GATEWAY OFFICE PARKS PRIOVATE LIMITEDI,CHENNAI V. ACIT, CORPORATE CICLE-6(1), CHENNAI

ITA 617/CHNY/2023

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The case involves Gateway Office Parks Private Limited, which appealed against the order of the Assistant Commissioner of Income Tax, Corporate Circle-6(1), Chennai, challenging the addition of Rs.11,67,14,298 as income under section 56(2)(viib) of the Income Tax Act, 1961, for the assessment year 2015-16. The Tribunal examined the valuation methods used for the share premium received from its holding companies and found the application of the Discounted Cash Flow (DCF) method appropriate as per Reserve Bank of India guidelines for shares issued to non-resident entities. The Tribunal also addressed the issue of prior period expenses and the charging of interest under section 234B, ultimately directing a re-adjudication on the former and dismissing the latter as consequential.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 470347 (ITAT-CHENNAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-02-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2015-2016
• Other Referred Cases: FIS payment solutions and services India Pvt Ltd, BLP Vayu (Project-1) (P.) Ltd. vs. Principal Commissioner of Income-tax, Kissandhan Agri Financial Services (P.) Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: NILAY BARAN SOM
• Assessee Lawyers: S. ANANTHAN; VIRTUAL; ISSUE OF SHARES AT CERTAIN PREMIUM
• Keywords: Set aside; Opportunity of being heard; Depreciation; Additional depreciation; Fair market value; Income from undisclosed sources; Capital receipt; Principle of natural justice; Valuation report; Deemed to accrue or arise in india; Wholly owned subsidiary
• Section: 250; 263; 56; 32; 56(2); 13; 115JB

Judgement Text

"Page - 1 - of 14 आयकर अपीलीय अधिकरण, ‘‘ए’ न्यायपीठ, चेन्नई। IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH: CHENNAI श्री एबी टी. वर्की, न्यायिर्क सदस्य एवं श्री अयिताभ शुक्ला, लेखा सदस्य क े समक्ष BEFORE SHRI ABY T VARKEY, JUDICIAL MEMBER AND SHRI AMITABH SHUKLA, ACCOUNTANT MEMBER आयकर अपील सं./ITA No.617/Chny/2023 निर्ाारण वर्ा /Assessment Years: 2015-16 Gateway Office Parks Private Limited, Block No.A6, Ground Floor, No.16, GST Road, Perungalathur, Chennai-600 063. [PAN: AAJCS8198P] Asst. Commissioner of Income Tax, Corporate Circle-6(1), Chennai. (अपीलार्थी/Appellant) (प्रत्यर्थी/Respondent) अपीलार्थी की ओर से/ Assessee by : Shri S.Ananthan, Advocate (Virtual). प्रत्यर्थी की ओर से /Revenue by : Shri Nilay Baran Som, CIT सुिवाई की तारीख/Date of Hearing : 22.01.2025 घोर्णा की तारीख /Date of Pronouncement : 19.02.2025 आदेश / O R D E R PER AMITABH SHUKLA, A.M : This appeal is filed by the assessee against the order bearing DIN & Order No.ITBA/APL/M/250/2022-23/1050825008(1) dated 16.03.2023 for the assessment years 2015-16. Through the aforesaid appeal the assesse has challenged order u/s 250 dated 16.03.2023 passed by CIT(A), Chennai. 2.0 Ground of appeal No.1 has been found to be general in nature and hence not worthy of any meritorious adjudication. ITA No.617/Chny/2024 Page - 2 - of 14 3.0 The first issue seminal to the ground of appeal No.2 is regarding an addition of Rs.11,67,14,298/- made by the Ld. AO invoking provisions of section 56(2)(viib). The Ld. Counsel for the assessee inviting our attention to the brief factual matrix of the case informed that the assessee company engaged in real estate and infrastructure development had filed its return of income declaring loss of Rs.29,69,90,473/-. During the year under consideration the assessee company had issued rights share of Rs.27,14,286 shares each to its two holding companies namely M/s.Shriram Properties Pvt Ltd and Sun Apollo investment Holding LLC, and consequently earned share premium of Rs.32,57,14,320/-. The Ld. AO had queried about feasibility of invocation of Rule 11 UA(2) of the Income Tax Rule in the case. The assessee had applied discounted tax flow method – a prescribed method for valuation of the company under Rule 11UA. The assessee had informed the Ld. AO that one of the company namely Sun Apollo Investment Holding LLC was a non-resident company. The Ld. AO rejected assessee’s arguments holding that projections are only a method of sampling which should always be closure to reality and that the calculation of the assessee are based upon surmises and guess work. Consequently he proceeded to reject the calculations made by the assessee under DCF method and applied ratio ITA No.617/Chny/2024 Page - 3 - of 14 laid down in Rule 11UA(2) viz-a-viz the NAV method. The addition of Rs.11,67,14,298/- was seminal to said assumptions of the Ld. AO. 3.1 The Ld. Counsel for the assessee submitted that the Ld. First Appellate Authority has confirmed the findings of the Ld.AO by pointing deficiencies and insufficiencies in the valuation given by the assessee. He concluded that the valuation done by the assessee’s valuer is based upon unverifiable facts and therefore cannot be accepted. The Ld. Counsel submitted that the Ld. CIT(A) directed the Ld.AO to adopt fair value of shares but under the DCF method. It is the case of the assessee that the action of the Ld. CIT(A) is not supported by facts on record and that consequently the decision to confirm the addition is incorrect. The Ld. Counsel for the assessee invited our attention to the decision of Hon’ble Delhi High Court in the case of FIS payment solutions and services India Pvt Ltd dated 29.07.2024 in respect of WP(C) 10289/2024 and CM APPL 42097 / 2024 to support his arguments that there is no element of profit embedded in the assessee and its Holding company. It was argued that the department has accepted the above decision. The Ld. Counsel has also invited our attention to the CBDT circular. The Ld. Counsel informed that the valuation report in this case was drawn by the registered valuer prior to the execution of shares deal. It was also argued that as per Reserve Bank of India stipulations, qua issue of share to non- ITA No.617/Chny/2024 Page - 4 - of 14 residents, the assessee was bound to follow the DCF method. The Ld. Counsel also submitted that the CBDT circular prescribes that section 56(2)(viib) is not applicable in case of applicability of issue of rights share. The Ld. DR would like to make us believe on the correctness of the order of lower authorities. Reliance was placed on the decision of Hon’ble Kolkata Tribunal in ITA No.513/Kol/2017. It was argued that CBDT circular is applicable for startup only. It was simultaneously requested that the matter be set aside to the Ld. AO for re adjudication of the issue 4.0 We have heard rival submissions in the light of material available on records. It is an admitted fact of the case that the valuation of the shares through the registered valuer was done prior to the execution of sale deed and therefore a presumption qua valuation made after the transactions and thus casting a doubt on its accuracy cannot be drawn. On the issue as to why the appellant assessee had adopted DCF method as against the NAV, we find force in the argument of the assessee that it was bound by the instructions of the RBI mandating adoption of DCF method when shares are issued to overseas entities. The action of the assessee therefore cannot be faulted. 4.1 We have also noted another dimension of the impugned controversy. However, before examining the same it is necessary to extract the relevant provisions of section 56 (2)(viib) and Rule 11UA reproduced hereunder:-. ITA No.617/Chny/2024 Page - 5 - of 14 Section 56(2) in The Income Tax Act, 1961 “….(2) In particular, and without prejudice to the generality of the provisions of sub- section (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 this clause shall not apply where the consideration for issue of shares is received— (i) by a venture capital undertaking from a venture capital company or a venture capital fund or a specified fund; or (ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf: Provided further that where the provisions of this clause have not been applied to a company on account of fulfilment of conditions specified in the notification issued under clause (ii) of the first proviso and such company fails to comply with any of those conditions, then, any consideration received for issue of share that exceeds the fair market value of such share shall be deemed to be the income of that company chargeable to income-tax for the previous year in which such failure has taken place and, it shall also be deemed that the company has under reported the said income in consequence of the misreporting referred to in sub-section (8) and sub-section (9) of section 270A for the said previous year. Explanation.—For the purposes of this clause,— (a) the fair market value of the shares shall be the value— (i) as may be determined in accordance with such method as may be prescribed; or (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, whichever is higher; (aa)….” 4.2 Further Rule 11 UA (2) of IT Rules prescribes as under:- “…..Notwithstanding anything contained in sub-clause (b) of clause (c) of sub-rule (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)(PE)| x (PV) where, ITA No.617/Chny/2024 Page - 6 - of 14 A=book value of the assets in the balance-sheet as reduced by any 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 and any amount shown in the balance-sheet as asset including the unamortised amount of deferred expenditure which does not represent the 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 share capital as shown in the balance-sheet; PV=the paid up value of such equity shares; or (b) the fair market value of the unquoted equity shares determined by a merchant banker [*] [Words ] as per the Discounted Free Cash Flow method….” 4.3 A perusal of the above alludes provisions of section 56 (2)(viib) that the law, by way a deeming provision, postulates inclusion of income in the hands of a taxpayer in situations where a company receives from any person – being a resident any consideration for issue of shares that exceeds the face market value of such shares. The exclusions are angel investors or the venture capital undertaking. This is the charging section for this transaction. The machinery provisions for the section have been prescribed in Rule 11UA(2)(b) which gives the assessee option to value its shares either by way of a discounted cash flow(DCF) method or net asset value(NAV) method. The stipulation in section 56 (2)(viib) is primarily conceived to arrest black money or unaccounted transactions, however even if assuming that the same would be applicable in the case of transactions as the one taken by the assessee it would be ITA No.617/Chny/2024 Page - 7 - of 14 seen that the charging provision of section 56 (2)(viib) deems a composite transaction or one single activity. It does not conceives split transactions i.e. it does not presumes the situation in which one part of the transaction is to be valued by one procedure and other part by another procedure. Similarly Rule 11UA(2)(b) clearly provides that the assessee as the option to either adopt DCF method or the NAV method. At the outset it is to be noted that this is a benefit given to the taxpayer and cannot be unilaterally taken away by the tax authorities. It is further seen that there is nothing in the rule which provides that one part of the transaction is to be valued by one procedure and other part by another method. 4.4 It is in the above background that the present controversy as a unique dimension. The appellant assessee has issued rights shares to two of its holding companies, in equal proportions, one of which is a non-resident company. As per the undisputed facts of the present case the assessing officer of Revenue has split the transaction in two parts for one part it applies DCF method and for another part it applies NAV method. The Ld. First Appellate Authority directs adoption of DCF method but on the basis of valuation of the Ld. AO done by NAV method. The question that arises is whether for a composite transaction, the extant law provides two opposite treatment. In view of the fact that the RBI guidelines mandate adoption of DCF method in share transactions concerning non-resident companies and also that Rule 11UA(2)(b) provides and option, we do not find any fault in action of the assessee to adopt valuation as per DCF method. We have also noted that there is nothing in law which mandates the Revenue would have the option of applying two different method of accounting in case of a solitary composite transaction. Thus, we find sufficient force in the argument of the assessee forwarded by Ld. Counsel for the appellant assessee. ITA No.617/Chny/2024 Page - 8 - of 14 4.5 We have also noted that the Hon’ble Delhi High Court in the case of FIS payment solutions and services India Pvt Ltd vide its order dated 29.07.2024 in respect of WP(C) 10289/2024 and CM APPL 42097 / 2024 has mandated as under:- “… 1. This writ petition has been preferred seeking the following reliefs:- \"a) Issuance of declaration that Section 56(2)(viib) of the Income-Tax Act,1961, inserted vide Finance act, 2012, is ultra vires being violative of Article 14 of Constitution of India, 1950; b) In the alternative to prayer (a). this Hon'ble Court may read down the provision as being applicable in situations where any unaccounted income or money can possibly be involved and would not apply to issuance of shares by a wholly owned subsidiary to its holding company; and c) In addition to Prayer (a) or (b), issuance of a writ of Certiorari quashing the impugned directions dated 29.06.2024 issued by the This is a digitally signed order. The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 09/08/2024 at 22:30:50 Ld. DRP to the extent of the addition arising out of Section 56(2)(viib) of the Income Tax Act, 1961. d) In the alternative to prayer (c), issuance of a writ of Mandamus or any other appropriate writ order or direction directing the Assessing Officer to not make the addition arising out of Section 56(2)(viib)of the Income-tax Act, 1961 while passing the final assessment order. e) For ad-interim reliefs as the Court may deem fit; and f) For the costs of this Petition; g) Pass any other further order (s) / direction (s) as this Hon'ble Court may deem fit and proper in the fact and circumstances of the case.\" 2. As would be evident from the above, apart from the challenge which stands raised to the directions as framed by the Dispute Resolution Panel1, the petitioner also questions the validity of Section 56(2)(viib) of the Income Tax Act, 19612 which came to be inserted in terms of Finance Act, 2012. ITA No.617/Chny/2024 Page - 9 - of 14 3. We note that the Income Tax Appellate Tribunal3 in BLP Vayu (Project-1) (P.) Ltd. vs. Principal Commissioner of Income- tax4 had an occasion to construe the ambit of that provision and had ultimately observed as follows:- \"11.1. As per case records, it is an undisputed fact that the shares have been allotted at a premium to its 100% holding company. Thus, applicability of Section on 56(2)(viib) has to be seen in this perspective. The Co-ordinate Bench of Tribunal in DCIT v. Ozone India Ltd. in ITA No. 2081/Ahd/2018 order dated 13.04.2021 in the context of Section 56(2)(viib) has analyzed the deeming provisions of Section 56(2)(viib) of the Act threadbare and inter alia observed that the deeming clause requires to be given a schematic interpretation. The transaction of allotment of shares at a premium in the instant case is between holding company and it is subsidiary company and thus when seen holistically, there is no benefit derived by the assessee by issue of shares at certain premium notwithstanding that the share premium exceeds a fair market value in a given case. Instinctively, it is a transaction between the self, if so to say. The true purport of Section 56(2)(viib) was analyzed in DRP Act Tribunal 2023 SCC OnLine ITAT 397 This is a digitally signed order. The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 09/08/2024 at 22:30:50 Ozone case and it was observed that the objective behind the provisions of Section 56(2)(viib) is to prevent unlawful gains by issuing company in the garb of capital receipts. In the instant case, not only that the fair market value is supported by independent valuer report, the allotment has been made to the existing shareholder holding 100% equity and therefore, there is no change in the interest or control over the money by such issuance of shares. The object of deeming an unjustified premium charged on issue of share as taxable income under Section 56(2)(viib) is wholly inapplicable for transactions between holding and its subsidiary company where no income can be said to accrue to the ultimate beneficiary, i.e., holding company. The chargeability of deemed income arising from transactions between holding and subsidiary or vice versa militates against the solemn object of Section 56(2)(viib) of the Act. In this backdrop, the extent of inquiry on the purported credibility of premium charged does not really matter as no prejudice can possibly result from the outcome of such inquiry. Thus, the condition for applicability of Section 263 for inquiry into the transactions between to interwoven holding and subsidiary company is of no consequence. We also affirmatively note the decision of SMC Bench in the case of KBC India Pvt. Ltd. v. ITO in ITA No. 9710/Del/2019, dated 02.11.2022 (SMC) where it was observed that Section 56(2)(viib) could not be applied in the case of transaction between holding company and wholly owned subsidiary in the absence of any benefit occurring to any outsider.\" 4. An identical view came to be expressed by the Tribunal in Deputy Commissioner of Income-tax vs. Kissandhan Agri Financial Services (P.) Ltd.5 to the following effect:- ITA No.617/Chny/2024 Page - 10 - of 14 \"12. This apart, as pointed out on behalf of the assessee, the shares have been subscribed by the holding company, i.e., the existing shareholders only. Pertinent to say, Section 56(2)(viib) creates a legal fiction whereby the scope and ambit of expression 'income' has been enlarged to artificially tax a capital receipt earned by way of premium as taxable revenue receipt. Hence, such a deeming fiction ordinarily requires to be read to meet its purpose of taxing unaccounted money and thus needs to be seen in context of peculiar facts of present case. The legal fiction has been created for definite purpose and its application need not be extended beyond the purpose for which it has been created. Bringing the premium received from holding company to tax net under these deeming fictions would tantamount to stretching provision to an illogical length and will lead to some kind of absurdity in taxing own money of shareholders without any corresponding benefit.\" This is a digitally signed order. The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 09/08/2024 at 22:30:51 5. Mr. Bhatia, learned counsel appearing for the respondent on instructions states that the respondents remain bound to act in terms of the declaration of the law as embodied in the decisions of the Tribunal aforenoted and that consequently the DRP may be called upon to revisit the direction impugned herein. 6. In view of the aforesaid, we find no occasion to go into the challenge raised with respect to the Section 56(2)(viib), since the apprehension of the writ petitioner stands duly allayed in light of the stand taken by the respondents herein and who have conceded to the enunciation of the legal position by the Tribunal in the decisions aforenoted. 7. We accordingly allow the writ petition in part and quash the direction of the DRP dated 29 June 2024. The matter shall stand remitted to the said authority who shall examine the issue afresh bearing in mind the judgments of the Tribunal in BLP Vayu and Kissandhan Agri. All other rights and contentions of respective parties on merits are kept open….” 4.6 Thus the Hon’ble High Court has held that in the case of issue of shares between a holding and subsidiary company there does not exist any presumption qua any benefit as no income can be said to accrue. The Hon’ble High Court also considered the decision of Hon’ble ITA No.617/Chny/2024 Page - 11 - of 14 Coordinate Bench of Delhi Tribunal in the case of BLP Vayu (Project-1) Ltd on the impugned issue. Further the Hon’ble High Court also considered another decision of Hon’ble Coordinate Bench of Delhi Tribunal in the case of Kissandhan Agri Financial Services Pvt Ltd wherein, analysing share transfer between a holding and subsidiary company, it was held that Section 56(2)(viib) is a deeming provision where a legal fiction has been created to artificially tax a capital receipt. The idea is to tax unaccounted money and consequently its application cannot be extended to tax premium received by subsidiary from its Holding company. It was submitted that the department has accepted the order of Hon’ble Delhi High court in FIS payment solutions and services India Pvt Ltd supra. 4.7 We have also noted that the action of the Ld. CIT(A) in adopting a different valuation without giving an opportunity to the assessee is also against the principle of natural justice. It is seen that he has merely adopted his presumptions for valuations which is violation of assessee’s right of natural justice. Further, it is noted that Rule 11UA gives an option to the assessee of choosing DCF or NAV method. Accordingly, in the light of discussions herein above, we are therefore of the considered view that no benefit accrues to an assessee on issue of shares between Holding company and Subsidiary and hence application ITA No.617/Chny/2024 Page - 12 - of 14 of section 56(2)(viib) is not warranted per se. Respectful deference in this regard is made to the decision of Hon’ble Delhi High court in the case of FIS payment solutions and services India Pvt Ltd supra, we hold the view that provisions of section 56(2)(viib) are not applicable in the present case and hence set aside the order of lower authorities. Accordingly we direct the Ld. AO to delete the addition of Rs.11,67,14,298/-. The ground of appeal No.2 raised by the assessee is therefore allowed. 5.0 The next issue raised by the assessee through ground no.3 is regarding an addition made by the Ld. AO of Rs.1,03,95,911/- on account of prior period expenses. The Ld. Counsel for the assessee submitted that the Ld. AO noted that the assessee had claimed even amount on account of accumulated depreciation as on 01.04.2011. The Ld. AO made the impugned addition on the premise that as the impugned expenditure does not pertains to the year under consideration therefore the same cannot be allowed as a deduction. The Ld. CIT(A) confirmed the findings of the Ld. AO holding that the additional depreciation has been claimed by the assessee on account of reclassification of assets in accordance with the provisions of Company Act 2013. The Ld. CIT(A) held that the assessee is entitled to depreciation as permissible under the ITA No.617/Chny/2024 Page - 13 - of 14 section 32 of the act and which has been allowed. The Ld. DR placed full reliance on the order of lower authorities. 5.1 We have heard rival submissions in the light of material available on records. The Ld. Counsel for the assessee has submitted that the Ld. AO has made the addition without appreciating and analysing full facts of the case. It was stated that the assessee had offered the income subsequently and hence a case of double taxation was made out. The Ld. CIT(A) is also reported to have sustained the addition including made under section 115JB on erroneous consideration of facts. We have noted that the Ld.AO apart from relying upon judicial pronouncements has not analysed the issue by bringing proper facts on records. We therefore hold the view that interest of justice would be met if the Ld.AO is given another opportunity to readjudicate the disallowance made by him of Rs.1,03,95,911/-. We therefore set aside the order of the lower authorities and direct the Ld. AO to readjudicate the matter de novo, after giving due opportunity of being heard and by passing a speaking order. The assessee shall comply with all the statutory notices of the Ld.AO and any non-compliance shall be viewed adversely. Accordingly the ground of appeal no.3 raised by the assessee is allowed for statistical purposes. ITA No.617/Chny/2024 Page - 14 - of 14 6.0 The ground of appeal no.4 is regarding charging of interest u/s 234B of the act. The charging of interest under the Income Tax Act is consequential in nature. The ground of appeal no.4 is raised by the assessee is therefore dismissed. 7.0 In the result, the appeal of the assessee is partly allowed. Order pronounced on 19th , February-2025 at Chennai. Sd/- ( एबी टी. वकी) (ABY T VARKEY) न्यानयक सदस्य / Judicial Member Sd/- (अयिताभ शुक्ला) (AMITABH SHUKLA) लेखा सदस्य /Accountant Member चेन्नई/Chennai, नदिांक/Dated: 19th , February-2025. KB/- आदेश की प्रतितिति अग्रेतिि/Copy to: 1. अिीिार्थी/Appellant 2. प्रत्यर्थी/Respondent 3. आयकर आयुक्त/CIT - Chennai 4. तिभागीय प्रतितिति/DR 5. गार्ड फाईि/GF "