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TMI Blog2024 (6) TMI 649X X X X Extracts X X X X X X X X Extracts X X X X ..... AV method is permissible only in the caseof issue of equity shares as per Rule 11UA(2) of the IT Rules. The converted equity shares on conversion of OCPS, when taken as a base for calculation of NAV, the premium charged would, statedly, be negligible or NIL as essentially found by the CIT(A) in paras 4.4 and 4.5 of its order. CIT(A) has endorsed this line of reasoning. We do find traction in such plea of the assessee that the FMV arrived at by the assessee is apparently justifiable when the calculation of the NAV is calculated with reference to the equity shares to be allotted on conversion. We do not see any cogent reason to discard the calculation of FMV with reference to quantity of equity share to arise on exercise of option relatable to issue of OCPS. Otherwise, the provisions of Rule 11UA(1)(c)(c) would be applicable which permits the Valuer to apply DCF method. Thus, seen from any angle, it is difficult to fault the valuation assigned for determination of FMV. Hence, action of the CIT(A) calls for no interference in terms of Rule 11UA(2) of the Rules. Thus, where the convertible shares have been allotted to wholly owned 100% holding company, the benefit if any arising to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for its flagship Solar power plant in the state of Tamil Nadu from its 100% holding company viz Hindustan Clean Energy Ltd. against which the assessee co. has allotted 1,00,000 Optionally Convertible Preference Shares (OCPS) of Rs. 1000/- having a face value of Rs. 10 at a premium of Rs. 990/-. The AO did not find the premium charged on issue of OCPS to be justifiable and thus rejected the FMV declared by the Assessee. The AO recomputed the Fair Market Value (FMV) of OCPS at Rs. 639.17 as against Rs. 1,000/- per OCPS received by the assessee. The AO observed that the share premium charged on issue of OCPS to M/s. Hindustan Clean Energy Ltd. is in excess of justifiable FMV and a sum of Rs. 3,60,83,000/- was thus quantified as excessive premium collected over FMV which was held to be susceptible to tax on the touchstone of section 56(2)(viib) of the Act. 4. Aggrieved, the assessee preferred appeal before the CIT(A). It was emphasized by the Assessee that the subscriber company, M/s. Hindustan Clean Energy Ltd. is 100% holding company of the assessee company and therefore, no motive of unlawful receipt of allegedly excess premium can be envisaged in such transactions between holding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ghtly taken the net asset value for shareholders, i.e. Rs. 1,77,42,664/- But denominator of 27759 number of shares is not correct. Because there are 10,000 equity shares and 17,759 OCPS, which are not equivalent. In this regard, balance sheet needs to be referred where number of shares outstanding as on 31.03.2015 are given, in point no. (d) of note 2 of the balance sheet it is cleared mentioned that every OCPS will be converted into 100 equity shares which means 1 OCPS is equivalent to 100 equity shares and vice versa. Accordingly, 10000 equity shares are equivalent to 100 (10000/100) OCPS. Therefore, for the purpose of getting actual value of OCPS, the equity has to be converted into equivalent OCPS so that correct value of shares could be calculated. Now effective number of OCPS is 17,859 (17759+100). Hence value of each OCPS is Rs. 993.48 (17742664/17859). 4.5 The AO though adopted the net asset value as per the appellant. But he equated the OCPS with those of equity shares and totaled the quantities without converting them as per their weightage. When 1 OCPS was equivalent to 100 equity shares in such case totaling could be done only after applying the conversion factor. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ever be done with arithmetic precision, hence the valuation by a Valuer has to be accepted unless, specific discrepancy in the figures and factors taken are found. Then AO or CIT (A) may refer to the Valuer to examine the same. 4.7 As per various tribunal orders, it was held that as per Rule 11UA(2), assessee could opt for DCF method and if assessee had so opted for DCF method, AO could not discard the same and adopt other method i.e. NAV method of valuing shares. In case of M/s. Rameshwaram Strong Glass (P) Ltd. vs. The ITO [2018] 172 ITD 571 (Jaipur - Trib.), the tribunal had reproduced relevant portion of another tribunal order rendered in case of ITO vs. M/s Universal Polypack (India) Pvt. Ltd. In such case, tribunal held that if assessee had opted for DC method, AO could not challenge the same but AO was well within his rights to examine methodology adopted by assessee and underlying assumptions and if he was not satisfied, he could challenge the same and suggest necessary modifications/alterations provided same were based on sound reasoning and rationale basis. In same tribunal order, a judgment of Bombay High Court was also taken note of having been rendered in case of Vodaf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of earlier year. Such facts are a matter of record with only discernible difference this year being, the assessee in the instance has the option available for conversion into equity shares within specified period whereas in the earlier year, the conversion was built mandatory in the issue of CCPS without any option (c) while the face value of pref. share is Rs. 10 at a premium of Rs. 990 per OCPS, however if the option is exercised, the subscriber would be entitled to 100 equity shares per OCPS and thus the number of converted equity shares to be reckoned would be 1,00,00,000 nos. instead of 10,000 shares adopted by Assessing Officer; on comparison of converted equity shares, it would be found that no premium is charged at all. 6.2 It is further case on behalf of the assessee that Rule 11UA(2) which prescribes NAV method of valuation is attributable to unquoted equity shares whereas present case relates to valuation of OCPS which falls for consideration under Rule 11UA(1)(c)(c). The OCPS being other than equity shares, the valuation done by the accountant ( who may value the security by DCF method) is in accord the mandate of the Rule and cannot be displaced without any cogent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... market value is supported by independent valuer report, the allotment has been made to the existing shareholder holding 100% equity and therefore, there is no change in the interest or control over the money by such issuance of shares. The object of deeming an unjustified premium charged on issue of share as taxable income under Section 56(2)(viib) is wholly inapplicable for transactions between holding and its subsidiary company where no income can be said to accrue to the ultimate beneficiary, i.e., holding company. The chargeability of deemed income arising from transactions between holding and subsidiary or vice versa militates against the solemn object of Section 56(2)(viib) of the Act. In this backdrop, the extent of inquiry on the purported credibility of premium charged does not really matter as no prejudice can possibly result from the outcome of such inquiry. Thus, the condition for applicability of Section 263 for inquiry into the transactions between to interwoven holding and subsidiary company is of no consequence. We also affirmatively note the decision of SMC Bench in the case of KBC India Pvt. Ltd. vs. ITO in ITA No.9710/Del/2019 order dated 02.11.2022 (SMC) where ..... X X X X Extracts X X X X X X X X Extracts X X X X
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