TMI Blog2022 (4) TMI 323X X X X Extracts X X X X X X X X Extracts X X X X ..... Hence the Assessing Officer s adoption of this method does not have the sanction of law. Once it is clear that the method adopted by the Assessing Officer is not permissible in law and the method adopted by the assessee is one permissible in law which has not been cogently rebutted by the Assessing Officer. It is crystal clear that the addition in this case has been made by the Assessing Officer on whims and fancies not sustainable in law. In this view of the matter valuation obtained by the assessee is as per the mandate provided under 56(2)(vii)(b) read with rule 11UA of the Act. Assessing Officer s substitution thereof is not in accordance with law and the same is not sustainable. Hence, we do not find any infirmity in the order of learned CIT(A). Hence, we uphold the same. Addition of depreciation under section 32(1)(ii) - A.O.'s action in denying depreciation on goodwill u/s. 32(1)(ii) arising to the Appellant pursuant to a scheme of amalgamation sanctioned by the Jurisdictional High Court, contending that the denial of depreciation ought to be restricted to the claim made by the Appellant in its books of accounts - HELD THAT:- We note that learned CIT(A) has deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance Utilities Power Ltd. [ 2009 (1) TMI 4 - BOMBAY HIGH COURT] and HDFC Bank Ltd.[ 2016 (3) TMI 755 - BOMBAY HIGH COURT] . As regards rule 8D(2)(iii) is concerned learned CIT(A) has directed to take average value of the investment on which no exempt income has been earned for making the computation. This view is supported by Special Bench decision of ITAT in the case of Vireet Investments[ 2017 (6) TMI 1124 - ITAT DELHI] . Hence we do not find any infirmity in the order of learned CIT(A) in this regard. Hence, we uphold the same. - I.T.A. No. 7061/Mum/2019, C.O. No. 53/Mum/2021 - - - Dated:- 22-3-2022 - Shri Shamim Yahya (AM) And Shri Amarjit Singh (JM) For the Assessee : Shri Yogesh Thar For the Department : Smt. Vatsala Jha ORDER PER SHAMIM YAHYA (AM) :- This appeal by the Revenue and cross objection by the assessee arise out of the order of learned CIT(A) dated 20.8.2019 for A.Y. 2015-16. Revenu s appeal : 2. Grounds of appeal read as under : 1. On the facts and circumstances of the case and in law, the ld. CIT(A) erred in deleting the addition of ₹ 33,26,40,000/- u/s 56(2)(viib)of the Act 2. On the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e report that accountant had taken dividend as appropriate measure of future cash flow as represented and certified by the management of the company. AO show caused the assessee as to why the excess amount than the share value worked out by her received should not be taxed as income under section 56(2)(viib) of the Act. 5. Assessee during the assessment proceedings submitted that, the company issued 'preference shares' not the equity shares. Preference shares are securities which can be thought of as being mid way between debt and equity. The AR submitted that the Chartered Accountant, in his valuation report prepared under Rule 11UA mentioned that for valuation of preference shares, he adopted a model similar to the Discounted Cash Flow model for arriving at the value of preference share, by considering dividend and redemption premium as the appropriate measure of future cash flows. The assessee also stated that dividend discounting model adopted by them uses the same analogy as discounted cash flow method. Assessee further, stated that the Rule 11UA of the Income Tax Rules prescribes NAV or DCF method specifically for valuation of equity shares and in Rule 11UA(1)(c) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and instead, assumed a random ERR. That however, none of the above factors were considered by the valuer in his report and did not make any assumption about future growth rates in earnings. That the rate of dividend and term years have been determined on random basis, as provided by the management without taking into consideration macro and micro economic factors affecting the business. AO mentioned that the assessee never paid dividend in earlier or in subsequent years. Therefore, she concluded that the valuer did not make educated valuation of the shares by not considering past performance, growth prospects, earnings, capacity, expansion etc but merely adopted the values provided by the management. That thus, the method adopted by the valuer was not scientific and did not follow the logic and principle of the standard methods as per the technical guide on share valuation. She concluded that the assessee infringed the section 56(2) (viib) of the Act. 7. Further A.O. issued summons u/s. 131 to the Proprietor of M/s. Manish P. Jain and Associates, CA, who had done the valuation of preference shares of the assessee company. After perusing the statement on oath of Mr. Manish Jai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ronouncements. That as per the provisions of Companies Act, 1956, Preference Shares has preferential right over equity shares in respect of dividend and repayment of capital on winding up. That further, another major difference is that Preference Share holders do not participate in the profits of the company. That following are the differences between Equity shares and Preference shares. Basis of difference Preference share Equity Share 1 Rate of dividend The rate of dividend on preference share is fixed by the issuing company/Board of the company. The rate of dividend on equity share is changed from year to year depending upon the availability of profits. 2 Payment of dividend They have a right to receive dividend before any divided is paid on equity shares Dividend on equity shares is paid, after any dividend is paid on preference shares. 3 Participation in management Preference shareholders a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eturn is fixed by terms of issue. That hence the net asset value of the company really represents the value of 'Equity shares' and not 'Preference shares'. Hence, learned CIT(A) held that the AO has misdirected herself in working out the Net Asset value of the company and adopting the same as the value of Preference Shares issued. 10. He observed that in the instant case, the AO has accepted that the assessee received money by issuing Preference Shares, but tried to hold that there is no difference between the equity shares and preference shares and there is no difference between the equity shares and preference shares in the section. 11. Thereafter learned CIT(A) referred to section 56(2)(viib) of the Act. He further referred to the Explanation a(i) thereto and the Rule 11UA pursuant thereto. Referring to the above he held as under :- It is clear from the above table that 11UA(2) specifically lays down that for the purpose of valuation of unquoted equity shares under 56(2) (viib) Explanation (a)(i), the assessee has an option of choosing one among the NAV method or DCF method. Whereas the Rule 11UA(1) lays down the method to be followed for valuatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the estimated price which it would fetch if sold in the open market on the valuation date for which the assessee can obtain a report from a merchant banker or an accountant. When the law has specifically provided an option and the assessee exercised the option by choosing a particular method (Dividend Discount Method), changing the method or adopting a different method would be beyond the powers of the AO. Permitting the AO to do so will render the clause (c) of Rule 11UA(l)(c) as nugatory. Thus, to this extent the action of the AO is not justified and it is held that the assessee has got all the right to choose a method which, cannot be changed by the AO. 3.14 Now coming to the compliance with the conditions laid down under Rule 11UA(1)(c)(c). It is clear that to comply with this rule the assessee was required to obtain a certificate of a Merchant Banker or Chartered Accountant, which the assessee complied. Further, though the AO can scrutinize the valuation report, only if some arithmetical mistakes are found, he may make necessary adjustments. But if he finds the working of the C.A. or the assumptions made as erroneous or contradictory, he may suggest the necessary modific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the A.O. adopted. Further, the NAV method is not one of the methods given under sub clause (c) of Rule 11A(1)(c). 'Therefore, the rate of 208 per share adopted by the A.O. based on NAV method is not applicable to preference shares. Therefore, the addition made by the AO using the NAV method is not correct as per the Act. The A.O. is directed to delete the addition made. The assessee gets relief. 13. Against the above order Revenue is in appeal before us. 14. We have heard both the parties and perused the records. We note that in the present case the issue is addition under section 56(2)(vii)(b) of the Act read with Rule 11UA, for the premium on preference shares which are unquoted. Before proceeding further we may gainfully refer to the provisions of section 56(2(vii)(b) of the Act and Rule 11UA which read as under :- Section 56(2) provides for addition in certain cases. Sub-section (viib) thereof reads as under : (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Exchange Board of India (Alternative Investment Fund) Regulations, 2012 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992); (ab) trust means a trust established under the Indian Trusts Act, 1882 (2 of 1882) or under any other law for the time being in force; (b) venture capital company , venture capital fund and venture capital undertaking shall have the meanings respectively assigned to them in clause (a), clause (b) and clause (c) of Explanation to clause (23FB) of section 10. Rule 11UA of the Act provides for valuation. Relevant sub-rule applicable for this assessment year with regard to valuation of shares and securities read as under : 11UA(1)(c) valuation of shares and securities,- (a) the fair market value of quoted shares and securities shall be determined in the following manner, namely,- (i) if the quoted shares and securities are received by way of transaction carried out through any recognized stock exchange, the fair market value of such shares and securities shall be the transaction value as recorded in such stock exchange; (ii) if such quoted shares and securities are received by way of transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ends payable in respect of cumulative preference shares; PE = total amount of paid up equity share capital as shown in the balance-sheet; PV = the paid up value of such equity shares. (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 which such valuation. [(2) Notwithstanding anything contained in sub-clause (b) of clause (c) of subrule (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) the fair market value of unquoted equity shares = (A-L) x (PV) (PE) Where , A= book value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... note in on the cusp of lack of proper understanding on the part of the Assessing Officer. By no stretch of imagination equity shares and preference shares can be said to be on the same footing. As a matter of fact Rule 11UA of the Act which provides method for valuation of shares duly make distinction in the valuation of equity shares and other shares. Hence, it is quite apparent that the Assessing Officer has misled himself with regard to provisions contained in income tax Rules and Act in this regard itself. 17. Now coming to the mandate of the Act, it is noted that section 56(2)(vii)(b) provides for addition in case of premium obtained from shares exceeds the fair market value of the shares. Fair market value is defined to be the value as may be determined in accordance with such a method as may be prescribed or as may be substantiated by the company to the satisfaction of the Assessing Officer based on certain aspect specified in the rule. Rule 11UA of the Act provides the necessary rule. Rule 11UA(1)(C)(c) which is the relevant here, provides that the fair market value of unquoted shares and securities other than equity shares in a company which are not listed in any reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... outs etc. We find that this reference by the Assessing Officer to this technical guide is itself misplaced as it runs contrary to the mandate provided under Rule 11UA which itself provides permission to the assessee to use dividend discount model in the scheme for valuation rules. Moreover, as regards the Assessing Officer s reliance upon Technical Guide of ICAI, learned CIT(A) has pointed that the reference in the said guide is with regard to valuation of the equity shares, which is not the case here. Hence it does not support the case of the Assessing Officer. Moreover as noted above it is not the case that the Assessing Officer has obtained the valuation report from the expert in this field. 19. Now we deal with the method adopted by the Assessing Officer. The Assessing Officer has adopted net asset value method which has been lifted from the method adopted for valuation of equity shares in Rule 11UA(c)(a). This is not at all a method prescribed for other shares and securities in which category the present issue of preference shares falls. The method applicable in the present case is as contained in Rule 11UA(C)(c). Hence the Assessing Officer s adoption of this method doe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the depreciation claimed on goodwill, which had never been acquired due to the amalgamation, should not be disallowed u/s. 32(1)(ii) of the Act as the goodwill created in the books of the transferee company had never been obtained due to the excess of the book value of liabilities over assets, nor any consideration had been paid by the assessee for incorporating the assets and liabilities of the transferor company, also to justify the valuation of the asset goodwill created due to the amalgamation. In reply, assessee submitted that in the assessee's case the liabilities were in excess of asset to the extent of ₹ 9,98,05,871. Section 32(1)(ii) of the Act prescribes that in respect of knowhow, patents, copyrights, trademarks, licences franchises or any other business or commercial rights of similar nature that are owned wholly or partly by the assessee and used for the purpose of business or profession shall be eligible for depreciation according to the prescribed rates. However, the A.O. did not accept the contention of the assessee as the assessee had issued shares to VDPL, before amalgamation, at more than market value, which when stand cancelled, lead to increase of lia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns in support of its contention that it is eligible for claiming depreciation on goodwill created due to merger u/s. 32(1)(ii) of the Act. It is seen that the Revenue had tiled appeal before the Hon'ble Supreme Court of India on this issue in the case of Smifs Securities Ltd. v. CIT. The Hon'ble Supreme Court, while interpreting the said provision, held dismissing the appeal as under: Explanation 3 to s. 32 states that the expression asset shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. The words any other business or commercial rights of similar nature in clause (b) of Explanation 3 indicates that goodwill would fall under the expression any other business or commercial right of a similar nature . The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). Consequently, Goodwill is an asset under Explanation 3(b) to s. 32(1) eligible for depreciation. Though the AO held that the assessee had not paid anything for the goodwill, this cannot be accepted because (a) the CIT ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d CIT(A) that the same is fully applicable in the present case. Hence, on this issue also we uphold the well reasoned order of learned CIT(A). 26. Apropos issue of addition under section 56(2)(viia) of the I.T. Act : During the course of assessment proceedings, the A.O. held that the assessee bought 100% shares (i.e. 19,160 shares) of Impetus Healthserve Pvt. Ltd.(hereafter referred to as IHPL or Impetus) And in turn became the 100% shareholder of VDPL as well. The shares of Imeptus were bought from a company named as Monarchy Healthserve Pvt. Ltd.(MHPL) and paid only a consideration of ₹ 10,000. Thus, the assessee company received shares of Impetus, which had the underlying value of the shares of VDPL, for a consideration, which was less than the aggregate fair market value of the shares. Therefore, the AO asked the assessee to provide details explaining the change of shareholding of Impetus from MHPL to NBZ Pharmna Ltd.,(the earlier name of the appellant company) along with the Financial Accounts of the IHPL. In the assessment order the AO mentioned that in reply, the assessee submitted the ledger copy of NBZ Pharma Ltd, reflecting the payment made for the purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10,000 for acquiring the shares of Impetus and in turn acquiring the shares of VDPL, therefore the aggregate FMV exceeding the consideration i.e. ₹ 41,94,79,280/- (₹ 41,94,89,280-10,000) was added u/s. 56(2)(viia) of the Act. 28. Upon assessee s appeal learned CIT(A) held that the Assessing Officer has invoked amended provisions contained in sub-clause (b) of Rule 11UA(1)(c) which is not applicable for this assessment year. He held as under : I have carefully gone through the assessment order and the written submission of the appellant. There is no dispute of the fact that the appellant company purchased total 19,160 shares of Impetus Healthcare Pvt. Ltd. (IHPL) from Monarchy Healthcare Pvt Ltd. for ₹ 10,000. It is also a fact that as IHPL Holds shares of VDPL and by acquiring all shares of IHPL, the appellant acquired VDPL also for ₹ 10,000. There is dispute regarding the fact that the book value of share of IHPL was negative as on 31.03.2014, therefore, the consideration of ₹ 10,000 was paid was more than book value of shares. However, the AO did not accept the argument because she was the opinion that the shares of IHPL have underlying va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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; PE= total amount of paid up equity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion method adopted by the Assessing Officer is not applicable for A.Y. 2015-16 and the said method is applicable only from A.Y. 2018-19. That learned CIT(A) has rightly held that it cannot be applied retrospectively. We note that the Assessing Officer has invoked the provisions of section 56(2)(viia) of the Act. The same read as under : [(viia) where a firm or a company not being a company in which the public are substantially interested, receives, in any previous year, from any person or persons, on or after the 1st day of June, 2010, any property, being shares of a company not being a company in which the public are substantially interested,- (i) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property; (ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration : Provided that this clause shall not apply to any such property received by way of a transaction not regarded as transfer under clause (via) or cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 32. Upon assessee s appeal as regard disallowance as per Rule 8D(2)(ii) learned CIT(A) gave a finding that the assessee has sufficient interest free funds. By referring to Hon'ble Bombay High Court decision in Reliance Utilities Power Ltd. 313 ITR 340 HDFC Bank Ltd. Vs. DCIT (383 ITR 529). He deleted the addition 33. As regard of Rule 8D(2)(iii) he held as under :- Appellant also filed a copy of the order of the ITAT Mumbai in its own case for AY 2011-12 in ITA No.368/Mum/2015 where in the addition under Rule 8D(2)(iii) is restricted considering the investment which yielded exempt income during the year. I have gone through the decisions relied including the assessee's own case. Respectfully following the order of the Hon'ble ITAT Mumbai in assessee's own case for AY 2011-12, the AO is directed to take the average investments which yielded the exempt income during the year and workout the disallowance under Rule 8D(2)(iii). The AO is directed to modify the addition accordingly. 34. Against the above order Revenue is in appeal before us. 35. We have heard both the parties and perused the records. We note that as regards the disallowan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he proposed additions. It is not the case of the appellant that the Range head proposed certain additions not mentioned by the AO in the show-cause notice and the said additions were made without giving opportunity of being heard. As there is no new addition as a result of reference u/s 144A, I do not find any reason to hold that the principles of natural justice are violated in the case. Assessee was given sufficient opportunity on each of the proposed addition by the AO, the submissions of the assessee are extracted in the assessment order and are fully considered. Therefore the ground of appeal is dismissed. 39. Against the above order assessee has filed cross objection. 40. We have heard both the parties and perused the records. We note that we have already decided the issue in favour of the assessee in Revenue s appeal, hence adjudication of this ground is only of academic interest. Hence, we are not dealing with the same. Hence, cross objection is dismissed as infructuous. 41. In the result Revenue s appeal is dismissed and assessee s cross objection is held to be infructuous. Order pronounced in the open court on 22.3.2022. - - TaxTMI - TMITax - In ..... X X X X Extracts X X X X X X X X Extracts X X X X
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