Income Tax Appellate Tribunal - Jaipur
M/S Sahu Minerals And Properties Ltd., ... vs Income Tax Officer, Jaipur on 3 August, 2018
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IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR
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BEFORE: SHRI VIJAY PAL RAO, JM & SHRI VIKRAM SINGH YADAV, AM
M.A. No. 81/JP/2018
(Arising out of ITA No. 895/JP/2017)
fu/kZkj.k o"kZ@Assessment Year : 2014-15
M/s Sahu Minerals & Properties Limited, cuke I.T.O.,
Plot No. D-04, Second Floor, Lalpura Vs. Ward 2(2),
House, Shakti Singh Marg, Jaipur. Jaipur.
LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AAFCS 9161 A
vihykFkhZ@Appellant izR;FkhZ@Respondent
fu/kZkfjrh dh vksj ls@ Assessee by : Shri Rajiv Sogani (CA)
jktLo dh vksj ls@ Revenue by : Shri J.C. Kulhari (JCIT)
lquokbZ dh rkjh[k@ Date of Hearing : 27/07/2018
mn?kks"k.kk dh rkjh[k@ Date of Pronouncement : 03/08/2018
vkns'k@ ORDER
PER: VIJAY PAL RAO, J.M. By way of this Misc. application, the assessee is seeking rectification in the order dated 02/05/2018 of this Tribunal passed in ITA No. 895/JP/2017.
2. The ld. A.R. of the assessee has submitted that the issue involved in the appeal of the assessee was valuation of fair market value of the shares issued by the assessee at premium U/s 56(2)(viib) of the Income Tax Act, 1961 (in short the Act) read with explanation to the said Section.
2 MA 81/JP/2018_ M/s Sahu Minerals & Properties Ltd. Vs ITO The ld AR has pointed out that the Tribunal, though, decided the issue of valuation by considering the methods prescribed under Rule 11UA of the Income Tax Rules, 1962 (in short the Rules) whereas the assessee claimed the value of the asset and fair market value of the shares in terms of Clause (i) of Explanation (a) to Section 56(2)(viib) of the Act.
The finding of the Tribunal is based on Explanation (a)(i) to Section 56(2)(viib) of the Act and therefore, the issue of valuation as per Explanation (a)(ii) has not been adjudicated by the Tribunal. The ld AR has referred to the contention of the assessee in para 3.1 of the impugned order and submitted that the assessee raised this contention that it has valued the fair market value of shares based on Clause (ii) of Explanation (a) and not (i) of Explanation (a) to Section 56(2)(viib) of the Act. Hence, there is a mistake correcting the impugned order for not considering and adjudicating the issue of valuation in terms of Clause (ii) of Explanation (a) to Section 56(2)(viib) of the Act. The ld AR has thus pleaded that the impugned order may be recalled to the extent of adjudication of the contention and issue of valuation of shares in terms of Clause (ii) of Explanation (a) of Section 56(2)(viib) of the Act.
3. On the other hand, the ld DR has submitted that the Tribunal has given the findings on merits after considering the facts of the case and 3 MA 81/JP/2018_ M/s Sahu Minerals & Properties Ltd. Vs ITO therefore, the said findings given on the merits, cannot be reviewed or revised in the proceeding U/s 254(2) of the Act. He has objected to the Misc. application of the assessee.
4. We have heard the rival submissions as well as relevant material on record. The assessee has alleged mistake in the impugned order for not considering and adjudication of the issue of valuation in terms of Clause
(ii) of Explanation (a) of Section 56(2)(viib) of the Act. We find that the assessee had raised this contention as recorded by the Tribunal in para 3.1 as under:
"3.1 Before us, the Id. A/R of the assessee has submitted that as per Explanation (a)(ii) to section 56(2)(viib) the assessee has to substantiate the valuation-of its shares with reference to market value of its assets. Therefore, the valuation determined by the AO on the basis of book value is not as per the provisions of section 56(2)(viib) of the Act read with Explanation (a)(ii). The Id. A/R has submitted that the value as per the said Explanation has to be taken as market value and, therefore, the fair market value of the shares were rightly determined in the valuation report produced by the assessee as per the Certificate of the Registered Valuer. He has further contended that the assessee company has taken the fair market value of its land at Rs. 21,73,21,000/- after giving due deduction on account of encroachments/encumbrances @ 32%. The AO has taken the value of the land at book value of Rs. 23,19,211/- which is not the mandate of the provisions of section 56(2)(viib). The assessee had substantiated the valuation by producing the valuation report of the Chartered Accountant Shri Rftesh Gupta as well as the valuation 4 MA 81/JP/2018_ M/s Sahu Minerals & Properties Ltd. Vs ITO reports Government approved valuer. Further, a certificate from the ' relevant authority from Government of West Bengal certifying the value of the land was also produced. The Id. A/R has forcefully contended that when the Chartered Accountant has evaluated the information by using his expert knowledge and only on his satisfaction he has issued the Certificate, then the valuation report based on the certificate of the Chartered Accountant cannot be rejected without bringing the contrary material on record. The Id. CIT (A) has given the instance of DLC rates of the similarly situated land which also corroborates the claim of the assessee though the rates cited by the Id. CIT (A) were without any deduction on account of encroachments/encumbrances. Thus the Id. A/R has submitted that the rejection of valuation report by the Id. CIT (A) is not justified. He has further contended that the assessee had made a specific request for referring the land valuation to the DVO.
However, the AO rejected the request for reference to the DVO on the reason that no such reference is possible under section 56(2)(viib) and that the reference under section 55A is related with capital gain income. The ld. A/R of the assessee has referred to the provisions of section 55A and contended that the section provides ascertaining the fair market value of a capital asset for the purpose of this chapter. Therefore, section 56 as well as section 55A fall in the same Chapter IV of the Act and hence the provisions of section 55A are applicable for ascertaining the valuation of the land for the purpose of section 56(2)(viib) of the Act. He has further contended that even otherwise as per section 142A of the Act, the AO is empowered to refer the valuation of any asset to Valuation Officer for the purpose of assessment or re-assessment. Thus the Id. A/R has submitted that the rejection of the request by the AO is contrary to the provisions of law. The Id. CIT (A) has taken up the role of Valuation Officer while deciding the issue instead of referring the matter to the DVO. In support of his contention, he has relied upon the 5 MA 81/JP/2018_ M/s Sahu Minerals & Properties Ltd. Vs ITO decision of Mumbai Bench of the Tribunal in case of Patel India vs. DCIT, 105 Taxman 28. The Id. A/R has submitted that the Mumbai Bench of the Tribunal has observed that the valuation is a highly technical matter and deserves to be referred to the Valuation Cell."
Thus, the assessee has contended before the Tribunal that the assessee has substantiated the value of its shares in terms of Clause(ii) of Explanation (a) of Section 56(2)(viib) of the Act. However, the Tribunal while deciding the issue of valuation, has considered the valuation as per the prescribed method under Rule 11UA of the Rules which are prescribed in terms of Clause (i) of Explanation (a) to Section 56(2)(viib) of the Act.
The findings of the Tribunal in para 4 is as under:
"4. We have considered the rival submissions as well as relevant material on record. The only dispute raised before us is regarding the fair market value of the shares of the assessee and further the value of the land in question which is at variance as taken by the assessee and adopted by the AO on different parameters. The AO has adopted the value of the land for the purpose of computing the net worth of the assessee as per the book value shown in the Balance Sheet whereas the assessee has claimed the value of the land by considering the market price of the land and after allowing the deduction @ 32% on account of encroachment/encumbrances. As per the provisions of section 56(2)(viib), the income being the difference between the consideration received by the assessee company for issue of shares and the fair market value of the shares. Thus in case the consideration received against the issue/allotment of shares exceeds the fair market value of the shares, the said excess amount received by the assessee has to be assessed as 6 MA 81/JP/2018_ M/s Sahu Minerals & Properties Ltd. Vs ITO income from other sources. Explanation to Section 56(2)(viib) defines the fair market value of the shares. For ready reference, we reproduce provisions of section 56(2)(viib) and Explanation (a)(ii) as under :-
56. (1) xxxxx xxxxxx.
(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head "Income from other sources", namely :--
[(viib) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares:
Provided that this Clause shall not apply where the consideration for issue of shares is received--
(i) by a venture capital undertaking from a venture capital company or a venture capital fund; or
(ii) by a company from a class or classes of persons as may be notified67 by the Central Government in this behalf. Explanation.--For the purposes of this Clause,--
(a) the fair market value of the shares shall be the value--
(i) Xxxxxx xxxxxx
(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;
Thus as per Clause (a) of the Explanation, the fair market value of shares shall be the value as may be determined in accordance with the methods prescribed. The method for this purpose is prescribed under Rule 11 UA of IT Rules. Further, if the valuation as adopted by the assessee is substantiated on the basis of the value of its assets to the satisfaction of the AO, then the said value as claimed by the assessee shall be the fair 7 MA 81/JP/2018_ M/s Sahu Minerals & Properties Ltd. Vs ITO market value of the shares. In case the AO is not satisfied with the value as claimed by the assessee then the only option with the AO to determine the fair market value in accordance with the method prescribed under Rule 11UA of IT Rules. Further, the value so determined as prescribed in rules or as per the value based on the assets of the company whichever is higher has to be taken into consideration. Thus if the value determined as per the prescribed method is higher than the fair market value based on the value of the assets of the company then the value so determined on the basis of prescribed method being the higher one has to be taken into consideration for the purpose of determining the fair market value of the shares and differential consideration, if any, to be taken into account for the purpose of making addition under section 56(2)(viib). In the case in hand, the AO has considered only the net asset method to determine the fair market value. Rule 11UA prescribes the method of computing the fair market value of unquoted equity shares for the purpose of Clause (a)(i) of Explanation to section 56(2)(viib). For ready reference, we reproduce Rule 11UA(2) as under :-
" [Rule 11UA (1) xxxx xxxxx (2) Notwithstanding anything contained in sub-Clause (b) of Clause (c) of sub- rule (1), the fair market value of unquoted equity shares for the purposes of sub- Clause (i) of Clause (a) of Explanation to Clause (viib) of sub-section (2) of section 56 shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner under Clause (a) or Clause (b), at the option of the assessee, namely:--
(A-L) ×
(a) the fair market value of unquoted equity shares = (PE) (PV), where, A = book value of the assets in the balance-sheet as reduced by any amount 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 and any amount shown in the balance-sheet as asset including the unamortised amount of deferred 8 MA 81/JP/2018_ M/s Sahu Minerals & Properties Ltd. Vs ITO expenditure which does not represent the value of any asset; 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 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 or an accountant as per the Discounted Free Cash Flow method. ]"
Thus sub-rule (2) of Rule 11UA prescribes two methods of computing the fair market value of shares and an option is given to the assessee for adopting the value by applying either of the two methods. The first method is based on the net worth of the company which was though taken by the AO and the second method is based on the fair market value as determined by a Merchandise banker or an Accountant as per the Discount Free Cash Flow Method. Thus as per the first method, the assets are to be taken as per the book value of the assets shown in the Balance Sheet and, therefore, this method does not prescribe the fair market price of the asset. The AO has applied the first method as per the Rule 11UA(2). It appears that even in the valuation report, the valuer has also applied this method and has not chosen the method based on Discount Free Cash Flow Method. Hence, both the AO as well as the
9 MA 81/JP/2018_ M/s Sahu Minerals & Properties Ltd. Vs ITO assessee opted the method provided under Clause (a) of Rule 11UA(2) of IT Rules and, therefore, there was no dispute regarding the net asset/net worth method applied by the AO as well as the assessee. Since the assessee has opted only the first method, therefore, there is no question of examining the value of the shares as per the second method provided in Clause (b) of Rule 11UA(2). The only dispute is the adoption of the value of the land which is shown as asset in the Balance Sheet at book value by the AO and at market price by the assessee. Going by the language and process as prescribed under Clause (a) of Rule 11UA(2), the only inference can be drawn is that the book value of the assets in the Balance Sheet has to be taken into account by reducing the book value of the liabilities as well as other deductions as prescribed thereunder and, therefore, the question of taking the market price of the asset does not arise under the said method. Since the assessee has not disputed the method and has opted only the net worth method as prescribed under the rule, therefore, we cannot go to examine the applicability of the other method in the case of the assessee. Thus when the rule does not provide the market price of the asset, then the assessee's claim has no leg to stand and accordingly the appeal of the assessee is without any merit."
Thus, it is evident from the finding on this issue that the Tribunal has adjudicated the issue of valuation in terms of Clause(i) of Explanation (a) to Section 56(2)(viib) of the Act read with Rule 11UA(2) of the I.T. Rules.
Therefore, the particular issue raised about the valuation of the fair market value of the shares in terms of Clause (ii) of Explanation (a) has not been adjudicated by the Tribunal while passing the impugned order.
10 MA 81/JP/2018_ M/s Sahu Minerals & Properties Ltd. Vs ITO Hence in the facts and circumstances of the case, we find that there is an error apparent on record for not adjudicating the issue of valuation in terms of Clause(ii) of Explanation (a) to Section 56(2)(viib) of the Act.
Accordingly, we recall the impugned order for the limited purpose of considering and adjudication of issue of valuation in terms of Clause (ii) of Explanation (a) to Section 56(2)(viib) of the Act. The appeal of the assessee is directed to be listed for hearing and adjudication of the particular issue on 10/09/2018. The parties be informed.
5. In the result, this Misc. application of the assessee is allowed.
Order pronounced in the open court on 03/08/2018.
Sd/- Sd/-
¼foØe flag ;kno½ ¼fot; iky jko½
(VIKRAM SINGH YADAV) (VIJAY PAL RAO)
ys[kk lnL;@Accountant Member U;kf;d lnL;@Judicial Member
Tk;iqj@Jaipur
fnukad@Dated:- 03rd August, 2018
*Ranjan
vkns'k dh izfrfyfi vxzsf'kr@Copy of the order forwarded to:
1. vihykFkhZ@The Appellant- M/s Sahu Minerals & Properties Limited, Jaipur.
2. izR;FkhZ@ The Respondent- The I.T.O., Ward 2(2), Jaipur.
3. vk;dj vk;qDr@ CIT
4. vk;dj vk;qDr¼vihy½@The CIT(A)
5. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k] t;iqj@DR, ITAT, Jaipur
6. xkMZ QkbZy@ Guard File (MA No. 81/JP/2018) vkns'kkuqlkj@ By order, lgk;d iathdkj@Asst. Registrar