TMI Blog2019 (9) TMI 553X X X X Extracts X X X X X X X X Extracts X X X X ..... alue 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 assessee company is marred by adhocism and beset with arbitrariness. CIT(A) has observed that project was ultimately set up at Dahej despite acquisition of land at Padra which defies logic and gives an impression of adhocism. We fail to understand the purport of such observation for determination of FMV. The intrinsic valuation of the land as sought to be demonstrated by the assessee was required to be looked into to give effect to Explanation (a) below Section 56(2)(viib). The manner in which 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) - 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olitary 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 of the assessee that the assessee has issued 1016000 shares having face value of ₹ 10/- at a premium of ₹ 23/-. The AO made inquiries with respect to the Fair Market Value (FMV) of the shares allotted having regard to the provisions of Section 56(2)(viib) of the Act for the purposes of ascertaining the correctness of premium charged. The assessee in response, submitted before the AO that the company holds certain parcels of land at Padra Dist. Vadodara and at GIDC, Dahej Dist. Bharuch, Gujarat, the FMV of which is substantially higher on the date of allotment of shares and consequently the premium charged of ₹ 23/- per share is quite commensurate that the FMV of shares allotted as co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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. To begin with, the learned AR pointed out that the assessee company was originally promoted by the members of two families namely Rauts Voras who contributed certain funds towards initial capital for the purposes of carrying on the business of manufacturing of and dealing in precipitated Silica. After incorporation of the company, the assessee purchased two plots of adjoining land in Taluka Padra Dist. Vadodara in the month of Jan. 2010. The aforesaid plots of land were agricultural plots and therefore the process of converting the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actions 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-promoter had robust marketing expertise. The learned AR submitted that given the solid combination of marketing expertise and technical expertise together with eminence associated with the Silica project, plant at Dahej and teams capabilities, a reputed company of Tata Group namely Tata Chemicals also offered for purchase of entire plant at ₹ 34.20Crore whereby per share value would stand at ₹ 40/- per share. However, due to certain legal obstacles the proposed Tata deal could not materialize. A business transfer ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Luhariwalas , the basis of arriving at the FMV of the shares was inter alia the market value of the Dahej land on which the construction of factory premise was being carried out. It was the proposition of Routs Voras that the jantri rate of Dahej land was fixed at ₹ 3060/- per sq.mtr. by Gujarat Government. The value of Dahej land would thus translated into its FMV in the vicinity of at ₹ 9.18 Crore as against its actual cos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lue. 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 premium as subject matter of addition under s.56(2)(viib) of the Act resulting into and addition of ₹ 2,04,82,560/- is de hors the ground realities as well as opposed to the letter as well as spirit of provision introduced. 6.9 Propping up its case, the learned AR for the assessee further referred to the assessment order concerning AY 2016-17 passed under s.143 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cessive 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 :-- . (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 thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue 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 mis-conception of law and facts. It is further case of the assessee that cursory observation of adhocism and arbitrariness by the first appellate authority can be no ground to depart from the ostensible factual position. The market value of the land prevailing at the time of issue of shares requires to be substituted whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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 lower authorities have failed to controvert the value adopted for land parcels in departure with the book value. No rebuttal of the fact towards the value is on record. The Revenue authorities are clearly guided by irrelevant consideration while holding ag ..... X X X X Extracts X X X X X X X X Extracts X X X X
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