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(NAV) method had been accepted by the department in certain cases that have been adjudicated by various benches of the Tribunal. The Ld. AR in support of his aforesaid contention had drawn our attention to the order of the ITAT, Bengaluru in the case of Information Technology Park Ltd. Vs. ITO, ITA Nos. 1357 and 1358/Bang/2018 dated 24.08.2022, Page 194 to 205 of APB. Referring to the aforesaid judicial pronouncement, the Ld. AR submitted that in the said case, the "Net Asset Value" (NAV) method that was adopted for valuing the preference shares was not disputed by the Transfer Pricing Officer (TPO), who had applied the same method to work out the valuation. In fact, the controversy before the Bench had arisen only concerning the value of land and building that was considered by the TPO for arriving at NAV. The Ld. AR submitted that the Tribunal in the aforesaid case, had observed that on a conjoint reading of sub-clause (b) and (c) of Section 11UA(1)(c), it can safely be gathered that for valuation of preference shares, the M/s. Avinash Developers Pvt. Ltd. Vs. DCIT/ACIT, Circle-2(1), Raipur guideline value of the immovable property was to be adopted since the same represented economic and commercial value of the preference shares on the date of value. Also, the Ld. AR submitted that the aforesaid observation of the Tribunal read a/w. the fact that the A.O/TPO had adopted NAV method for determining the FMV of preference shares left no ambiguity on the aspect that the valuation of the preference shares could safely be carried out as per "Net Asset Value" method as was so done by the present assessee company.

(C) Re: A.O erred in rejecting the "Net Asset Value" method adopted by the assessee company for determining FMV of the subject preference shares:

38

M/s. Avinash Developers Pvt. Ltd. Vs. DCIT/ACIT, Circle-2(1), Raipur

38. As observed by us hereinabove, the assessee company had determined the FMV of the subject preference shares that were issued on 04.04.2016 to S/shri Anand Singhania and Priyank Singhania, director/ex-director at Rs. 121.58 per share based on the "Net Asset Value" (NAV) method, i.e the same method that was adopted for valuing the equity shares, Page 101 of APB. The aforesaid factual position can safely be gathered from the valuation certificate dated 05.04.2016 obtained by the assessee company from its Chartered accountant, and also, the latter's "affidavit" dated 04.12.2023 that was filed in the course of the proceedings before us.

39. Ostensibly, the A.O was of the view that as the equity and preference shares could not be placed on the same pedestal, therefore, determination of the FMV of the preference shares based on the "Net Asset Value" (NAV) method by the assessee company did not merit acceptance. The A.O., observed, that as the preference shares were quasi-debt instruments, which were differently placed in comparison to equity shares, therefore, the FMV of the same could not be determined in the manner that applied to equity shares. The A.O. was of the view that unlike the preference shareholders while the equity shareholders were the real owners of the company, the preference shareholders who had no stake over the assets of the company were only vested with a preference over the equity shareholders on repayment of equity. Accordingly, the A.O. was of the view that the "Net Asset Value" (NAV) method which represented the value of equity shares could not be adopted for determining the FMV of the preference shares.

(NAV) method. As observed by us hereinabove, the Ld. A.R. had submitted that now when the determination of FMV of the subject preference shares as per NAV method by the assessee company was as per the mandate of "Explanation (a)(ii)" of Sec. 56(2)(viib) of the Act; therefore, the A.O had grossly erred in most arbitrarily discarding the same and substituting it by the FMV that was determined by him based on the "dividend discounting method" while framing the assessment.

42. Although at first blush the aforesaid contention of the Ld. A.R. appeared to be very convincing but we are afraid that the same does not merit acceptance. As observed by the A.O., and rightly so, the preference shares unlike the equity shares do not carry any stake in the ownership of the company. The preference shares commonly known as preferred stocks are those shares that enable their holders to receive dividends announced by the company before the same is received by the equity shareholders. If the company decides to pay out its dividends to investors, then the preference shareholders are the first to receive payouts from the company. Also, in the case of liquidation, the preference shareholders have priority over non- preferential shareholders. The preferred stock is a type of hybrid security; one that M/s. Avinash Developers Pvt. Ltd. Vs. DCIT/ACIT, Circle-2(1), Raipur has the features of both debt (as receiving a fixed income in the form of dividends), and equity (preferential treatment over common shareholders in the case of a company buyout). Unlike common shares which stake a claim in the ownership of a company, preferred shares provide incentives for outsiders to invest in the company, including fixed dividends and preferential treatment upon the exit of the company. In fact, the equity shares are mainly owned by the founders and employees, whereas preferred shares are usually owned by investors in the company. We concur with the A.O. that as the preference shares do not carry any stake in the ownership of the company, therefore, the net asset value of the company represents the value of equity shares and not that of preference shares. We, thus, are persuaded to subscribe to the view taken by the A.O. that the "Net Asset Value" (NAV) could not have been adopted for determining the FMV of the subject preference shares issued by the assessee company to S/sh. Anand Singhania and Priyank Singhania. At the same time, we may herein observe, that the discount rate is to be calculated based on the inherent risk, or is to be obtained from the public market for similar types of financial securities. Although the assessee claims that as the subject preference shares are optionally convertible preference shares, convertible into a similar number of equity shares of the assessee company, therefore, essential characteristic on the exercise of the conversion option is that of equity shares, and hence Net Asset value (NAV) method for valuation of these shares need to be considered, but we are unable to accept the said contention. As the subject shares are optionally convertible non-cumulative redeemable preference shares, which, as M/s. Avinash Developers Pvt. Ltd. Vs. DCIT/ACIT, Circle-2(1), Raipur observed by the A.O in the body of the assessment order, as per the terms and conditions on which they have been issued by the assessee company, inter alia, in the event of winding up shall not be entitled to its assets, therefore, their FMV in our view cannot be safely determined based on the "Net Asset Value" (NAV) method. At the same time, we are of the view that the fact that the subject shares are optionally convertible preference shares would in itself be a primary factor to be considered in the backdrop of the unlisted equity shares, and thus, will have a strong bearing while determining of their FMV by an analyst. As regards the orders of the coordinate benches of the Tribunal that have been pressed into service by the Ld. A.R, viz. (i). ITAT, "C" Bench, Bengaluru in the case of Information Technology Park Ltd. Vs. ITO, ITA Nos. 1357 and 1358/Bang/2018 dated 24.08.2022, Page 194-205 of APB; and