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TMI Blog2024 (7) TMI 1332X X X X Extracts X X X X X X X X Extracts X X X X ..... ney. The transaction between a wholly owned subsidiary and its holding company does not create any unaccounted income or inflated share value for tax evasion purposes unless it is specifically proved. CIT(A) correctly applied the provisions of law and judicial precedents in deleting the addition made by the AO. The valuation of shares based on the DCF method is valid, and the AO s objections lack merit. The order of the CIT(A) is upheld. The addition u/s 56(2)(viib) of the Act is hereby deleted. Appeal filed by the Revenue is dismissed. - Shri Siddhartha Nautiyal, Judicial Member And Shri Makarand V. Mahadeokar, Accountant Member For the Assessee : Shri Vartik Chokshi And Shri Dhrunal Bhatt, ARs For the Revenue : Shri Kamlesh Makwana, CIT-DR ORDER PER SHRI MAKARAND V. MAHADEOKAR, AM: This appeal is filed by the Revenue against the order dated 09/07/2020 passed by the Commissioner of Income Tax (Appeals)-32, New Delhi [hereinafter referred to as CIT(A) in short] arising out of the assessment order dated 11/12/2018 passed by the Assessing Officer (AO) under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act ) relevant to the Assessment Year (AY) 2016-17. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the projections are far from reality and the financials used by the Valuer are not up to the date of certificate. 2.3. Not satisfied with the order of AO, the assessee filed an appeal before the Ld.CIT(A), who partly allowed the appeal by deleting addition of Rs. 79,19,01,000/- made u/s 56(2)(viib) of the Act. The relevant paras from the order are reproduced hereunder for the sake of clarity: 5.4.3 On merits Mr Verma submitted that the Valuation, having been in accordance the provisions of Law and the Rules prescribed by the CBDT/Legislatures, is the correct one and therefore, FMV is neither against the so called correct parameters nor is exaggerated in value and as submitted hereinbefore, Assessing Officer having no power to reject the valuation and substitute his own method/valuation, this reason is not relevant at all so as to reject the valuation. 5.4.4 On the point of justification of the method adopted for valuing the 'CCPS' and disclaimer given by the C.A. reference was made to the Para 5.4 of the Appellate Order in case of Appellant's group Company M/s First Class Infrabuild Pvt. Ltd. wherein both these issues had been discussed and decided by the CIT(A)-3 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-determined state of mind of the Officer to make addition. Referring to the provisions of Explanation to section 56(2)(viib) of the Act and the provisions of Rule 11UA(1)(c)(c) and Rule 11UA(2) it was submitted that the Legislature has provided different methods for computing fair market value' of 'unquoted equity shares' and unquoted shares other than the equity shares' and so far Appellant's case is concerned, the fair market value' of 'CCPS' having been estimated in accordance with the provisions of Rule 11UA(1)(c)(c), A.O. had no jurisdiction/power to object to the same and substitute his valuation. It was further submitted that as far as Rule 11UA (2) is concerned, firstly, this Rule is for computing the fair market value' of 'unquoted equity shares' and secondly, Rule has given option to the Assessee to compute the value in accordance with Rule 11UA(2)(a) or Rule 11UA(2)(b) and for that purpose the assessee has to be allowed an opportunity to select its option, which was missing in this case. According to him A.O. did not have jurisdiction/power either to reject the Valuation Report or to substitute his own value computed under Rul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erted after a period of 18 yrs, compulsorily, in 100 shares of face value of Rs. 10/- each, the value of Rs. 1000/- of each CCPS as on the date of allotment could not be said to be unreasonable or in excess of the F.M.V. on that date. Therefore, appellant's case is out of the provisions of section 56(2)(viib). The addition under appeal is therefore, directed to be deleted on this count also. Therefore, the addition of Rs. 79,19,01,000/- u/s 56(2)(viib) is hereby deleted. Accordingly, grounds of appeals no. 2 to 6 on this addition are allowed. 3. Aggrieved by the order of the Ld.CIT(A), the Revenue is in appeal before us with following grounds of appeal: 1. The Ld.CIT(A) has erred in law and on facts in deleting the addition of Rs 79, 19,01,000/- U/s 56(2) (viib) of the IT Act 2. The Ld CIT(A) failed to appreciate that to arrive at fair value of the unquoted noncumulative compulsory convertible preference shares, the Valuer has taken future cash flows as certified by Management without verifying the projections and assumptions adopted by the management. 2.1. The CIT(A) failed to appreciate that the valuation has been determined based on unverified exorbitant cash flow given by m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Tax Officer, Ward 1(4), New Delhi [2018] 94 taxmann.com 112 (Delhi Trib.) where the AO rejected the valuation report and independently determined FMV of the shares as the Merchant banker had solely relied upon the assumed data without independent verification or truthfulness and completeness of information. 5. The Ld.Authorised Representative (AR) of the assessee stated that the assessee is a wholly owned subsidiary of holding company Hindustan Cleanenergy Ltd. to whom 7,99,900 Compulsorily Convertible Preference Shares (CCPS) of face value of Rs. 10/- each are issued at a premium of Rs. 990/- per share. He further stated that as per the terms of issue of CCPS, these shares will be compulsorily converted into equity shares within a period of 18 years from the date of issue at the option of the company or shareholder in the ratio of 100:1 meaning 100 equity shares in lieu of 1 CCPS or as may be determined by the company at the time before such conversion. 5.1. The Ld.AR further stated that the Valuer was issued notice u/s 133(6) of the Act by the AO calling for the information and the Valuer submitted all the details called for. He also stated that the Valuer reviewed the financi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... favour of the assessee, supporting the Valuer's methodology and disclaimers. The Ld.CIT(A) has cited the ITAT Bangalore Bench's decision in the case of Innovit Payment Solutions Pvt. Ltd. to reinforce the process and principles for scrutinizing valuation reports. The Ld.CIT(A) reinforced that Valuers must provide disclaimers due to the inherent uncertainties in valuations. The decision cited by the Ld.CIT(A) underscores that the AO can scrutinize, but not arbitrarily reject a valuation without proper reasons and adherence to the DCF method, which cannot be changed by the AO. The CIT(A) found fault with the AO s interpretation of Section 56(2)(viib) and Rule 11UA. The Ld.CIT(A) deemed that the AO s rejection of the valuation report beyond his jurisdiction, especially when the valuation is done as per Rule 11UA(1)(c)(c). Thus, the Ld.CIT(A) s decision systematically dissects the AO s actions, emphasizing adherence to legal procedures and the importance of a fair valuation process. 6.2. We have reviewed the judicial pronouncements relied on by the Ld.DR. The decision of Delhi Bench of ITAT in the case of Agro Portfolio (P.) Ltd. (supra) is not applicable in the present case a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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