Income Tax Appellate Tribunal - Jaipur
M/S Sahu Minerals And Properties Ltd., ... vs Income Tax Officer, Jaipur on 2 May, 2018
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IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR
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BEFORE: SHRI VIJAY PAL RAO, JM AND SHRI VIKRAM SINGH YADAV, AM
vk;dj vihy la-@ITA No. 895/JP/2017
fu/kZkj.k o"kZ@Assessment Year : 2014-15.
M/s. Sahu Minerals and Properties Ltd., cuke The Income Tax Officer,
Plot No. D-04, Second Floor, Vs. Ward 2(2),
Lalpura House, Shakti Singh Marg, Jaipur.
Jaipur.
LFkk;h ys[kk la-@thvkbZvkj la-@PAN No. AAFCS 9161 A
vihykFkhZ@Appellant izR;FkhZ@Respondent
fu/kZkfjrh dh vksj ls@ Assessee by : Shri Rajeev Sogani (CA)
jktLo dh vksj ls@ Revenue by: Smt. Manisha Chandra (CIT)
lquokbZ dh rkjh[k@ Date of Hearing : 17.12.2018
?kks"k.kk dh rkjh[k@ Date of Pronouncement : 07/01/2019.
vkns'k@ ORDER
PER VIJAY PAL RAO, JM :
This appeal by the assessee is directed against the order dated 27th September, 2017 of ld. CIT (A)-I, Jaipur for the assessment year 2014-15. The assessee has raised the following grounds :-
" 1. In the facts and circumstances of the case ld. CIT (A) has erred in holding that the Assessing Officer who passed the impugned assessment order had proper jurisdiction over the appellant company. Relief may please be granted by quashing the entire assessment order being without jurisdiction.
2.(a) In the facts and circumstances of the case ld. CIT (A) has erred in confirming the action of the ld. AO in adding a sum of Rs. 42,83,96,680/- u/s 56(2)(viib) of Income Tax Act, 1961, on account of alleged excess share premium amount received by the assessee company. The action of ld. CIT (A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by deleting the said addition of Rs. 42,83,96,680/-.2 ITA No. 895/JP/2017
M/s. Sahu Minerals & Properties Ltd., Jaipur.
(b) In the facts and circumstances of the case ld. CIT (A) has erred in interpreting and applying the Rules 11 U and 11UA of Income Tax Rules, 1962. The action of ld. CIT (A) is illegal, unjustified, arbitrary and against the f acts of the case. Relief may please be granted by applying the said rules properly and deleting the addition of Rs.
42,83,96,680/-.
(c) In the facts and circumstances of the case ld. CIT (A) has erred in not accepting the contention of the assessee Company of it being a Company in which public is substantially interested u/s 2(18) of the Income Tax Act, 1961 and, accordingly, provision of section 56(2)(viib) being applicable. Relief may please be granted by deleting the said addition of Rs. 42,83,96,680/-.
(d) In the facts and circumstances of the case ld. CIT (A) has erred in not accepting the FMV of land at Rs. 21,73,21,000/- for the purpose of valuing equity shares of the company for determining excess premium chargeable to tax u/s 56(2)(viib). The action of ld. CIT (A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by deleting the addition of Rs. 42,83,96,680/- being no excess premium received by the company.
(e) In the facts and circumstances of the case ld. CIT (A) has erred in rejecting the valuation Report of Chartered Accountant as well as Approved Valuer for determining the value of equity shares of company to determine excess premium chargeable to tax u/s 56(2)(viib). The action of ld. CIT (A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may be please granted by valuing the shares in accordance with the report of Chartered Accountant as well as Approved Valuer and deleting the addition of Rs. 42,83,96,680/-.
(f) In the facts and circumstances of the case ld. CIT (A) has erred in confirming the valuation of equity shares of the company done by ld. A.O. The action of ld. CIT (A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by accepting the valuation done by assessee.
3. In the facts and circumstances of the case ld. CIT (A) has erred in not allowing the set off of the current year loss of Rs. 3,97,619/- from the addition made u/s 56(2)(viib). The action of ld. CIT (A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by allowing the set off of current year loss claimed by the assessee, as per the provisions of Income Tax Act, 1961.
4. The assessee craves its right to add, amend or alter any of the grounds on or before the hearing. "
3ITA No. 895/JP/2017
M/s. Sahu Minerals & Properties Ltd., Jaipur.
2. The appeal of the assessee was decided by the Tribunal vide order dated 2nd May, 2018 whereby the issue of fair market value of shares as per the method prescribed under Rule 11UA of IT Rules for the purpose of section 56(2)(viib) of the IT Act was decided against the assessee. Subsequently, the assessee filed a Miscellaneous Application No. 81/JP/2018 and vide order dated 3rd August, 2018 the Tribunal recalled the earlier order dated 2nd May, 2018 to the extent of considering the fair market price of the shares in terms of the method prescribed under clause
(ii) of Explanation (a) of section 56(2)(viib) of the IT Act.
3. We have heard the ld. A/R as well as the ld. D/R and considered the relevant material on record. The ld. A/R of the assessee has submitted that the assessee filed the valuation report of the Chartered Accountant as well as valuation report of the approved valuer in support of the claim of fair market price of the shares issued by the assessee at premium. Therefore, the evidence produced by the assessee clearly shows that the assessee claimed the fair market price based on the valuation as prescribed under clause (ii) of Explanation (a) of section 56(2)(viib) of the IT Act.
He has further contended that once the assessee has filed the supporting evidence in the shape of the valuation report, then in case the AO was not satisfied with the valuation of the assessee, the matter ought to have been referred to the DVO. The AO has valued the fair market price of the shares as per the method provided under Rule 11UA of the IT Rules whereas as per section 56(2)(viib) of the IT Act the fair market value of the shares shall be the value as may be determined in accordance with such method as may be prescribed or as may be substantiated by the company to the satisfaction of the AO based on the valuation on the date of issue of shares of its assets including intangible assets whichever is higher. Therefore, the valuation 4 ITA No. 895/JP/2017 M/s. Sahu Minerals & Properties Ltd., Jaipur.
as per the prescribed method or as per the value of the assets of the company as on the date of issue of shares whichever is higher has to be taken into consideration. Thus the ld. A/R has contended that the assessee proved the claim of issuance of shares at premium by furnishing the valuation reports of the Chartered Accountant as well as the prescribed valuer.
4. On the other hand, the ld. D/R has submitted that though during the assessment proceedings the assessee has claimed its valuation as per the prescribed method under Rule 11UA, however, even the value to be considered as per the value of the assets as on the date of issue of shares the assessee was not having any asset except the alleged land at Kolkata. The ld. D/R has submitted that the AO has conducted an enquiry through the TRO in the Office of Principal CIT, Kolkata for recovery of outstanding demand and found that the alleged land/property situated at premises no. 19/1, Burdwan Road, Alipore does not exist at the alleged place and further the Kolkata Municipal Corporation also confirmed that the premises no. 19/1, Burdwan Road, Alipore, Ward no. 74 does not exist in the system database of Kolkata Municipal Corporation. The ld. D/R has thus submitted that once the property was not found situated at the given address, then the value of the said property cannot be considered for the purpose of fair market price of the shares issued by the assessee. He has relied upon the orders of the authorities below.
5. We have considered the rival submissions as well as the relevant material on record. So far as the issue of fair market value of the shares as per the prescribed method, the same was already decided by the Tribunal vide order dated 2nd May, 2018 and to that extent the said order of the Tribunal has attained the finality. However, subsequently on the Miscellaneous Application filed by the assessee, the 5 ITA No. 895/JP/2017 M/s. Sahu Minerals & Properties Ltd., Jaipur.
Tribunal vide order dated 03.08.2018 has recalled the earlier order for limited purpose of considering the fair market value of the shares as per valuation determined in terms of the clause (ii) of Explanation (a) to section 56(2)(viib) of the Act. The relevant part of the order in the Miscellaneous Application in para 4 is as under :-
"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 reports Government approved valuer. Further, a certificate from the ' relevant authority from Government 6 ITA No. 895/JP/2017 M/s. Sahu Minerals & Properties Ltd., Jaipur.
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 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."
7ITA No. 895/JP/2017
M/s. Sahu Minerals & Properties Ltd., Jaipur.
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 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 8 ITA No. 895/JP/2017 M/s. Sahu Minerals & Properties Ltd., Jaipur.
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 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 9 ITA No. 895/JP/2017 M/s. Sahu Minerals & Properties Ltd., Jaipur.
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 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;10 ITA No. 895/JP/2017
M/s. Sahu Minerals & Properties Ltd., Jaipur.
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 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 11 ITA No. 895/JP/2017 M/s. Sahu Minerals & Properties Ltd., Jaipur.
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. 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."
Thus it is clear that the finding on the issue of valuation of the fair market price of the shares in terms of the method prescribed under Rule 11UA of IT Rules has attained the finality and the Tribunal has not disturbed the said finding while passing the order in the Miscellaneous Application. The earlier order was recalled only for the limited purpose of valuation of fair market value of the shares in terms of clause
(ii) of Explanation (a) to section 56(2)(viib) of the IT Act which was not adjudicated earlier. Therefore, in the recalled proceedings the scope is limited to consider the valuation of fair market value of the shares by considering the method as prescribed under clause (ii) of Explanation (a) to section 56(2)(viib) of the IT Act. We find that the assessee has filed the valuation report given by the Chartered Accountant Shri 12 ITA No. 895/JP/2017 M/s. Sahu Minerals & Properties Ltd., Jaipur.
Ritesh Gupta as well as the valuation report of the approved valuer Shri Prabir Kumar Chaudhuri in support of the fair market value of the shares. In those valuation reports the assessee has shown the market price of the assets at Rs. 22,89,01,740/-. This value of assets mainly consists of valuation of the property situated at Kolkata bearing no. 19/1, Burdwan Road, Alipore, Ward No. 74, Alipore District, South 24 Parganas at Rs. 21,73,21,000/-. The valuation of the property at Kolkata is the major part of the total assets and therefore, the correct and true value of the property at Kolkata is inevitable part of the process of the fair market value of the shares issued by the assessee. The AO has taken the value of the said property as per the book value which is shown at the cost price and not at the market value whereas the ld. CIT (A) has conducted some verification at his level and found that the valuation of the property after applying 32% discount on account of encumbrance comes to Rs. 18,23,74,333/-. The fair market value of the shares as per clause (ii) of Explanation (a) to section 56(2)(viib) has to be taken based on the value of the assets including intangible assets of the company as on the date of issue of shares which connotes that the value as on the date of issue and not as per the book value or at cost. Hence we find merit in the submission of the learned A/R that fair market value of the shares has to be computed by taking the market value of the assets of the assessee company as on the date of issue of shares. We find that the land/property situated at Kolkata is not free from encumbrances as assessee had admitted that there is encroachment in the said land and, therefore, it becomes essential to value the said property after finding out the actual status of the land/property in question. Therefore, the issue requires a proper verification and enquiry at the level of the Assessing Officer and in case the AO does not 13 ITA No. 895/JP/2017 M/s. Sahu Minerals & Properties Ltd., Jaipur.
agree with the value claimed by the assessee, the matter is required to be referred to the DVO for the purpose of determining the value of the assets of the assessee as on the date of issue of shares. Since the land in question is situated at Kolkata, therefore, a proper enquiry is required to be conducted to find out the true and correct value of the land at the hand of the assessee. Accordingly, the matter of fair market value of the shares as per the method provided under clause (ii) of Explanation (a) to section 56(2)(viib) of the IT Act is set aside to the record of the AO for fresh adjudication in terms of the above order.
6. In the result, appeal of the assessee is allowed for statistical purposes.
Order is pronounced in the open court on 07/01/2019.
Sd/- Sd/-
(foØe flag ;kno) (fot; iky jkWo ½
(VIKRAM SINGH YADAV ) (VIJAY PAL RAO)
ys[kk lnL;@Accountant Member U;kf;d lnL;@Judicial Member
Jaipur
Dated:- 07/01/2019.
Das/
vkns'k dh izfrfyfi vxzfs "kr@Copy of the order forwarded to:
1. The Appellant- M/s. Sahu Minerals and Properties Ltd., Jaipur.
2. The Respondent - The ITO Ward 2(2), Jaipur.
3. The CIT(A).
4. The CIT,
5. The DR, ITAT, Jaipur
6. Guard File (ITA No. 895/JP/2017) vkns'kkuqlkj@ By order, lgk;d iathdkj@ Assistant. Registrar 14 ITA No. 895/JP/2017 M/s. Sahu Minerals & Properties Ltd., Jaipur.