Jt. CIT(OSD)-2(3)(1), Mumbai V. M/S WAVELL INVESTMENT PVT. LTD., Mumbai

ITA 1288/MUM/2019

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 6169 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 5 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-08-2022
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: G
• Assessment Year: 2015-2016
• Appeal Filed On: 05-03-2019
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Additional evidence; Fair market value; Valuation report; Rule 8D
• Section: 56; 143(3); 56(2); 14A; 13

Judgement Text

Page | 1 ITA nos. 1288 & 1644/Mum/2019 M/s Wavell Investment Pvt. Ltd.; A.Y. 5–16 IN THE INCOME TAX APPELLATE TRIBUNAL “G” BENCH, MUMBAI BEFORE SHRI VIKAS AWASTHY, JM AND SHRI PRASHANT MAHARISHI, AM ITA No. 1288/Mum/2019 (Assessment Year 2015–16) Jt. CIT (OSD ) 2(3) (1) Room no. 552, 5 th f loor, Aaya kar Bha van, Mum bai-400 020 Vs. M/s W avell In vestm ent P vt. Ltd. 15, Mohindra House, J N Heredia Marg, Ballard Estate, Mumbai-400 038 (Appellant) (Respondent) PAN No. AAACW0598C ITA No. 1644/Mum/2019 (Assessment Year 2015–16) M/s W avell In vestm ent P vt. Ltd. 15, Mohindra House, J N Heredia Marg, Ballard Estate, Mumbai-400 038 Vs. Jt. CIT (OSD ) 2(3) (1) Room no. 552, 5 th f loor, Aaya kar Bha van, Mum bai-400 020 (Appellant) (Respondent) Assessee by : Ms Ritika Agarwal, AR Revenue by : Shri Hoshang B. Irani, DR Date of hearing: 09.06.2022 Date of pronouncement : 17.08.2022 O R D E R PER PRASHANT MAHARISHI, AM: 01. These are the cross appeals filed by the assessee as well as The learned Joint Commissioner of Income-tax (OSD) 2(3)(1) (the learned Assessing Officer) for A.Y. 2015-16 Page | 2 ITA nos. 1288 & 1644/Mum/2019 M/s Wavell Investment Pvt. Ltd.; A.Y. 5–16 against the appellate order passed by The Commissioner Of Income-Tax (Appeals)-6, Mumbai [the learned CIT (A)) dated 17 th December, 2018. 02. The learned AO in ITA No. 1288/Mum/2019 has raised solitary ground of appeal as under:- “1. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in restricting the disallowance u/s 14A to exempt income earned by the assessee, when there is no provision in the Income Tax Act 1961 and Income Tax Rules 1962 which restricts the disallowance u/s 14A to the exempt income earned by the assessee." 03. The assessee in ITA No. 1644/Mum/2019 has raised concise grounds of appeal as under:- “1. BECAUSE the CIT(A) has erred in law and on facts in upholding the disallowance of Rs. 1,93,38,298/- made by the AO u/s. 56(2)(viib) of the Income Tax Act, 1961 which is based on incorrect computation of fair market value of shares.. 2. BECAUSE, the CIT (A) has erred on facts and in law in holding that the AO's valuation is as per Rule 11UA, which is to be done on the date of receipt of consideration, whereas AO's valuation is based on the balance sheet of the preceding year. 3. BECAUSE, the CIT (A) has erred on facts and in law in upholding that the AO's valuation even though it has adopted an incorrect date of fair market valuation of shares. Page | 3 ITA nos. 1288 & 1644/Mum/2019 M/s Wavell Investment Pvt. Ltd.; A.Y. 5–16 4. BECAUSE, the CIT (A) has erred on facts and in law in falling to consider that for the purposes of section 56(2)(viib), the higher of the two prescribed valuations is to be taken. 5. BECAUSE, the CIT(A) has erred in law and on facts in upholding Rs. 1,01,20,374/ being estimated disallowance of Interest u/s. 36(1)(ii) on loans amounting to Rs. 11,34,22,705/- ignoring the fact that the advances were made from interest free funds and could not be considered for interest disallowance. 6. BECAUSE, the CIT(A) has erred in law and on facts in upholding estimated disallowance of interest u/s. 36(1)(i) Ignoring the fact that loan given of Rs. 10,75,00,000/- was not interest free as erroneously claimed by the AO and that such a fallacy has resulted in gross miscarriage of justice.” 04. Brief fact of the case shows that the assessee is a company engaged in investment activity. It filed its return of income on 30 September 2015, declaring a loss of ₹ 4,68,52,572/-. The case of the assessee was picked up for scrutiny. Ld AO made following three additions/ disallowance :- i. During the year, assessee issued 6885 equity shares to M/s Airoplast Pvt. Ltd. having a face value of ₹100 each at premium of ₹3036.40 per share. Accordingly, assessee raised ₹ 2,08,14,500/- as share premium. The learned Assessing Officer asked the assessee to furnish the details of the above transaction. The Page | 4 ITA nos. 1288 & 1644/Mum/2019 M/s Wavell Investment Pvt. Ltd.; A.Y. 5–16 assessee submitted on 21 September 2017, the relevant details along with the share valuation report dated 30 November 2014 along with the working of the valuation of the share. The learned Assessing Officer invoked the provisions of Section 56(2) (viib) of the Income-tax Act, 1961 (The Act) and asked assessee to justify premium. Assessee did not submit any justification for the same except valuation report as above. The learned Assessing Officer found that assessee has incurred a huge loss since F.Y. 2013-14 till F.Y. 2016-17 and held that there is no cash flow available. According to the learned Assessing Officer, the assessee has not provided any justification for the verification of the share valuation which should have been carried out as per Rule 11UA of Income Tax Rules, 1963 (The Rules) considering the book value of the assets or Discounted Cash Flow method. He also noted that share premium is credited on 31 st March, 2015, whereas the assessee has taken the value of shares from the balance sheet as on 31 st March, 2014 as per Net Asset Value method. He also found that assessee did not provide valuation as per Discounted Cash Flow Method. Therefore, learned Assessing Officer proceeded to value shares as per book value of the asset as per Rule 11UA of the Rules. He valued the shares at ₹315.35 per share, but assessee has received ₹3136.40 per share, therefore made an addition of ₹2821.05 per share Page | 5 ITA nos. 1288 & 1644/Mum/2019 M/s Wavell Investment Pvt. Ltd.; A.Y. 5–16 amounting to ₹1,93,38,298/- under Section 56(2) (viib) of the Act. ii. Learned Assessing Officer further noted that Assessee has earned dividend income of ₹17,910/- as exempt income under Section 10(34) of the Act but did not disallow any expenses under Section 14A of the Act. On 10 November 2017, the learned Assessing Officer issued notice for invoking Rule 8D of the Rules for working out the disallowance under Section 14A of the Act. Assessee did not respond and therefore, the learned Assessing Officer made a disallowance of ₹3,46,18,729/- as per Rule 8D under Section 14A of the Act. He also made an addition of the same amount to the book profit under Section 115JB of the Act. iii. During the course of hearing, the learned Assessing Officer noted that assessee has claimed interest expenses of ₹4,63,18,954/- and noted that assessee has advanced loans to the companies without charging interest of ₹11,29,31,277/-. Assessee has shown interest income of ₹10,33,212/-. The learned Assessing Officer found that assessee has paid interest at the rate of 12.63 per annum. Hence, he found that on an average loan of ₹8,83,10,260/- to various parties without charging interest, the income should have been ₹1,11,53,586/-. Accordingly, he disallowed the balance sum of ₹ Page | 6 ITA nos. 1288 & 1644/Mum/2019 M/s Wavell Investment Pvt. Ltd.; A.Y. 5–16 1,01,23,374/- as interest bearing funds diverted for non-interest bearing advances. 05. Accordingly, the assessment order under Section 143(3) of the Act was passed on 14 th December, 2017 determining the total income of ₹1,72,24,829/- against the loss of ₹4,68,52,572/-. 06. Assessee aggrieved with that order preferred the appeal before the learned CIT (A). The learned CIT (A) i. Confirmed the addition under Section 56(2) (viib) of the Act stating that assessee is not able to rebut the observations of the learned Assessing Officer and before him also assessee failed to substantiate the valuation of shares in objective manner. ii. With respect to disallowance of interest, learned CIT (A) noted that amount of loan and advances given to the related parties far exceeded the assessee’s own funds, there is an increase substantial interest bearing funds as well as non-interest bearing advances. He therefore held that neither the assessee could prove that there was any business expediency for advancement of such loan to the related parties and nor there is a case that assessee has own funds or non interest bearing funds higher than the loans and advances given to the related parties without charging interest. Accordingly, he confirmed the disallowance of ₹1,01,20374/- under Section 36(1)(iii) of the Act. Page | 7 ITA nos. 1288 & 1644/Mum/2019 M/s Wavell Investment Pvt. Ltd.; A.Y. 5–16 iii. With respect to the disallowance under Section 14A of the Act of ₹ 3,46,18,729/-, he found that exempt income is only ₹17,910/-, disallowance cannot exceed exempt income. Accordingly, he restricted the disallowance under Section 14A of the Act to the extent of ₹17,910/-. 07. Assessee and ld AO both are aggrieved with the order of the learned CIT (A) and in appeal before us. 08. The learned Assessing Officer is aggrieved with the deletion of disallowance and restricting it to only exempt income of ₹17,910/-. We have heard both the parties on this aspect. We find that as the exempt income earned by assessee is merely ₹17,910/-, the disallowance under Section 14A of the Act cannot exceed the sum. The learned CIT (A) allowed the relief to the assessee following the decision of Hon'ble Delhi High Court in case of Cheminvest Ltd. v. CIT [2015] 61 taxmann.com 118 (Delhi) and CIT Vs. Cortech Energy P. Ltd. [2014 (3) TMI 856 - Guj] The learned Departmental Representative could not show us any infirmity in the appellate order. Accordingly, we confirm the order of the learned CIT (A) in restricting the disallowance under Section 14A of the Act to the extent of exempt income of ₹17910/-. Accordingly, the solitary ground of appeal of learned Assessing Officer is dismissed. 09. In the result, ITA No. 1288/Mum/2019 filed by the learned Assessing Officer is dismissed. Page | 8 ITA nos. 1288 & 1644/Mum/2019 M/s Wavell Investment Pvt. Ltd.; A.Y. 5–16 010. Now, we come to the appeal of assessee in ITA No. 1644/Mum/2019. 011. Ground nos. 1 to 4 is against the addition under Section 56(2) (viib) of the Act of ₹1,93,38,298/- regarding alleged excess share price received by the assessee. At the time of hearing, assessee moved a petition for admission of additional evidences under Rule 29 of the Rules. Assessee submitted exhibit C1 to exhibit C4 containing page nos. 32-38 as additional evidences. Assessee submitted that assessee inadvertently omitted to file certain documents before the lower authorities in support of valuation report. It was stated that these are necessary for deciding the issue of addition. Assessee relied on the decision of Hon'ble Jurisdictional High Court in case of Smt. Prabhavati S. Shah vs. CIT [1998] 231 ITR 1 (Bombay). It was also stated that unless these are considered the issue of share premium and its taxability could not be decided. She submitted that there is a clarification dated 5 June 2021 issued by the Chartered Accountant on the share valuation certificate dated 30 November 2014 and certificate of Chartered Engineer based on which share valuation is determined of immovable property owned by the assessee company. The market value of such immovable property also needs to be considered for the purposes of valuation. It was further stated that assessee holds equity shares of one listed company and those shares are quoted at National Stock Exchange, for the purpose of the valuation market value of these shares is required to be taken into consideration. Assessee has Page | 9 ITA nos. 1288 & 1644/Mum/2019 M/s Wavell Investment Pvt. Ltd.; A.Y. 5–16 worked out valuation based on book value of all other assets other than immovable property and listed shares. Both these properties are valued at market rate; therefore, this additional evidence may kindly be admitted. 012. The learned Departmental Representative vehemently objected to the additional evidences and submitted that assessee before the learned Assessing Officer as well as the learned CIT (A) did not submit these documents and therefore, it may not be admitted now. He further submitted that there is no justification by the assessee as to why these two evidences were not submitted before lower authorities. 013. We have carefully considered the application of the assessee for admission of the additional evidence. We find that, before ld AO, assessee submitted valuation report of equity shares of assessee company dated 30 November 2014 wherein in para number 4.1 it is stated that as per the net asset value method of valuation of equity shares one equity share of Rs 100/- each fully paid up works out to ₹ 3136/- . Along with that report a worksheet for valuation of equity shares was attached where valuation of a flat at New Delhi which has a book value of ₹ 79.14 lakhs which has the indicative market value of ₹ 28.66 crores but considered for valuation of shares only to the extent of ₹ 21.51 crores being only ¾ of the market value. Further assessee has the non-current investment in quoted equity shares of ₹ 14.64 crores the market value of such shares is considered at ₹ 92.10 crores however Page | 10 ITA nos. 1288 & 1644/Mum/2019 M/s Wavell Investment Pvt. Ltd.; A.Y. 5–16 for the purpose of valuation assessee considered only ¼ of such value for the purpose of valuation of equity shares of the company. In fact total book value of the assets as at 31/3/2014 of the company is 26.38 crores and value of the liabilities is 23.54 crores however, considering the above market value to that extent only as indicated in worksheet for valuation, the value of assets considered is ₹ 51.77 crore and liabilities were ₹ 23.54 crores. This resulted into the net asset valuation as on 30/11/2014 of ₹ 28.22 crores for 90,000 equity shares. Accordingly, the valuation was derived at ₹ 3136 per share. 014. Before the lower authorities assessee did not furnish any information that value of the flat at New Delhi is ₹ 7,914,248 which has an indicative market value of ₹ 28.66 crores but for the valuation of the equity share is only considered the value at ₹ 21.50 crores being only 3/4 value of the indicative market value. Similarly the investment in court in shares were having the book value of ₹ 146,394,641 having indicative market value as on 31/3/2014 of ₹ 921,074,734/– which has been considered to the extent of only ¼ of the indicative market value of ₹ 230,268,683. 015. As there was no justification of (1) indicating market value of flat at New Delhi as well as the quoted equity investment, (2) why assessee only took a part of such indicative market value for the purpose of valuation of equity shares. Now the assessee has submitted a clarification dated 5 June 2021 of the chartered accountant Page | 11 ITA nos. 1288 & 1644/Mum/2019 M/s Wavell Investment Pvt. Ltd.; A.Y. 5–16 is stating that value of equity shares in dynamic technologies Ltd, a listed company has been derived from the average market rate for the three months ending on 28 November 2014 subject to certain further downward adjustments. Assessee has also submitted a report on valuation of property of flat at Delhi, which is valued at ₹ 28.67 crores but considered only part of such valuation for the purpose of equity shares. These additional evidences are relevant and necessary for determination of the fair market value of equity shares. Accordingly, those are admitted 016. Facts shows that on 24/12/2014 resolution was passed wherein 6855 equity shares are allotted having a face value of ₹ 100 per share and at a premium of ₹ 3036.40 per share. Accordingly total nominal amount of equity share capital was ₹ 685,500 and total premium amount is ₹ 20,814,500/–. For justification of the share premium assessee submitted the valuation report dated 30 November 2014 of the chartered accountant who has valued the total value of those shares at ₹ 3136 per share as at 31/3/2014. 017. According to the provisions of Section 56 (2) (viib) provides that where a company, in which public is not substantially interested, receives in any previous year from any 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 shall be chargeable to tax as Page | 12 ITA nos. 1288 & 1644/Mum/2019 M/s Wavell Investment Pvt. Ltd.; A.Y. 5–16 income of the company under the head ‘income from other sources’. The explanation (a) defines that fair market value of the shares shall be (1) as may be determined in accordance with such method as may be prescribed i.e. rule 11 UA of the income tax rules, (2) 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 any intangible assets. The higher of option at (1) or (2) shall be considered as the fair market value of the shares. Rule 11UA of the income tax rules prescribes two methods by which the fair market value of the asset can be determined namely, (1) net asset value method and (2) discounted cash flow method. Therefore, the assessee has an option to justify the valuation of the shares either according to the above two methods prescribed under rule 11 UA or any other method or working based on which the value so arrived at which can be substantiated by the company to the satisfaction of the AO. The higher of the above three options/workings would be considered as ‘fair market value’. In the present case, the assessee has worked out fair market value of the shares according to explanation (a) (ii) to section 56 (2)(viib) of the act. However, the learned assessing officer, in absence of proper justification by the assessee, could not verify the above valuation by assessee. Now assessee has tried to substantiate the same before us. In view of above additional evidences submitted by the assessee, we direct the assessee to justify the share valuation before the learned assessing officer as per Page | 13 ITA nos. 1288 & 1644/Mum/2019 M/s Wavell Investment Pvt. Ltd.; A.Y. 5–16 explanation (a) (ii) of section 56 (2) (viib) of The Act. We direct the learned AO examine methodology of working adopted by the assessee by including market value of certain assets only to certain extent as well as the value of quoted equity shares at indicative market value but considering only part of such market value for the purpose of valuation. The above working given by the assessee is strange; as it is not of the date of on which the shares are issued and also it includes only part of the market value of some of the assets , at its own whims and fancies. However, valuation needs to fulfill the criteria of ‘satisfaction of the AO’, therfore, it is prerogative of ld AO to apply his mind to it and then decide. If , the ld AO is not satisfied with such valuation , the only option left with ld AO is to value shares according to Rule 11 UA of The IT Rules, which ld AO has already done as per net assets value method, against which ld AR did not submit anything, should be upheld. Accordingly ground number 1 – 4 of the appeal of the assessee are restored back to the file of the learned assessing officer to decide the issue on the merits of the case on the basis of submission made by the assessee. Learned AO may also carry out such inquiries in accordance with the law, as he may deem fit. The assessee is also directed to justify the valuation supported by the proper documentation as well as any other information to justify share valuation. 018. Per ground numbers 5 – 6 assessee challenges disallowance of interest expenses , claim of the assessee is that the advances were made by assessee from Page | 14 ITA nos. 1288 & 1644/Mum/2019 M/s Wavell Investment Pvt. Ltd.; A.Y. 5–16 interest-free funds and could not be considered for interest disallowances and further the loan given of ₹ 10.75 crores is not interest free as claimed by the AO, as assessee has charged interest thereon. 019. The assessee submitted that it has paid interest of ₹ 39,320,207/– with respect to the loan taken from three different parties. Assessee submitted that it has taken loan from ILFS financial services Ltd on 26 th of March 2015, from Religare Finance in Ltd on 25 th of March 2013 and shawney Kirkwood private limited on 27 th of March 2014. The assessee also claims that a loan of ₹ 29.80 crores was given, received back of ₹ 19.5 crores, resulting in closing balance of ₹ 10.75 crores from dynamic technologies Ltd from which the assessee has received interest also of ₹ 1,033,212/–, therefore, this advance cannot be considered for interest disallowances. With respect to the loan given of ₹ 11,90,400, to Combar India private limited, ₹ 225,000 to JKM Holdings private limited it is submitted that interest free loans were received from director of the company which has been utilized for giving these advances. With respect to advances given to other two different parties, it is stated that no disallowance of interest can be made as those loans are given before receipt of interest-bearing loans by the assessee. Therefore, no disallowance of interest should have been made. 020. We find that these are the new arguments taken by the assessee before us, same were not taken before the Page | 15 ITA nos. 1288 & 1644/Mum/2019 M/s Wavell Investment Pvt. Ltd.; A.Y. 5–16 learned AO or the learned CIT – A. On careful consideration of the orders of the lower authorities, it is apparent that the claim of the assessee before us is that assessee has not advanced interest-bearing funds to the advances without charging interest to the related parties. However, the claim of the assessee before the lower authorities was only that assessee has given the advances for the business consideration and also assessee has enough interest free funds available and therefore it is entitled to a presumption that the advances have been given out of those interest-free funds. Both these arguments before the lower authorities have been rejected by them for cogent reasons. The assessee does not have enough interest free funds available with it to have the benefit of presumption that advances given free of interest have emanated out of that. The claim of the advances given for the business purpose is also not repeated before us. Therefore, both these arguments have been correctly rejected by authorities. 021. Now the only issue that remains is whether the amount of advances given by the assessee without charging any interest are having any nexus of non-interest-bearing funds obtained by the assessee. The onus is very heavy on the assessee to show that the amount of advances given by it does not have nexus with interest-bearing funds or mix funds. Here the assessee has stated that the advances have been given prior to the assessee of obtaining interest-bearing funds as loan. Further, the claim of the assessee is also that on some of the advances, interest Page | 16 ITA nos. 1288 & 1644/Mum/2019 M/s Wavell Investment Pvt. Ltd.; A.Y. 5–16 has been charged. If the interest has been charged at the lower rate, even then disallowance deserves to be made o the extent of differential rate of interest. As this facts are not raised before ld AO CIT (A), same were not examined. As this are the factual examination, in the interest of justice, same needs to be remitted back to file of LD AO. Therefore, the ground number 5 – 6 are set-aside to the file of the learned assessing officer with a direction to the assessee to justify the claim with adequate evidences to the satisfaction of the assessing officer that non-interest- bearing funds have been utilized , or proper interest has been charged. The AO may examine the claim of the assessee and decide the issue afresh. 022. In the Result, appeal of the assessee is allowed for statistical purposes. 023. Appeal of the AO is dismissed and appeal of the assessee is allowed for statistical purposes. Order pronounced in the open court on 17.08.2022. Sd/- Sd/- (VIKAS AWASTHY) (PRASHANT MAHARISHI) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) Mumbai, Dated: 17.08.2022 Sudip Sarkar, Sr.PS Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. The CIT(A) 4. CIT 5. DR, ITAT, Mumbai Page | 17 ITA nos. 1288 & 1644/Mum/2019 M/s Wavell Investment Pvt. Ltd.; A.Y. 5–16 6. Guard file. BY ORDER, True Copy// Sr. Private Secretary/ Asst. Registrar Income Tax Appellate Tribunal, Mumbai