M/S.KARMIC LABS PRIVATE LIMITED, MUMBAI V. INCOME TAX OFFICER 15(2)(1), MUMBAI

ITA 3955/MUM/2018

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 8878 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 1 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-07-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: H
• Assessment Year: 2014-2015
• Appeal Filed On: 04-06-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R BHUPATHI
• Keywords: Gift; Deemed to accrue or arise in india; Fair market value; Valuation report; Revenue expenditure; Set aside
• Section: 143(3); 56(2); 73; 13; 56

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES H, MUMBAI BEFORE SHRI RAJESH KUMAR, ACCOUNTANT MEMBER & SHRI AMARJIT SINGH, JUDICIAL MEMBER ITA NO.3955/MUM/2018 ASSESSMENT YEAR: 2014-15 KARMIC LABS PVT.LTD. B-1, 2302, THE ADDRESS, OPPOSITE R-CITY MALL, LBS MARG GHATKOPAR(WEST) MUMBAI-400 086 PAN: AACCK7809G VS. ITO,WARD-15(2)(1) AAYKAR BHAWAN M.K.ROAD MUMBAI-400 020 (ASSESSEE) (REVENUE) REVENUE BY : SHRI R.BHUPATHI ASSESSEE BY : SHRI KETAN VED DATE OF HEARING : 10/07/2020 DATE OF PRONOUNCEMENT : 28 /07/2020 O R D E R PER RAJESH KUMAR, ACCOUNTANT MEMBER 1. THE ASSESSEE BY WAY OF THIS APPEAL IS CHALLENGIN G THE ORDER OF THE LD. COMMISSIONER OF INCOME-TAX (APPEALS)-24 HEREINAFTER CALLED [CIT(A)], MUMBAI, IN APPEAL NO.CIT(A)-24/ITO -15(2)(1)I.T 349/2016-17 DATED 28/03/2018. THE ASSESSMENT FOR IM PUGNED AY WAS FRAMED BY INCOME TAX OFFICER WARD-15(2)(1), MUMBAI [AO] U/S 143(3) OF THE INCOME TAX ACT,1961 ON 30/03 /2015. THE VARIOUS GROUNDS RAISED BY THE ASSESSEE ARE REPRODUC ED AS UNDER: 1.0 RE.: CONSIDERING THE PREMIUM OF RS. 3,96,54,53 1/- RECEIVED FROM SHAREHOLDERS VIA-A-VIS ISSUE OF EQUITY SHARES AND P REFERENCE SHARES AS INCOME U/S. 56(2)(VIIB) OF THE INCOME-TAX ACT, 1961 : 2 ITA N O.3955/MUM/2018 KARMIC LABS PVT.LTD. 1.1 THE COMMISSIONER OF INCOME-TAX (APPEALS) HAS ER RED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER OF CONSIDERING THE SHARE PREMIUM RECEIVED FROM THE SHAREHOLDERS ON ISSUE OF EQUITY SHARES AND PREFERENCE SHARES AS INCOME FOR THE YEAR UNDER CONSIDERATION U/S. 56(2)( VIIB) OF THE INCOME-TAX ACT, 1961. THE APPELLANT SUBMITS THAT CONSIDERING THE FACTS AN D CIRCUMSTANCES OF ITS CASE AND THE LAW PREVAILING ON THE SUBJECT, THE PRE MIUM ON ISSUE OF EQUITY SHARES AND PREFERENCE SHARES CANNOT BE CONSIDERED A S INCOME AND THE COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE HELD AS SUCH. 1.3 THE APPELLANT SUBMITS THAT THE ASSESSING OFFIC ER BE DIRECTED TO DELETE THE ADDITION SO MADE BY HIM AND TO RE-COMPUTE ITS TOTAL INCOME ACCORDINGLY. 2 : 0 RE.: GENERAL: 2 : 1 THE APPELLANT CRAVES LEAVE TO ADD, ALTER, A MEND, SUBSTITUTE AND / OR MODIFY IN ANY MANNER WHATSOEVER ALL OR ANY OF THE F OREGOING GROUNDS OF APPEAL AT OR BEFORE THE HEARING OF THE APPEAL. 2. THE ONLY ISSUE RAISED BY THE ASSESSEE IS AGAINST THE CONFIRMATION OF ADDITION BY LD.CIT(A) AS MADE BY TH E LD. AO U/S 56(2)(VIIB) OF THE ACT. 3. THE FACTS IN BRIEF ARE THAT THE ASSESSEE FILED A RETURN OF INCOME ON 29/09/2014 AT NIL. THE CASE OF THE ASSE SSEE WAS SELECTED UNDER CASS FOR SCRUTINY AND ACCORDINGLY ST ATUTORY NOTICES WERE ISSUED AND SERVED UPON THE ASSESSEE. T HE ASSESSEE IS A REGISTERED COMPANY UNDER THE COMPANIES ACT AND IS ENGAGED IN THE BUSINESS OF PROVIDING CLINICAL TESTING, CLIN ICAL TRIAL MANAGEMENT, CLINICAL DATA MANAGEMENT, BIO STATISTIC S AND MEDICAL WRITING SERVICES TO PHARMACEUTICAL & MEDICA L DEVICE COMPANIES. DURING THE COURSE OF ASSESSMENT PROCEEDI NGS, THE LD. AO OBSERVED THAT DURING THE YEAR, THE ASSESSEE HAS ISSUED EQUITY SHARES, AS WELL AS PREFERENCE AT A PREMIUM AS PER D ETAILS BELOW: 3 ITA N O.3955/MUM/2018 KARMIC LABS PVT.LTD. SL. NO. DATE NO. OF SHARES FACE VALUE PREMIUM RATE NATURE OF ALLOTMENT 1 18.10.2013 8024 10/- @ 1987/- PREFERENTIAL ALLOTMENT 2 18.10.2013 340 10 1987/- EQUITY 3 25.02.2014 18 10 / - 1987/- EQUITY 4 28.02.2014 8806 10/- 26S9/- EQUITY AND ACCORDINGLY, THE LD. AO CALLED UPON THE ASSESSE E TO FURNISH THE BASIS OF VALUATION FOR ISSUING THE SHARES AT A PREMIUM, WHICH WAS REPLIED BY THE ASSESSEE BY SUBMITTING THAT SEC TION 56 OF THE I.T ACT R.W.S. RULE 11UA PROVIDES FOR THE VALUATION OF SHARES AND ACCORDING TO THE COMPANY HAS VALUED ITS SHARES AS P ER DISCOUNTED FREE CASH FLOW METHOD. THE SAID METHOD U SES THE FUTURE FREE CASH FLOW PROJECTIONS AND DISCOUNTS THE M AND THUS FILED THE VALUATION REPORT BEFORE THE LD. AO. ON PE RUSAL OF PROJECTION OF THE GROWTH OF THE ASSESSEE, THE LD. A O OBSERVED THAT THE PROJECTIONS DID NOT REFLECT THAT THE TRUE AND R EALISTIC FIGURE, AS THE PROJECTIONS MADE WERE NEITHER COMPARABLE WITH T HE GROWTH OF THE COMPANY IN THE PAST NOR IN THE SUBSEQUENT YEAR. THE LD. AO NOTED THAT AY 2015-16 & 2016-17 RETURNS FILED BY TH E ASSESSEE REVEAL THAT THE ASSESSEE HAS FAILED TO ACHIEVE THE REVENUE PROJECTIONS AND SO THE EBITDA. MOREOVER, THE ASSESS EE HAS ALSO FAILED TO BRING ON RECORD, THE BASIS WHEREIN TWO DI FFERENT PROJECTIONS WERE GIVEN BY IT IN THE SAME FINANCIAL YEAR. THE LD. AO NOTED THAT AS PER THE ASSESSEES VALUATION, THE ASSESSEE HAS 4 ITA N O.3955/MUM/2018 KARMIC LABS PVT.LTD. VALUED SHARE PRICE AT A PREMIUM OF RS.1987/- ON 25/ 02/2014 AND RS. 2689/- ON 28/02/2014, JUST THREE DAYS AFTER , THE DATE OF THE EARLIER ISSUE OF SHARES. NO EVIDENCE WERE PRODU CED ON RECORD TO EXPLAIN THE HIKE OVER THE THREE DAYS AND ACCORDI NGLY ISSUED A SHOW CAUSE NOTICE TO THE ASSESSEE AS TO WHY THE PRO VISIONS OF RULE 11UA(2)(A) SHOULD NOT BE ADOPTED FOR CALCULATI NG THE MARKET VALUE IN THE SHARES AS ON THE DATE OF ISSUE OF PREM IUM, WHICH WAS RESPONDED BY THE LD. AR, VIDE LETTER DATED 16/1 2/2016, WHICH WAS REJECTED BY THE LD. AO THEREBY REJECTING THE VALUATION OF DISCOUNTED CASH FLOW METHOD CALCULATED BY THE A SSESSEE STATING THE SAME OF HAVING UNREALISTIC RESULTS AND CALCULATED THE VALUATION OF SHARE AS PER PROVISIONS OF RULE 11UA(2 )(A). THE LD. AO OBSERVED THAT SINCE, THE LIABILITIES EXCEEDS TH E ASSETS OF THE COMPANY AS CALCULATED IN PARA 5.8 OF THE ASSESSMENT ORDER, THE FAIR MARKET VALUE OF THE SHARES IS NEGATIVE AND H ENCE, THE MARKET VALUE IS TAKEN AT FACE VALUE OF RS.10/- EAC H AND ACCORDINGLY, THE SHARE PREMIUM RECEIVED OF RS. 3,96 ,54,531/- WAS ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE U/S 56(2)(VIIB) OF THE I.T.ACT. 4. IN THE APPELLATE PROCEEDINGS, THE LD. CIT(A) DIS MISSED APPEAL OF THE ASSESSEE BY OBSERVING AND HOLDING AS UNDER:- 4. I HAVE GIVEN MY CAREFUL CONSIDERATION TO THE RI VAL SUBMISSIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED THE FACTUAL MATRIX OF THE CASE AS ALSO THE APPLICABLE LEGAL POSITION. GROUND NO. 2 4.1 IN THIS GROUND, THE APPELLANT HAS CHALLENGE D THE ADDITION OF RS. 3,96,54,531 U/S.56(2)(VIIB) OF THE ACT BY THE AO ON ACCOUNT OF ISSUANCE OF 5 ITA N O.3955/MUM/2018 KARMIC LABS PVT.LTD. SHARES O BASIS OF DISCOUNTED FREE CASH FLOW METHOD INSTEAD OF NET ASSET METHOD. SECTION 56(2)(VIIB) OF THE ACT STATES '(2) IN PARTICULAR, AND WITHOUT PREJUDICE TO THE GE NERALITY OF THE PROVISIONS OF SUB-SECTION (1), THE FOLLOWING INCOMES, SHALL BE CH ARGEABLE TO INCOME-TAX UNDER THE HEAD 'INCOME FROM OTHER SOURCES', NAMELY: (VIIB) WHERE A COMPANY, NOT BEING A COMPANY IN WHI CH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, RECEIVES, IN ANY PREVIOUS YEAR, FROM ANY PERSON, BEING A RESIDENT, ANY CONSIDERATION FOR ISSUE OF SH ARES THAT EXCEEDS THE FACE VALUE OF SUCH SHARES, THE AGGREGATE CONSIDERATION R ECEIVED FOR SUCH SHARES AS EXCEEDS THE FAIR MARKET VALUE OF THE SHARES'. APPELLANT HAS CARRIED OUT THE VALUATION OF SHARES U NDER THE DISCOUNTED FREE CASH FLOW METHOD WHICH USES THE FUTURE PROJECTIONS OF FINANCIAL GROWTH TO ARRIVE AT THE FMV OF SHARES. AFTER PERUSING THE RET URN OF INCOME OF THE APPELLANT FOR AY 2015-16 & 2016-17 IT IS EVIDENT TH AT THE PROJECTIONS ESTIMATED BY THE APPELLANT ARE NOT ACHIEVED. FURTHER, THE APP ELLANT HAS VALUED THE PREMIUM PRICE OF SHARES AT R/1,987 OH 25.02.2014 AN D RS2,68S ON 28.02.2014 WHILE IT HAS FAILED TO PROVIDE ANY EVIDE NCES TO PROVE THIS HIKE IN THE PROJECTION OF THE SHARE PRICES. THE APPELLANT, IN ITS SUBMISSIONS HAS MADE A REFERE NCE TO THE SUPREME COURT'S DECISION IN THE CASE OF SWASTHYA ADHIKAR MA NCH, INDORE & ANR. V/S UNION OF INDIA & ORS. WHEREIN THE SUPREME COURT ASK ED THE GOVERNMENT TO PROVIDE MORE DETAILS ON THE MECHANISM ADOPTED TO AP PROVE THE CLINICAL / DRUG TRIALS. IN SPITE OF THIS ORDER HAVING A NEGATIVE IM PACT ON THE COMPANIES IN THE BUSINESS OF CLINICAL TRIAL MANAGEMENT, THE APPELLAN T HAS PROJECTED HIGHER GROWTH. FURTHER, WHEN THE SECOND ROUND OF SHARES WE RE ISSUED BY THE ASSESSE THE SUPREME COURT HAD ALREADY COME UP WITH ITS OBSERVATIONS WHICH WERE AGAINST THE APPELLANT AS PER HIS OWN SUBMISSIO NS AND STILL THE SAID SHARES WERE ISSUED AT A HIGHER PREMIUM. THE SUBMISS IONS ALSO SUGGEST THAT THE APPELLANT'S PROJECTIONS DO NOT MATCH WITH THE P AST GROWTH AS WELL AS THE FUTURE PROJECTED GROWTH FOR AY 2015-16 & 2016-17. THE AO IS ACCURATE IN CALCULATING THE FMV OF SHARE S AS PER THE PROVISIONS OF RULE 11UA(2)(A) AND DISREGARDING THE APPELLANTS C ALCULATION AS PER THE DISCOUNTED FREE CASH FLOW METHOD IN VIEW OF THE ABOVE, IT HAS TO BE HELD THAT THE AO IS RIGHT IN ADDING THE ENTIRE PREMIUM OF RS. 3,96,54,531 TO THE TOTAL INCOME OF T HE APPELLANT U/S 56(2)(VIIB) OF THE ACT. THIS GROUND OF APPEAL IS DISMISSED. 5. THE LD. AR, AT THE OUTSET SUBMITTED FOR BENCH TH AT THE ASSESSEE HAS FOLLOWED DISCOUNTED CASH FLOW METHOD, WHICH WAS 6 ITA N O.3955/MUM/2018 KARMIC LABS PVT.LTD. ONE OF THE TWO METHODS PROVIDED U/S 56(2) OF THE AC T R.W. RULE 11UA OF THE ACT. THE LD. AR SUBMITTED THAT THE ASSE SSEE DETERMINED THE MARKET VALUE OF THE SHARES ON THE BA SIS OF ORDERS BOOK, WHICH WERE EITHER FINALIZED OR WERE AT THE F INAL STAGE OF THE NEGOTIATIONS. THE TOTAL ORDER VALUE OF ORDERS IN HA NDS WERE RS. 18.01 CRORES BASED ON THE SAID ORDERS BOOK. THE ASS ESSEE HAS ESTIMATED THE FUTURE CASH FLOW AND ALSO SUBMITTED T HE ORDERS BOOK ALONG WITH ADVANCE RECEIVED FROM VARIOUS CLIEN TS. THE LD. AR PRAYED BEFORE THE BENCH THAT THE VALUATION, AS P ER THE DCF METHOD REQUIRES REVENUE PROJECTIONS FOR THE FUTURE YEARS WHICH IS BASED ON THE CURRENT SITUATION AND THE FUTURE ESTIM ATES, WHICH WERE BASED UPON PRESENT CIRCUMSTANCES AND FACTS SUC H AS ORDERS BOOK AND ACCORDINGLY, THE LD. AR SUBMITTED THAT THE ASSESSEE HAS A VALID BASIS FOR THE REVENUE FORECAST S AND IF DUE CERTAIN SUBSEQUENT HAPPENINGS AND UNAVOIDABLE CIRCU MSTANCES, THE PROJECTIONS WERE NOT ACHIEVED, THE SAME CANNO T BE ATTRIBUTABLE TO THE ASSESSEE. THE LD. AR, THEREFORE STATED THAT IT IS WRONG ON THE PART OF THE LD. AO TO REJECT THE V ALUATION DONE BY THE ASSESSEE, AS PER DCF METHOD AND PRAYED FOR THE BENCH THAT ADDITIONS MADE MAY KINDLY BE DELETED. THE LD. AR RE LIED ON THE FOLLOWING THE DECISION IN DEFENCE OF THE ARGUMENTS I.E I) VODAFONE M-PESA LTD. VS PCIT [2018] 92 TAXMANN.COM 73 (BOMBA Y) II) DCIT VS OZONELAND AGRO PVT.LTD ITA NO.4854/MUM/201 6 AY 2013-14 DATED 02/05/2018 AND VODAFONE M-PESA LTD VS DCIT [2020] 114 TAXMANN.COM 323 (MUMBAI-TRIB.) ORDER DAT ED 13/12/2019. THE LD. AR SUBMITTED THAT IN ALL THESE ABOVE DECISIONS, IT HAS BEEN HELD THAT THE LD. AO IS NOT AT LIBERTY TO CHANGE THE METHOD ADOPTED BY THE ASSESSEE AT HIS WH IMS AND 7 ITA N O.3955/MUM/2018 KARMIC LABS PVT.LTD. FANCIES AND IS BOUND BY THE VALUATION DONE BY THE A SSESSEE , AS PER BY THE METHOD PRESCRIBED UNDER RULE 11UA OF THE RULES AND THUS, THE PRAYED BEFORE THE BENCH THAT APPEAL OF TH E ASSESSEE MAY BE ALLOWED. 6. THE LD. DR, ON THE OTHER HAND RELIED ON THE ORD ER OF THE AUTHORITIES BELOW BY SUBMITTING THAT THE VALUATION DONE BY THE ASSESSEE, AS PER THE DCF METHOD WAS TOO DISTANT FRO M REALITY AS IN THE SUBSEQUENT RETURNS FILED BY THE ASSESSEE, T HE PROJECTIONS WERE NOT ACHIEVED AND THUS, THE VALUATION OF THE A SSESSEE WAS NOT CORRECT AND THEREFORE, RIGHTLY REJECTED BY THE LD. AO AND THEREFORE, PRAYED THAT THE APPEAL OF THE ASSESSEE M AY BE DISMISSED. 7. AFTER HEARING BOTH THE PARTIES AND PERUSING THE MATERIAL AVAILABLE ON RECORD, WE NOTE THAT THE ASSESSEE HAS ISSUED SHARES AT A PREMIUM. IN ORDER TO ASCERTAIN THE MARKET VAL UE OF THE SHARES, THE ASSESSEE ADOPTED DCF METHOD, AS PRESCRI BED UNDER RULE 11UA R.W.S 56(2) OF THE ACT AND ACCORDINGLY, T HE SHARES WERE ISSUED AT A PREMIUM. ACCORDING TO THE LD. AO, THE V ALUATION REPORT FURNISHED BY THE ASSESSEE IS NOT REALISTIC A S THE PROJECTIONS SHOWN BY THE ASSESSEE IN THE VALUATION REPORT WERE NOT REALISTIC AND WERE NOT ACHIEVED IN ACTUALITY IN THE SUBSEQUEN T YEARS. WHEREAS ON THE OTHER HAND THE ASSESSEE HAS TRIED TO JUSTIFY THE VALUATION WITH REFERENCE TO ORDERS BOOK OF RS.18.01 CRORES. THEREFORE, ONLY ISSUE BEFORE US, WHETHER THE LD. AO HAS THE POWER TO CHANGE THE METHOD ADOPTED BY THE ASSESSEE FROM ONE METHOD TO ANOTHER METHOD PROVIDED UNDER RULE 11UA. WE HAVE PERUSED THE DECISIONS RELIED UPON BY THE ASSESSEE A ND ARE OF THE 8 ITA N O.3955/MUM/2018 KARMIC LABS PVT.LTD. CONSIDERED VIEW THAT THE ISSUE IS SETTLED IN THE F OLLOWING CASES, WHERE IT HAS BEEN HELD THAT IT IS BEYOND THE JURISD ICTION OF THE AO TO CHANGE THE METHOD OF VALUATION. IN THE CASE OF DCIT VS M/S OZONELAND AGRO PVT.LTD. THE TRIBUNAL HAS HELD AS UN DER:- 5.1. IN OUR OPINION, THE VALUATION HAS BEEN LEFT TO THE DISCRETION OF THE ASSESSEE. IN OTHER WORDS THE AO CANNOT ADOPT A METH OD OF HIS CHOICE. IN THE CASE UNDER CONSIDERATION THE WHOLE CONTROVERSY HAS ARISEN BECAUSE OF THE AO HAS REJECTED THE METHOD ADOPTED BY THE ASSESSEE. WE FIND THAT IN THE CASE OF MEDPLUS HEALTH SERVICES P.LTD.(SUPRA)SIMILAR ISSUE WAS DELIBERATED UPON AND DECIDED. WE ARE REPRODUCIN G THE RELEVANT PORTION OF THE ORDER WHICH READS AS UNDER: 3.DURING THE ASSESSMENT PROCEEDINGS U/S 143(3) OF THE ACT, AO OBSERVED THAT THE ASSESSEE COMPANY IS A WHOLESALE SUPPLIER O F GOODS MAINLY TO ITS GROUP COMPANY M/S. OPTIVAL HEALTH SOLUTIONS P. LTD. , WHICH IN TURN IS ENGAGED IN RETAIL BUSINESS OF PHARMACEUTICALS AND GENERAL G OODS AND FURTHER THAT BOTH THE COMPANIES HAVE MORE THAN 67% COMMON SHAREHOLDIN GS. IT WAS OBSERVED THAT DURING THE F.Y. 2010-11, A MAJOR RESTRUCTURING OF THE GROUP HAD TAKEN PLACE WHEREIN ALMOST ALL THE SHARES OF M/S. OPTIVAL HEALTH SOLUTIONS P. LTD., WERE TAKEN-OVER BY THE ASSESSEE COMPANY AND THE WHO LESALE OPERATIONS FROM THE ASSESSEE WERE TAKEN-OVER BY M/S. OPTIVAL HEALTH SOLUTIONS P. LTD., RESULTING IN THE ASSESSEE COMPANY BECOMING THE HOLD ING COMPANY OF M/S. OPTIVAL HEALTH SOLUTIONS P. LTD., AND BOTH THE WHOL ESALE AND RETAIL OPERATIONS COMING UNDER THE ASSESSEE COMPANY INDIRE CTLY. HE FURTHER OBSERVED THAT MAJORITY OF THE SMALL SHAREHOLDERS OF M/S. MEDPLUS HEALTH CARE P. LTD., TRANSFERRED THEIR SHARES TO MR. G. MADHUKA R REDDY, PROMOTER AND ONE OF THE MAJOR SHAREHOLDERS OF ASSESSEE COMPANY AND M R. MADHUKAR REDDY ALONG WITH OTHER MAJOR SHAREHOLDERS TRANSFERRED THE IR MAJORITY OF SHAREHOLDINGS AT AN ATTRACTIVE PRICE TO SOME LOCAL AND INTERNATIONAL INSTITUTIONAL INVESTORS. OUT OF THESE TRANSACTIONS, THE A.O. OBSERVED THAT TWO PERSONS I.E., MR. C. SRINIVASA RAJU AND CHINTALAPAT I HOLDINGS P. LTD., TRANSFERRED THEIR SHARES TO THE ASSESSEE ON 0 4.03.2011 AT RS.75.49 PER SHARE WHEREAS, ON THE SAME DAY AND ALSO ON 08.03.20 11 ALL THE OTHER SHAREHOLDERS TRANSFERRED THEIR SHAREHOLDINGS TO THE ASSESSEE AT RE.1 PER 9 ITA N O.3955/MUM/2018 KARMIC LABS PVT.LTD. SHARE. HE OBSERVED THAT WHEN THE MARKET RATE IS RS. 75.49 PS, THE ASSESSEE HAS PURCHASED THE SHARES AT LESS THAN THE MARKET PR ICE I.E., RE.1 PER SHARE AND THEREFORE, THE TRANSACTIONS ATTRACT PROVISIONS OF SECTION 56(2)(VIIA) OF THE I.T. ACT. THEREFORE, THE A.O. ISSUED A SHOW CAUSE N OTICE DATED 27.02.2014 REQUIRING THE ASSESSEE TO EXPLAIN AS TO WHY THE DIF FERENCE AMOUNT OF RS.74 PER SHARE SHOULD NOT BE TREATED AS A DEEMED GIFT/IN COME AND TAXED IN THE HANDS OF THE COMPANY. THE ASSESSEE, VIDE LETTER DAT ED 07.03.2014, SUBMITTED A DETAILED NOTE AS TO WHY THE PROVISIONS OF SECTION 56(2)(VIIA) ARE NOT APPLICABLE TO THE ASSESSEES CASE. IT WAS SUBMITTED THAT AS PER EXPLANATION TO SECTION 56(2)(VIIA) OF THE ACT, THE FAIR MARKET VA LUE (FMV IN SHORT) HAS TO BE COMPUTED IN ACCORDANCE WITH RULE 11UA OF I.T. RULES AND THAT THE ASSESSEE HAD COMPUTED THE FAIR MARKET VALUE AS PER THE PRESC RIBED RULE ACCORDING TO WHICH, THE FAIR MARKET VALUE OF THE SHARE IS LESS T HAN RE. ZERO AND HENCE, PAYMENT OF RE.1 PER SHARE BY THE ASSESSEE TO ACQUIR E THE SHARES IS MORE THAN THE FAIR MARKET VALUE COMPUTED UNDER RULE 11UA . THUS, ACCORDING TO HIM, THE PROVISIONS OF SECTION 56(2)(VIIA) OF THE A CT DO NOT APPLY. THE A.O. HOWEVER, WAS NOT CONVINCED WITH THE ASSESSEES CONT ENTIONS AND HELD THAT THE MARKET VALUE MENTIONED IN THE RULE MEANS 'PRI CE WHICH IT WOULD HAVE FETCHED IF SOLD IN THE OPEN MARKET.' HE OBSERVED THAT THE VALUATION OF ANY PROPERTY IS B ASED ON THE FACT AS TO WHAT VALUE THE PROPERTY WOULD FETCH IF SOLD IN THE OPEN MARKET AND SINCE IN THE ASSESSEES OWN CASE THERE ARE CERTAIN TRANSACTIONS TO CLEARLY ESTABLISH MARKET VALUE OF THE SHARES SOLD, RESORTING TO ESTIMATION/C ALCULATION OF MARKET VALUE OF THE UNLISTED SHARES AS PER THE FORMULA UNDER RULE 1 1UA OF I.T. RULES DOES NOT ARISE. HE OBSERVED THAT AS PER THE COMPUTATION OF F AIR MARKET VALUE UNDER RULE 11UA(C)(B) OF I.T. RULES, THE VALUE OF M /S. OPTIVAL HEALTH SOLUTIONS P. LTD., WAS (-) RS.64.48 PS (I.E., THE VALUE OF M/ S. OPTIVAL SHARE IS AT NEGATIVE FIGURE) WHEREAS, ASSESSEE HAS PAID RE.1 PER SHARE A ND THE BASIS FOR ADOPTING RE.1 PER SHARE BY THE ASSESSEE IS NOT PROVIDED. HE FURTHER OBSERVED THAT ONE OF THE SHAREHOLDERS MR. KALYANA BHASKARA SOLD HIS S HARES IN OPTIVAL TO MR. MADHUKAR REDDY AT RS.63.79 PS PER SHARE AND THE BASIS FOR ADOPTING THIS RATE IS ALSO NOT KNOWN BUT SINCE IT WAS MUCH MORE T HAN WHAT IS CLAIMED BY THE ASSESSEE AT RE.1 PER SHARE, HE HELD THAT IT WAS SO SHOWN TO DEFRAUD THE REVENUE BY TRANSACTING AT ABNORMALLY LOW PRICE. HE THEREFORE, HELD THAT THE PROVISION OF DEEMED GIFT UNDER SECTION 56(2)(VIIA) OF THE I.T. ACT IS APPLICABLE. THUS, HE ADOPTED THE PRICE OF RS.75.49 PS PAID TO U NRELATED PARTIES TO BE THE MARKET PRICE OF THE UNQUOTED SHARES OF THE COMPANY M/S. OPTIVAL HEALTH SOLUTIONS P. LTD., AND THE DIFFERENCE OF RS.74.49 P S PER SHARE WAS TREATED AS 10 ITA NO.3955/MUM/2018 KARMIC LABS PVT.LTD. 'INCOME FROM OTHER SOURCES' IN THE HANDS OF THE COM PANY. FURTHER, VIDE ITS LETTER DATED 19.03.2014, THE ASSESSEE SUBMITTED THAT AS ON 3RD MARCH, 2011, THE TOTAL VALUE OF EQUITY SHARES OF M/S. OPTI VAL HEALTH SOLUTIONS P. LTD., WAS RS.45,44,740, OUT OF WHICH, THE SHARES OF RS.15 ,90,000 WERE PARTLY PAID I.E., ONLY UP TO RS.0.50 PS AND THAT THESE PARTLY P AID UP SHARES WERE ALSO ACQUIRED BY THE COMPANY FROM THE SHAREHOLDERS. IT W AS SUBMITTED THAT IN THE CASE OF PARTLY PAID UP SHARES, AN AMOUNT OF RS.9.50 PS IS STILL TO BE PAID BY THE PURCHASER AND HENCE, THE VALUE OF DEEMED GIFT IN TH E CASE OF PARTLY PAID SHARES IS TO BE CALCULATED ACCORDINGLY. AFTER CONSI DERING THE ASSESSEES CONTENTIONS, THE A.O. COMPUTED THE VALUE OF THE DEE MED GIFT OF PARTLY PAID UP SHARES AT RS.10,33,34,100 AND OF FULLY PAID UP SHAR ES AT RS.10,89,39,465 AND BROUGHT IT TO TAX. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. CIT(A) WHO CONFIRMED THE ORDER OF THE A.O. AND AGAI NST THE ORDER OF THE LD. CIT(A), THE ASSESSEE IS IN SECOND APPEAL BEFORE US. 4. THE LD. COUNSEL FOR THE ASSESSEE, MR. KANCHAN KA USHAL, WHILE REITERATING THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE THE AUT HORITIES BELOW, DREW OUR ATTENTION TO THE PROVISIONS OF SECTION 56(2)(VIIA) OF THE I.T. ACT, TO DEMONSTRATE THAT THE SAID PROVISIONS WOULD APPLY TO THE ASSESSE E ONLY IF THE PRICE PAID BY THE ASSESSEE WAS LESS THAN THE FAIR MARKET VALUE CO MPUTED UNDER RULE 11UA OF I.T. RULES. HE SUBMITTED THAT WHERE THE LEGISLAT URE PRESCRIBES A PARTICULAR METHOD TO BE ADOPTED, THEN THE SAID METHOD ALONE SH OULD BE ADOPTED. HE HAS SUBMITTED THAT IN THE CASE OF ASSESSEE BEFORE US, N EITHER THE PROVISIONS OF SECTION 56(2)(VIIA) NOR THE RULES PRESCRIBE FOR ADO PTION OF THE MARKET VALUE OF THE SHARES AS THE FAIR MARKET VALUE FOR THE PURPOSE OF DEEMED GIFT UNDER SECTION 56(2)(VIIA) OF THE I.T. ACT SINCE THE PROVI SIONS RELATES TO ANTI-ABUSE PROVISIONS. HE SUBMITTED THAT WHERE A SPECIFIC METH OD IS PRESCRIBED, THE A.O. IS PRECLUDED FROM ADOPTING ANY OTHER METHOD. HE FUR THER DREW OUR ATTENTION TO THE DECISION OF HONBLE ALLAHABAD HIGH COURT IN THE CASE OF DR. SHASHI KANT GARG V. CIT [2006] 285 ITR 158/ 152 TAXMAN 308 IN S UPPORT OF HIS CONTENTION THAT A PRESCRIBED METHOD HAS TO BE STRICTLY FOLLOWE D. HE HAS ALSO PLACED RELIANCE UPON THE FOLLOWING OTHER JUDGMENTS IN SUPP ORT OF HIS CONTENTION : XXXX 5. THE LD. D.R. ON THE OTHER HAND, SUPPORTED THE OR DERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT WHERE THE MARKET PRICE OF THE SHARES AT WHICH THE ASSESSEE HAS PURCHASED THE SHARES ON THE VERY SAME DAY IS AVAILABLE, THE A.O. HAS RIGHTLY ADOPTED THE SAME INSTEAD OF RESORT ING TO THE VALUATION OF THE FAIR MARKET VALUE OF THE SHARES UNDER RULE 11UA OF THE I.T. ACT. THUS, ACCORDING TO HIM, THE ASSESSMENT ORDER IS TO BE UPH ELD. 11 ITA NO.3955/MUM/2018 KARMIC LABS PVT.LTD. 6. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE M ATERIAL ON RECORD, WE FIND THAT GROUND NO.1 IS GENERAL IN NATURE AND HENCE NEE DS NO ADJUDICATION. WITH REGARD TO GROUND NO. 2, WE FIND THAT THOUGH THE ASS ESSEE HAS RAISED THIS GROUND OF APPEAL BEFORE THE LD. CIT(A), IT WAS REJE CTED ON THE GROUND THAT THE ASSESSEE DID NOT PRESS THE SAID GROUND OF APPEAL. E VEN BEFORE US, THE ASSESSEE DID NOT ADVANCE ANY ARGUMENTS ON THIS ISSU E AT THE TIME OF HEARING. IN VIEW OF THE SAME, GROUND NO. 2 OF THE ASSESSEE I S NOT ADJUDICATED AND TREATED AS REJECTED. 7.AS REGARDS GROUNDS NO. 3 TO 5 ARE CONCERNED, WE F IND THAT THE UNDISPUTED FACTS ARE THAT THE ASSESSEE HAS PURCHASED THE SHARE S OF M/S. OPTIVAL HEALTH SOLUTIONS P. LTD., AT RE.1 ON 4/3/2011 AND 8/3/2011 WHILE SOME OF THE SHAREHOLDERS HAVE SOLD THE SHARES OF THE VERY SAME COMPANY TO THE ASSESSEE ON THE VERY SAME DAY AT RS. 75.49 PER SHARE. IT IS ALSO NOT DISPUTED THAT THE ASSESSEE COMPANY AND M/S. OPTIVAL HEALTH SOLUTIONS P. LTD., ARE RELATED TO EACH OTHER. THE ONLY DISPUTE IS WHETHER THE PROVISI ONS OF SECTION 56(2)(VIIA) OF THE I.T. ACT ARE APPLICABLE TO THE FACTS OF THE CAS E BEFORE US. FOR THE SAKE OF CONVENIENCE AND READY REFERENCE, THE RELEVANT PROVI SIONS ARE REPRODUCED HEREUNDER : EXPLANATION. FOR THE PURPOSES OF THIS CLAUSE, 'FAIR MARKET VALUE' OF A PROPERTY, BEING SHARES OF A COMPANY NOT BEING A COMPANY IN WH ICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, SHALL HAVE THE MEANING AS SIGNED TO IT IN THE EXPLANATION TO CLAUSE (VII);] 7.1 FURTHER, THE EXPLANATION TO CLAUSE (VII) TO 56( 2) OF THE ACT READS AS UNDER : EXPLANATION: (B) 'FAIR MARKET VALUE' OF A PROPERTY OTHER THAN A N IMMOVABLE PROPERTY, MEANS THE VALUE DETERMINED IN ACCORDANCE WITH THE METHOD AS MAY BE PRESCRIBED. 7.2 THE PRESCRIBED METHOD FOR VALUATION OF THE FAIR MARKET VALUE IS UNDER RULES 11U AND 11UA(C)(B) OF I.T. RULES. RULE 11UA ( C)(B) READS AS UNDER : 7.3 FROM THE LITERAL READING OF THE ABOVE PROVISION , IT IS CLEAR THAT TO APPLY THE ABOVE PROVISION, THE FOLLOWING CONDITIONS HAVE TO B E SATISFIED: I. THERE IS TRANSFER OF SHARES A COMPANY NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED: II. THE PURCHASER OF THE SHARES IS A COMPANY NOT BE ING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED; III. THE CONSIDERATION IS LESS THAN THE AGGREGATE F AIR MARKET VALUE OF THE PROPERTY BY AN AMOUNT EXCEEDING FIFTY THOUSAND RUPE ES; AND IV. THE DEEMED INCOME IN THE HANDS OF THE TRANSFERE E SHALL BE THE AGGREGATE FAIR MARKET VALUE OF SUCH PROPERTY AS EXCEEDS SUCH CONSIDERATION. 12 ITA NO.3955/MUM/2018 KARMIC LABS PVT.LTD. 8. FROM THE FACTS OF THE CASE BEFORE US, IT IS SEEN THAT THE PROPERTY I.E., SHARES WHICH ARE TRANSFERRED ARE THE SHARES OF A COMPANY I N WHICH THE PUBLIC ARE NOT SUBSTANTIALLY INTERESTED. SINCE THE TRANSACTION OF SALE AND PURCHASE OF SHARE S IS BETWEEN RELATED PARTIES AND BOTH THE COMPANIES ARE COMPANIES IN WHI CH THE PUBLIC ARE NOT SUBSTANTIALLY INTERESTED, WE ARE OF THE OPINION THA T THE AO WAS JUSTIFIED IN EXAMINING THE APPLICABILITY OF THE PROVISIONS OF SE CTION 56(2)(VIIA) OF THE ACT TO THE TRANSACTION OF TRANSFER OF SHARES. 9. THE NEXT STEP FOR APPLICATION OF THIS PROVISION IS TO ARRIVE AT THE FAIR MARKET VALUE OF THE SHARES BEFORE COMPARING IT WITH THE CO NSIDERATION AT WHICH THE SHARES ARE PURCHASED BY THE ASSESSEE TO EXAMINE IF IT WAS LESS THAN THE AGGREGATE FAIR MARKET VALUE OF THE PROPERTY EXCEEDI NG RS. 50,000. IN THE CASE BEFORE US, THE AO HAD ADOPTED THE PRICE AT WHICH THE ASSESSEE HAS PURCHASED THE SHARES FROM TWO OF THE SHAREHOLDE RS AT A HIGHER PRICE OF RS. 75.49 PS AS THE FAIR MARKET VALUE OF THE SHARE. THE QUESTION BEFORE US IS, WHETHER THIS IS VALID AND AS PRESCRIBED UNDER THE A CT? CLAUSE (B) OF THE EXPLANATION TO CLAUSE (VII) TO SECTION 56(2) DEFINE S FAIR MARKET VALUE TO BE THE VALUE AS COMPUTED UNDER THE PRESCRIBED RULE I.E., R ULE 11UA. ACCORDING TO THE LD COUNSEL FOR THE ASSESSEE, WHERE THE ACT PRESCRIB ES A RULE, IT HAS TO BE STRICTLY AND MANDATORILY FOLLOWED AND FURTHER IF TH E STATUTE HAS CONFERRED A POWER TO DO AN ACT AND HAS LAID DOWN THE METHOD IN WHICH THAT POWER IS TO BE EXERCISED, IT NECESSARILY PROHIBITS THE DOING OF TH E ACT IN ANY OTHER MANNER THAN THAT HAS BEEN PRESCRIBED. IN SUPPORT OF THIS CONTENTION, THE ASSESSEE HAS REL IED UPON VARIOUS DECISIONS CITED SUPRA. LET US NOW EXAMINE THE APPLICABILITY O F THE SAID DECISIONS TO THE FACTS OF THE CASE BEFORE US. XXXX THOUGH THE FACTS AND CIRCUMSTANCES UNDER WHICH THE ABOVE RULINGS HAVE BEEN GIVEN ARE DISTINGUISHABLE, WE FIND THAT THE LEGAL P RINCIPLES LAID DOWN IN THE ABOVE JUDGMENTS ARE CLEARLY APPLICABLE TO THE FACTS OF THE CASE BEFORE US. THEREFORE THE QUESTION BEFORE US IS WHETHER THE A.O . CAN ADOPT THE VALUE AT WHICH THE ASSESSEE ACQUIRES THE SHARES OF THE SAME COMPANY ON THE SAME DAY FOR A HIGHER CONSIDERATION AS THE FAIR MAR KET VALUE OF THE SHARES OR WHETHER FMV IS COMPULSORILY TO BE VALUED UNDER RULE 11UA OF THE ACT BEFORE APPLYING THE PROVISIONS OF SEC. 56(2)(VIIA) OF THE ACT. 10. FROM A PLAIN READING OF THE PROVISIONS WHICH AR E REPRODUCED ABOVE AND ALSO THE PRECEDENTS DISCUSSED ABOVE, IT IS SEEN THA T SECTION 56(2)(VIIA) REQUIRES THAT BEFORE APPLICATION OF THE SAID PROVIS ION, THE A.O. HAS TO 13 ITA NO.3955/MUM/2018 KARMIC LABS PVT.LTD. NECESSARILY COMPUTE THE FAIR MARKET VALUE AND ONLY THEN CAN COMPARE THE SAME WITH THE CONSIDERATION PAID BY THE ASSESSEE AN D APPLY THE SAID PROVISION ONLY IF THE CONDITIONS SET THEREIN ARE SA TISFIED. IN THE CASE BEFORE US, UNDISPUTEDLY SOME OF THE SHAREHOLDERS HAVE SOLD THE SHARES AT A MUCH HIGHER PRICE THAN THAT AT WHICH THE ASSESSEE HAS PURCHASED THE BALANCE OF THE SHARES FROM OTHER SHAREHOLDERS I.E., AT RE.1. THOUG H THE A.O. HAS NOT COMPUTED THE FAIR MARKET VALUE IN ACCORDANCE WITH R ULE 11UA OF THE I.T. RULES, HE HAD EVIDENCE BEFORE HIM TO BE SATISFIED T HAT THE MARKET VALUE OF THE SHARES WAS MUCH HIGHER THAN THE VALUE AT WHICH THE BALANCE OF SHARES WERE TRANSFERRED TO THE ASSESSEE. THE AO HAS OBSERVED TH AT 'MAINLY THE VALUATION OF ANY PROPERTY IS BASED ON FACT AS TO WHAT VALUE T HE PROPERTY WOULD FETCH IF SOLD IN OPEN MARKET BUT GENERALLY THE DETAILS AS TO HOW MUCH VALUE AN UNLISTED SHARE WOULD FETCH WILL NOT BE AVAILABLE AN D HENCE THE FORMULA IS GIVEN TO OVERCOME THAT DEFICIENCY'. SINCE THE MARKET PRIC E OF SOME OF THE SHARES AT A HIGHER VALUE THAN RE.1 WAS AVAILABLE, THE AO HAS ADOPTED THE SAME AS THE FAIR MARKET VALUE. THIS STAND OF THE AO COULD HAVE BEEN SUSTAINABLE HAD THE SECTION PROVIDED THAT THE FMV OF AN UNQUOTED SHARE SHALL BE THE VALUE COMPUTED IN ACCORDANCE WITH THE RULE OR THE ACTUAL MARKET VALUE, IF ANY, WHICHEVER IS HIGHER. BUT AS CAN BE SEEN FROM THE AC T AND THE RULES PROVIDED THERE UNDER, NO SUCH PROVISION HAS BEEN MADE. IN FA CT, UNDER THE WEALTH TAX ACT, SECTION 7(1) DEFINES THE EXPRESSION 'VALUE OF AN ASSET' AS 'THE PRICE WHICH IN THE OPINION OF THE WTO IT WOULD FETCH IF S OLD IN THE OPEN MARKET ON THE VALUATION DATE' BUT IN THE RELEVANT PROVISIONS THE DEFINITION OF FAIR MARKET VALUE IS GIVEN IN THE ACT AND METHOD HAS ALSO BEEN PRESCRIBED THEREUNDER. 11. ON A CAREFUL READING OF THE JUDGMENTS DISCUSSED ABOVE, IT IS SEEN THAT THE COURTS HAVE HELD THAT WHERE A METHOD HAS BEEN PRESC RIBED BY THE LEGISLATURE, THAT METHOD ALONE SHALL BE FOLLOWED FOR COMPUTATION OF THE FAIR MARKET VALUE. THE A.O. AND THE LD. CIT(A) HAVE NOT FOLLOWED THE R ELEVANT PROVISIONS FOR ADOPTING OR COMPUTING THE FAIR MARKET VALUE OF THE SHARES, BUT HAVE ADOPTED THE MARKET VALUE AT WHICH SOME OF THE SHARES HAVE B EEN PURCHASED BY THE ASSESSEE AS FMV. THIS, IN OUR OPINION, IS NOT CORRE CT. AS HELD BY THE COURTS IN THE ABOVE JUDGMENTS, THE A.O. HAS TO COMPUTE THE FA IR MARKET VALUE IN ACCORDANCE WITH THE PRESCRIBED METHOD BUT CANNOT AD OPT THE MARKET VALUE AS FAIR MARKET VALUE UNDER SECTION 56(2)(VIIA) OF THE ACT. THE LEGISLATURE IN ITS WISDOM HAS ALSO GIVEN A FORMULAE FOR COMPUTATIO N OF THE FAIR MARKET VALUE WHICH CANNOT BE IGNORED BY THE AUTHORITIES BELOW. 12. WE FIND THAT AT PARA 4.12 OF THE ASSESSMENT ORD ER, THE AO HAS RECORDED THAT THE ASSESSEE HAS FURNISHED THE VALUATION OF TH E SHARES BASED ON THE 14 ITA NO.3955/MUM/2018 KARMIC LABS PVT.LTD. WORKING GIVEN UNDER RULE 11UA(C)(B) OF THE IT RULES , ACCORDING TO WHICH, THE FAIR MARKET VALUE OF THE SHARES IS RS. 64.48/- (I.E ., THE VALUE OF OPTIVAL SHARE IS AT A NEGATIVE FIGURE) WHEREAS THE ASSESSEE HAS PAID AT RE.1 PER SHARE. HE HAS ALSO OBSERVED THAT NO BASIS IS GIVEN BY THE ASS ESSEE FOR ADOPTING THE RATE OF RS.63.79 PER SHARE FOR PURCHASE OF SHARES BY SRI MADHUKAR REDDY. HE OBSERVED THAT THERE IS NO BASIS FOR TRANSACTING IN THE SHARES AT DIFFERENT RATES AND THAT THIS ARRANGEMENT HAS BEEN DONE TO DEFRAUD THE REVENUE OF ITS TAXES BY TRANSACTING AT ABNORMALLY LOW PRICES. HAVING REG ARD TO THE ABOVE OBSERVATIONS OF THE AO, WE ARE OF THE OPINION THAT IF THE AO WAS NOT SATISFIED WITH THE WORKING GIVEN BY THE ASSESSEE, HE OUGHT TO HAVE COMPUTED THE FMV HIMSELF IN THE METHOD PRESCRIBED UNDER THE RULES BU T OUGHT NOT TO HAVE ADOPTED HIGHER OF THE PRICES PAID BY THE ASSESSEE F OR PURCHASE OF SOME OF THE SHARES OF M/S OPTIVAL AS EVEN WHEN THE TRANSACTIONS ARE BETWEEN THE RELATED PARTIES, THE PROVISIONS OF SECTION 56(2)(VIIA) CAN BE APPLIED ONLY IN ACCORDANCE WITH THE PRESCRIBED METHOD AND THE DIFFERENCE BETWE EN THE PRICE AT WHICH THE ASSESSEE HAS PURCHASED THE SHARES AND AGGREGATE OF THE FAIR MARKET VALUE OF THE SHARES AS COMPUTED CAN BE BROUGHT TO TAX AS DEE MED INCOME IN THE HANDS OF THE ASSESSEE... 5.2 .HERE,WE WOULD LIKE TO REFER TO THE CASE OF TAPARIA TOOLS LTD.(372 ITR 605)OF THE HONBLE APEX COURT. IN THAT MATTER THE A SSESSEE WAS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING. IT FLOATED AN ISSU E OF NON-CONVERTIBLE DEBENTURES UNDER THE TERMS AND CONDITIONS OF WHICH SUBSCRIBERS WERE GIVEN TWO OPTIONS AS REGARDS THE PAYMENT OF INTEREST THER EUPON : THEY COULD EITHER RECEIVE INTEREST HALF YEARLY AT 18 PER CENT. PER AN NUM OVER A PERIOD OF FIVE YEARS OR OPT FOR A ONE-TIME PAYMENT OF RS. 55 PER D EBENTURE TO BE IMMEDIATELY PAID. AT THE END OF THE FIVE-YEAR PERIO D, THE DEBENTURES WERE TO BE REDEEMED AT THE FACE VALUE OF RS. 100. TWO SUBSCRIBERS GAVE THEIR LETTER OF ACCEPTANCE OPT ING FOR PAYMENT OF INTEREST UPFRONT AND WERE ACCORDINGLY PAID INTEREST IN SUMS OF RS. 2,72, 25,000/AND RS. 55 LAKHS, RESPECTIVELY, IN THE ACCOUNTING YEARS 1995-96 AND 1996- 97,RESPECTIVELY. IT SHOWED THE UPFRONT PAYMENT OF I NTEREST ON DEBENTURES AS DEFERRED REVENUE EXPENDITURE IN THE ACCOUNTS TO BE WRITTEN OFF OVER A PERIOD OF FIVE YEARS. HOWEVER, IN ITS RETURNS FOR THE AY.S 19 96-97 AND 1997-98, IT CLAIMED THE ENTIRE UPFRONT INTEREST PAYMENT AS FULL Y DEDUCTIBLE EXPENDITURE. THE AO DENIED THE ASSESSEES CLAIM AND INSTEAD, SPR EAD THE DEDUCTION OVER A PERIOD OF FIVE YEARS THEREBY GIVING DEDUCTION ONL Y TO THE EXTENT OF ONE-FIFTH IN EACH OF THE RESPECTIVE ASSESSMENT YEARS. THE FAA, T RIBUNAL AND THE HIGH 15 ITA NO.3955/MUM/2018 KARMIC LABS PVT.LTD. COURT MAINTAINED THE METHOD OF DEDUCTION ADOPTED BY THE AO. ALLOWING THE APPEAL, THE HONBLE SUPREME COURT HELD AS UNDER: .. THE DISALLOWANCE OF THE DEDUCTION ON THE GROUN D THAT THE DEBENTURES WERE ISSUED FOR A PERIOD OF FIVE YEARS WAS CLEARLY NOT TENABLE. TWO METHODS OF PAYMENT OF INTEREST WERE STIPULATED IN THE DEBENTUR E ISSUED. BY ALLOWING ONLY ONE-FIFTH OF THE UPFRONT PAYMENT ACTUALLY INCU RRED, THOUGH THE ENTIRE AMOUNT OF INTEREST WAS ACTUALLY INCURRED IN THE VER Y FIRST YEAR, THE ASSESSING OFFICER, IN FACT, TREATED BOTH METHODS OF PAYMENT AT PAR, WHICH WAS CLEARLY UNSUSTAINABLE. BY DOING SO, THE ASSESSING OFFICER, IN FACT, TAMPERED WITH THE TERMS OF ISSUE, WHICH WAS B EYOND HIS DOMAIN (EMPHASIS ADDED).ON EXERCISE BY THE SUBSCRIBER OF THE OPTION FOR UPFRONT PAYMENT OF INTEREST IN THE VERY FIRST YEAR, THE ASSESSEE PAID THAT AMOUNT IN TERMS OF THE DEBENTURE ISSUE AND BY DOING SO IT WAS SIMPLY DISCHARGING THE INTEREST LIABILITY IN THAT YEAR THE REBY SAVING THE RECURRING LIABILITY TO INTEREST FOR THE REMAINING LIFE OF THE DEBENTURES BECAUSE FOR THE REMAINING PERIOD THE ASSESSEE WAS NOT REQUIRED TO P AY INTEREST ON THE BORROWED AMOUNT. BY DISCHARGING THE LIABILITY TO IN TEREST IN THE FIRST YEAR OF THE ISSUE ITSELF, THE ASSESSEE HAD BENEFITED BY MAKING PAYMENT OF A LESSER AMOUNT OF INTEREST IN COMPARISON WITH THE IN TEREST WHICH WAS PAYABLE UNDER THE FIRST MODE OVER A PERIOD OF FIVE YEARS. ..THE MOMENT THE SECOND OPTION WAS EXERCISED BY THE DEBENTURE HOLDER TO REC EIVE THE PAYMENT UPFRONT, THE LIABILITY OF THE ASSESSEE TO MAKE THE PAYMENT I N THAT VERY YEAR, ON EXERCISE OF THIS OPTION, HAD ARISEN AND THIS LIABIL ITY WAS TO PAY RS. 55 PER DEBENTURE. NOT ONLY HAD THE LIABILITY ARISEN IN THE ASSESSMENT YEAR IN QUESTION, IT WAS EVEN QUANTIFIED AND DISCHARGED AS WELL IN TH AT VERY ACCOUNTING YEAR. ..THE ASSESSEE DID NOT SEEK TO SPREAD THIS E XPENDITURE OVER A PERIOD OF FIVE YEARS AS IN ITS RETURN, IT HAD CLAIMED THE ENTIRE INTEREST PAID UPFRONT AS DEDUCTIBLE EXPENDITURE IN THE SAME YEAR. WHEN THIS COURSE OF ACTION WAS PERMISSIBLE IN LAW TO THE ASSESSEE AS IT WAS IN CON SONANCE WITH THE PROVISIONS OF THE ACT WHICH PERMIT THE ASSESSEE TO CLAIM THE E XPENDITURE IN THE YEAR IN WHICH IT WAS INCURRED, THE FACT THAT A DIFFERENT TR EATMENT WAS GIVEN IN THE BOOKS OF ACCOUNT COULD NOT BE A FACTOR WHICH WOULD BAR THE ASSESSEE FROM CLAIMING THE ENTIRE EXPENDITURE AS A DEDUCTION. ONC E A RETURN IN THAT MANNER WAS FILED, THE ASSESSING OFFICER WAS BOUND TO CARRY OUT THE ASSESSMENT APPLYING THE PROVISIONS OF THE ACT AND N OT TO GO BEYOND THE RETURN. THERE IS NO ESTOPPEL AGAINST THE STATUTE AN D THE ACT ENABLES AND 16 ITA NO.3955/MUM/2018 KARMIC LABS PVT.LTD. ENTITLES THE ASSESSEE TO CLAIM THE ENTIRE EXPENDITU RE IN THE MANNER IT IS CLAIMED. CONSIDERING THE RATIO OF TAPARIA TOOLS(SUPRA),WE HO LD THAT THE AO HAD TAMPERED WITH THE PROVISIONS OF THE ACT. SECTION 56 ALLOWS THE ASSESSEES TO ADOPT ONE OF THE METHODS OF THEIR CHOICE. BUT, THE AO HELD THAT THE ASSESSEE SHOULD HAVE ADOP TED ONLY ONE METHOD FOR DETERMINING THE VALUE OF THE SHARES. IN OUR OPINION ,IT WAS BEYOND THE JURISDICTION OF THE AO TO INSIST UPON A PARTICULAR SYSTEM, ESPECIALLY THE ACT ALLOWS TO CHOOSE ONE OF THE TWO METHODS. UNTIL AND UNLESS THE LEGISLATURE AMENDS THE PROVISION OF THE ACT AND PRESCRIBES ONLY ONE METHOD FOR VALUATION OF THE SHARES, THE ASSESSEE ARE FREE TO ADOPT ANY O NE OF THE METHODS. THEREFORE, N OUR OPINION THE ORDER OF THE FAA DOES NOT SUFFER FROM ANY FACTUAL OR LEGAL INFIRMITY. 8. SIMILARLY, THE BOMBAY HIGH COURT, IN THE CASE OF VODAFONE M-PESA LTD. VS PCIT (SUPRA), THE HONBLE COURT HAS HELD THAT THE LD. AO CANNOT CHANGE THE METHOD ADOPTED BY THE ASSE SSEE FOR VALUING THE MARKET VALUE OF THE SHARES FROM DISCOUN TED CASH FLOW METHOD TO NET ASSET VALUE METHOD, WHICH WAS VIOLAT ION OF RULE 11UA AND ACCORDINGLY, THE IMPUGNED ORDER WAS TO BE SET ASIDE. SIMILARLY, THE CO-ORDINATE BENCH IN THE CASE OF VOD AFONE M-PESA LTD VS PCIT (SUPRA) HAS HELD THAT THE LD. AO CANNOT CHANGE THE METHOD OF VALUATION ADOPTED BY THE ASSESSEE BY MERE LY RELYING ON THE ACTUAL RESULTS IN THE SUBSEQUENT YEARS AND ARBI TRARILY COMING TO THE CONCLUSION THAT PROJECTIONS WERE NOT ACHIEVE D. WE, THEREFORE RESPECTFULLY FOLLOWING THE DECISIONS AS D ISCUSSED ABOVE, SET ASIDE THE ORDER THE LD.CIT(A) AND DIRECT THE LD . AO TO DELETE THE ADDITIONS. 9. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS A LLOWED. 17 ITA NO.3955/MUM/2018 KARMIC LABS PVT.LTD. ORDER PRONOUNCED ON 28 /7/2020 UNDER RULE 34 (4) OF THE ITAT RULES 1963. SD/- SD/- (AMARJIT SINGH) (RAJESH KUMAR) JUDICIAL MEMBER ACCO UNTANT MEMBER MUMBAI, DATED : 28/07/2020 * THIRUMALESH, SR.PS COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT(A), MUMBAI. 4. THE CIT 5. THE DR, H BENCH, ITAT, MUMBAI BY ORDER (ASSISTANT REGISTRAR) INCOME TAX APPELLATE TRIBUNAL, MUMBAI