AI Insights
The case involves Apna Punjab Resorts Limited, which appealed against the order of the PCIT under section 263 of the Income Tax Act, 1961, for the assessment year 2016-17. The PCIT had set aside the assessment order passed by the AO, alleging that the AO had not made proper and in-depth inquiries regarding the valuation of share premium and the assessment of interest income. The Tribunal examined the detailed proceedings and found that the AO had indeed made specific inquiries and considered the detailed replies along with the share valuation report before passing the assessment order. The Tribunal also noted that the valuation method used by the AO was in accordance with the rules prescribed under the Income Tax Act, and the AO's decision was based on the valuation report provided by an expert, which was not properly contested by the PCIT.
Appeal Details
Counselvise Citation
[2023] 140 COUNSELVISE.COM (IT) 127808 (ITAT-CHANDIGARH)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
1 year(s) 9 month(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
23-02-2023
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
A
Next Hearing Date
09-01-2023
Assessment Year
2016-2017
Appeal Filed On
23-05-2021
Judgement Text
आयकर अपील य अ धकरण,च डीगढ़ यायपीठ, च डीगढ़ I N T H E I N C O M E T A X A P P E L L A T E T R I B U N A L D I V I S I O N B E N C H , ‘ A ’ , C H A N D I G A R H BEFO RE SHRI A. D. JAIN, VICE PRE SIDE NT & SHRI VIKR AM S INGH YA DA V, A CCO UNTA NT MEMBE R आयकर अपील सं./ ITA No. 1 1 1 / C H D / 2 0 2 1 नधा रण वष / Assessment Year : 2 0 1 6 - 1 7 Apna Punjab Resorts Limited, Canal Road, Shaheed Sukhdev Nagar, Ludhiana 1410127 Vs. बनाम Pr. Commissioner of Income Tax, Ludhiana-1 थायी लेखा सं./PAN NO: AAECA3001C अपीलाथ /Appellant यथ /Respondent Hearing through video Conferencing नधा रती क ओर से/Assessee by : Sh. Parikshit Aggarwal, CA राज व क ओर से/ Revenue by : Sh. Vivek Nangia, CIT DR स ु नवाई क तार#ख/Date of Hearing : 10.01.2023 उदघोषणा क तार#ख/Date of Pronouncement : 24.02. 2023 आदेश/Order Per A.D. Jain, Vice President: Thi s i s Assessee’s appeal for assessment ye ar 2016-17 agai nst t he PCIT’s order dat ed 29.03.20 21, passed u/ s 263 of t he Inc o me Tax Act , 1961 ( herei naft er call ed 'the Act'). 2. The f oll owing Gr ounds ha ve been r ai sed: - 1. On the fact s and ci rcumsta nces of t he case and i n law, t he lear ned P ri ncipal C ommi ssi oner of I ncome Tax, Ludhi ana- 1 (PCIT ) has erred i n assuming 2 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana juri sdi ct ion by i ssui ng a n oti ce u/ s 263 of t he Inc ome T ax Act , 1961 (Act ), givi n g an incorrect fi ndi ng, fai l ing t o show as to how the assessme nt order passed by the Assessi ng Of fi cer (AO ) under secti on 143 (3) of the Act date d 21. 12. 2018 was errone ous in so f ar as it was prej udi ci al to t he interest of Revenue. 2. On the fact s and ci rcumsta nces of t he case and i n law, the lear ned PCI T has erred i n assumi ng juri sdi ct ion by i ssui ng a n oti ce u/ s 263 of t he Inc ome Tax Act, 1961 (Act ), subst i tut i ng hi s ow n val uat io n of shar e premi um u/ r 11 U and 11UA of the I ncome Tax Rules, 1962, neve r confr ont ed to the ap pel la nt, t o all ege t hat t he af oresaid assessment or der was erroneous in so f ar as i t was prej udi ci al t o t he i nterest of Revenue. 3. The l e arned PC IT has erred in l aw and on f act s in issui ng n oti ce and passi ng t he order u/s 263 of t he Act on t he issue of valuat i on of share premi um recei ved when t he AO had al ready rai sed speci fi c queri es i n the quest ion naires, c onsi dered and verif ied the det ai l ed repli es incl udi ng t he share val uat io n report prepared by an exp ert u/ r 11U and 11U A of t he Inc ome Tax Rul es, 1962 fi led during the course of assessment proceedi ngs bef ore passing t he assessment order u/ s 143 (3 ) of t he Act de hors the al legat ions i n t he order u/s 263 t hat the AO accepte d the cl ai m wi t hout making pr oper and in dept h enqui ri es . 4. The l e arned PC IT has erred in l aw and on f act s in assumi ng j urisdi ct ion u/s 263 of t he Act on t he specious gr ound of ' no e nqui ry or veri fi cati on' i n terms of Expl anat ion 2to sect i on 263, hol di ng t hat 'the AO has f ai le d to exami ne and verif y t he issue rel ati ng t o share premi um received and interest 3 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana earne d', direct ing t he AO t o make f urther enqui ries namel y (i ) val uat i on of share premi um received and (i i ) i nterest ea rned during t he course of const ructi on peri od, in ut ter disregard t o the f act that i n t he cours e of assessment proceedi ngs u/ s 143(3 ), t he AO had al ready made necessary enq uiri es on t he above i ssues and af t er due verif icat ion, he had tak en a c onsci ous decisi on in acc ordanc e wi th t he provisi ons of t he Act . 5. The lear ned PCI T has erred i n fail ing t o consi der that a not ice udder secti on 139(9 ) of the A ct dat ed 19. 09. 2017 was i ssued t o t he assessee poi nt ing out that credi t of tax deduct ed at source under rul e 37B read wit h sect i on 199 of the Act coul d not be gi ve n as correspon ding i nc ome/ recei pt has been omi tt ed t o be off ered but t hen s uch receipt of i nterest i ncome was all owed t o be set of f ag ainst cost of capit ali zat ion aft er due appli cat i on of mind and t he due ref und had bee n issued. 6. Your a ppel l ant c raves li berty t o add, alt er, ame nd, substi tute or wi thdraw any of the ground of appe al hereinabove c ont ained. 3. The f acts, as per the Or der under ap peal are as f oll ow s. 4. As per t he ld. PCI T, on e xa mi nati on of the assess ment record, i t was seen t hat the assess ment completed u/s 14 3( 3) of t he I. T. Act , vi de order dat ed 21. 12.20 18, for A. Y. 2016- 17, had be en ma de wit hout maki ng proper and in- dept h enqui res. The PCIT i ssued a Show Ca use Not ice [(Assessee’ Paper Book (APB)- 2] dat ed 17. 03. 2021 t o t he assessee, as under : - 4 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana “4. Exa mi nat i on of assess me nt recor ds reveale d t hat t he co mpan y h ad issued 1, 25, 380 share s f or Rs. 1, 087/ - per share i .e. , at a pre miu m of Rs. 987/ - per shar e dur ing the F. Y. 2015- 16, relevant t o 2 016-17. As p er rul e 11U and 11U A, f ai r ma rket val ue was co mput ed at Rs. 450/- per share. Theref or e, t he AO has fail ed t o assess the shar e pre mi u m r ecei ved over an d ab ove of Rs. 4 50/- by a ppl yi ng pr ovisi on of secti on 56( 2) (vi i b) of I. T. Act , 196 1. 5. Fro m t he assess ment recor d, i t i s also noti ced that yo u ha ve ear ned i nt erest i nco me of Rs. 9, 48, 784/ - and cl ai me d TDS but no i nt er est inco me has been off ere d f or t axat ion whi l e fi l ing r et urn of i nc o me. The A O has al so not made an y v er if icat ion i n t his regar d a nd a mount of Rs. 9, 48, 784/ - re mai ned unassessed”. 5. The Assessee f il ed repl y ( APB- 3) dat ed 23. 03. 2021. I t was stat ed t herei n, th at as per val uer ’s Val uati on R ep ort, as al read y fi l ed be for e t he A O, mar ket value per shar e ha d been arri ve d at at Rs. 1, 087/ -; and that int erest had bee n earned on fi xed deposi ts ma de f or t he pur pose of obt ai ni ng b ank guarantee aga i nst the EPC G l icences avai l ed b y the assessee, si nce t he Assessee’s hot el was under const r uct ion dur ing t he Fina nci al Year 2015-16, and t he sa me had bee n set -off a gai nst t he t ot al cost of capit alizati on. 5 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana 6. However, rej ect ing t he Assessee’s r epl y as not te nabl e, t he ld. PCIT hel d t hat t he AO had fail ed t o e xa mine a nd ve rif y t he i ssues relat ed to shar e pr emi u m r ecei ved and i nterest ear ne d, whic h i ssues had re mai ned una ddressed. It was held t hat t he Assess ment Or der was a cr ypti c a nd rout ine Or der, er r oneous a nd prejudi ci al to t he i nterest of the Revenue, wit hi n the mea ning of explanati on 2 t o sect ion 263 of t he I .T. Act . The A ssess me nt Or der was set asi de, wit h a di rect io n t o t he AO t o pass a fresh Assess ment Order keepi ng i n mi nd t he observati ons made b y t he l d. PCIT. 7. Aggr ie ved, t he As sessee i s in appeal befor e us. 8. Chal lengi ng t he i mp ugned Or der, t he l d. Counsel for t he Assessee has cont ended t hat t he l d. PCIT has erred i n hol di ng t hat t he AO ha d f ai led t o exa mi ne t he i s sues of sha re pre mi u m recei ved and i nterest earne d; that whi l e doi ng so, t he ld. PCIT did not take i nto consi de rat ion t he f act that in the assess ment pr oceedi ngs, t he AO had raised speci fi c que ri es thr ough quest ionnai res i ssued and t he Assessee had f urni s hed det ai l ed repl i es t heret o; that t he ld. PCIT has erroneousl y s ubst i tut ed hi s own ver sion of valuati on of share pr e mi u m under r ul es 11U and 11U A of t he I. T. Rul es, wi thout even conf r ont ing it t o t he Assessee, over the Shar e Valuati on Report ( APB 69- 74) of an expert , pre par ed under r ules 1 1U and 6 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana 11U A of t he IT. Rul es, as f il ed b y the Assessee before t he A O in t he assess ment or der proceedi ngs, and corre ct l y accepted b y t he AO; that apr opos t he othe r i ssue of i nterest earned, t he ld. PCIT fail ed to c onsi der t hat t hough ini t i all y, a noti ce t o t r eat t he r et ur n as def ecti ve had been issued t o t he Assessee on 1 9. 09. 2017, und er secti on 139( 9) of t he I. T. Act , st at ing that c redit of Tax D ed uct ed at Source under r ul e 3 7BA of t he I. T. Rules read wit h sect ion 199 of t he I. T. Act could not be given, as though c redit f or TDS had been clai med, t he corre spondi ng i nco me / receipt had been o mit ted to be off ere d t o t ax, later on, t he retur n was tr eated as a val id retur n and was pr ocessed u nder sect ion 143( 1) of t he Act, at the retur ned i nco me, and t he int er est inco me wa s al lowed t o be set off agai nst t he c ost of ca pi ta li zati on, and ref und ha d been i ssued; that loo ked at fro m an y angl e, the Order under a ppe al i s not sustainabl e in l aw; and t hat t hus, t he i mpugne d Orde r be cancell ed, on all owi ng t he Appeal fi l ed b y t he Assessee. We have been t ake n, as wi ll be di scussed present l y, thr ough t he Paper Book, to su pport t he assert ion t hat ful l enqui r y was cond uct ed b y t he AO. 9. On t he ot her hand, the l d. DR has pl aced str ong rel i ance on t he i mpugned or der. It has been contended t hat as correct l y hel d b y t he l d. PCI T, the AO had fail ed t o exa mine and veri f y t he i ssues 7 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana relat ing t o shar e pre mi u m received and int erest ea rne d, and t he AO’s or der was a cr ypt ic or der w hi ch was er r oneo us as well as prej udici al t o t he i nterest s of the Revenue, wi thi n the me ani ng of secti on 263 r ea d wi th i ts expl anati on. 10. We have heard t he parti es a nd have per use d the mat er ial on recor d. The t wo i ssues before us are: 1) Whet her , as cont ended b y t he Asses see, t he l d. PCIT has err ed i n hol di ng t hat the AO has fai led t o assess the share pre miu m r ec ei ved b y t he Asses see, over a nd above Rs. 450/ -, b y fail i ng to ma ke exa mi nati on i n thi s regard, 2) Whet her, as per t he Assessee, t he l d. PCI T has al so gone wrong in hol di ng t hat the AO has f ai led t o enqu ire int o t he mat ter t hat the Assessee ha d ear ne d i nter est inco me of Rs. 9, 48, 784/ - and had c lai med T DS, but no int er est i nco me had been offered f or t axat ion, there b y leavi ng t he a mount of Rs. 9, 48, 784/ - unassessed. 11. A pr opos the matt er of shar e pre miu m, i t is seen t hat N ot ice dated 13. 07. 2018 (APB 29- 30) w as i ssued b y t he AO to t he Assessee, und er secti on 143( 2) of t he I. T. Act , i nfor mi ng, i nt er ali a, t hat t he Assessee’s Ret urn of Income f or assessment ye ar 2016- 17 had been select ed for scrut i n y under CASS; t hat an oppor tuni t y was being gi ve n t o t he Assessee, to produc e an y e vidence / inf or mati on 8 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana felt necessar y i n suppor t of t he sai d Retur n of I ncome; a nd t hat speci fi c Questi onnaires / r equi sit i on of i nfor mat i on or docu me nts woul d be sent subseque nt l y, i f requi red. 12. Not ice, al so dat ed 13. 07.2 018, al ong wi t h Q uesti onnaire ( APB 31- 34) was i ssued t o the Assessee, un der secti on 142(1) of t he Act, i nter al ia, requi ri ng t he Assessee (a) t o f ur ni sh the accounts and doc u me nts specif i ed i n t he Q uest i onnai re, and ( b) t o f urni sh t he i nfor mat i on cal led f or as pe r the Questi onnair e and on t he poi nt s and matt ers as sp ecifi ed t herei n. I n the Q uest ionnai re, vide Para No. 2 (AP B 32), t he Assessee was r equi r ed t o fur nish the foll owi ng i nfor mat i on i n r espect of addi t ions i n shar e c apit al , share appli cat ion mone y and share pre mium: “(a) amount and date of recei vi ng share capi t al. (b ) M ode of trans act ion (c as h / cheque / DD ). (c) Conf i rm at ion f rom t he share- hol ders / subscribers. (d ) Co py of I ncom e Tax Ret ur n wit h com put at ion chart , bal ance sheet and i ts encl os ures of t he sharehol ders / subscribers i ncl udi ng detail s regardi ng the A. O. havi ng j uri sdicti on over hi m. (e) Releva nt bank stat eme nt of t he share- hol ders / subscribers. (f ) Det ai ls / evi dence regardi n g t he ident it y and credit worthi ness of t he share- hol ders / subscri bers and the genuine ness of t he transacti ons. ” 9 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana 13. Vi de Para N o. 9 ( APB 34), t he Assessee was asked to pr oduce co mpl et e books of account . 14. Noti ce dat ed 11.0 9.2 018 al ong wit h Q uest ionnai re ( APB 35- 38) was i ssued to the Assessee under sect i on 142( 1) of t he Act, i nter al ia, agai n asking t he Assessee t o furni sh t he accounts and doc u me nts spe ci fi ed i n t he Quest i onnai r e, and (b) to f ur ni sh t he i nfor mat i on cal led f or as pe r the Questi onnair e and on t he poi nts and matt ers as sp ecifi ed t herei n. I n the Q uest ionnai re, vide Para No. 2 (APB 36) , t he Assessee was req uir ed t o furni s h i nf or mat ion, as call ed f or i n the Q uest i onnai re se nt al ong wi t h t he Noti ce i ssued under sect i on 142 (1) of t he Act , on 13. 07. 2018, as di scussed i n t he prece di ng par agr a ph, and t o pr oduce compl et e boo ks of account . 15. The assessee fi l ed r epl y dat ed 2 9.1 0. 2018 ( APB 39) and, along t herewi th, st at eme nt of account of t he share-hol der / subscri ber, M/ s U niq ue Merca nt il e Indi a Pvt . Lt d. , S hare Appl icat ion Money a nd Reser ves and S ur pl us in t he books of t he Assessee for the ye ar under co nsiderati on ( APB 40-45), cop y of Balance Sheet ( and i ts annexures) of M/ s Uni qu e Mercant i le Indi a Pvt . Lt d. fo r the ye ar ( APB 46- 64) and Val uati on Report dat ed 11. 09. 2014 ( APB 68- 74), of t he Char tered Ac countant f or t he 10 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana pur pose of val uati on of equi t y s har es under sect i on 56 of t he I. T. Act read wi t h r ule s 11U and 11UA of t he I nco me Tax Rules. 16. Agai n, N ot ice date d 22. 11. 2018 (AP B 6 5) was issued t o t he Assessee under sect i on 142( 1) of t he Act, al ong wi th Quest ionnai re (APB 66) . As per t he Questi onnai re, t he Assessee was asked t o f il e t he co mpl et e evi dence and cr edi t w ort hi ness of the persons w ho had pur chased t he shar es of t he co mpan y duri ng the yea r. 17. The Assessee f il ed Repli es dat ed 11. 12. 2018 (A PB 76- 77) and 13. 12. 2018 (A PB 78- 79) bef ore the AO. In t he Repl y dat ed 11. 12. 2018, t he Assessee f urni shed t he detail s of t he share appli cat ion mone y and the shar es all ot ted, al ongwi th bank stat ement s. In the Repl y date d 13. 12. 201 8, i t was st at ed that t he detail s of co mple te addr ess, I D pr oof and cop y of Inco me Tax Retur ns al ong wit h C o mputati on C hart had al rea d y been sub mit t ed vi de Re pl y dat ed 11. 12. 2018. 18. Bef or e us , t he Assessee has fil ed cert if ied copies of t he aforesai d N oti ces and Repli es, al ongwit h t he at t achment s appended t her et o, obtaine d fro m t he A. O. , on fil e i nspect ion b y f il ing AS K Appl icat ion dat ed 12. 9. 2022. These copi es have been fi led bef ore us b y w a y of a S ynopsi s, at pages 1A t o 84 t her eof. At page 1A of 11 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana t he S ynopsi s i s t he AO ’s l ett er da ted 13. 09. 2022, provi di ng t hese cert i fied copies t o the Assessee. 19. The AO, t hough he ma de no di scussi on o n t he issue i n t he assessment order, accepte d th e val uati on of shar es a s do ne b y t he Assessee, and he di d not make an y addi ti on. 20. In t he opi ni on of t he PCIT, t houg h t he Assessee had st at ed t hat t he f ai r mar ket value of each s hare had bee n ar r ived at at Rs. 1, 087/ -, as per the Valuat i on R ep ort of t he Val uer, thi s st and of t he Assessee was not accepta ble, as the f ai r mar ket value , co mput ed in accor dance wit h rul es I1U an d 11UA of t he I. T. Rul es, was Rs. 450/ - per share; that the AO fail ed to assess t he shar e pr e mi u m received b y t he A ssessee over and above the fair market val ue of Rs. 450/ - per share, b y a ppl yi ng t he pr ovisi ons of secti on 56(2) (vi i b) of t he I. T. Act ; and t hat t her ef ore, t he i ssue re mai ned una ddressed. 21. Let us see, if t he concl usion arri ve d at b y t he l d. PCI T i s in accor dance wi th l aw. For this, it has to be ascert ai ned as t o whether t he val uati on got done b y t he Assessee as per t he Val uat ion Repor t dated 11. 09. 2014 (APB 68- 74) fi led bef or e t he Assessing Of fi cer, is 12 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana correct as per l aw, or the val uati on ar rived at b y t he PCI T is t he correct val uat i on. 22. The sta nd t ake n by t he Assessee i s t hat t he f air mar ket val ue of Rs. 450/- per share was arr i ve d at b y t he l d. PCIT b y foll owi ng t he ‘B ook Value ’, or t he Net A sset Val ue ( NAV ) Met hod for valui ng s hares a s per t he Bala nce Sheet of t he i mmedi at el y prece di ng year, whereas t he val uer of t he Assessee had f oll owed t he ‘Di scount ed Fr ee Cash Flow ’ or ‘DCF ’ met h od for valuati on of t he sha res; that t hi s met hod i s per mi t ted b y sect ion 56( 2)( vi i b) of t he Act rea d wi th rul e 1 1UA of the Rules; and t hat for thi s reason, t he ‘Boo k Value ’ or t he Net As set Val ue (N AV) Met hod of valuat i on cannot be pr ef erre d over and above the ‘DC F’ Met hod. 23. The r el eva nt pr ovi si ons fi rst. 24. Sect ion 56(2) of t he I. T. Act prescr i bes i nc o mes whic h are not t o be exclude d fr o m t he t otal income u nder t he Act and shal l be char geable to inco me t ax under t he hea d ‘I nco me f r om Other Sources ’. Cl ause (vi ib) of sect i on 56( 2) pr escr ibes one such inco me, as fol l ows; ‘56(2 ). I n part icul ar, and wi t hout preju dice t o t he generali t y of t he provisi ons of sub-sect ion (1 ), t he f oll owi ng 13 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana incomes shall be char geable t o i ncome- tax under t he he ad “I ncom e f rom ot her Sources” namel y:- (i ) t o (vii a)....... (vi i b ) where a company, not bei ng a com pany in w hi ch the publ ic are subst anti al ly i nt erest ed, recei ves, i n the pre vi ous year, f rom any pe rson bei ng a resident , any consi derat i on for issue of shares t hat excee ds the f ace val ue of suc h shares, the aggr egat e c onsi derat i on received for such shares as exceeds the fai r market val ue of t he shares... ’ 25. Th us, as per sect ion 5 6( 2)( vii b), t he aggre gat e consi derati on r ecei ved i n e xcess of the fair mar ket val ue of t he shares t o be issue d, wher e t he consi derat i on recei ved exceeds t he f ace val ue of such shares, is to be char ged to t ax as inco me f ro m ot her sources. 26. ‘F air mar ket value’ of t he shar es, f or t he pur poses of sect ion 56( 2) ( vi ib) , is defi ned b y E xpl anati on ( a) t o t he sect ion, as t he hi gher of t he value as ma y be det er mi ned i n accor dance wi th t he met h od prescri bed b y r ules 11U a nd 11UA of t he I. T. Rul es, or t he val ue as ma y be subst ant iat ed b y t he co mpan y t o t he sati sfact ion of the Assessi ng Of fi cer, based on t he value of i ts t angi bl e an d i nt angi bl e assets as on the dat e of i ssue of shares. 27. For r ead y r efe rence, expl anat i on ( a) t o sec ti on 56 (2) (vii b) is reprod uce d her eunder: 14 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana ‘Section 56(2)(viib)... 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, licences, franchises or any other business or commercial rights of similar nature, whichever is higher;’ 28. Rule 11U of t he I .T. Rules, 1962 gi ves t he mea ni ng of expressi ons used in det er mi nat ion of fair mar ket val ue of pr oper t y ot her t han i mmov abl e pr opert y f or ar ri ving at t he inco me t o t he t reat ed as i nco me fro m ot he r sources under sect io n 56(2) ( vii b) of t he I. T. Act . The por ti on t here of w hich is relevant f or our prese nt pur poses is reproduced as under ; ‘11U For the purpose of this rule and rule 11UA, - (a) .... (b) “balance sheet”, in relation to any company, means, - (c) (i) for the purpose of sub-rule (2) of rule 11UA, the balance sheet of such company (including the notes annexed thereto and forming part of the accounts) as drawn up on the valuation date which was been audited by the auditor of the company appointed under section 224 of the Companies Act, 1956 (1 of 1956) and where the balance sheet on the valuation date is not drawn up, the balance sheet (including the notes annexed thereto and forming part of the accounts) drawn up as on a date immediately preceding the valuation date which has been 15 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana approved and adopted in the annual general meeting of the shareholder of the company..... (ii) .... (c) to (i) (j) “valuation date” means the date on which the property or consideration, as the case may be is received by the assessee.’ 29. The f ai r mar ket val ue, for t he pur poses of secti on 56 of t he I. T. Act, of pr ope rt y, ot her th an i mmovabl e pr operty, in the nature of unquot ed equi t y s har es, i s t o be deter mi ned i n the manner pr ovi ded in r ule 11UA( 1) (c) (b), as fol l ows: ‘11UA (1) For the purposes of section 56 of the Act, the fair market value of a property, other than immovable property, shall be determined in the following manner, namely – (a).... (b).... (c) valuation of shares and securities, - (a) ...... (b) the fair market value of unquoted equity shares shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner, namely:— the fair market value of unquoted equity shares =(A+B+C+D - L)× (PV)/(PE), where, A= book value of all the assets (other than jewellery, artistic work, shares, securities and immovable property) in the balance- sheet as reduced by,— (i) any amount of income-tax paid, if any, less the amount of income-tax refund claimed, if any; and (ii) any amount shown as asset including the unamortised 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; 16 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana 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 refund, if any, 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; PV= the paid up value of such equity shares; PE = total amount of paid up equity share capital as shown in the balance-sheet; 30. However, over ri di ng t he pr ovi si ons of r ul e 11UA( 1)( c ) (b) of t he Rules, r ul e 11U A( 2) p rovi des for the f ai r market value of unquote d equi t y shares t o be det er mi ned in t he ma nner l aid dow n in clause ( a) or cl ause ( b) of t he rul e, i. e., b y fol lowi ng ei ther t he 17 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana Book Val ue (N A V) Met hod, or t he Di scou nte d Fr ee Cash Fl ow Met hod, at t he opti on of t he assessee. Rul e 11UA( 2) re ads t hus: (2) 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, 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; 18 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana 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 as per the Discounted Free Cash Flow method. 31. It is evident fro m t he f act t hat t he ld. PCIT di d not r aise an y chal lenge i n t his r egar d, t hat sub-cl ause ( ii ) of clause ( a) of t he Ex planat i on to sect ion 56( 2)(vi i b) is not appl i cable to t he case of t he Assessee, and the Assessee was not r equi red to sati sf y t he Assessing Of ficer ab out the val uat i on done. T he f ai r mar ket val ue of the shar es was, therefor e, essenti all y t o be as per sub-cl ause( i) of clause ( a) of the Expl anat ion t o sect ion 56 (2) (vii b), i. e. , t he value t o be deter mi ned i n accor danc e wit h the met hod prescri bed b y rul e 11UA( 2) of t he I nco me Ta x Rules,1962. 32. On a q uer y as t o how, i n t he absence of an yt hi ng evi nci bl e on t he recor d i n t hi s regar d, the Assessee mai ntai ns t hat the l d. PCI T has co mpute d t he fai r mar ket val ue of the shar es, in accordance wit h t he NAV / Book Val ue Met hod of valuat i on at Rs. 450/ - per share, our att enti on has been drawn to t he Assessee’s Bal ance Sheet as on 31. 3. 2016 (APB 11- 18), fro m whic h, it is seen t hat as on 31. 3. 2015, t he Assessee had share capit al of Rs. 96, 004,600/- and it s t ot al rese rves and surpl uses were at Rs. 3,35, 60 5, 909/ -, 19 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana gi vi ng a t ot al a mo unt of Rs. 431,61 0, 509/ -. There was 900046 f ul l y paid s har es. It w as fro m t his that t he fai r mar ket v al ue was ar ri ved at b y the ld. PCIT at Rs. 450/ -. That this is as per t he NA V Meth od, i n accor dance wi t h rul e 11U A( 2)( a), i s cl ear, and not disputed. Th us, t hough i t i s not so st at ed, eit her i n t he S how Cause Not i ce dated 1 7.2.20 21 ( APB- 1- 2), issue d u/ s 2 63 of t he Act , or i n t he Order un der appea l, it is evi dent and not disput ed t hat the l d. PC IT empl o yed the B ook Value or NAV Met hod, as per r ul e 11UA( 2) (a) of the Rul es, f or det er mini ng t he fa ir mar ket val ue of t he unquot ed equit y shares i ssued b y t he Assessee, i n vi olati on of t he opt ion pr ovi ded b y r ul e 11U A ( 2), as not ed herei nabove. 33. The assessee, on t he ot her ha nd, exercised t he opt i on made avai labl e b y rul e 11U A(2) , and arr i ved at t he mar ket value of i t s unquote d shar es on t he basi s of t he Di scounted Fr ee Cash Fl ow Met hod, or the DCF Metho d, as pr ovi ded i n r ul e 11U A(2 (b). I n t he Repl y date d 2 3.3.2021 ( APB- 3) t o t he S how Cause N oti ce issued b y t he PCI T under s ect ion 263 of t he Act , t he Assessee st at ed that (para 1 of the Repl y): “As per r ul es 11 and 11UA, a val uati on report was obt aine d f rom a Chartered Acc ount ant for t he pur pose of val uat ion of equit y shares. The val uat ion re port was already pr ovi ded to the Assessing Of f icer f or t he purpose 20 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana of assessme nt . As per t he v aluati on report t he f ai r market val ue of shares was arri ved at at Rs. 1, 087. The val uat ion report h as been at t ache d herewit h f or your ref erence. ” 34. In t he or der un der appeal , t he l d. PCIT has observe d t hat t he Assessee had st at ed in it s Repl y t hat t he val uati on r ep ort ha d alread y been suppl ied to t he A.O. and the fai r ma rket val ue of each share w as arri ved at at Rs. 1, 087/ - as per t he Val uat i on Repor t of t he val uer ; t hat t hi s st and of t he As sessee was not acceptable; t hat t he f ai r mar ket va lue of t he shares, as per r ul es 11U and 11U A of t he R ul es, had been co mpute d at R s. 450/- per shar e; and that t he share pre mi u m r ec ei ved b y t he Assessee in excess of the rat e of Rs. 450/ - per share had r e mained fr o m bei ng assessed at the hands of t he Assessing Off icer. The l d. PCI T, howe ver , di d not venture t o elaborate as to how the det er mi nat ion of t he f ai r mar ket val ue of t he shares, as arr ive d at at Rs. 1,087/- per shar e b y the As sessee, on t he basis of t he DCF Met hod a nd cer ti fi ed b y t he Assessee’s C har tered Acc ount ant s, w as not accept able, r e maini ng obli vi ous to t he stat utor y mandat or y opt ion ma de a vai labl e to t he A ssessee b y t he pr ovisi ons of r ule 11U A( 2) of t he Rules, la yi n g down that the fair ma r ket val ue of unquot ed shares shal l be, as provi ded i n the said rul e, t he val ue as deter mi ned ei the r under cl ause (a) , or cl ause ( b) of the r ule, that is, b y i nvoki ng t he Book Val ue ( NAV) Met hod, or 21 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana t he Di scount ed Fr ee Cash Flow (or DCF) Met hod, at the opti on of t he Assessee. 35. That the above p osi t ion i s t he c orre ct posi t ion of l aw has been recognized i n var i ous deci si ons. So me s uch deci sions are bei ng di scussed i nf r a. 36. In ‘Vodaf one M- Pesa Lt d. Vs. PCI T’, ( 2018) 101 CCH 230 (Bo m.) , de mand was r ai sed b y t he AO on account of fai r mar ket value of t he sh are s whi ch had bee n issued at a pre mi u m. T he AO had, f or t he pur poses of det er mi ni ng t he fair mar ket value of t he shares, substi tuted the DCF Method b y t he Book Val ue / NA V Met hod. I n i ts appli cati on f or sta y fi led bef ore t he Co mmi ssi oner , t he Assessee cont ended t hat t hi s w as cont ra r y t o rul e 11UA of t he I. T. Rules, as t he rul e pr ovi ded an opti on t o t he Ass essee t o arri ve at a f ai r market val ue of t he sha r es, eit her as pres cri be d i n r ul e 11U A( 2)(a) of t he Rules, i .e. , the NAV Method, or in ter ms of r ule 11( 2) (b) of t he R ules, i. e., t he DCF Met hod. I n exercise of t hi s opt i on, t he Asses see had pr ovi ded a val uati on re port based on adopt ion of t he D CF Method. The AO, wi th out an y j ust i fi cati on, as done b y th e l d. P CIT i n t he case at hand, gave a c ompl et e go- b y t o t he DCF M et hod and a dopt ed the NAV Met hod to det er mine t he ma r ket val ue of the shares. The Hon'ble Hi gh C ourt obser ved that 22 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana i n t he i mpugne d or der t he C o mmi s sioner, however, di d not deal wit h t hi s pri mar y gr ievance of t he Assessee, ev en thoug h he conceded t hat t he met hod of valuat ion, na mel y, eit her the NA V me t hod, or t he D CF Metho d, to det er mi ne t he f ai r mar ket val ue of shares, has t o be adopte d at the Assessee’s opti on; that never theless, t he Co mmissi oner ha d not deal t wit h the cha nge i n t he me t hod of val uat i on b y t he Assessi ng Of f icer, whi ch c hange had result ed i n t he de man d; that i t was not open t o t he Assessing Offi cer to c hange the met hod of val uat io n whi ch had bee n opt ed f or b y t he Assessee; t hat i n f act, the Assessi ng Offi ce r had co mpletel y di sregar de d t he D CF Met hod f or ar r ivi ng at t he f ai r ma r ket val ue; and that t her efo re, the demand needed to be sta yed. 37. 1 In ‘Ra meshwara m St rong Gl ass ( P. ) Ltd. Vs. I TO’, [ 2018] 96 t ax mann. co m 5 42 ( Jai pur –T ri b.) , t he Assessee compa ny issued 1, 40, 000/ - shares havi ng f ace val ue of Rs. 10 each, at a pre mi u m of Rs. 60 pe r share. The Assessee had det er mi ned t he fai r market value of t he s hares o n t he basis of t he DCF Met hod, i n accor dance wit h rule 11UA( 2) (b) of t he Rul es r ead wi t h secti on 56 (2) (vii b) of t he Act . The Asse ssi ng O ffi cer rej ected such market val uat i on and deter mi ned t he fai r mar ket value of t he shares on the basis of t he NAV Met hod. T he AO f ound that t he calcul at ion of the s hare 23 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana pre mi u m was not i n accordance wi th r ule 11UA of t he R ul es, and after ref err i ng to Rul e 11UA (2)( b) , t he fai r mar ket value of t he shares was co mp ut ed on t he basis of Book Val ue. The Assessing Offi cer hel d that t he fair mar ket val ue of t he unq uote d shares of t he Assessee came t o Rs. 32. 76 onl y, an d t he Assessee was ent i tl ed t o char ge pre mi u m of Rs. 2. 27 la khs [ Rs. 32. 76 ( -) Rs . 10. 00 = Rs. 22. 76 x 10,0 00 s har es], agai nst whi ch, t he Assessee had char ged pre mi u m of Rs. 84 l akhs; a nd t hat t hus, t he excess pre mi u m of Rs. 81. 72 l ak hs recei ved b y t he Asses see was not just ified and not in accor dance wit h t he a mended pr ovi sions of secti on 56( 2)( vii b). The l d. CIT( A) par tl y confi r med t he a ddi ti on b y reject in g the val uat ion done as per the DCF met hod. 37. 2 The Tri bunal obs erve d that t he re was no disput e be t ween t he part ies that rul e 11UA( 1) was not appli cabl e t o t he fact s and circu mst ances of the case; t hat r ul e 11U A( 1) i s a pr ovi sion of gener al nat ure, whereas r ul e 11U A(2) i s a specif ic rule pr ovi ding for t he val uati on of unquot ed shar es; t hat the mat ter of val uat ion of unquote d equit y s hares has bee n l ef t , b y r ule 11UA(2), co mpletel y t o t he di scr et ion of t he Assessee and i t i s hi s opti on whether t o choose t he NA V Met hod (Book Val ue) unde r cl ause ( a), or t he DCF Met hod under cla use ( b) , and t he Assessing Offi cer cannot ad opt a 24 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana me t hod of his ow n choi ce; t hat t he Aut horit i es cannot co mpel t he Assessee t o choo se the NA V Met hod onl y, as agai nst t he DC F Met hod; and t hat when t he legi sl ati on has conf err ed an opt ion on t he Assessee t o choose a par ti cul ar metho d, the valu at ion of shares has t o be i n accor dance wit h such met hod onl y. 37. 3 The Tri bunal furt her obser ved t hat the Assessee-co mpan y had exerci se d the opt i on t o val ue t he s hares b y t he D CF Met hod; that however, th e AO had w orked out t he val ue based on the NA V me t hod; that t hough i n t he bod y o f t he assessment or der , he had referre d t o r ul e 11U A( 2)( b), in subst ance, he had val ued t he shares based on t he boo k val ue f igur es onl y, b y consi der ing the val ue of t he assets show n in t he Balance S heet. 37. 4 The Tri bunal f urt her observe d t hat t hough t he C o mmi ssi oner (Appeal s) t o o had c onsidere d t he case i n t he cont ext of r ul e 11U A( 2)(b) , his act ion of aski ng for a val uat ion repo rt onl y on act ual figures was nothi ng ot her t ha n askin g f or a val uati on done on t he basi s of t he N et Asset Val ue Met hod; t hat fr o m t he fact s, it was clear t hat t he t axi ng A uthorit i es wa nted t o i mpose on the Assessee, t he met h od of val uati on of t hei r own choi ce, completel y di sregar di ng t he l egi slati ve int ent whi ch has gi ve n t he Assessee an opt i on to c hoose a n y one of t he t wo met hods of valuati on; that w hen 25 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana t he l aw has specif i cal l y pr o vide d di f fer ent met hods of val uati on and t he Assessee exer cised an opti on by c hoosing a particular meth od, changi ng t hat met hod w ould go be yond t he powers of t he Reve nue Aut horit i es; t hat per mit t ing t he Revenue Aut ho rit i es to do so w ould render cla use (b) of r ule 11UA( 2) nugat or y and purposel ess; and t hat thus, to t hi s extent, t he acti on of the ta xi ng A ut hori ti es was not j usti fi ed. It was hel d t hat t he Asses see had all t he ri ght t o choose a me t hod, whi ch could not be cha nged b y t he Assessing Off icer. 37. 5 It was f urt he r observed b y t he Tri bunal that co mi ng t o t he aspect whether the Assessee had co mpli ed wi t h t he condi t ions laid dow n under r ul e 11U A(2) (b), i t was clear t hat t o compl y w it h t hi s rul e, t he Assessee was requir ed t o obt ai n a cer ti fi cate of a Merchant Banker or a C hart ere d Account a nt and t o base t he valuat i on on t he DCF Method onl y; and that to exe r ci se t he opt i on under t hi s cl ause, t he Assessee was not t o be subject ed to t he ful fi l l me nt of any ot her condi ti on, except these two, whi ch t he Assessee had done . 37. 6 The Tri bunal next obser ved that C BDT Inst r uction ( Fil e No. 173/ 14/ 2018–I TA.I ) dated 6. 2.2018, given i n the ca se of st ar tup co mpanies, i s useful i n t he cont ext of det er mi nation of f ai r mar ket value of unquote d equi t y s har es un der secti on 56(2)( vii b) read wi th 26 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana rul e 11UA( 2) , whi ch I nstruct ion st at es t hat t hough st ar tup co mpanies i nvar ia bl y s ub mi t valuat ion re port s i n accor danc e wi th rul e 1 1UA( 2) ( b), in t he assess me nts, such repo rts are not bei ng accept ed and ar e bei ng rej ect ed / modifi ed b y t he Assessing Offi cers, consi der ing t he sa me as based on a bnor mal val uati ons, whic h result s i n addi t ions; and th at the CBDT has, accordi ngl y, di rect ed not t o ta ke coercive meas ur es in s uch cases f or r ecover y of de mand res ul t ing i n addi ti ons, and t he Co mmi ssi oners (A ppeal s) have been di rect ed t o dispose such appeals expedi t iousl y. 37. 7 It was al so obser ved b y t he Tri bunal t hat i t appear ed t hat t he t axi ng Aut hori t ies had i gnored Expl anati on ( a) below sect ion 56( 2) (vi i b); that t he sai d Expl anati on pr ovi des t hat the fai r mark et value of t he shar es shall be the val ue – (i ) as ma y be det er mi ned i n accor dance wit h s uch met h od as may be prescri bed, i. e., under r ul e 11U A, or ( ii ) as ma y be subst anti at ed b y the compa ny t o t he sat i sf acti on of t he Assessi ng O ffi c er, based on t he val ue, on t he date of i ssue of shares, of it s assets, i ncl udi ng int angi bl e asset s being goodwil l, know- how, pat ent s, trade mar ks, l i ences, franchises or a n y ot her business or co mme rci al ri ght s of s i milar nat ure, whic hever i s higher; and t hat i t i s onl y t he E xpl anati on (a)(i i ), whic h speaks of t he sat isf acti on of t he Assessi ng Of f i cer, but there 27 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana appears no such condi t ion i n t he E xpl anati on (a)(i ) and, theref ore, t he Assessi ng Off i cer i s not per mi t t ed to inter fere in the val uat ion done in acc ordance wi th t he met hod prescri bed in r ul e 11UA(2). 36. 8 The Tr ibunal concl ude d t hat thus, there was no j ust if icat ion behi nd rej ecti ng t he declar ed value of the shar es and in t he addit ion ma de b y t he Assessi ng Offi cer but par tl y sust ained b y t he Co mmissi oner ( Appe al s). The addi ti on was delete d. 38 In ‘Ci nest aan E nt ert ai n ment (P ) Lt d. Vs. Inco me Tax Of fi cer , Ward-6( 2), New Delhi ’, [ 2019] 177 I TD 809 (Del hi ) , i t was held t hat the Assesse e has an opt i on to do val uat io n of s har es and deter mi ne fair ma rket val ue ei t her on the DCF Met hod, or t he NA V Met hod; t hat t he Assessing Offi cer cannot exa mi ne or subst it ut e hi s ow n val ue i n pl ace of t he val ue det er mi ned; t hat the I nco me Ta x Depart ment can not sit i n t he ar mc hai r of t he busi ness ma n t o deci de what is pr ofi tabl e and how busi ness shoul d be ca rried out; that co mme rci al expedi enc y has t o be seen fr o m t he poi nt of vi ew of t he busi ness ma n; t hat strat egi c i nvest ments and ri sks are undert aken f or appreci at ion of capi tal and lar ger r et urns, and not si mpl y di vi dend and i nterest ; that an y busi ness ma n or e nt rep reneur visuali ses t he busi ness based on cert ai n f uture pr oj ecti ons and underta kes al l ki nds of ri sks; t ha t i t is the ri sk fact or al one, whi ch gives a hi gher 28 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana retur n to a busi ness ma n, and the Inco me Ta x Depar t ment or Revenue of fi ci al c ann ot gui de a busi ness man as t o in whi ch manner ri sk has to be undert ake n; t hat such an a ppr oach of t he Reve nue has been j udi ci al l y frowne d upon by t he Ape x Curt on sever al occasions; that the Inco me Tax Rules pr ovi de f or t wo valuat ion me t hodolo gies; t hat o ne i s t he asset s based N AV Method, w hic h i s based on act ual nu mber s as per t he l at est audi t ed fi nanci al s of t he Assessee Co mpan y, w hereas in t he ot her method, t hat i s, t he DCF Met hod, t he val ue is based on est imat ed f ut ure pr oject i on; t hat if t he invest ment ha s been ma de keepi ng i n mi nd t he Assessee’s own busi ness obj ecti ve, t hen suc h com me r ci al wi sdom c annot be questi one d; t hat even the prescri bed rul e 11UA (2) doe s not gi ve an y power t o t he Ass essi ng Of ficer t o exa mine or substi t ute his own value i n place of t he value deter mi ned, nor does i t require an y sat i sf acti on on the par t of the Assessi ng Of fi cer t o ti nker wi th s uch valuat i on; t hat sec ti on 56(vi i b) of t he Inc o me Ta x Act i s a dee mi ng pr ovisi on and one cannot e xpand t he mea ni ng or sco pe of an y wor d whil e i nt er pr et i ng such a dee mi ng pr ovi sion; that if the statut e pr ovi des t hat t he val uat i on has t o be done as per the prescri bed me t hod, and one o f t he prescr i be d met hods has been a dopt ed b y t he Assessee, t hen t he Assessing Offi cer has t o acce pt t he sa me and even in case he i s not sat i sfied, he cannot do ot her wi se, as there i s 29 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana no expr ess pr ovi si on under t he Act or t he R ules, where under t he Assessing O ffi cer can ado pt hi s own val uat ion, or get it done b y some di ff ere nt val uer ; that t her e has to be so me enabli ng provi sion under t he R ul es or the Act , gi vi ng power t o t he Assessing Off icer t o t inker wi th t h e val uat io n re por t obt ai ned fr o m an i nde pende nt value r, as per t he quali fi cati on gi ven i n r ule 11U; t hat such a pr ovisi on is absent; and that i n a n y case, i f the law provi des for t he Assessee to get t h e val uat ion done fro m a prescr i bed exper t as per t he prescri be d me t hod, t he n t he same cannot be rej ected, bec ause neit her t he Assessing Offi cer, nor t he Assessee have be en recognized as experts unde r t he l aw. 39. 1 In ‘P rinci pal Commi ssioner of I nco me Tax Vs. Cinestaan Entert ai n ment Pvt . Lt d. ’, ( 2021) 433 I TR 82 ( Del ), i t was co nte nded on behal f of t he Assessee-Respondent bef ore t he Hon'ble Hi gh Cour t, int er al ia, that sect ion 56( 2) ( vi i b) of t he A ct i s not a ppl icabl e t o genuine busi ness transact i ons ; that the genui neness and credi t wor thi ness of t he st rat egic i nvestor s was not doubt ed b y eit her t he AO, or t he CI T( A); that sub- clause (i i ) of cl ause (a) of t he Ex planat i on t o se ct ion 56( 2) (vi i b) was not appli ca bl e to the c ase of t he Respondent - Assessee and t he Assessee was not requi red t o sat i sf y t he Assessing Off icer about t he val uat ion done; and t hat in 30 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana accor dance wi t h sub-cl ause ( i) of c l ause ( a) of t he E xpl anati on to secti on 56( 2) (vi ib ), t he Responde nt- Assessee had an opt io n t o carr y out a val uati on and deter mi ne t he fair mar ket value of t he shares onl y on t he Discount ed Cash Fl ow Met hod (t he DCF Method ), whic h was appr opri at el y f ol lowed by t he Responde nt -Assessee. 39. 2 Di s mi ssi ng t he appeal f il ed b y t he De par t me nt, the H on'bl e High C ou rt obser ved, i nt er ali a, t hat t he shar es wer e issued based on t he val uat i on r eport recei ved fr om t he prescri bed expert , i . e. , a Chart ere d Accountant , who used t he DCF Met hod, which is one of t he met hods sti pul at ed under sect i on 56( 2) ( vii b) r ead wi t h rul e 11U A( 2)(b) ; t hat based on t he va luati on r epor t of the Char tere d Acc ount ant , t he A ssessee i ssued shar es to var ious equit y par t ners at a pr e mi u m; t hat t he t est laid dow n by t he C ourt s f or i nterferi ng wi th t he fi ndi ngs of a val uer was not sat isf ied in t hat case, as t he Respondent - Assessee had adopt ed a recognise d met hod of val uat ion and t he Ap pel lant -Revenue had been u nabl e t o show that t he Assessee had ado pted a de monst rabl y wr ong appr oach, or that t he me t hod of val uati on was made on a w hol l y er r oneous basis, or t hat i t had c o mmi tt ed a mist ake goi ng to t he root of the val uat ion pr ocess; t hat t he Tri bunal ha d f ol l owe d t he di ct a lai d down b y t he Hon'bl e Supre me Court i n mat t ers relati ng t o the commercial 31 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana pr udence of an as sessee rel ati ng t o val uat i on of an asset; that t he l aw r equi re d det er mi nati on of fair ma r ket value as per prescri bed me t hodolo g y; t hat t he A ppel lant -Revenue ha d t he opti on t o conduct i ts own val uat io n and to det er mi n e t he fair mar ket value on t he basis of ei t her t he DCF Met hod, or t he NAV Met hod; that t he Respondent - Assessee, bei ng a st art -up co mp an y, ha d adopt ed t he DCF Met hod t o val ue it s shares; t hat t his had bee n carri ed out on t he basi s of i nfor mat i on and mat eri al avai l abl e on t he date of valuat i on and pr oject i on of f ut ur e revenue; and that t her e was no di spute t hat the met hod adopt ed by t he Assessee had been done appl yi ng a r ecogni sed and accepte d met hod. 40. I n ‘DCI M V s. Ozonel and Agr o P vt. Lt d. ’ vide or der dat ed 2. 5. 2018, passed for assess ment year 2013- 14, in ITA N o. 4854/Mu m/ 2016, the Mu mbai Tri bunal hel d t hat sect i on 56 all ows t he Assessees to adopt one of the met hods of t hei r choi ce; that however, the Assessi ng Off icer hel d that t he Assessee shoul d have adopt ed onl y one metho d f or det er mi ni ng t he value of t he shar es; t hat it was be yond t he j uri sdi ct ion of t he Assessi ng Of ficer t o insi st upon a part i cul ar s yst e m, especial l y whe n t he Act al lows t o choose one of t he t wo met hods; that unl ess and unt il the l egisl at ur e amends t he pro vi si ons of t he Act and prescri bes only o ne met hod 32 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana for valuat ion of t he shar es, t he Ass essees are fr ee t o adopt an y one of t he met hods; and t hat t he Assessing Offi cer had ‘t ampere d wi th’ t he pr ovisi ons of the Act . 41. In ‘ Kar mi c Labs Pvt. Lt d. Vs. ITO ’, or der date d 2 8.7.2020, passed f or assessment ye ar 201 4- 15, in I TA No. 3955/ Mu m/2018, ‘DCI T Vs. M/ s O zonel and Agr o Pvt . Lt d. , ’(supr a) and ‘V odaf one M- Pesa Ltd. Vs. PCIT’ ( su pra) were foll owed. 42. In ‘Da da Ganpat i Guar Pr oduct s Pvt . Lt d. Vs. Principal Co mmissi oner of Inco me Ta x’, (2021) 92 ITR ( Tri b) 408 (Cha ndi gar h), the Cha ndi gar h Tri bunal has f oll owed ‘ Voda fone M- Pesa Lt d. Vs. Princi pal Co mmi ssi one r of Inco me Tax’( s upra), ‘P ri nci pal C o mmi ssi oner of I nco me Tax x Vs. Cinestaan Entert ai n ment Pvt . Lt d. ’ (s upr a) , ‘Ra meshwara m St r ong Gl ass (P.) Lt d. Vs. Inc o me Tax Offi cer, Ward- 2( 1), Aj mer ’ (supr a), an d ‘Ci nest aan Ent er tain ment ( P.) Ltd Vs. Inc o me T ax Offi cer, War d- 6( 2), New Del hi ’ ( supra ). 43. In ‘Nir bhai Te xt il es Pvt . Lt d. Vs. The ACI T, Cir cl e-2 Lu dhiana’, or der dated 22.8. 2022, for A. Y. 2014- 15 , in ITA N o. 1401/Chd/ 2018, t he C ha ndi gar h Tr i bunal has f oll ow ed ‘Pr inci pal Co mmissi oner of Inco me Tax Vs. Cinestaan Ent er tain ment Pvt . 33 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana Lt d. ’(supra) , ‘V odaf one M-Pesa Lt d. Vs. Pri ncipal Commi ssi oner of Inc o me Tax’ (supr a) and ‘Dada Ganpat i Guar P rod uct s Pvt . Lt d Vs. Pri nci pal C o mmis sioner of I nco me Tax’(supr a). 44. No decisi on cont r ar y t o t he af ore- di scussed casel aws has been cit ed bef ore use. 45. In vi ew of t he a bove discussi on, we are of the co nsidered opi ni on that : (a) The Assessee f ol l owe d the DC F Method f or valui ng the share s, wher eas t he l d. PCI T ut il i sed t he NAV Method t o do so. (b) This acti on of the ld. PCIT is i n direct contr ave nti on of t he provi sions of Ex planat i on (a ) (i ) t o sect i on 56( 2)( vii ) of t he I .T. Act read wit h rul e 11UA( 2) (b) of the I. T. Rul es. (c) The AO co ul d not have change d the met ho d of valuat i on opte d by t he Assessee, in vi ew of the stat utor y man dat e of rule 1 1UA( 2) of t he Rules. (d) The above is in keepi ng wi t h t he casel aws di scussed h ereinabove. (d) Theref ore, t her e was no er ror in the Assessi ng Offi cer ’s Or der dat ed 21. 12. 2018, cal l ing f or revi si on under sec ti on 263 of t he I .T . Act . 34 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana 46. Accor di ngl y, t he gri evance of t he Assessee b y wa y of Gr ound Nos. 1 to 4 i s found to be j usti fi ed and is accept ed. The i mpugned or der i s r eversed qua this issue and t he assessment or der is revi ved. 47. Now, we co me t o the ot her issue, i . e, whet her or not t he AO i nqui red i nt o t he i nt erest i nco me ear ned b y t he Assessee, amount ing t o Rs. 9, 48, 784/ - on w hich, TDS w as cl ai med, w hereas as per t he l d. PCIT, no int er est i ncome was of fered t o t ax b y t he Assessee. In t he Show Ca use Noti ce i ssued u/ s 263 of the Act (A PB 1- 2), t he l d. PCIT i n par a 5, stated that ; “5. Fr om t he asse ssment record, i t i s al so not ed t hat you have earned i nterest i ncome of Rs. 9, 46, 784/ - a nd c lai med T DS but no i nt erest i ncome has been off ered f or t ax ati on whil e fi li ng ret urn of i ncome. The AO has al so not made any verif i cat i on i n thi s regard and amount of Rs. 9, 48, 784/ - rem ai ned un- assessed. ” 48. In response, t he Assessee, vi de i t s repl y dat ed 23. 03. 2021 (APB - 3), st ated as unde r: - “2. Int erest income i s ear ned on f ixed deposi t s made f or t he pur pose of obt aini ng bank guarantee ag ainst t he EPC G Licenses avail ed by t he company. EPC G l icenses were obt ai ned w hil e i mport i ng M ac hi nery f or t he hot el . The hot el wa s under c onstructi on during t he f i nancial y ear 2015- 16 and hen ce t he i nt erest i ncome e arned duri ng t he year w as set off against t he total c ost 35 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana of capi tal i zati on a s it i s i ncident al to ac quisi ti on of asset s. ” 49. The l d. PCI T, however, hel d t hat t he AO had f ail ed to exa mi ne and ver if y t he i ssue rel ati ng to t he i nterest earne d and had, t her eb y, rendere d t he assessment or der e rrone ous and prej udi ci al t o t he i nterests of t he Revenue on thi s issue al so. 50. It i s seen that the Assessee had fi l ed bef ore the l d. PCI T, a cop y of not ice dat ed 19.7. 20 17 ( AP B 19 to 20) , i ssued u/ s 13 9( 9) of t he I . T. Act and order date d 24. 10. 2016 (APB 21 to 28) i ssued u/s 143( 1) of t he I. T. Act . 51. The st and o f the Assessee i s t hat it r ecei ved int er est i nco me on fi xed de posi ts, required to be made f or the pur poses of obtaini ng bank gua rantee a gai nst t he EPC G l i censes avai le d w hil e i mporti ng ma chi ner y f or t he hot el bei ng const ructed. Tax deducti on on t he i nterest i nc o me was cl ai med i n t he r et ur n, but no cor r espondi ng i nco me was s ho wn, as the i nt erest i nco me had bee n set of f agai nst t he t ot al cost of c api t al izat i on duri ng t he const ruct i on per iod. The aforesai d noti ce u/ s 139( 9) of t he Act was i ssued to t he Assessee to t reat t he ret ur n as a defect i ve ret ur n, stati ng t hat as per R ul e 3 7BA of t he I nco me Ta x Rules, 1962 re ad wi t h sect ion 199 of the I nco me Tax Act, 1961, cr edi t of t ax deduct ed at sour ce shal l be gi ven i n t he 36 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana assessment ye ar f or whic h such inco me is assessabl e; t hat as avai labl e f r o m t he ret ur n of i nc o me fi led, cr edi t of TDS ha d been clai med, but t he corres pondi ng receipt / i nco me had bee n o mi tt ed fr o m bei ng off ere d for t axati on; and t hat the sai d omi ssi on was a defect as per cl ause (a) t o t he Expl anat ion to secti on 139( 9) o f t he Act . However, l at er on, vi de t he af or esai d or der dat e d 24. 10. 2016, i ssued u/ s 143(1) of t he Act, the r etur n fil ed was t r eat ed as val id and was pr ocessed at t he ret urne d i nco me. The ld. PCIT, t hough, fail ed t o t ake note of bot h, t he not i ce i ssued un der sect ion 139( 9) of t he Act and t he or der l at er passed u/ s 143( 1), pr ocess ing the r et ur n fi l ed at the inco me ret ur ned. 52. The i nt er est on t he de posit s for obt ai ni ng bank gu arant ee, whic h bank gua rant ee had been gi ven f or i mport of ma chiner y f or a hot el under co nstruct ion, ha d been reduce d b y t he Assessee f ro m t he cost of t he asset under const ruct i on. T his is ent ir el y i n keepi ng wit h t he vi ew i n ‘CIT vs. Bokaro St eel Lt d. ’, (199 9) 236 ITR 315 (SC) a nd ‘ Co mmi ssi oner of I nc o me Ta x vs. Karnal Co-operat i ve Sugar Mi ll s Ltd.’, ( 2000) 243 I TR 2 ( SC) . 53. In ‘B okar o Steel ’ (supr a), t he Assessee co mpan y ha d recei ved rent , pl ant and ma chi ner y hir e char ges a nd int er est on su ms advanced t o contr act ors. 37 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana 54. The rent r ecei ved was char ge d by t he Assessee t o i ts contr actor s f or housi ng wor kers and staff e mp lo yed b y t he contr actor f or t he assessee’s const r uct i on wor k, includi ng cert ain ameni t ies grant ed b y t he Assessee to t he st aff . 55. The hi re char ges were for pl ant and ma chi ner y gi ven b y t he Assessee t o it s contract ors f or use in i t s constr uct i on wor k. 56. The i nt er est rec ei ved was fr o m advances made b y t he Assessee t o it s cont ract ors f or f acil it ati ng it s work of const r ucti on. 57. The H on'bl e Supr e me Court hel d t hat the Assessee’s acti vi ti es i n connecti on wit h all t hese three r eceipt s were direc tl y c onnect ed wit h or were incid ent al to t he Asses see’s wor k of const ructi on of i ts steel pl ant, when the co mpan y ha d not start ed an y business and pr oduct io n had not c o mme nced. It was hel d that t he Assessee’s arrange ment s wi t h i ts cont ractors, c onc erni ng t hese thr ee recei pt s, were i nt ri nsical l y connect ed wit h the const ructi on of t he Assessee’s steel pl ant. It was held t hat t he ut il isati on of var i ous asset s of t he Assessee co mpany and t he pa yme nt received f or s uch ut il isati on were di rect l y li nked wi t h t he act ivit y of set ti ng up of t he Assessee’s steel pl a nt. I t was hel d t hat t hese recei pts w ere 38 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana i next ri ca bl y l i nked wi th t he set t ing up of t he capit al st ructure of t he assessee compan y; and t hat t heref or e, t he y must be vi ewed as capi tal recei pt s g oing t o re duce t he cost of const ructi on. It was held t hat in keepi ng wit h ‘C hal lapal l i Sugars Ltd. vs. CI T’, ( 1975) 98 I TR 167 (SC) , the accept ed ac cou nta nc y r ul e f or det er mini ng cost of fi xed asset s i s t o incl ude a ll t he e xpe ndi tur e necessar y t o bri ng s uch asset s into e xist ence and t o put t he m i n worki ng condi ti on. It was hel d that i n case mone y i s bor r owe d b y a newl y start ed co mpan y whi ch i s in t he pr ocess of c onstr uct i ng and erecti ng i ts pla nt , t he i nterest incurr ed be fore t he c o mme nce me nt of pr oduct io n on such borr owe d mone y can be capi tali zed and adde d to t he cost of f ixed assets cr eated as a resul t of s uch e xpen dit ure. I t was h el d t hat b y t he sa me reasoning, if the Assessee r ecei ves an y amount s w hi ch ar e i next ri ca bl y l i nked wit h t he pr ocess of set ti ng up it s pl ant and machi ner y, such receipt s wi ll go to re duc e the c ost of it s asset s. It was held t hat t hese are r ecei pt s of a capit al nat ure and ca nnot be taxed as inco me. 58. ‘B okara Steel ’ (s upra) was appl ied b y t he Su preme Court in ‘C o mmi ssi oner of Inco me T ax Vs. Kar nal Co- ope rati ve Sugar Mil ls Lt d. ’, (2000) 243 ITR 2 (S C), to hol d t hat where t he Assessee had deposit ed mone y t o open a l ett er of credit for t he pur chase of 39 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana ma chi ner y r equi r ed f or sett ing up it s pl ant i n t er ms of t he Assessee’s agr eement wi t h it s suppl ier, and i nt er est had been earne d on the mo ne y so deposi t ed, i t was not a cas e w here an y surpl us shar e ca pi tal mone y, w hich was l yi ng idl e, had been deposit ed i n t he bank f or t he pur pose of ear ni ng i nterest ; and t hat t he dep osit of mo ne y was di rect l y l inked wi t h t he pur chase of plant and machi ner y. It was held t hat hence, an y i nco me earned on such deposit is i nci dent al t o the ac quisi t ion of asset s f or the set ti ng up of t he pl ant and mac hiner y. 59. In t he pr esent case, t he Assessee’s hot el w as under constr uct ion. Ma chi ner y was i mp or ted b y t he As sessee for t he pur pose of such const ructi on. Whil e so i mpor ti ng mac hi ner y, Ex port Pr o mot ion Capi t al Goods (EPC G) l icenses, whereunder, capi tal goods i ncl udi ng spar es f or pr e- pr oducti on ar e al l owe d, at zero cust o ms dut y, wer e avai led. Fi xed deposi t s were requi re d to be made for t he purposes of obt ai ning bank guarant ee agai nst t he EPC G li censes. It was on t hese f i xed de posit s, t hat t he int er est in questi on was recei ved b y t he Asses see. Now, t his trai l of events clearl y s hows t hat this recei pt , l i ke t he ones i n ‘B okaro Steel ’ (supr a), was connect ed di rect l y w i t h t he w or k of const ructi on of t he Assessee’s hotel. Had t he fi xed deposi ts not been ma de, the 40 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana Assessee w oul d not have been able t o obt ai n bank gua rantee agai nst t he EPCG li censes avail ed whil e import ing machi ner y f or i ts hotel , whic h was under constr uct i on. The fi xed de posit s, as such, wer e ma de to f acil it ate the constr uct i on of t he Assessee’s hotel , i . e. , its fi xed asset. The Assessee’s arr ange ment wi th regar d to the i nt erest received on th e fi xed de posi ts was an ar range ment int rinsi cal l y connect ed wi t h t he c onst r uct i on of the Assessee’s hot el . T he Assessee adjust ed t he i nterest recei ved, r educing it fr o m t he cost of constr uct ion of i ts hot el . The int er est was set off agai nst the total cost of capit ali zati on duri ng the const ructi on period. The i nt erest receipt, therefore, went t o reduce t he cost of const ructi on. 60. The fi xed de posi t s and t he i nt er est recei ve d b y t he Assessee t her eon wer e direct l y li nked wi th t he acti vi t y of sett i ng up t he hotel of t he Assessee. The i nterest is l inked i next ri cabl y w i th t he pr ocess of set t ing up of t he capi tal st ruct ure of the Assessee-co mpa n y. I t must , hence, i n respect ful co nf or mit y wit h ‘Bokar o St eel ’ (supra) , be vi ew ed as a capi tal r eceipt g oing t o r educ e the cost of constr uct ion. 61. The n, as i n ‘Kar nal Co-oper at i ve’ ( supra) , t he mo ne y had t o be deposi ted in or der t o obt ai n bank guara nt ee against t he EPCG 41 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana l icenses avai l ed b y the Assessee whi le i mport ing ma chi ner y f or t he pur pose of c onstr uct io n t o i t s hot el . I t was, li kewi se, not a case of de posit of an y surplus shar e ca pit al mone y l yi ng idle wi th t he Assessee, for e ar ning i nterest. Rat her , a gai n li kewi se, t he deposi t was co nnecte d di r ect l y wi th t he sett i ng up of the As sessee’s pl ant and machi ner y, i .e. , it s hot el , and s o, t he i nt er est received on s uch deposit was incident al t o acqui sit i on of assets f or t he set ti ng up of pl ant and machi ne r y. 62. Evi dent l y, t her ef or e, t he vi ew t aken b y t he AO w as a possi bl e vi ew a nd t he or der passed b y t he AO i n thi s re gar d was n ot errone ous, muc h l ess prej udi ci al t o t he i nterests of t he Revenue. This, though, t he l d. PCIT fai l ed t o t ake i nt o c onsi derati on whil e passi ng t he i mpugned order. 63. Accor di ngl y, on t his issue al so, t he or der of the l d. PCI T is rever sed an d t he assess me nt or der i s r evi ve d. 64. To c onclude, qua bot h t he i ssues, the order of the l d. PCIT is set asi de and rev ersed and the assess ment or der is revi ved. T he gri evance of the Assessee rel at ing t o bot h the i s sues is f ound j usti fi ed and is accept ed. 42 ITA No. 111/Chd/2021 – Apna Punjab Resorts Limited, Ludhiana 65. In the result , t he appe al i s allowe d. Ord er pr onounced on 24. 02. 2023. Sd/ - Sd/ - (VIKRAM SINGH YADAV) ( A.D. JAIN ) Accountant Member Vice President Dated : 24.02.2023 “आर.के.” आदेश क त*ल+प अ,े+षत / Copy of the order forwarded to : 1. अपीलाथ / The Appellant 2. यथ / The Respondent 3. आयकर आय ु 1त/ CIT 4. आयकर आय ु 1त (अपील)/ The CIT(A) 5. +वभागीय त न6ध, आयकर अपील#य आ6धकरण, च8डीगढ़/ DR, ITAT, CHANDIGARH 6. गाड फाईल/ Guard File आदेशान ु सार/ By order, सहायक पंजीकार/ Assistant Registrar
Other Referred Cases
Vodafone M-Pesa Ltd. Vs. PCIT, Rameshwaram Strong Glass (P.) Ltd. Vs. ITO, Principal Commissioner of Income Tax Vs. Cinestaan Entertainment Pvt. Ltd., Nirbhai Textiles Pvt. Ltd. Vs. The ACIT, Circle-2 Ludhiana, Dada Ganpati Guar Products Pvt. Ltd. Vs. Principal Commissioner of Income Tax, Karni C Labs Pvt. Ltd. Vs. ITO
Laws Referred To
Income Tax Act, 1961, Income Tax Rules, 1962
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