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2019 (9) TMI 553

..... ction of the FMV determined by the assessee and approved the determination of FMV on the basis of book value of assets and liabilities under Rule 11UA of the Rules - HELD THAT:- 0ne of the grounds taken for rejecting the basis of determination of FMV is that no accounting entry has been passed in respect of difference between the FMV of the immovable property at the relevant point of time in the books of accounts. No merit in this line of reasoning adopted by the lower authorities. It is well settled that even where the assessee fails to make necessary entries in the books of accounts, it will not operate as a bar for claiming benefits by way of deduction etc. as was held in the case of Kedarnath Jute Manufacturing Co. Ltd. vs. CIT [1971 (8) TMI 10 - SUPREME COURT] Secondly, the second limb of Explanation (a) itself provides for determination of FMV based on value of underlying assets. As a corollary, the value once substantiated would be replaced with the book value for the purposes of FMV regardless of the book entries in this regard. This basis adopted by the lower authorities therefore does not hold any water. Another allegation made by the CIT(A) that the action of the assesse .....

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..... adverse conclusion drawn by the Revenue Authorities. - Decided in favour of assessee - I.T.A. No. 2474/Ahd/2017 - 11-9-2019 - Shri Pradip Kumar Kedia, Accountant Member And Shri Mahavir Prasad, Judicial Member For the Appellant : Shri Narayan Atal And Shri Surya Prasad Vishwakarma, A.R. For the Respondent : Shri Vinod Tanwani, Sr. D.R. ORDER PER PRADIP KUMAR KEDIA - AM: The captioned appeal has been filed at the instance of the assessee against the order of the Commissioner of Income Tax (Appeals)-6, Ahmedabad, ( CIT(A) in short), dated 20.09.2017 arising in the assessment order dated 28.12.2016 passed by the Assessing Officer (AO) under s. 143(3) of the Income Tax Act, 1961 (the Act) concerning AY 2014-15. 2. The solitary ground of appeal of the assessee seeks to impugn the action of the CIT(A) in confirming an addition of ₹ 2,04,82,560/- to the returned income by invoking the provisions of Section 56(2)(viib) of the Act. 3. Briefly stated, the assessee, a Private Limited Company, filed its return of income for AY 2013-14 in question declaring total income of Rs.Nil. In the course of scrutiny assessment, the AO inter alia noticed from the verification of the balance sheet o .....

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..... ₹ 33/-, including the premium of ₹ 23/-per share; (c) Since the Appellant initially acquired an immovable property in village Padra for setting up its plant and thereafter acquired another land at village Dahej in view of it not being in a position to complete the legal formalities vis-a-vis the first property, there is an element of adhocism in the actions of the Appellant; (d) The FMV of the share, as calculated by the Appellant, was not substantiated by it to the satisfaction of the AO. 5. The CIT(A) alleged adhocism in the action of the assessee and further alleged arbitrariness in the determination of basis of the value of land as suited to the assessee. The CIT(A) consequently justified the basis adopted by the AO for rejection of the FMV determined by the assessee and approved the determination of FMV on the basis of book value of assets and liabilities under Rule 11UA of the Rules. 6. Further aggrieved by the denial of relief, the assessee preferred appeal before the Tribunal. 6.1 The learned AR for the assessee submitted at the outset that the action of the Revenue authorities is based on the mis-appreciation of facts and mis-conception towards position of law. .....

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..... fact substantially below even the jantri rate declared by the Government of Gujarat in so far as Dahej land was concerned. On the basis of this arrangement, the assessee issued 2,10,000 shares to Luhariwala group in FY 2012-13 (AY 2013-14) and further 9,06,000 shares in FY 2013-14 (AY 2014-15). All these shares were issued at a premium of ₹ 23 per share. The assessee also issued 1,61,000 shares each in FY 2013-14 to the original two groups the Rauts & Voras who also subscribed the shares at the same rate of premium. All these transactions were carried out through proper banking channel and necessary formalities as prescribed under the Companies Act, 2013 were duly complied with. Upon completion of all these formalities, the share holdings of each of these three groups resulted in almost equal proportion as per the initial understanding between them. 6.2 The learned AR pointed out that the core promoter namely Bharat Raut is an IIT in Chemical Engineering with over 35 years experience in Silica, a chemical product with vast array of end uses in Tyres, toothpaste, cosmetics, fertilizers, pesticides, footwears and so on. Similarly, Mr. Vineet Luhariwala who joined as co-pro .....

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..... held by the company. Therefore, the Revenue Authorities have committed fatal error in not taking cognizance of the intrinsic value of the parcels of lands held by the assessee. 6.4 The learned AR next submitted that insertion of Section 56(2)(viib) was aimed to primarily curb the practice adopted earlier by certain companies with dubious intent whereby shares were being issued at huge premium in favour of dummies who would otherwise be men of no means. Such provision is not intended to harm the genuine business transactions. Rule 11UA connotes FMV of shares only with reference to the book value of underlying assets and liabilities which may, at times, be at great variance in comparison to the intrinsic value of assets and business capabilities prevailing at the relevant point of time. It is for this reason that an alternative method for arriving at FMV was embodied in Explanation (a) so as to ensure that the commercial decisions legitimately taken at arm s length between the parties are not adversely effected. 6.5 The learned AR went on to submit that in the backdrop of aforesaid submissions, it needs to be appreciated that when the Routs & Voras negotiated the deal with the Lu .....

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..... s no substance. The learned AR contended in this regard that financial accounting is pre-dominantly historical in method and the re-valuation of assets in the books of accounts is not necessary at all for the purposes of the second limb to Explanation (a) to Section 56(2)(viib) of the Act. A re-valuation or otherwise, according to the learned AR does not have any impact for determination of true value. The learned AR referred to and relied upon the decision of the Supreme Court in Kedarnath Jute Manufacturing Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC) for the proposition that the manner of entries in the books of accounts would not be decisive or conclusive in determination of true profits and absence of entries in the books of accounts will not impinge upon the rights of the assessee in demonstrating the intrinsic value. The learned AR thus submitted that the revenue authorities gravely misapplied the position of law in the facts of the case. 6.8 The learned AR thus contended that on a recital of the factual position and position of law noted above, the action of the AO in restricting the FMV of shares artificially at ₹ 12.84 and thereby subjecting the differential amount of pr .....

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..... n the light of provisions of Section 56(2)(viib) of the Act. 8.1 The Finance Act, 2012 inserted Section 56(2)(viib) of the Act w.e.f. 1st April, 2013 and consequently applicable from AY 2013-14 onwards. Section 56(2)(viib) of the Act imposes tax liability on company itself in respect of excessive premium collected by such company from resident subscribers of its shares. It will be thus prudent to reproduce the relevant provision applicability of which is in question: "Income from other sources. 56. (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head "Income from other sources", if it is not chargeable lo income-tax under any of the heads specified in section 14, items A to E. (2) In particular, and without prejudice to the generality of the provisions of subsection (1), the following incomes, shall be chargeable to income-tax under the head "Income from other sources ", namely :- ………………………………………………………………&he .....

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..... e assessee company requires to be replaced by intrinsic value, by virtue of which the FMV would surpass the negotiated premium by the assessee company. 8.4 It is essentially the case of the assessee that the intrinsic value of parcels of land allocated at Padra & Dahej are substantially higher and once the book value is replaced by the intrinsic value, the FMV of shares allotted would be far higher than the negotiated price. At this stage, we notice from the assessment order that calculation of premium has been made by the assessee in para 3.1 whereby the share premium eligible to the assessee was worked out to ₹ 22.34 per share (say to ₹ 23/-) on substitution of book value of land by the value as per the valuation report. It is the case of the assessee that value of Dahej land has been taken at 45% of the jantri value only whereas if full amount as per jantri value is adopted, the valuation would be more than double of the present valuation. In the circumstances, it is case of the assessee that higher FMV as per second limb to the Explanation is duly substantiated by the valuation report and the action of the CIT(A) in confirming the order of the AO is marred by mi .....

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..... ch the assessee was required to run its business is totally within the domain of the assessee and has no bearing on applicability of Section 56(2)(viib) of the Act. We are also unable to see substance in the allegation of arbitrariness in the conduct of the assessee. What the assessee has attempted to demonstrate that the market value of Padra land and 45% of jantri value of Dahej land itself is sufficient to justify the premium collected. By stating so, the assessee merely seeks to justify the bonafides of the premium based on value of the land. The assessee has also attempted to narrate the circumstances for unison of existing promoters group (Rauts & Voras) and incoming group (Luhariwala). The valuation got done after the issue of shares is really of no consequence. What is relevant is whether at the time of allotment of shares, the value of shares as claimed existed or not! The valuation report is not an evidence in itself but merely an opinion of an independent having regard to totality of expert facts and circumstances existing on the date of valuation. So long as the facts and circumstances exist, the presence or otherwise valuation report per se has no effect. Both the .....

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