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TMI Blog2024 (7) TMI 393X X X X Extracts X X X X X X X X Extracts X X X X ..... ion report so furnished by the assessee. Rather, in the present case, the AO treated the value of the premium on the shares at Rs. Nil without following any of the methods prescribed under the relevant Rules. It is evident from the record that the AO by comparing the financials of the assessee and Projected Summarised Financials in the valuation report noted that the assessee has in fact incurred loss during the assessment year 2018-19. As decided in Cinestaan Entertainment Pvt. Ltd., [ 2021 (3) TMI 239 - DELHI HIGH COURT] that the valuer makes a forecast of approximation based on the potential value of business, while the underline facts and assumptions can undergo change over a period of time. The Hon ble High Court further held that valuation is not an exact science, and therefore cannot be done with arithmetic precision. Undoubtedly, section 56(2)(viib) of the Act is an anti-abuse provision brought in the statute to prevent the practice of transferring shares of specified company for no or inadequate consideration. As pertinent to note that in the present case, the shares of the assessee were subscribed not by a sister concern or any closely related person but by an outside inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the aforesaid decision, we direct the AO to delete the disallowance made under section 36(1)(iii) of the Act in respect of interest-free advances given to M/s Dharmatar Infrastructure Private Limited. Accordingly, grounds no. 1-3 raised in assessee s appeal are allowed. - BEFORE SHRI B.R. BASKARAN, ACCOUNTANT MEMBER AND SHRI SANDEEP SINGH KARHAIL, JUDICIAL MEMBER For the Assessee : Shri Nishant Thakkar a/w Ms. Jasmin Amlsadwala For the Revenue : Shri R.A. Dhyani and Shri H.M. Bhatt ORDER PER SANDEEP SINGH KARHAIL, J.M. The present cross appeals have been filed challenging the impugned order dated 06/11/2019, passed under section 250 of the Income Tax Act, 1961 ( the Act ) by the learned Commissioner of Income Tax (Appeals) 8, Mumbai, [ learned CIT(A) ], for the assessment year 2016-17. 2. In its appeal, the Revenue has raised the following grounds: 1. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) is justified in deleting the disallowance made u/s 56(2)(viib) of the Act without appreciating the fact that shares have been allotted on premium of Rs. 590 only on the basis of valuation report which was not supported by the documentary evidences? 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... confirming the initiation of Penalty proceeding u/s 274 r.w.s. 271(1)(c) of the Act. 5. The Hon'ble CIT(Appeals) has erred in law and facts by confirming the levy of interest u/s 234B and 234C of the Act. Your Appellant craves leave to add to, alter, amend, delete and/or modify the above grounds of appeal on or before the final date of hearing. 7. The Appellant prays your honour for allowing the appeal. 4. The issue arising in grounds no. 1 and 2, raised in Revenue s appeal, pertains to the deletion of disallowance made under section 56(2)(viib) of the Act. 5. The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is engaged in giving port and port-related logistics services at PNP Port, Dharmtar, District Raigad, Maharashtra. For the year under consideration, the assessee filed its return of income on 16/10/2016 declaring a total income of Rs. 24,77,23,700. The return filed by the assessee was selected for scrutiny and statutory notices under section 143(2) as well as section 142(1) were issued and served on the assessee. From the perusal of the financial statement of the assessee, it was observed that the assessee has issued 10,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Discounted Cash Flow ( DCF ) method. The learned CIT(A) further held that the share premium was given by no less than a company of the stature of Shapoorji Pallonji Company Private Limited, which cannot be expected to be charged unjustified over- valuation of shares and who must have invested after doing their due diligence. The learned CIT(A) held that the assessee has submitted the valuation report by an auditor as per Explanation-(a)(ii) to section 56(2)(viib) of the Act, according to which the fair market value of the unquoted shares comes to Rs. 735, however in the present case the assessee has adopted a value of Rs. 600 only which is much less than the fair market value as per the valuation report adopting the DCF method. Accordingly, the learned CIT(A) held that the fair market value of the shares computed by the assessee as per Rule 11UA is correct and deleted the addition of Rs. 58,99,99,990 as share premium under section 56(2)(viib) of the Act. Being aggrieved, the Revenue is in appeal before us. 7. We have considered the submissions of both sides and perused the material available on record. The assessee raised funds through the issue of equity shares to Shapoorji Pallo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordance with the prescribed method. Rule 11UA(2) of the Rules prescribes Net Asset Value ( NAV ) method and DCF method for the determination of the fair market value of the shares for the purposes of sub-clause (i) of clause (a) of the Explanation to section 56(2)(viib) of the Act. Further, under Rule 11UA(2) of the Rules, the assessee has the option to carry out a valuation and determine fair market value as per any of the aforesaid methods. 10. In the present case, it is undisputed that the assessee opted for valuation as per the DCF method and the auditor arrived at the fair market value of Rs. 735 per share. Since the assessee had issued the shares at Rs. 600 (including a premium of Rs. 590), which was lower than the fair market value determined by the auditor on the basis of the DCF method, the assessee claimed that section 56(2)(viib) of the Act is not applicable, as the said section only brings to tax the consideration in excess of the fair market value. In the alternative, during the appellate proceedings before the learned CIT(A), the assessee also furnished the fair market value of the shares at Rs. 410.14 per share as per the NAV method. However, it is evident from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore cannot be done with arithmetic precision. The relevant findings of the Hon ble High Court, in the aforesaid decision, are reproduced as under:- 13. ..There is no dispute that methodology adopted by the Respondent- Assessee has been done applying a recognized and accepted method. Since the performance did not match the projections, Revenue sought to challenge the valuation, on that footing. This approach lacks material foundation and is irrational since the valuation is intrinsically based on projections which can be affected by various factors. We cannot lose sight of the fact that the valuer makes forecast or approximation, based on potential value of business. However, the underline facts and assumptions can undergo change over a period of time. The Courts have repeatedly held that valuation is not an exact science, and therefore cannot be done with arithmetic precision. It is a technical and complex problem which can be appropriately left to the consideration and wisdom of experts in the field of accountancy, having regard to the imponderables which enter the process of valuation of shares. The Appellant-Revenue is unable to demonstrate that the methodology adopted by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bank of Maharashtra was taken for the acquisition of assets and for making payments to the parties during the course of business. It was further submitted that the interest-free advances to related parties were during the course of business and it was out of the funds raised from the issue of shares and the reserve and surplus on hand. The assessee further submitted that the interest-free advances were given to M/s Dharmatar Infrastructure Private Limited, a related party, who had allowed exclusive use of 139 acres of land adjacent to its jetties and a custom-notified area along with Railway siding warehouses and administrative buildings on lease. It was further submitted that the said infrastructure was used for the port operations and only because of the use of the said infrastructure, the assessee could achieve a turnover of Rs. 128.65 crore and earned profit which was offered to tax. 15. The AO, vide assessment order, did not agree with the submissions of the assessee and held that the investments made were clearly not for the purpose of business and profession. It was further held that the assessee has not justified making the investment in zero coupon debentures in PNP Infra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the aforesaid interest expenditure, the AO was of the view that investment of Rs. 42,80,00,000 in zero coupon debentures in PNP Infra Projects Pvt. Ltd. and security deposit amount of Rs. 100,12,02,392 given to M/s Dharmatar Infrastructure Private Limited were not for the purpose of business and there is a possibility that the assessee has utilised the interest- bearing funds for the purpose of giving the interest-free advances/deposits/investments to the relatives and others. 18. As per the assessee, the zero coupon debentures of Rs. 42,80,00,000 was pursuant to the Debenture Subscription Agreement and Share Transfer Agreement dated 01/04/2015 with PNP Infra Projects Pvt. Ltd., where under the assessee transferred fixed assets, financial assets, shares and land for a total consideration of Rs. 42,80,88,952 with effect from 01/04/2015. As a consideration in respect of the transfer of assets and liabilities, PNP Infra Projects Pvt. Ltd. issued 428 unlisted non-convertible zero coupon secured debentures, having a face value of Rs. 10,00,000 each, amounting to Rs. 42,80,00,000 and the balance consideration of Rs. 88,952 was paid in cash to the assessee. As per the assessee, it has rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be sale consideration instead of investment as claimed by the Revenue, therefore it is evident that the assessee had sufficient own funds for giving interest-free deposit of Rs. 100,12,02,392 to M/s Dharmatar Infrastructure Private Limited. We find that the Hon'ble Jurisdictional High Court in CIT v/s Reliance Utilities Power Ltd., [2009] 313 ITR 340 (Bom.), held that if funds are available with the assessee, which are sufficient to meet the investment, then presumption would arise that the investment is made out of funds so available with the assessee and, therefore, no disallowance under section 36(1)(iii) can be made. In view of the above, respectfully following the aforesaid decision, we direct the AO to delete the disallowance made under section 36(1)(iii) of the Act in respect of interest-free advances given to M/s Dharmatar Infrastructure Private Limited. Accordingly, grounds no. 1-3 raised in assessee s appeal are allowed. 21. Ground No. 5 raised in Revenue s appeal is general in nature and is dismissed in view of our findings on other grounds in Revenue s appeal. 22. Ground No. 4 raised in assessee s appeal pertains to the initiation of penalty proceedings, which is ..... 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