report. 10. So far as, the issue of changing method of valuation by 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 valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... projections. Moreover, it is not denied by the AO that the valuation reports were not as per the guidelines given by the Institute of Chartered Accountants of India. c) Rule 11 UA gives an option to appellant to value the share on the valuation date either under Net asset value as prescribed or DCF method. In this case appellant chose the DCF method since option was given to appellant under the provisions of the Act and Rules. As per rule 11 UA of 1962 Rules, the Fair Market Value of unquoted 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch the public are substantially interested) receives in any previous year from any resident person, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration for receipt of shares should not exceed the fair market value of the shares. Such excess value shall be deemed to be the income of the concerned company chargeable to tax under the head income from other sources for the relevant financial year. In other words, the aggregate consideration received for such 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. Fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted that the AO in the instant case has not followed the provisions of Rule 11UA(2). Referring to page No.75 of the paper book, he submitted that the auditors of M/s Call Health Services Pvt.Ltd. has adopted the DCF method. Further, the ld.CIT(A) while deciding the issue has followed various decisions. Therefore, the same being in accordance with law, the order of the ld.CIT(A) should be upheld and the ground raised by the revenue should be dismissed. 17. We have heard the rival arguments made by both the sides, perused 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gement that it has not omitted any relevant and material factors and that it has checked out relevance and significance of information to the present exercise with us in case of any doubt. Accordingly, we do not express any opinion or offer any form of assurance regarding its accuracy and completeness. Our conclusions are based on these assumptions, forecasts and other information given by/on behalf of the company. The management of the company has indicated to us that it has understood that any omissions, inaccuracies or misstatements 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are not applicable in the facts of the present case. Since, the AO has given valid reasons while making the addition, therefore, the order of ld.CIT(A) which is contrary to facts cannot be upheld. We therefore set aside the order of the ld.CIT(A) on this issue and the grounds raised by the revenue is allowed. 18. Ground of appeal No.2 raised by the revenue reads as under:- Whether on facts and in the circumstances of the case, the ld.CIT(A) was right in allowing the ground relating to loss claimed by the assessee without appreciating that 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 remunerati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny could be operated without any financial difficulty. The arrangement of funds is according to the business necessity and commercial expediency of the appellant who is carrying on business. In the instant case the situation of commercial expediency has to be seen from the perspective of he business entity with the funds utilized and relative position of the funds required on the respective dates and no room for any assumptions and imputations. As it is clearly understood that no entity can admit a business failure as long as there is a scope to survive 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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