ACIT CORPORATE CIRCLE 6(2), CHENNAI V. SPECSMAKERS OPTICIANS PVT. LTD., CHENNAI

ITA 1427/CHNY/2019

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 6778 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 7 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-12-2021
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2015-2016
• Appeal Filed On: 07-05-2019
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Corroborative evidences; Valuation report; Set aside

Judgement Text

आयकर अपील य अ धकरण, ‘सी’’ यायपीठ, चे नई IN THE INCOME TAX APPELLATE TRIBUNAL , ‘C’ BENCH, CHENNAI ी महावीर संह, उपा य एवं ी जी. मंज ु नाथ, लेखा सद%य के सम BEFORE SHRI MAHAVIR SINGH, VICE-PRESIDENT AND SHRI G.MANJUNATHA, ACCOUNTANT MEMBER आयकरअपीलसं./I. T. A. No. 1 4 2 7/ Chn y/ 2 0 1 9 ( नधा रणवष / A s se s sm ent Y ea r : 2 01 5- 16 ) The Assistant Commissioner of Income Tax, Corporate Circle-6(2) Chennai-600 034 V s M/s. Specsmakers Opticians Pvt.Ltd. 5, Thirumalaipillai Road, T.Nagar, Chennai-600 017. PA N: A AP CS 6 3 7 1 Q (अपीलाथ /Appellant) ( यथ /Respondent) अपीलाथ क ओरसे/ Appellant by : Mr. G.Johnson, Addl.CIT यथ क ओरसे/Respondentby : Mr. R.Vijayaraghavan, Advocate स ु नवाईक तार ख/D a t e o f h e a r i n g : 01.12.2021 घोषणाक तार ख /D a t e o f P r o n o u n c e m e n t : 08.12.2021 आदेश / O R D E R PER G.MANJUNATHA, AM: This appeal filed by the Revenue is directed against order passed by the learned Commissioner of Income Tax (Appeals)-15, Chennai, dated 28.02.2019 and pertains to assessment year 2015-16. 2. The Revenue has raised following grounds of appeal:- “1. The order of the Ld. CIT(A) is contrary to the law and facts of the case. 2. The Ld. CIT(A) relied upon the decision of the CIT(A) in the assessee’s own case in ITA No. 311/CIT (A) - 15/2016-17 dated 28-03-2018 for the AY 2014-15 and decided the issue in favour of assessee. 2.1. The Ld. CIT(A) failed to appreciate that the Revenue has filed an appeal before the Tribunal against the order of the Ld. CIT(A) on the same issue, which is still pending. 2 ITA No. 1427/Chny/2019 2.2. The Ld. CIT(A) has ignored the finding of the AO that the estimated cash flow of the assessee for the Discounted Free Cash Flow method was purely based on surmises and guess work and not supported by any cogent material. 2.3. The Ld. CIT(A) failed to appreciate that in the facts and circumstances of the case, it is necessary to invoke rules 11UA(2) of the Rules to arrive at the valuation of unquoted equity shares.” 3. Brief facts of the case are that the assessee M/s. Specsmaker Opticians Pvt.Ltd. is engaged in the business of retail outlet chain for eye care services. The assessee has filed its return of income for assessment year 2015-16 on 30.09.2015 declaring current year loss of Rs.77,24,828/-. During financial year relevant to assessment year 2015-16, the assessee had issued shares at Rs.430/- per equity share including premium. The assessee has justified value of shares on the basis of valuation report obtained from an Accountant on the basis of discounted cash flow method, as per which,value of shares as per certificate of valuer is more than price charged by the assessee. During the course of assessment proceedings, the Assessing Officer called upon the assessee to justify issue of share at Rs.430/- per share, for which the assessee submitted that once it has followed a particular method for 3 ITA No. 1427/Chny/2019 valuation of shares either by Net Asset method or Discounted cash flow method, then the Assessing Officer cannot change method of valuation followed by the assessee. The assessee has further claimed that it has justified share price with valuation report as per which intrinsic value per share is more than share price charged by the assessee. Therefore, question of taxing excess consideration for issue of shares u/s.56(2)(viib) of the Act does not arise. The Assessing Officer, however, was not convinced with explanation furnished by the assessee and according to him, the assessee is not justified in fixing share price of Rs.430/- per share, when price of share was determined by the assessee at Rs.90/- per share in immediately preceding financial year, therefore, he has rejected explanation furnished by the assessee and adopted net asset method as prescribed under Rule 11(UA) of the Income Tax Rules, 1962, and determined excess consideration charged for issue of shares at Rs.3,36,28,169/- and added back to the total income u/s.56(2) (viib) of the Act. 4. Being aggrieved by the assessment order, the assessee preferred an appeal before learned CIT(A). Before the learned 4 ITA No. 1427/Chny/2019 CIT(A), the assessee has challenged additions made by the Assessing Officer towards share premium on two counts. The first and foremost argument of the assessee was that as per rules prescribed for valuation of shares, it is for the assessee to choose a particular method and thus, once the assessee chooses a particular method, then the Assessing Officer can verify veracity of such method, but he cannot adopt different method for determination of share price. The assessee had also justified valuation of share price with the help of valuation report and argued that as per discounted cash flow method, intrinsic value of share is more than price charged by the assessee for issue of shares. Further, if you go by enterprise value, value of share was determined at Rs.1,545/- per equity share as against issue price of Rs.430/- per share. Therefore, he submitted that the Assessing Officer has erred in making addition towards excess consideration for issue of shares u/s.56(2)(viib) of the Act. 5. The learned CIT(A), after considering relevant facts and also by following his predecessor CIT(A) order for assessment year 2014-15, deleted additions made by the Assessing Officer 5 ITA No. 1427/Chny/2019 towards excess premium charged on issue of equity shares u/s.56(2)(viib) of the Act, by holding that when you compare actual share price of the assessee with projected share price, actual share price is more than the share price determined on projection and thus, the Assessing Officer is not correct in taxing excess consideration for issue of shares u/s.56(2)(viib) of the Income Tax Act, 1961. Aggrieved by the learned CIT(A) order, the Revenue is in appeal before us. 6. The learned DR submitted that the learned CIT(A) has erred in relied upon decision of his predecessor CIT(A) order for assessment year 2014-15 to delete additions made by the Assessing Officer towards excess premium charged on equity shares without appreciating fact that in the earlier financial year, the assessee has determined share price at Rs.90/- per share, whereas in impugned assessment year share price was valued at Rs.430/- per share, which is exorbitant and not supported by necessary financials and valuation. 7. The learned A.R for the assessee, on the other hand, supporting order of the learned CIT(A) submitted that the 6 ITA No. 1427/Chny/2019 learned CIT(A) has apprised facts in right perspective on the basis of evidences placed on record by the assessee, as per which, share price on the basis of actual financial position was higher than share price charged by the assessee for issue of shares on the basis of projection and thus, there is no reason for the Assessing Officer to make additions towards excess share premium u/s.56(2)(viib) of the Act, by changing method of valuation of equity shares as prescribed under Rule 11UA of the Income Tax Rules, 1962. However, he fairly agreed that the issue may be set aside to the file of the Assessing Officer to examine valuation of shares for fixing share price on the basis of discounted cash flow method. 8. We have heard both the parties, perused material available on record and gone through orders of the authorities below. The provisions of section 56(2)(viib) of the Income Tax Act, 1961, deals with consideration received for issue of shares over and above fair market value of such shares. If premium charged by an assessee for issue of shares is over and above fair market value of shares, then excess premium charged on issue of shares can be treated as income of the 7 ITA No. 1427/Chny/2019 assessee u/s. 56(2)(viib) of the Act. Rule 11UA of Income Tax Rules, 1962, deals with valuation of equity shares, as per said rules, the assessee at its option either can follow net asset method or discounted free cash flow method for determination of share price. Further, rules make it very clear that once the assessee chooses a particular method for valuation of shares, then the Assessing Officer cannot adopt different method for valuation of shares, but he can very well verify method selected by the assessee for valuation of shares. In this case, the assessee has adopted discounted free cash flow method for determination of share price, whereas the Assessing Officer has adopted net asset method. Therefore, if at all, the Assessing Officer is not satisfied with price determined by the assessee in any method, then he can verify methodology followed by the assessee for arriving at share price, but he cannot change different method altogether without any valid reasons. In this case, although the assessee has followed discounted free cash flow method, but the Assessing Officer has changed to net asset method contrary to position of law. At the same time, although, the assessee claims that it has justified issue of shares at Rs.430/- per equity share, but on 8 ITA No. 1427/Chny/2019 perusal of details filed by the assessee before the learned CIT(A), we find that learned CIT(A) has deleted additions made by the Assessing Officer by following his predecessor CIT(A) order for assessment year 2014-15, where the assessee has issued share at premium of Rs.90/- per equity share.Since there is abnormal increase in premium charged by the assessee when compared to previous assessment year, we are of the considered view that the learned CIT(A) has completely erred by following his predecessor CIT(A) order, without examining share price arrived at by the assessee at Rs.430/- per equity share. Therefore, we are of the considered view that the issue needs to go back to the file of the Assessing Officer to verify share price determined by the assessee by adopting discounted cash flow method. Hence, we set aside the appeal to file of the Assessing Officer and direct him to reconsider the issue de-novo in accordance with law. However, he should follow discounted cash flow method as chosen by the assessee, but free to examine projected cash flow method arrived at by the assessee in light of financials and other supporting evidences. 9 ITA No. 1427/Chny/2019 9. In the result, appeal filed by the Revenue is treated as allowed for statistical purposes. Order pronounced in the open court on 8 th December, 2021 Sd/- Sd/- (महावीर संह) (जी. मंज ु नाथ) (Mahavir Singh) (G. Manjunatha ) उपा य / Vice-President लेखा सद%य / Accountant Member चे'नई/Chennai, (दनांक/Dated 8 th December, 2021 DS आदेश क त*ल+प अ,े+षत/Copy to: 1. Appellant 2. Respondent 3. आयकर आय ु -त (अपील)/CIT(A) 4. आयकर आय ु -त/CIT 5. +वभागीय त न1ध/DR 6. गाड फाईल/GF.