Unnati Inorganics Pvt. Ltd., Bhavnagar V. The ITO, Ward-1(5), , Bhavnagar

ITA 2474/AHD/2017

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 1346 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 10 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-09-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2014-2015
• Appeal Filed On: 09-11-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: NARAYAN ATAL; SURYA PRASAD VISHWAKARMA
• Keywords: Cost of acquisition; Fair market value; Valuation report
• Section: 143(3); 56(2)

Judgement Text

, D IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, AHMEDABAD BEFORE SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER & SHRI MAHAVIR PRASAD, JUDICIAL MEMBER ./ I.T.A. NO. 2474/AHD/2017 ( ASSESSMENT YEAR : 2014-15) UNNATI INORGANICS PVT. LTD. PLOT NO.1897, FLAT NO. 503, PANNA TARACE, NR. RUPANI CIRCLE, BHAVNAGAR - 364001 / VS. THE INCOME-TAX OFFICER, WARD-1(5), BHAVNAGAR ./ ./ PAN/GIR NO. : AABCU1208J ( APPELLANT ) .. ( / RESPONDENT ) / APPELLANT BY : SHRI NARAYAN ATAL & SHRI SURYA PRASAD VISHWAKARMA, A.R. / RESPONDENT BY : SHRI VINOD TANWANI, SR. D.R. DATE OF HEARING 09/07/2019 !'# / DATE OF PRONOUNCEMENT 11/09/2019 / O R D E R PER PRADIP KUMAR KEDIA - AM: THE CAPTIONED APPEAL HAS BEEN FILED AT THE INSTANCE OF THE ASSESSEE AGAINST THE ORDER OF THE COMMISSIONER OF I NCOME TAX (APPEALS)-6, AHMEDABAD, (CIT(A) IN SHORT), DATED 20.09.2017 ARISING IN THE ASSESSMENT ORDER DATED 28.12.2016 PA SSED BY THE ASSESSING OFFICER (AO) UNDER S. 143(3) OF THE INCOM E TAX ACT, 1961 (THE ACT) CONCERNING AY 2014-15. ITA NO. 2474/AHD/17 [UNNATI INORGANICS PVT. LTD. VS. ITO] A.Y. 2014-15 - 2 - 2. THE SOLITARY GROUND OF APPEAL OF THE ASSESSEE SE EKS TO IMPUGN THE ACTION OF THE CIT(A) IN CONFIRMING AN ADDITION OF RS.2,04,82,560/- TO THE RETURNED INCOME BY INVOKING THE PROVISIONS O F SECTION 56(2)(VIIB) OF THE ACT. 3. BRIEFLY STATED, THE ASSESSEE, A PRIVATE LIMITE D COMPANY, FILED ITS RETURN OF INCOME FOR AY 2013-14 IN QUESTION DECLARI NG TOTAL INCOME OF RS.NIL. IN THE COURSE OF SCRUTINY ASSESSMENT, THE AO INTER ALIA NOTICED FROM THE VERIFICATION OF THE BALANCE SHEET OF THE ASSESSEE THAT THE ASSESSEE HAS ISSUED 1016000 SHARES HAVING FACE VALUE OF RS.10/- AT A PREMIUM OF RS.23/-. THE AO MADE INQUIRIES WITH R ESPECT TO THE FAIR MARKET VALUE (FMV) OF THE SHARES ALLOTTED HAVING RE GARD TO THE PROVISIONS OF SECTION 56(2)(VIIB) OF THE ACT FOR TH E PURPOSES OF ASCERTAINING THE CORRECTNESS OF PREMIUM CHARGED. T HE ASSESSEE IN RESPONSE, SUBMITTED BEFORE THE AO THAT THE COMPANY HOLDS CERTAIN PARCELS OF LAND AT PADRA DIST. VADODARA AND AT GIDC , DAHEJ DIST. BHARUCH, GUJARAT, THE FMV OF WHICH IS SUBSTANTIALLY HIGHER ON THE DATE OF ALLOTMENT OF SHARES AND CONSEQUENTLY THE PR EMIUM CHARGED OF RS.23/- PER SHARE IS QUITE COMMENSURATE THAT THE FM V OF SHARES ALLOTTED AS CONTEMPLATED IN EXPLANATION BELOW SECTI ON 56(2)(VIIB) OF THE ACT. THE AO HOWEVER DISPUTED THE FMV OF FRESH ALLOTMENT OF SHARES SOUGHT TO BE DEMONSTRATED BY THE ASSESSEE. THE AO EVENTUALLY APPLIED THE PRESCRIBED METHOD OF VALUATION AS STIPU LATED IN RULE 11UA OF THE IT RULES TO DETERMINE THE FMV OF THE SHARES. FOR THIS PURPOSE, THE AO ADOPTED THE BOOK VALUE OF THE ASSETS AND LIA BILITIES INCLUDING LAND AS AT 31.03.2013 AND DETERMINED THE FMV OF FRE SH ALLOTMENT AT RS.12.84 PER SHARE IN PLACE OF 33 PER SHARE ADOPTED BY THE ASSESSEE. THE AO ACCORDINGLY HELD THAT THE ASSESSEE HAS RECEI VED AN EXCESS AMOUNT OF RS.2,04,82,560/- ON ISSUE OF SHARES QUA THE FMV AS PER RULE 11UA OF IT RULES AND ADDED THE SAME AS INCOME FROM OTHER SOURCES IN THE HANDS OF THE ASSESSEE WITH REFERENC E TO SECTION 56(2)(VIIB) OF THE ACT. ITA NO. 2474/AHD/17 [UNNATI INORGANICS PVT. LTD. VS. ITO] A.Y. 2014-15 - 3 - 4. AGGRIEVED BY THE DISPUTE RAISED TOWARDS FMV OF S HARES CONTEMPLATED UNDER S.56(2)(VIIB) OF THE ACT, THE AS SESSEE PREFERRED APPEAL BEFORE THE CIT(A). THE CIT(A) HOWEVER ALSO DID NOT PERCEIVE ANY MERIT IN THE CASE MADE OUT BY THE ASSESSEE TOWA RDS JUSTIFICATION OF FMV OF SHARES AT RS.33/- PER SHARE. THE CIT(A) CON FIRMED THE ACTION OF THE AO INTER ALIA ON FOLLOWING GROUNDS: (A) NO ACCOUNTING ENTRY HAS BEEN PASSED IN RESPECT OF THE DIFFERENCE BETWEEN THE FAIR MARKET VALUE (FMV) OF THE IMMOVABL E PROPERTY AT THE RELEVANT POINT OF TIME (BASED ON JANTRI PRICE) AND ITS CORRESPONDING ACTUAL COSTS AS REFLECTED IN THE BOOKS OF ACCOUNT; (B) SINCE THE PREMIUM CHARGED WAS LESS THAN WHAT WA S REQUIRED TO BE CHARGED, IF BASED ON THE JANTRI PRICE OF ONE OF THE UNDERLYING IMMOVABLE PROPERTIES, THERE IS ARBITRARINESS IN DECIDING THE PRICE OF THE SHARE AT A LOWER AMOUNT OF RS.33/-, INCLUDING THE PREMIUM OF R S.23/-PER SHARE; (C) SINCE THE APPELLANT INITIALLY ACQUIRED AN IMMOV ABLE PROPERTY IN VILLAGE PADRA FOR SETTING UP ITS PLANT AND THEREAFT ER ACQUIRED ANOTHER LAND AT VILLAGE DAHEJ IN VIEW OF IT NOT BEING IN A POSIT ION TO COMPLETE THE LEGAL FORMALITIES VIS-A-VIS THE FIRST PROPERTY, THERE IS AN ELEMENT OF ADHOCISM IN THE ACTIONS OF THE APPELLANT; (D) THE FMV OF THE SHARE, AS CALCULATED BY THE APPE LLANT, WAS NOT SUBSTANTIATED BY IT TO THE SATISFACTION OF THE AO. 5. THE CIT(A) ALLEGED ADHOCISM IN THE ACTION OF THE ASSESSEE AND FURTHER ALLEGED ARBITRARINESS IN THE DETERMINATION OF BASIS OF THE VALUE OF LAND AS SUITED TO THE ASSESSEE. THE CIT(A) CONS EQUENTLY JUSTIFIED THE BASIS ADOPTED BY THE AO FOR REJECTION OF THE FM V DETERMINED BY THE ASSESSEE AND APPROVED THE DETERMINATION OF FMV ON THE BASIS OF BOOK VALUE OF ASSETS AND LIABILITIES UNDER RULE 11U A OF THE RULES. 6. FURTHER AGGRIEVED BY THE DENIAL OF RELIEF, THE A SSESSEE PREFERRED APPEAL BEFORE THE TRIBUNAL. 6.1 THE LEARNED AR FOR THE ASSESSEE SUBMITTED AT TH E OUTSET THAT THE ACTION OF THE REVENUE AUTHORITIES IS BASED ON THE M IS-APPRECIATION OF FACTS AND MIS-CONCEPTION TOWARDS POSITION OF LAW. TO BEGIN WITH, THE LEARNED AR POINTED OUT THAT THE ASSESSEE COMPANY WA S ORIGINALLY ITA NO. 2474/AHD/17 [UNNATI INORGANICS PVT. LTD. VS. ITO] A.Y. 2014-15 - 4 - PROMOTED BY THE MEMBERS OF TWO FAMILIES NAMELY RAU TS & VORAS WHO CONTRIBUTED CERTAIN FUNDS TOWARDS INITIAL CAPIT AL FOR THE PURPOSES OF CARRYING ON THE BUSINESS OF MANUFACTURING OF AND DEALING IN PRECIPITATED SILICA. AFTER INCORPORATION OF THE CO MPANY, THE ASSESSEE PURCHASED TWO PLOTS OF ADJOINING LAND IN TALUKA PAD RA DIST. VADODARA IN THE MONTH OF JAN. 2010. THE AFORESAID PLOTS OF LAND WERE AGRICULTURAL PLOTS AND THEREFORE THE PROCESS OF CON VERTING THE SAME INTO NON AGRICULTURAL ONE WAS COMMENCED SO AS TO UT ILIZE THE SAME FOR SETTING UP THE MANUFACTURING FACILITIES THEREON. H OWEVER, TO OBVIATE POSSIBLE DELAY AND CONSUMPTION OF LONGER TIME FOR C OMPLETION OF THE CONVERSION, THE ASSESSEE PURCHASED ANOTHER PIECE OF INDUSTRIAL LAND AT DAHEJ, DIST. BHARUCH AND THE ACTIVITIES OF SETTING UP NECESSARY INFRASTRUCTURE THEREON WERE COMMENCED. SINCE, THE SETTING OF ENTIRE MANUFACTURING FACILITY REQUIRED SIZEABLE INVESTMENT AND SINCE THE ASSESSEE COMPANY WAS OWNED AND CONTROLLED ONLY BY T WO FAMILIES AT THE RELEVANT POINT OF TIME, IT WAS CONSIDERED NECES SARY TO NEGOTIATE AND INVITE ONE MORE GROUP TO JOIN ASSESSEE COMPANY NOT JUST BY CONTRIBUTION OF FUNDS TOWARDS SHARE CAPITAL BUT ALS O TO JOIN ITS BOARD OF DIRECTORS. ONE LUHARIWALA GROUP HEADED BY MR. V INEET LUHARIWALA AGREED TO THE PROPOSAL AND INTRODUCED CERTAIN FUNDS INTO THE ASSESSEE COMPANY PARTLY IN THE FINANCIAL YEAR RELEVANT TO AY 2013-14 AND PARTLY IN THE YEAR UNDER CONSIDERATION I.E. AY 2014 -15. THE LEARNED AR NEXT OBSERVED THAT AS PER A BROAD UNDERSTANDING WITH LUHARIWALA GROUP, ITS MEMBERS AGREED TO PURCHASE / APPLY FOR S UCH NUMBER OF SHARES SO AS TO BE HOLDERS OF APPROXIMATELY 1/3 RD OF THE AGGREGATE SHARES OF THE COMPANY. OWING TO SUBSTANTIAL INCREA SE IN THE UNDERLYING PARCELS OF LAND ACQUIRED BY THE ASSESSEE COMPANY IN PAST, IT WAS AGREED THAT THE SHARES WILL BE ACQUIRED BY LUHA RIWALA GROUP AT A NEGOTIATED PRICE OF RS.33/- PER SHARE BEARING FACE VALUE OF RS.10/-. IT WAS ALSO AGREED THAT EVEN THE ORIGINAL PROMOTER GRO UPS WILL ALSO CONTRIBUTE CERTAIN ADDITIONAL FUNDS INTO THE ASSESS EE COMPANY WHICH WILL ALSO BE ALLOTTED AT THE SAME RATE. THE LEARNE D AR THEREAFTER ITA NO. 2474/AHD/17 [UNNATI INORGANICS PVT. LTD. VS. ITO] A.Y. 2014-15 - 5 - SUBMITTED THAT THE NEGOTIATION OF PRICE WITH LUHARI WALA GROUP WAS CLEARLY BASED ON THE FMV OF PARCELS OF LAND TAKEN I N A VERY CONSERVATIVE WAY WHICH WAS IN FACT SUBSTANTIALLY BE LOW EVEN THE JANTRI RATE DECLARED BY THE GOVERNMENT OF GUJARAT IN SO FAR AS DAHEJ LAND WAS CONCERNED. ON THE BASIS OF THIS ARRANGEMENT, THE ASSESSEE ISSUED 2,10,000 SHARES TO LUHARIWALA GROUP IN FY 2012-13 ( AY 2013-14) AND FURTHER 9,06,000 SHARES IN FY 2013-14 (AY 2014-15). ALL THESE SHARES WERE ISSUED AT A PREMIUM OF RS.23 PER SHARE. THE A SSESSEE ALSO ISSUED 1,61,000 SHARES EACH IN FY 2013-14 TO THE ORIGINAL TWO GROUPS THE RAUTS & VORAS WHO ALSO SUBSCRIBED THE SHARES AT THE SAME RATE OF PREMIUM. ALL THESE TRANSACTIONS WERE CARRIED OUT T HROUGH PROPER BANKING CHANNEL AND NECESSARY FORMALITIES AS PRESCR IBED UNDER THE COMPANIES ACT, 2013 WERE DULY COMPLIED WITH. UPON COMPLETION OF ALL THESE FORMALITIES, THE SHARE HOLDINGS OF EACH O F THESE THREE GROUPS RESULTED IN ALMOST EQUAL PROPORTION AS PER THE INIT IAL UNDERSTANDING BETWEEN THEM. 6.2 THE LEARNED AR POINTED OUT THAT THE CORE PROMOT ER NAMELY BHARAT RAUT IS AN IIT IN CHEMICAL ENGINEERING WITH OVER 35 YEARS EXPERIENCE IN SILICA, A CHEMICAL PRODUCT WITH VAST ARRAY OF END USES IN TYRES, TOOTHPASTE, COSMETICS, FERTILIZERS, PESTICID ES, FOOTWEARS AND SO ON. SIMILARLY, MR. VINEET LUHARIWALA WHO JOINED AS CO-PROMOTER HAD ROBUST MARKETING EXPERTISE. THE LEARNED AR SUBMITT ED THAT GIVEN THE SOLID COMBINATION OF MARKETING EXPERTISE AND TECHNI CAL EXPERTISE TOGETHER WITH EMINENCE ASSOCIATED WITH THE SILICA P ROJECT, PLANT AT DAHEJ AND TEAMS CAPABILITIES, A REPUTED COMPANY OF TATA GROUP NAMELY TATA CHEMICALS ALSO OFFERED FOR PURCHASE OF ENTIRE PLANT AT RS.34.20CRORE WHEREBY PER SHARE VALUE WOULD STAND A T RS.40/- PER SHARE. HOWEVER, DUE TO CERTAIN LEGAL OBSTACLES THE PROPOSED TATA DEAL COULD NOT MATERIALIZE. A BUSINESS TRANSFER AGREEME NT WAS ALSO SIGNED IN THIS REGARD. IN DECEMBER 2016, A SINGAPORE BASE D COMPANY HAS ACTUALLY PURCHASED 10% SHARES OF THE ASSESSEE COMPA NY AT A PRICE OF ITA NO. 2474/AHD/17 [UNNATI INORGANICS PVT. LTD. VS. ITO] A.Y. 2014-15 - 6 - APPROXIMATELY RS.47/- PER SHARE. REFLECTING THE CO NFIDENCE OF THE GIANT GROUPS IN THE TECHNOLOGY START UP, THE PROMOT ERS HAVE THEMSELVES PULLED IN THEIR OWN FUNDS AT A MODERATE PREMIUM OF RS.23/- PER SHARE. IT WAS POINTED OUT THAT THE AFORESAID PREMIUM IS NO T ASTRONOMICAL IN ANY MANNER IN SUCH TECHNICAL START UPS. THE LEARNE D AR ALSO REFERRED TO AN ARTICLE AS PUBLISHED ON 10.02.2017 IN NEWSPAP ER THE HINDU- BUSINESS LINE REVEALING ONGOING CURRENT PLANS BY TATA GROUP TO I NVEST SUBSTANTIAL AMOUNT IN THE PLANT SET UP BY THE ASSES SEE COMPANY FOR MANUFACTURING PROCESSED SILICA. 6.3 IT WAS THEN SUBMITTED THAT THE AO HOWEVER DID N OT APPRECIATE THE SIMPLE JUSTIFICATION OF CHARGING PREMIUM @ RS.23/- PER SHARE BY MIS- INTERPRETING THE CLEAR AND UNAMBIGUOUS PROVISIONS O F SECTION 56(2) OF THE ACT. THE LEARNED AR ADVERTED TO EXPLANATION TO SECTION 56(2)(VIIB) OF THE ACT AND SUBMITTED THAT THE FMV O F THE SHARES TO BE ADOPTED SHALL BE HIGHER OF TWO LIMBS AS PROVIDED IN THE EXPLANATION (A) TO SECTION 56(2)(VIIB) OF THE ACT. IT WAS CONT ENDED THAT AS PER FIRST LIMB, THE METHOD OF VALUATION AS SET OUT IN RULE 11 UA MAY BE APPLIED FOR DETERMINATION OF FMV. AS PER THE SECOND LIMB, HOWEVER, THE ASSESSEE IS ENTITLED TO AND IS AT LIBERTY TO SUBSTA NTIATE AND JUSTIFY THE FMV OF SHARES BASED ON INTRINSIC VALUE OF TANGIBLE AND INTANGIBLE ASSETS HOLD BY THE ASSESSEE COMPANY. THE LEARNED A R THEN OBSERVED THAT THE AO IGNORED THE SECOND LIMB OF EXPLANATION (A) COMPLETELY. REFERRING TO THE SECOND LIMB, THE LEARNED AR SUBMIT TED THAT DILUTION OF OWNERSHIP OF THE EXISTING SHAREHOLDERS ON ACCOUN T OF FURTHER ISSUE OF SHARE CAPITAL IS COMMERCIALLY TENABLE ONLY ON TH E BASIS OF FMV OF THE UNDERLYING ASSETS ALREADY HELD BY THE COMPANY. THEREFORE, THE REVENUE AUTHORITIES HAVE COMMITTED FATAL ERROR IN N OT TAKING COGNIZANCE OF THE INTRINSIC VALUE OF THE PARCELS OF LANDS HELD BY THE ASSESSEE. ITA NO. 2474/AHD/17 [UNNATI INORGANICS PVT. LTD. VS. ITO] A.Y. 2014-15 - 7 - 6.4 THE LEARNED AR NEXT SUBMITTED THAT INSERTION OF SECTION 56(2)(VIIB) WAS AIMED TO PRIMARILY CURB THE PRACTIC E ADOPTED EARLIER BY CERTAIN COMPANIES WITH DUBIOUS INTENT WHEREBY SHARE S WERE BEING ISSUED AT HUGE PREMIUM IN FAVOUR OF DUMMIES WHO WOU LD OTHERWISE BE MEN OF NO MEANS. SUCH PROVISION IS NOT INTENDED TO HARM THE GENUINE BUSINESS TRANSACTIONS. RULE 11UA CONNOTES FMV OF S HARES ONLY WITH REFERENCE TO THE BOOK VALUE OF UNDERLYING ASSETS AN D LIABILITIES WHICH MAY, AT TIMES, BE AT GREAT VARIANCE IN COMPARISON T O THE INTRINSIC VALUE OF ASSETS AND BUSINESS CAPABILITIES PREVAILING AT T HE RELEVANT POINT OF TIME. IT IS FOR THIS REASON THAT AN ALTERNATIVE ME THOD FOR ARRIVING AT FMV WAS EMBODIED IN EXPLANATION (A) SO AS TO ENSURE THAT THE COMMERCIAL DECISIONS LEGITIMATELY TAKEN AT ARMS LE NGTH BETWEEN THE PARTIES ARE NOT ADVERSELY EFFECTED. 6.5 THE LEARNED AR WENT ON TO SUBMIT THAT IN THE BA CKDROP OF AFORESAID SUBMISSIONS, IT NEEDS TO BE APPRECIATED T HAT WHEN THE ROUTS & VORAS NEGOTIATED THE DEAL WITH THE LUH ARIWALAS, THE BASIS OF ARRIVING AT THE FMV OF THE SHARES WAS INTER ALIA THE MARKET VALUE OF THE DAHEJ LAND ON WHICH THE CONSTRUCTION O F FACTORY PREMISE WAS BEING CARRIED OUT. IT WAS THE PROPOSITION OF R OUTS & VORAS THAT THE JANTRI RATE OF DAHEJ LAND WAS FIXED AT RS.3060/- PER SQ.MTR. B Y GUJARAT GOVERNMENT. THE VALUE OF DAHEJ LAND WOULD THUS TRANSLATED INTO ITS FMV IN THE VICINITY OF AT RS.9.18 CRORE AS AGAINST ITS ACTUAL COST OF ACQUISITION AT RS.2,31,46,397/- AS INCURRED BY THE ASSESSEE AND CONSEQUENTLY, REFLECTED AS BOOK VALUE IN THE BOOKS OF ACCOUNTS. WHEN THE AFORESTATED MARKET VALUE IS FACTORED AND SUBSTI TUTED TO THE BOOK VALUE, THE NET WORTH OF THE COMPANY WOULD GO UP CON SIDERABLY AND THE SHARES PRICE WOULD SHOOT UP TO NEARLY RS.55/- PER S HARE I.E. FAR BEYOND THE NEGOTIATED PRICE. UPON NEGOTIATION WITH LUHARI WALA, A TRADE OFF WAS ARRIVED AT A PRICE OF RS.33/- PER SHARE COUPLED WITH A CLEAR UNDERSTANDING THAT ROUTS & VORAS WILL ALSO INFUSE F URTHER FUNDS BY ACQUIRING 1,61,000 SHARES EACH AND SUCH SHARES WILL ALSO BE ISSUED AT ITA NO. 2474/AHD/17 [UNNATI INORGANICS PVT. LTD. VS. ITO] A.Y. 2014-15 - 8 - THE SAME PRICE. THE LEARNED AR POINTED OUT THAT VI NEET LUHARIWALA BEING A GOLD MEDALIST IN CHEMICAL ENGINEERING FROM IIT, RURKI AND VERY SUCCESSFUL PROFESSIONAL IN THE FIELD, THE EXIS TING PROMOTERS READILY AGREED TO CONCEDE THE TERMS OF ARMS LENGTH BASIS IN KEEPING WITH THE OVERALL INTEREST OF THE BUSINESS OF THE CO MPANY. 6.6 AS A PART OF THE ABOVE ARRANGEMENT, THE ASSESSE E ISSUED 2,10,000 SHARES TO LUHARIWALA GROUP IN FY 2012-13 RELEVANT T O AY 2013-14. THE PAID UP SHARE CAPITAL WAS FURTHER INCREASED IN THE YEAR UNDER APPEAL BY ISSUING 1,61,000 SHARES EACH TO THE ROUTS & VORAS AND 6,94,000 SHARES TO THE LUHARIWALA. ALL THESE SHARE S WERE ISSUED TO THE VARIOUS GROUPS AT A PREMIUM OF RS.23/- PER SHARE. UPON COMPLETION OF THIS ARRANGEMENT, EACH OF THE THREE GROUPS ENDED UP HOLDING ALMOST 1/3 RD OF THE TOTAL SHARE CAPITAL OF THE COMPANY. AS A P ART OF THIS ARRANGEMENT, VINEET LUHARIWALA WAS TAKEN ON BOARD A S A THIRD DIRECTOR OF THE COMPANY AND CONTINUES TO HOLD THE S AME POSITION THEREAFTER. 6.7 TURNING TO THE ANOTHER CONTENTION OF THE REVENU E, THE LEARNED AR THEREAFTER SUBMITTED THAT THE CONTENTION OF THE AO AS WRONGLY APPROVED BY THE CIT(A) THAT ABSENCE OF ACCOUNTING E NTRY IN RELATION TO RE-VALUATION OF ASSET IN THE BOOKS MAKES THE ACTION OF THE ASSESSEE FOR DETERMINATION OF FMV QUESTIONABLE HAS NO SUBSTANCE. THE LEARNED AR CONTENDED IN THIS REGARD THAT FINANCIAL ACCOUNTING IS PRE-DOMINANTLY HISTORICAL IN METHOD AND THE RE-VALUATION OF ASSETS IN THE BOOKS OF ACCOUNTS IS NOT NECESSARY AT ALL FOR THE PURPOSES O F THE SECOND LIMB TO EXPLANATION (A) TO SECTION 56(2)(VIIB) OF THE ACT. A RE-VALUATION OR OTHERWISE, ACCORDING TO THE LEARNED AR DOES NOT HAV E ANY IMPACT FOR DETERMINATION OF TRUE VALUE. THE LEARNED AR REFERR ED TO AND RELIED UPON THE DECISION OF THE SUPREME COURT IN KEDARNATH JUTE MANUFACTURING CO. LTD. VS. CIT (1971) 82 ITR 363 (S C) FOR THE PROPOSITION THAT THE MANNER OF ENTRIES IN THE BOOKS OF ACCOUNTS WOULD ITA NO. 2474/AHD/17 [UNNATI INORGANICS PVT. LTD. VS. ITO] A.Y. 2014-15 - 9 - NOT BE DECISIVE OR CONCLUSIVE IN DETERMINATION OF T RUE PROFITS AND ABSENCE OF ENTRIES IN THE BOOKS OF ACCOUNTS WILL NO T IMPINGE UPON THE RIGHTS OF THE ASSESSEE IN DEMONSTRATING THE INTRINS IC VALUE. THE LEARNED AR THUS SUBMITTED THAT THE REVENUE AUTHORIT IES GRAVELY MISAPPLIED THE POSITION OF LAW IN THE FACTS OF THE CASE. 6.8 THE LEARNED AR THUS CONTENDED THAT ON A RECITAL OF THE FACTUAL POSITION AND POSITION OF LAW NOTED ABOVE, THE ACTIO N OF THE AO IN RESTRICTING THE FMV OF SHARES ARTIFICIALLY AT RS.12 .84 AND THEREBY SUBJECTING THE DIFFERENTIAL AMOUNT OF PREMIUM AS SU BJECT MATTER OF ADDITION UNDER S.56(2)(VIIB) OF THE ACT RESULTING I NTO AND ADDITION OF RS.2,04,82,560/- IS DE HORS THE GROUND REALITIES AS WELL AS OPPOSED TO THE LETTER AS WELL AS SPIRIT OF PROVISION INTRODUCE D. 6.9 PROPPING UP ITS CASE, THE LEARNED AR FOR THE AS SESSEE FURTHER REFERRED TO THE ASSESSMENT ORDER CONCERNING AY 2016 -17 PASSED UNDER S.143(3) OF THE ACT WHEREIN THE AO DISPUTED THE ALL OTMENT OF FRESH SHARES TO BHARAT RAUT GROUP (JANAY PROJECT & SERVIC ES PVT. LTD.) AT RS.46/- PER SHARE AND AGREED FOR FMV AT RS.33/- PER SHARE AT WHICH THE SHARES WERE ALLOTTED TO LUHARIWALA GROUP. THE AO I N AY 2016-17 ACCORDINGLY TREATED RS.13/- PER SHARE TO BE EXCESS PREMIUM COLLECTED AND CONSEQUENTLY CHARGEABLE TO TAX UNDER S.56(2)(VI IB) OF THE ACT. THE LEARNED AR THUS SUBMITTED THAT IN THE SUBSEQUEN T ASSESSMENT YEAR, THE PREMIUM COLLECTED BY THE ASSESSEE ON SUBSCRIPTI ON MADE BY LUHARIWALA GROUP WAS ACTUALLY ENDORSED. THUS, IT D OES NOT LIE IN THE MOUTH OF THE REVENUE TO TAKE A DIFFERENT POSITION I N THE PRECEDING ASSESSMENT YEARS IN TOTAL CONTRAST TO A POSITION DU LY TAKEN. 6.10 MAKING REFERENCE TO THE DECISION RENDERED BY T HE CO-ORDINATE BENCH IN RAMESHWARAM STRONG GLASS (P) LTD. 172 ITD 571 (JAIPUR TRIB.) & ASG LEATHER (P) LTD. 171 ITD 476 (KOLKATA TRIB.) THE LEARNED AR SOUGHT TO ASSERT THAT THE ASSESSEE HAS A STRONG CASE ON ITA NO. 2474/AHD/17 [UNNATI INORGANICS PVT. LTD. VS. ITO] A.Y. 2014-15 - 10 - MERITS IN TERMS OF EXPLANATION (A) (II) TO SECTION 56(2)(VIIB) OF THE ACT. THE LEARNED AR SUBMITTED THAT THE CIT(A) HAS TOTALLY IGNORED AND BYPASSED THE POSITION OF LAW IN THE GIVEN SET O F FACTS AND ALLEGED ADHOCISM AND ARBITRARINESS DISREGARDING THE COMMERC IAL EXIGENCIES AND CONSEQUENTLY ALLEGED THAT THE ACTION OF REVENUE IS TOTALLY OPPOSED TO THE FACTS AND VITIATED IN LAW. THE LEARNED AR A CCORDINGLY URGED FOR REVERSAL OF THE ACTION OF THE AO AND CIT(A). 7. THE LEARNED DR FOR THE REVENUE, ON THE OTHER HAN D, RELIED UPON THE ORDER OF THE CIT(A) AND SUBMITTED THAT THE ASSE SSEE HAS FULLY DISCHARGED ITS BURDEN OF SUBSTANTIATION OF THE VALU E OF ASSETS ON THE DATE OF ISSUE OF SHARES. IT WAS THUS CONTENDED THA T NO INTERFERENCE WITH THE ORDER OF THE CIT(A) IS CALLED FOR. 8. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS. THE SHORT CONTROVERSY PRESENTED BEFORE US IS MAINTAINABILITY OF ADDITIONS ON ACCOUNT OF ALLEGED EXCESSIVE PREMIUM CHARGED BY THE ASSESSEE COMPANY TOWARDS ISSUANCE AND ALLOTMENT OF FRESH SHA RES IN THE LIGHT OF PROVISIONS OF SECTION 56(2)(VIIB) OF THE ACT. 8.1 THE FINANCE ACT, 2012 INSERTED SECTION 56(2)(VI IB) OF THE ACT W.E.F. 1 ST APRIL, 2013 AND CONSEQUENTLY APPLICABLE FROM AY 20 13-14 ONWARDS. SECTION 56(2)(VIIB) OF THE ACT IMPOSES TA X LIABILITY ON COMPANY ITSELF IN RESPECT OF EXCESSIVE PREMIUM COLL ECTED BY SUCH COMPANY FROM RESIDENT SUBSCRIBERS OF ITS SHARES. I T WILL BE THUS PRUDENT TO REPRODUCE THE RELEVANT PROVISION APPLICA BILITY OF WHICH IS IN QUESTION: 'INCOME FROM OTHER SOURCES. 56. ( 1 ) INCOME OF EVERY KIND WHICH IS NOT TO BE EXCLUDED FROM THE TOTAL INCOME UNDER THIS ACT SHALL BE CHARGEABLE TO INCOME-TAX UNDER THE HEAD 'INCOME FROM OTHER SOURCES', IF IT IS NOT CHARGEABLE LO ITA NO. 2474/AHD/17 [UNNATI INORGANICS PVT. LTD. VS. ITO] A.Y. 2014-15 - 11 - INCOME-TAX UNDER ANY OF THE HEADS SPECIFIED IN SECT ION 14, ITEMS A TO E. (2) IN PARTICULAR, AND WITHOUT PREJUDICE TO THE GEN ERALITY OF THE PROVISIONS OF SUBSECTION (1), THE FOLLOWING INCOMES , SHALL BE CHARGEABLE TO INCOME-TAX UNDER THE HEAD 'INCOME FRO M OTHER SOURCES ', NAMELY :- . (VIIB) WHERE A COMPANY, NOT BEING A COMPANY IN WHIC H THE PUBLIC ARE SUBSTANTIALLY INTERESTED, RECEIVES, IN ANY PREVIOUS YEAR, FROM ANY PERSON BEING A RESIDENT, ANY CONSIDERATION FOR ISSU E OF SHARES THAT EXCEEDS THE FACE VALUE OF SUCH SHARES, THE AGGREGAT E CONSIDERATION RECEIVED FOR SUCH SHARES AS EXCEEDS THE FAIR MARKET VALUE OF THE SHARES: PROVIDED THAT THIS CLAUSE SHALL NOT APPLY WHERE THE CONSIDE RATION FOR ISSUE OF SHARES IS RECEIVED (I) BY A VENTURE CAPITAL UNDERTAKING FROM A VENTURE CAPITAL COMPANY OR A VENTURE CAPITAL FUND; OR (II) BY A COMPANY FROM A CLASS OR CLASSES OF PERSON S AS MAY BE NOTIFIED BY THE CENTRAL GOVERNMENT IN THIS BEHALF. EXPLANATION.FOR THE PURPOSES OF THIS CLAUSE, (A) THE FAIR MARKET VALUE OF THE SHARES SHALL BE TH E VALUE (I) AS MAY BE DETERMINED IN ACCORDANCE WITH SUCH ME THOD 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 GO ODWILL, KNOW-HOW, PARENTS, COPYRIGHTS, TRADEMARKS, LICENCES, FRANCHIS ES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE, WH ICHEVER IS HIGHER.' 8.2 A PERUSAL OF SECTION 56(2)(VIIB) OF THE ACT QUO TED ABOVE SEEKS TO ENABLE THE DETERMINATION OF FMV BY TWO METHODS: (I) PRESCRIBED METHOD AS PURPORTEDLY EMBEDDED IN RULE 11UA OF INCO ME TAX RULES AND (II) FMV BASED ON THE INTRINSIC VALUE OF THE AS SETS BOTH TANGIBLE AND INTANGIBLE ON THE DATE OF ISSUE OF SHARES. THU S, THE FMV OF ALL THE ASSETS (TANGIBLES, INTANGIBLES, HUMAN RESOURCES, RI GHT OF MANAGEMENT OR CONTROL OR OTHER RIGHTS WHATSOEVER IN OR IN RELA TION TO INDIAN COMPANY) WHETHER RECORDED IN THE BOOKS OR NOT, APPE ARING IN THE ITA NO. 2474/AHD/17 [UNNATI INORGANICS PVT. LTD. VS. ITO] A.Y. 2014-15 - 12 - BOOKS AT THEIR INTRINSIC VALUE OR NOT, IS A SUFFICI ENT WARRANT TO VALUE THE PREMIUM ON ISSUE OF UNQUOTED EQUITY SHARES BY C LOSELY HELD COMPANY. THUS, THE EXPLANATION (A)(II) ITSELF IMPL IES THAT BOOK ENTRY FOR RECOGNITION OF INTRINSIC VALUE IS NOT NECESSARY AT ALL. ALSO, THE HIGHER OF THE VALUE DETERMINED AS PER THE FIRST AND SECOND LIMB OF EXPLANATION SHALL BE ADOPTED FOR THE PURPOSES OF SE CTION 56(2)(VIIB) OF THE ACT. 8.3 THE ASSESSEE COMPANY, IN THE INSTANT CASE, SEEK S TO TAKE SHELTER OF SECOND LIMB OF EXPLANATION (A) TO CONTEND THAT B OOK VALUE OF THE PARCEL OF LANDS HOLD BY THE ASSESSEE COMPANY REQUIR ES TO BE REPLACED BY INTRINSIC VALUE, BY VIRTUE OF WHICH THE FMV WOUL D SURPASS THE NEGOTIATED PREMIUM BY THE ASSESSEE COMPANY. 8.4 IT IS ESSENTIALLY THE CASE OF THE ASSESSEE THAT THE INTRINSIC VALUE OF PARCELS OF LAND ALLOCATED AT PADRA & DAHEJ ARE S UBSTANTIALLY HIGHER AND ONCE THE BOOK VALUE IS REPLACED BY THE INTRINSI C VALUE, THE FMV OF SHARES ALLOTTED WOULD BE FAR HIGHER THAN THE NEGOTI ATED PRICE. AT THIS STAGE, WE NOTICE FROM THE ASSESSMENT ORDER THAT CAL CULATION OF PREMIUM HAS BEEN MADE BY THE ASSESSEE IN PARA 3.1 W HEREBY THE SHARE PREMIUM ELIGIBLE TO THE ASSESSEE WAS WORKED OUT TO RS.22.34 PER SHARE (SAY TO RS.23/-) ON SUBSTITUTION OF BOOK VALUE OF L AND BY THE VALUE AS PER THE VALUATION REPORT. IT IS THE CASE OF THE ASS ESSEE THAT VALUE OF DAHEJ LAND HAS BEEN TAKEN AT 45% OF THE JANTRI VALUE ONLY WHEREAS IF FULL AMOUNT AS PER JANTRI VALUE IS ADOPTED, THE VALUATION WOULD BE MORE THAN DOUBLE OF THE PRESENT VALUATION. IN THE CIRCUMSTANCES, IT IS CASE OF THE ASSESSEE THAT HIGHER FMV AS PER SECOND LIMB TO THE EXPLANATION IS DULY SUBSTANTIATED BY THE VALUATION REPORT AND THE ACTION OF THE CIT(A) IN CONFIRMING THE ORDER OF THE AO IS MARRED BY MIS-CONCEPTION OF LAW AND FACTS. IT IS FURTHER CAS E OF THE ASSESSEE THAT CURSORY OBSERVATION OF ADHOCISM AND ARBITRARINESS B Y THE FIRST APPELLATE AUTHORITY CAN BE NO GROUND TO DEPART FROM THE OSTENSIBLE ITA NO. 2474/AHD/17 [UNNATI INORGANICS PVT. LTD. VS. ITO] A.Y. 2014-15 - 13 - FACTUAL POSITION. THE MARKET VALUE OF THE LAND PREV AILING AT THE TIME OF ISSUE OF SHARES REQUIRES TO BE SUBSTITUTED WHICH VA LUE IS DULY SUPPORTED BY THE VALUATION REPORT OBTAINED IN THIS REGARD. SUCH VALUATION REPORT HAS NOT BEEN SUCCESSFULLY CONTROVE RTED BY THE REVENUE. 8.5 AS NARRATED IN THE PRECEDING PARAS, THE LIMITED QUESTION THAT ARISES FOR CONSIDERATION IS WHETHER THE VALUE OF LA ND PARCELS ADOPTED BY THE ASSESSEE AS PER THE VALUATION REPORT REQUIRE S TO BE TAKEN COGNIZANCE OF FOR THE PURPOSES OF SECTION 56(2)(VII A) OF THE ACT OR NOT. AT THIS JUNCTURE, WE OBSERVE THAT ONE OF THE GROUNDS TAKEN FOR REJECTING THE BASIS OF DETERMINATION OF FMV IS THAT NO ACCOUNTING ENTRY HAS BEEN PASSED IN RESPECT OF DIFFERENCE BETW EEN THE FMV OF THE IMMOVABLE PROPERTY AT THE RELEVANT POINT OF TIME IN THE BOOKS OF ACCOUNTS. AS OBSERVED IN THE EARLIER PARAS, WE DO NOT SEE ANY MERIT IN THIS LINE OF REASONING ADOPTED BY THE LOWER AUTHORI TIES. IT IS WELL SETTLED THAT EVEN WHERE THE ASSESSEE FAILS TO MAKE NECESSARY ENTRIES IN THE BOOKS OF ACCOUNTS, IT WILL NOT OPERATE AS A BAR FOR CLAIMING BENEFITS BY WAY OF DEDUCTION ETC. AS WAS HELD BY THE HONBLE SUPREME COURT IN THE CASE OF KEDARNATH JUTE MANUFACTURING CO. LTD. V S. CIT (1971) 82 ITR 363 (SC). SECONDLY, THE SECOND LIMB OF EXPLANA TION (A) ITSELF PROVIDES FOR DETERMINATION OF FMV BASED ON VALUE OF UNDERLYING ASSETS. AS A COROLLARY, THE VALUE ONCE SUBSTANTIAT ED WOULD BE REPLACED WITH THE BOOK VALUE FOR THE PURPOSES OF FMV REGARDL ESS OF THE BOOK ENTRIES IN THIS REGARD. THIS BASIS ADOPTED BY THE LOWER AUTHORITIES THEREFORE DOES NOT HOLD ANY WATER. 8.6 WE NOW ADVERT TO THE ANOTHER ALLEGATION MADE BY THE CIT(A) THAT THE ACTION OF THE ASSESSEE COMPANY IS MARRED B Y ADHOCISM AND BESET WITH ARBITRARINESS. THE CIT(A) HAS OBSERVED THAT PROJECT WAS ULTIMATELY SET UP AT DAHEJ DESPITE ACQUISITION OF L AND AT PADRA WHICH DEFIES LOGIC AND GIVES AN IMPRESSION OF ADHOCISM. WE FAIL TO ITA NO. 2474/AHD/17 [UNNATI INORGANICS PVT. LTD. VS. ITO] A.Y. 2014-15 - 14 - UNDERSTAND THE PURPORT OF SUCH OBSERVATION FOR DETE RMINATION OF FMV. THE INTRINSIC VALUATION OF THE LAND AS SOUGHT TO BE DEMONSTRATED BY THE ASSESSEE WAS REQUIRED TO BE LOOKED INTO TO GIVE EFF ECT TO EXPLANATION (A) BELOW SECTION 56(2)(VIIB) OF THE ACT. THE MANN ER IN WHICH THE ASSESSEE WAS REQUIRED TO RUN ITS BUSINESS IS TOTALL Y WITHIN THE DOMAIN OF THE ASSESSEE AND HAS NO BEARING ON APPLICABILITY OF SECTION 56(2)(VIIB) OF THE ACT. WE ARE ALSO UNABLE TO SEE SUBSTANCE IN THE ALLEGATION OF ARBITRARINESS IN THE CONDUCT OF THE A SSESSEE. WHAT THE ASSESSEE HAS ATTEMPTED TO DEMONSTRATE THAT THE MARK ET VALUE OF PADRA LAND AND 45% OF JANTRI VALUE OF DAHEJ LAND ITSELF IS SUFFICIENT TO JUSTIFY THE PREMIUM COLLECTED. BY STATING SO, THE ASSESSEE MERELY SEEKS TO JUSTIFY THE BONAFIDES OF THE PREMIUM BASED ON VALUE OF THE LAND. THE ASSESSEE HAS ALSO ATTEMPTED TO NARRATE T HE CIRCUMSTANCES FOR UNISON OF EXISTING PROMOTERS GROUP (RAUTS & VORAS) AND INCOMING GROUP (LUHARIWALA). THE VALUATION GOT DONE AFTER T HE ISSUE OF SHARES IS REALLY OF NO CONSEQUENCE. WHAT IS RELEVANT IS W HETHER AT THE TIME OF ALLOTMENT OF SHARES, THE VALUE OF SHARES AS CLAIMED EXISTED OR NOT! THE VALUATION REPORT IS NOT AN EVIDENCE IN ITSELF BUT M ERELY AN OPINION OF AN INDEPENDENT HAVING REGARD TO TOTALITY OF EXPERT FACTS AND CIRCUMSTANCES EXISTING ON THE DATE OF VALUATION. S O LONG AS THE FACTS AND CIRCUMSTANCES EXIST, THE PRESENCE OR OTHERWISE VALUATION REPORT PER SE HAS NO EFFECT . BOTH THE LOWER AUTHORITIES HAVE FAILED TO CONTROVERT THE VALUE ADOPTED FOR LAND PARCELS IN DE PARTURE WITH THE BOOK VALUE. NO REBUTTAL OF THE FACT TOWARDS THE VA LUE IS ON RECORD. THE REVENUE AUTHORITIES ARE CLEARLY GUIDED BY IRREL EVANT CONSIDERATION WHILE HOLDING AGAINST THE ASSESSEE. THE AO HIMSELF IN THE SUBSEQUENT YEAR HAS DISPUTED THE HIGHER VALUATION OF RS.46/- A ND UNEQUIVOCALLY ADOPTED RS.33/- AS FAIR VALUE. THE ASSESSEE HAS AL SO BEEN ABLE TO DEMONSTRATE THE ARMS LENGTH TRANSACTION AND UNISON OF TWO DIFFERENT GROUPS BRINGING DIFFERENT CAPABILITIES AND EXPERTIS E FOR THE FURTHERANCE OF BUSINESS. THE PERIPHERAL EVIDENCES IN THE FORM OF INTEREST SHOWN BY GIANT GROUPS LIKE TATA ARE SIGNIFICANT AND UNDER LIE THE BONAFIDES IN ITA NO. 2474/AHD/17 [UNNATI INORGANICS PVT. LTD. VS. ITO] A.Y. 2014-15 - 15 - THE FAIR VALUATION FOR ISSUANCE OF FRESH SHARES. T HERE IS ANOTHER OVERWHELMING FACTOR SUBSISTING IN THE CASE TO JUSTI FY THE FAIR VALUE. THE EXISTING PROMOTERS HAVE ALSO SUBSCRIBED AT THE RATE SIMILAR TO THE RATE AT WHICH SHARES WERE ALLOTTED TO LUHARIWALA GR OUP WHICH FURTHER REINFORCES THE INHERENT STRENGTH IN THE VALUATIONS OF THE COMPANY AS REPRESENTED BY THE VALUE OF EQUITY SHARES. WE THUS SEE NO VALID REASON WHATSOEVER IN UPHOLDING THE ADVERSE CONCLUSION DRAW N BY THE REVENUE AUTHORITIES. THE ORDER OF THE CIT(A) ACCORDINGLY S ET ASIDE AND THE AO IS DIRECTED TO DELETE THE ADDITION MADE UNDER S. 56(2)(VIIB) OF THE ACT DISCUSSED ABOVE. 9. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. SD/- SD/- (MAHAVIR PRASAD) (PRADIP KUMA R KEDIA) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD: DATED 11/09/2019 TRUE COPY S. K. SINHA !'#' / COPY OF ORDER FORWARDED TO:- &. / REVENUE 2. / ASSESSEE (. )*+ , / CONCERNED CIT 4. ,- / CIT (A) /. 012 33*+4 *+#4 56) / DR, ITAT, AHMEDABAD 7. 289 : / GUARD FILE. BY ORDER / 4 /5 *+#4 56) THIS ORDER PRONOUNCED IN OPEN COURT ON 11/09/20 19