TMI Blog2022 (9) TMI 102X X X X Extracts X X X X X X X X Extracts X X X X ..... n the approach of the assessee in considering the guideline value of land building to arrive the fair value of preference shares that it would fetch in the open market on the valuation date and arriving at the premium value for redemption of the preference shares. Method of valuation adopted as NAV is not disputed as the TPO has also applied the same method and impugned addition has arisen only due to the value of land and building considered by the TPO for arriving at the NAV. Considering the guideline value of land and building for the purpose of valuation of preference shares under NAV method is the right. Therefore the addition made by the TPO computing the differential premium basis the book value of assets is not sustainable. Since we have held that there cannot be any addition made towards the premium on redemption of the preference shares, the addition made by the CIT(Appeals) considering the same as deemed dividend u/s.2(22)(e) also will not survive. The appeal for the assessment year 2010-11 is allowed in favour of the assessee. Excess premium paid to APFI by the assessee on redemption of preference shares cannot be taxed u/s.2(22)(d) or 2(22)(d) - AY 2009-10 - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... han 9 months from the date of allotment. 4. The assessee filed its original return of income for AY 2010-11 on 28.09.2010 declaring NIL income, after set off of brought forward business loss of Rs.65,66,55,271. The return was processed u/s. 143(1) and subsequently the case was selected for scrutiny under CASS and notice u/s. 143(2) 142(1) were issued. During the assessment proceedings a reference was made to the Transfer Pricing Officer (TPO) for determination of the Arm s Length Price (ALP) of this international transaction assessee entered into with AFPI. The assessee has during the previous year relevant to AY 2010-11 redeemed some of the preference shares at a premium based on the valuation done the expert valuer by adopting the Net Asset Value (NAV) method. The TPO accepted the method of valuation adopted by the assessee i.e., NAV method, but reworked the redemption value based on book value of assets. The TPO arrived at the redemption value at Rs.286.80 per share which resulted in an adjustment of Rs.29,95,66,000 that arose out of the difference between the redemption value adopted by the assessee and the TPO. The AO passed the final assessment order giving effect to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missions with regard to all the grounds, for the purpose of adjudication, we would consider only ground Nos. 3 to 5 with regard to valuation methodology of preference shares as the rest of the arguments would become academic once we decide on these grounds. The relevant grounds are extracted as under:- Valuation methodology of preference shares 3. The learned CIT(A) has erred in law and facts in: (a) adopting the value of preference shares at Rs.270.10 as against Rs.900 per share (in case of 5,90,000 shares). (b) arriving at the above value ignoring the fair value (guidance value) of land and building adopted by the appellant. (c) arriving at the above value by taking only the book value of the land and building. (d) rejecting the alternative contention of the appellant that, based on the facts of the case, Discounted Cash Flow Method is the most appropriate method to be followed for valuation of shares. 4. The learned CIT(A) has erred in not appreciating that the redemption of preference shares by Ascendas Property Fund (India) Pte Limited, a Foreign Venture Capital Investor was at a price in accordance with the prescribed exchange control regulations. 5. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchase or otherwise or sell shares/convertible debentures/units or any other investment held by it in the IVCUs or VCFs or schemes/funds set up by the VC'Fs at a price that is mutually acceptable to the buyer and the seller/issuer. The FVCI may also receive the proceeds arising of the liquidation of VCFs or schemes/funds set up by the VCFs. (vi) Therefore, FEMA regulations do not mandate a valuation exercise. It allows for a mutually agreed price for purchase/sale of shares. Further, the valuation guidelines were amended only from 1.4.2010 onwards [Page 9 of CIT(A) order]. For this reason, also, the price agreed between APFI, and the assessee should be considered as the arm's length for the purpose of redemption of preference shares 9. The ld. DR relied on the order of the CIT(Appeals). He also submitted that Rule 11UA(1)(c)(b) is amended only with effect from 01/04/2018 and prior to amendment the fair market value of the unquoted shares are to be arrived at basis the book value of assets and liabilities. The ld DR therefore contented that the amended rules cannot be applied in assessee s case for the relevant assessment year. 10. The ld. AR, in rebuttal, relied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d amount of deferred expenditure which does not represent the value of any asset; B = the price which the jewellery and artistic work would fetch if sold in the open market on the basis of the valuation report obtained from a registered valuer; C = fair market value of shares and securities as determined in the manner provided in this rule; D = the value adopted or assessed or assessable by any authority of the Government for the purpose of payment of stamp duty in respect of the immovable property; 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 income-tax paid, if any, less the amount of income-tax claimed as refun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arket on the valuation date and arriving at the premium value for redemption of the preference shares. 13. The method of valuation adopted as NAV is not disputed as the TPO has also applied the same method and impugned addition has arisen only due to the value of land and building considered by the TPO for arriving at the NAV. We have in the above para held that considering the guideline value of land and building for the purpose of valuation of preference shares under NAV method is the right. Therefore the addition made by the TPO computing the differential premium basis the book value of assets is not sustainable. Since we have held that there cannot be any addition made towards the premium on redemption of the preference shares, the addition made by the CIT(Appeals) considering the same as deemed dividend u/s.2(22)(e) also will not survive. The appeal for the assessment year 2010-11 is allowed in favour of the assessee. ITA Nos.1357/Bang/2018 14. We will now take up the appeal for the assessment year 2009-10. The assessee raised 19 grounds including the legal ground challenging the jurisdiction of reassessment proceedings u/s. 147 (Ground no.2 to 5). 15. The asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee has utilised the securities premium as defined in section 78 of the Companies Act, 1956 [refer balance sheet entry at Page 76, indicating debit to securities account] which is not part of accumulated profits as defined in explanation 2 to section 2(22). In this regard, the ld AR relied on the decision of the Delhi ITAT in DCIT vs. MAIPO India Ltd [2008] 24 SOT 42 (Delhi) wherein while dealing with the provisions of section 78 of the Companies Act it is held that section 78 places a statutory bar on the usage of securities premium whereby the same can be utilised only for the purposes mentioned therein and not for any other purposes. It was submitted that one of the purposes envisaged is the payment of premium on the redemption of shares [Para 8 Page 573] and the payment of dividend from securities premium is prohibited by Companies Act. The ld AR drew our attention to the fact that the accounting entries in the books of accounts of the assessee reflect that the payment was made from a specific reserve and not a free reserve as envisaged under section 2(22) and owing to the limited usage of securities premium granted by the Companies Act, any declaration of dividend fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or advance which is repayable in future. It is further submitted that there would be no occasion for APFI to repay or return the amounts received on redemption. The ld AR also submitted that section 2(22)(e) entails a distribution from free reserves and as discussed earlier, securities premium cannot be utilised for the payment of dividend under the Companies Act. In addition to the above submissions the ld AR submitted that section 2(22) provides instances where distribution of accumulated profits would not constitute dividend and that a distribution to a shareholder who is entitled to a fixed rate of dividend with or without a right to participate in the profits cannot be considered as deemed dividend. In assessee s case since APFI is a preference share holder who is entitled to a fixed rate of dividend, any distribution made to them cannot be considered as dividend under section 2(22)(e) for the purposes of the Act. 21. Without prejudice to the above submissions, ld AR submitted that the assessee is engaged in developing, operating and maintaining a SEZ and therefore would be covered by section 115-0(6) which states that no DDT shall be paid by an assessee engaged in developi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits; ******** 24. From the plain reading of the above provisions, it is clear that sub-clause (d) is applicable when there is any distribution by the company to its shareholders by a company on the reduction of its capital and in order to attract clause (d), the payment should be by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares. In the given case, the payment made by the assessee towards premium of redemption of preference shares is neither towards reduction of share capital nor towards advance or loan. We are therefore in agreement with the various arguments put forth by the ld AR in this regard. We are of the considered vi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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