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TMI Blog2023 (3) TMI 553X X X X Extracts X X X X X X X X Extracts X X X X ..... nquired into the interest income earned by the Assessee on which, TDS was claimed, whereas as per the Ld. PCIT, no interest income was offered to tax by the Assessee? - In the present case, the Assessee's hotel was under construction - Had the fixed deposits not been made, the Assessee would not have been able to obtain bank guarantee against the EPCG licenses availed while importing machinery for its hotel, which was under construction. The fixed deposits, as such, were made to facilitate the construction of the Assessee's hotel, i.e., its fixed asset. The Assessee's arrangement with regard to the interest received on the fixed deposits was an arrangement intrinsically connected with the construction of the Assessee's hotel. Assessee adjusted the interest received, reducing it from the cost of construction of its hotel. The interest was set off against the total cost of capitalization during the construction period. The interest receipt, therefore, went to reduce the cost of construction. The fixed deposits and the interest received by the Assessee thereon were directly linked with the activity of setting up the hotel of the Assessee. The interest is linked ine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecific queries in the questionnaires, considered and verified the detailed replies including the share valuation report prepared by an expert u/r. 11U and 11UA of the Income Tax Rules, 1962 filed during the course of assessment proceedings before passing the assessment order u/s. 143 of the Act de hors the allegations in the order u/s. 263 that the AO accepted the claim without making proper and in depth enquiries. 4. The learned PCIT has erred in law and on facts in assuming jurisdiction u/s. 263 of the Act on the specious ground of 'no enquiry or verification' in terms of Explanation 2 to section 263, holding that 'the AO has failed to examine and verify the issue relating to share premium received and interest earned', directing the AO to make further enquiries namely (i) valuation of share premium received and (ii) interest earned during the course of construction period, in utter disregard to the fact that in the course of assessment proceedings u/s. 143(3), the AO had already made necessary enquiries on the above issues and after due verification, he had taken a conscious decision in accordance with the provisions of the Act. 5. The learned PCIT has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld that the AO had failed to examine and verify the issues related to share premium received and interest earned, which issues had remained unaddressed. It was held that the Assessment Order was a cryptic and routine Order, erroneous and prejudicial to the interest of the Revenue, within the meaning of explanation 2 to section 263 of the I.T. Act. The Assessment Order was set aside, with a direction to the AO to pass a fresh Assessment Order keeping in mind the observations made by the Ld. PCIT. 7. Aggrieved, the Assessee is in appeal before us. 8. Challenging the impugned Order, the Ld. Counsel for the Assessee has contended that the Ld. PCIT has erred in holding that the AO had failed to examine the issues of share premium received and interest earned; that while doing so, the Ld. PCIT did not take into consideration the fact that in the assessment proceedings, the AO had raised specific queries through questionnaires issued and the Assessee had furnished detailed replies thereto; that the Ld. PCIT has erroneously substituted his own version of valuation of share premium under rules 11U and 11UA of the I.T. Rules, without even confronting it to the Assessee, over the Share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en that Notice dated 13.07.2018 (APB 29-30) was issued by the AO to the Assessee, under section 143(2) of the I.T. Act, informing, inter alia, that the Assessee's Return of Income for assessment year 2016-17 had been selected for scrutiny under CASS; that an opportunity was being given to the Assessee, to produce any evidence/information felt necessary in support of the said Return of Income; and that specific Questionnaires/requisition of information or documents would be sent subsequently, if required. 12. Notice, also dated 13.07.2018, along with Questionnaire (APB 31-34) was issued to the Assessee, under section 142(1) of the Act, inter alia, requiring the Assessee (a) to furnish the accounts and documents specified in the Questionnaire, and (b) to furnish the information called for as per the Questionnaire and on the points and matters as specified therein. In the Questionnaire, vide Para No. 2 (APB 32), the Assessee was required to furnish the following information in respect of additions in share capital, share application money and share premium: (a) amount and date of receiving share capital. (b) Mode of transaction (cash/cheque/DD). (c) Confirmation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13.12.2018, it was stated that the details of complete address, ID proof and copy of Income Tax Returns along with Computation Chart had already been submitted vide Reply dated 11.12.2018. 18. Before us, the Assessee has filed certified copies of the aforesaid Notices and Replies, alongwith the attachments appended thereto, obtained from the A.O., on file inspection by filing ASK Application dated 12.9.2022. These copies have been filed before us by way of a Synopsis, at pages 1A to 84 thereof. At page 1A of the Synopsis is the AO's letter dated 13.09.2022, providing these certified copies to the Assessee. 19. The AO, though he made no discussion on the issue in the assessment order, accepted the valuation of shares as done by the Assessee, and he did not make any addition. 20. In the opinion of the PCIT, though the Assessee had stated that the fair market value of each share had been arrived at at Rs. 1,087/-, as per the Valuation Report of the Valuer, this stand of the Assessee was not acceptable, as the fair market value, computed in accordance with rules 11U and 11UA of the I.T. Rules, was Rs. 450/- per share; that the AO failed to assess the share premium receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come from other sources. 26. 'Fair market value' of the shares, for the purposes of section 56(2)(viib), is defined by Explanation (a) to the section, as the higher of the value as may be determined in accordance with the method prescribed by rules 11U and 11UA of the I.T. Rules, or the value as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value of its tangible and intangible assets as on the date of issue of shares. 27. For ready reference, explanation (a) to section 56(2)(viib) is reproduced hereunder: 'Section 56(2)(viib)... 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, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher;' 28. Rule 11U of the I.T. Rul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e which does not represent the value of any asset; B = the price which the jewellery and artistic work would fetch if sold in the open market on the basis of the valuation report obtained from a registered valuer; C = fair market value of shares and securities as determined in the manner provided in this rule; D = the value adopted or assessed or assessable by any authority of the Government for the purpose of payment of stamp duty in respect of the immovable property; 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 name called, even if the resulting figure is negative, other than those set apart towards depreciation; (iv) any amount representing provision for taxation, other than amount of income-tax paid, if any, less the amount of income-tax claimed as refund, if any, to the extent of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto; (v) any amount representing provisions 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; or (b) the fair market value of the unquoted equity shares determined by a merchant banker as per the Discounted Free Cash Flow method. 31. It is evident from the fact that the Ld. PCIT did not raise any challenge in this regard, that sub-clause (ii) of clause (a) of the Explanation to section 56(2)(viib) is not applicable to the case of the Assessee, and the Assessee was not required to satisfy the Assessing Officer about the valuation done. The fair market value of the shares was, therefore, essentially to be as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . and the fair market value of each share was arrived at Rs. 1,087/- as per the Valuation Report of the valuer; that this stand of the Assessee was not acceptable; that the fair market value of the shares, as per rules 11U and 11UA of the Rules, had been computed at Rs. 450/- per share; and that the share premium received by the Assessee in excess of the rate of Rs. 450/- per share had remained from being assessed at the hands of the Assessing Officer. The Ld. PCIT, however, did not venture to elaborate as to how the determination of the fair market value of the shares, as arrived at at Rs. 1,087/- per share by the Assessee, on the basis of the DCF Method and certified by the Assessee's Chartered Accountants, was not acceptable, remaining oblivious to the statutory mandatory option made available to the Assessee by the provisions of rule 11UA(2) of the Rules, laying down that the fair market value of unquoted shares shall be, as provided in the said rule, the value as determined either under clause (a), or clause (b) of the rule, that is, by invoking the Book Value (NAV) Method, or the Discounted Free Cash Flow (or DCF) Method, at the option of the Assessee. 35. That the abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mined the fair market value of the shares on the basis of the NAV Method. The AO found that the calculation of the share premium was not in accordance with rule 11UA of the Rules, and after referring to Rule 11UA(2)(b), the fair market value of the shares was computed on the basis of Book Value. The Assessing Officer held that the fair market value of the unquoted shares of the Assessee came to Rs. 32.76 only, and the Assessee was entitled to charge premium of Rs. 2.27 lakhs [Rs. 32.76 (-) Rs. 10.00 = Rs. 22.76 x 10,000 shares], against which, the Assessee had charged premium of Rs. 84 lakhs; and that thus, the excess premium of Rs. 81.72 lakhs received by the Assessee was not justified and not in accordance with the amended provisions of section 56(2)(viib). The Ld. CIT(A) partly confirmed the addition by rejecting the valuation done as per the DCF method. 37.2. The Tribunal observed that there was no dispute between the parties that rule 11UA(1) was not applicable to the facts and circumstances of the case; that rule 11UA(1) is a provision of general nature, whereas rule 11UA(2) is a specific rule providing for the valuation of unquoted shares; that the matter of valuation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Chartered Accountant and to base the valuation on the DCF Method only; and that to exercise the option under this clause, the Assessee was not to be subjected to the fulfillment of any other condition, except these two, which the Assessee had done. 37.6. The Tribunal next observed that CBDT Instruction (File No. 173/14/2018-ITA.I) dated 6.2.2018, given in the case of startup companies, is useful in the context of determination of fair market value of unquoted equity shares under section 56(2)(viib) read with rule 11UA(2), which Instruction states that though startup companies invariably submit valuation reports in accordance with rule 11UA(2)(b), in the assessments, such reports are not being accepted and are being rejected/modified by the Assessing Officers, considering the same as based on abnormal valuations, which results in additions; and that the CBDT has, accordingly, directed not to take coercive measures in such cases for recovery of demand resulting in additions, and the Commissioners (Appeals) have been directed to dispose such appeals expeditiously. 37.7. It was also observed by the Tribunal that it appeared that the taxing Authorities had ignored Explanation (a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assets based NAV Method, which is based on actual numbers as per the latest audited financials of the Assessee Company, whereas in the other method, that is, the DCF Method, the value is based on estimated future projection; that if the investment has been made keeping in mind the Assessee's own business objective, then such commercial wisdom cannot be questioned; that even the prescribed rule 11UA(2) does not give any power to the Assessing Officer to examine or substitute his own value in place of the value determined, nor does it require any satisfaction on the part of the Assessing Officer to tinker with such valuation; that section 56(viib) of the Income Tax Act is a deeming provision and one cannot expand the meaning or scope of any word while interpreting such a deeming provision; that if the statute provides that the valuation has to be done as per the prescribed method, and one of the prescribed methods has been adopted by the Assessee, then the Assessing Officer has to accept the same and even in case he is not satisfied, he cannot do otherwise, as there is no express provision under the Act or the Rules, whereunder the Assessing Officer can adopt his own valuati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olly erroneous basis, or that it had committed a mistake going to the root of the valuation process; that the Tribunal had followed the dicta laid down by the Hon'ble Supreme Court in matters relating to the commercial prudence of an assessee relating to valuation of an asset; that the law required determination of fair market value as per prescribed methodology; that the Appellant-Revenue had the option to conduct its own valuation and to determine the fair market value on the basis of either the DCF Method, or the NAV Method; that the Respondent-Assessee, being a start-up company, had adopted the DCF Method to value its shares; that this had been carried out on the basis of information and material available on the date of valuation and projection of future revenue; and that there was no dispute that the method adopted by the Assessee had been done applying a recognised and accepted method. 40. In 'DCIM Vs. Ozoneland Agro Pvt. Ltd.' vide order dated 2.5.2018, passed for assessment year 2013-14, in ITA No. 4854/Mum/2016, the Mumbai Tribunal held that section 56 allows the Assessees to adopt one of the methods of their choice; that however, the Assessing Officer held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... UA(2) of the Rules. (d) The above is in keeping with the caselaws discussed hereinabove. (d) Therefore, there was no error in the Assessing Officer's Order dated 21.12.2018, calling for revision under section 263 of the I.T. Act. 46. Accordingly, the grievance of the Assessee by way of Ground Nos. 1 to 4 is found to be justified and is accepted. The impugned order is reversed qua this issue and the assessment order is revived. 47. Now, we come to the other issue, i.e., whether or not the AO inquired into the interest income earned by the Assessee, amounting to Rs. 9,48,784/- on which, TDS was claimed, whereas as per the Ld. PCIT, no interest income was offered to tax by the Assessee. In the Show Cause Notice issued u/s. 263 of the Act (APB 1-2), the Ld. PCIT in para 5, stated that; 5. From the assessment record, it is also noted that you have earned interest income of Rs. 9,46,784/- and claimed TDS but no interest income has been offered for taxation while filing return of income. The AO has also not made any verification in this regard and amount of Rs. 9,48,784/- remained un-assessed. 48. In response, the Assessee, vide its reply dated 23.03.2021 (A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the deposits for obtaining bank guarantee, which bank guarantee had been given for import of machinery for a hotel under construction, had been reduced by the Assessee from the cost of the asset under construction. This is entirely in keeping with the view in 'CIT vs. Bokaro Steel Ltd.', (1999) 236 ITR 315 (SC) and 'Commissioner of Income Tax vs. Karnal Co-operative Sugar Mills Ltd.', (2000) 243 ITR 2 (SC). 53. In 'Bokaro Steel' (supra), the Assessee company had received rent, plant and machinery hire charges and interest on sums advanced to contractors. 54. The rent received was charged by the Assessee to its contractors for housing workers and staff employed by the contractor for the assessee's construction work, including certain amenities granted by the Assessee to the staff. 55. The hire charges were for plant and machinery given by the Assessee to its contractors for use in its construction work. 56. The interest received was from advances made by the Assessee to its contractors for facilitating its work of construction. 57. The Hon'ble Supreme Court held that the Assessee's activities in connection with all these three r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inery. It was held that hence, any income earned on such deposit is incidental to the acquisition of assets for the setting up of the plant and machinery. 59. In the present case, the Assessee's hotel was under construction. Machinery was imported by the Assessee for the purpose of such construction. While so importing machinery, Export Promotion Capital Goods (EPCG) licenses, whereunder, capital goods including spares for pre-production are allowed, at zero customs duty, were availed. Fixed deposits were required to be made for the purposes of obtaining bank guarantee against the EPCG licenses. It was on these fixed deposits, that the interest in question was received by the Assessee. Now, this trail of events clearly shows that this receipt, like the ones in 'Bokaro Steel' (supra), was connected directly with the work of construction of the Assessee's hotel. Had the fixed deposits not been made, the Assessee would not have been able to obtain bank guarantee against the EPCG licenses availed while importing machinery for its hotel, which was under construction. The fixed deposits, as such, were made to facilitate the construction of the Assessee's hotel, i.e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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