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2017 (5) TMI 58 - AT - Income TaxRevision u/s 263 - AO has failed to make necessary enquiries as to justification for issue of non cumulative compulsory convertible preference shares of ₹ 10/- each fully paid up at a premium of ₹ 240/- per share - manner of computing fair value of shares for the purposes of Section 56(2)(viib) - Held that:- There are certain flash points which should have triggered further probe by the AO as to the valuation report dated 15-10-2012 furnished by the assessee as the assessee did not issued equity shares during the relevant previous year but instead issued 10% non cumulative compulsory convertible preference shares of ₹ 10/- each fully paid up issued at a premium of ₹ 240/- per share which are convertible into 1 equity share for every preference share held by the allottee or at such higher ratio of conversion at the end of the tenure of 10 years as may be decided by Board of Directors of the assessee company. These shares are also convertible at the option of allottee after three years at the conversion ratio to be decided by Board of Directors of the assessee company and assumption of the said CA V R Jain & Company who issued valuation report dated 15-10-2012 in assuming and presuming that each non cumulative compulsory convertible preference shares shall be converted into one equity share of the assessee company needed enquiry by the AO vis-à-vis its implication in computing income as contemplated u/s 56(2)(viib) of 1961 Act and any discounting factor is to be used in this regard. Further, the shares issued by the assessee were preference shares and not equity shares albeit preference shares are compulsorily convertible into equity shares. The AO should have also looked into this aspect that Rule 11UA(1)(c)(c) of 1962 Rules stipulates that in case of issue of shares other than equity shares , the Rule mandate valuation as per following method : (c) the fair market value of unquoted shares and securities other than equity shares in a company which are not listed in any recognized stock exchange shall be estimated to be price it would fetch if sold in the open market on the valuation date and the assessee may obtain a report from a merchant banker or an accountant in respect of such valuation.] The AO should have enquired into this aspect that convertible preference shares were issued which were although convertible into equity shares after a certain period but did the law equate the same to be equity shares for the purposes of valuation of shares as mandated under the provisions of statute and rules made there-under. Further , the AO needed to look into an explanation to Section 56(2)(viib) that explanation refers to value of assets also as per clause (ii) as well method prescribed as per clause (i) of the said explanation, as is contained in explanation to Section 56(2)(viib) of the 1961 Act as to the fact that manner of computing fair value of shares for the purposes of Section 56(2)(viib) of 1961 Act is provided in above explanation of being higher of the two sub-clauses. The AO merely accepted the valuation report dated 15-10-2012 of the valuer submitted by the assessee without going into all these aspects. In our considered view, the ld. Pr. CIT has rightly invoked the provisions of section 263 of the Act as the A.O. failed to make proper enquiry and verification as required for completion of the assessment u/s 143(3) of 1961 Act, which made the said assessment order dated 23-03- 2016 as erroneous in so far as prejudicial to the interest of Revenue. - Decided against assessee.
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