TEX- KARE CLEANERS PVT. LTD., MUMBAI V. ITO 8 (3)(1), MUMBAI

ITA 6924/MUM/2018

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 6067 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 3 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-03-2022
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: E
• Assessment Year: 2013-2014
• Appeal Filed On: 03-12-2018
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Fair market value; Valuation report
• Section: 56; 56(2)(vii)(b); 143(3); 56(2)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “E”, MUMBAI BEFORE SHRI KULDIP SINGH (JUDICIAL MEMBER) AND SHRI GAGAN GOYAL (ACCOUNTANT MEMBER) I.T.A No.6924/Mum/2018 (Assessment year: 2013-14) Tex-Kare Cleaners Private Limited 99/103, Kazi Sayeet Street Masjid Bunder, Mumbai-400 003 PAN : AADCT1696D vs Income-tax Officer 83)-1, Mumbai APPELLANT RESPONDENT Assessee represented by Sou. Ritika Agarwal Department represented by Shri B.K. Bagchi Date of hearing 02/03/2022 Date of pronouncement 25/03/2022 O R D E R Per: Gagan Goyal (AM): This appeal has been filed by the assessee against the order dated 20/07/2018 passed by the Commissioner of Income-tax (Appeals)-14, Mumbai (hereinafter called CIT (A), for the assessment year 2013-14. 2. The assessee has raised the following grounds of appeal:- “Being aggrieved by the order of the Assessing Officer 8 (3) - 1, Mumbai, this appeal petition is filed on the following amongst other grounds of appeal, which it is prayed may be considered without prejudice to one another. 2 ITA 6924/Mum/2018 1. On the facts, and in circumstances of the case, and in law, learned Commissioner of Income-tax (Appeal) erred in upholding action of the Assessing Officer in adding share premium of Rs. 11,340,000 being Rs. 900 per share for 12,600 equity shares in aggregate without appreciating that the method of valuation adopted by the Assessee fetched the same result as prescribed in Rule 11UA of the Income-tax Rules 1962, and even otherwise, valuation as submitted to the Assessing Officer under discounted cash flow method recognized under Rule 11 UA fetched the same result as worked out in earlier method. 2. On the facts, and in circumstances of the case, and in law, learned Commissioner of Income-tax (Appeal) erred in arriving value per share at RS. 27.90 Which was below the face value per share disregarding the legal position that a company is prohibited from issuing shares at discount in terms of section 53 of the Companies Act 2013. 3. On the facts, and in circumstances of the case, and in law, learned Commissioner of Income-tax (Appeal) erred in appreciating that Rule 11 UA of Income Tax Rules, 1962, which determines the valuation of unquoted shares and being a provision which purports to determine the income which is chargeable to tax was introduced by Income Tax (Fifteenth Amendment) Rules, 2012, came into effect on November 29, 2012, and so the said valuation rules cannot be applied. 4. On the facts, and in circumstances of the case, and in law, without prejudice to grounds of appeal considered elsewhere, addition u/s 56 of the Income Tax Act, 1961, ought to be restricted to the amount received by the appellant on or after November 29, 2012, and not for amounts received in earlier years and also for amounts received prior to November 29, 2012, during the previous year 2012-13.” 3. Subsequently, vide petition dated 28 th July, 2021 for admission of additional ground under rule 11 of the Income-tax (Appellate Tribunal) Rules, 1962, the 3 ITA 6924/Mum/2018 assessee sought to raise the following additional grounds, numbered as grounds 6 to 8:- "6. BECAUSE, the CIT (A) has erred in law and on facts in upholding the addition made by the AO u/s. 56(2)(viib) of the Income Tax Act, 1961 on the mistaken belief that the valuation submitted before the AO was incorrect. 7. BECAUSE, the CIT(A) has erred in law and on facts in substituting the Appellant's valuation for his own valuation by computing the quantum of liabilities incorrectly and by adopting incorrect date of valuation. 8. Without prejudice, the order passed by the CIT (A) is nullity and void ab initio, since it has resulted into enhancement of assessed income without following the due process of law" and without affording an opportunity of hearing to the Appellant." 4. We have heard the parties on the issue of admission of additional grounds raised. Upon hearing the parties we found that the additional grounds raised by the assessee go to the root of the matter and does not require any additional material so as to come to the conclusion. Rather, the additional grounds are off- shoots of the grounds originally raised. Therefore, the additional grounds are admitted for adjudication. In this regard, reliance is being placed on the judgment of Mahindra & Mahindra Ltd. Vs. DCIT (2009) 313 ITR 263 (Mum.) and NTPC Ltd. Vs. CIT (1998) 229 ITR 383 (SC). 5. The brief facts of the case are that the assessee, a private limited company, has filed its return of income on 18/09/2013 declaring total income at Nil. The assessment of the assessee was completed under section 143(3) of the I.T. Act, 1961 on 28/03/2016 determining the total income at Rs.1,13,13,687/- by making 4 ITA 6924/Mum/2018 addition under section 56(2)(vii)(b) of the Act. The assessee filed appeal before the CIT (A) but could not find favour with the Ld.CIT (A), who dismissed the appeal. 6. All the grounds raised including the additional grounds raised by the assessee harp on the issue of addition under section 56(2) (vii) (b) read with rule 11UA of I.T. Rules, 1962. 7. Ground Nos. 1, 2, 6, 7 & 8 are inter-related, hence, discussed, analyzed and disposed of as under: “Assessee/Appellant issued 12600 shares of Rs. 100/- each at a premium of Rs. 900/- each (each share of Rs. 1000/-). As per assessee, he followed Net Asset Valuation method which is almost in line with Rule 11UA of the Income Tax Rules, 1962 (for short ‘the Rules’)”. All the five shareholders subscribed to the shares of the assessee @ Rs. 100/- per share + Rs. 900/- as premium. Total shares subscribed as per Exhibit -9 of the PB are 12,600 equity shares. 8. Assessee worked out premium on each shares as under: “ASSET Investment in Equity Instrument 1. (SPOTLESS LAUNDRY SERVICES PVT. LTD.) 1, 25, 63,000 2. Bank & Cash balance 92,967 LESS: Provision for Expense 13,000 NET ASSET 1, 26, 42,967 No. of Share issued 12,600 Therefore, value per Share (rounded off to nearest ten) 1,000 09. The Assessee was submitted that, even otherwise, if method prescribed under Rule 11UA is adopted, it will fetch the same result. 5 ITA 6924/Mum/2018 10. The Assessing Officer made calculation as per Rule 11UA as under: A 1,26,55,967 1,26,55,961 A= Book value of Assets L 13,000 L= Book Value of liabilities PE 2,00,000 PE= Total amount of paid up capital VE 100 PV= Paid up value of Equity shares Fair Market Value of shares: A-L X ------------------------------- PV (PE) 1, 26, 42,967 X ------------------------------- 100 2, 00,000 = 1, 26, 55,961 Number of shares issued 12,600 Value per share 1,004.44 Say 1000 11. Despite this, the Assessing Officer opined that since Appellant valued shares on wrong figures, the same is not acceptable.” 12. Ld. CIT (A) upheld the order passed by AO by making observations as under: CIT(A) in his order have following observations; “I have considered the submission filed by the appellant and the reasons recorded by the AO. The valuation as per Income Tax Rule 11UA submitted by the appellant before the AO was valuation Post issue of shares at premium. The same is not relevant. The appellant should have carried out valuation just before the issue of shares because it is then only it will be known as to whether the share premium charged by the appellant exceeds fair market value of the shares or not. If we conclude the fair market value of the shares of the appellant on 6 ITA 6924/Mum/2018 the basis of balance sheet of the appellant as on 31.03.2012, the following results emerges” A = 1, 26, 11,950/- L = 1, 25, 56,118/— PE= 2, 00,000/- PV = 100/- Fair Market Value of unquoted shares = (A = L)x (PV) /(PE) = 55,832 x 100 / 2, 00,000 = Rs. 27.09” 13. However, the AO and the CIT (A) were not satisfied with the valuation figures adopted by assessee as discussed above. The AO pointed out that assessee have worked the valuation of the shares after the issue of share at premium which assessee supposed to justify keeping in view the provisions of Rule 11UA of the Rules. Further, there is no valuation certificate issued by the Chartered Accountant to substantiate the valuation of shares. The ld. AR of the assessee has submitted list of allottees along with number of shares and premium charged as per page no. 9 of Paper Book (PB), Ledger A/c of share capital showing details of original shareholder and fresh shares allotted on 05.02.2013 vide page no. 14 of PB, copy of ledger account of investment in shares of Spotless Laundry Services Pvt. Ltd. vide page nos. 15 & 16 of PB and ledger account of share application money received from Akash Dharamsey, Devchand Dharamsey, Dr. Meera Dharamsey, Gorden Jagwani and Neetu Jagwani vide page nos. 17 to 21 of PB. 7 ITA 6924/Mum/2018 From the aforesaid documents relied upon by the assessee, we have noticed that the assessee had tried to justify the flow of money for the investment in the shares of M/s. Spotless Laundry Services Ltd. 14. During the course of argument, Ld. AR for the assessee was asked to place (within 3 days) on record the Balance Sheet of M/s Spotless Laundry Services Ltd. in which huge investments has been made to examine the issue, if it is a genuine transaction. However Ld. AR failed to place the same on record. So, adverse inference has to be drawn, that it is not a genuine transaction of assessee. 15. We have examined the impugned order passed by the Ld. CIT (A), who has uphold the addition made by the AO by specific findings in his order. When we examine the findings of Ld. CIT (A) in the light of ledgers maintained/produced by the assessee available at page nos. 17 to 21 and 14 of the PB, relied upon by the assessee during the course of argument, there is no scope for interference in the order passed by the Ld. CIT (A). A chart we are re-producing herein reflecting receipt of money from shareholders/share applicants and then flow of the money towards investment in the shares of M/s Spotless Laundry Services Pvt. Ltd. Date Amount received as Share Application/Allotment Money From whom (party) Total amount received. 31.05.2011 21.07.2011 10,000,00 5,50,000 Devchand Dharamsey 15,50,000 15.02.2010 19.02.2010 3,50,000 3,50,000 Akash Dharamsey 24,50,000 8 ITA 6924/Mum/2018 04.03.2010 18.03.2010 01.07.2010 16.08.2010 17.01.2012 2,35,000 3,00,000 30,000 2,10,000 9,75,000 06.08.2011 28.09.2011 01.01.2013 7,70,000 15,00,000 30,000 Dr. Meera Dharamsey 23,00,000 01.08.2011 28.09.2011 24.08.2012 11.01.2013 8,00,000 15,00,000 14,45,000 55,000 Gorden Jagwani 38,00,000 23.04.2011 27.07.2011 19.01.2012 10,00,000 5,50,000 9,75,000(-25,000)= Neetu Jagwani 25,00,000 Total share application money received 1,26,00,000 Details of investment in M/s Spotless Laundry Services Ltd. Date Amount Voucher Type Total (Rs.) 24.08.2009 1,00,000 Cheque Payment 1,00,000 03.11.2009 50,00,000 Journal 50,00,000 18.03.2010 24,70,000 Journal 24,70,000 30.06.2010 30,000 Journal 30,000 28.02.2013 49,50,000 Journal 49,50,000 Total Rs. 1,25,50,000 9 ITA 6924/Mum/2018 From the aforesaid table it is proved on record that at the time of alleged investment, assessee has no money of its own. Out of total investment of Rs.1, 25, 50,000/- only 1,00, 000/- was paid rest of the acquisition is through journal entry and thereafter two more payments were made, i.e. Rs. 30,00,000/- on 28-09-2011 and 19,50,000/- on 20-01-2012. There are no details on record regarding balance investment of Rs. 75, 00,000/- in M/s Spotless Laundry Services Ltd. There are no details found in paper book furnished. It is clearly visible from the details furnished by the assessee appellant that assessee did not have any money to make investment of his own; rather it issued shares at premium first and then invested the same money in the shares of M/s Spotless Laundry Services Ltd. 16. The assessee itself adopted NAV method for valuation of shares issued on premium, this method has been accepted in Toto by the AO and CIT (A). There is no challenge to the method of valuation adopted by assessee, although the ld. CIT (A) corrected the figures of NAV calculation as against adopted by the assessee. Which is permissible by law, although method of valuation chosen by assessee can’t be changed. 17. As per rule11UA, the assessee only has 2 options for working out FMV of unquoted shares viz., NAV method or discounted cash flow method. Since the assessee did not furnish any valuation report as per DCF method, it can be reasonably inferred that assessee had adopted NAV method. Valuation under rule 11UA is prescribed to ascertain worth of the share issuing entity and simultaneously to justify share premium charged by it. 10 ITA 6924/Mum/2018 18. In this case Assessee Company issued the shares on premium first and then invested the same in the shares of M/s Spotless Laundry Services Ltd. (as demonstrated above in the tables) to justify its net worth or in other words NAV. The event which is to take place first, occurred second and vice-versa. 19. To substantiate its argument assessee relied on following authorities as under: A). DCIT vs. Credtalpha Alternative Investment Advisors Pvt. Ltd. ITA No. 7056/Mum/2019 B. Karmic Labs Pvt. Ltd. vs. ITO (ITA No. 3955/Mum/2018) C. PCIT-2 vs. M/s. Cinestaan Entertainment Pvt. Ltd. (ITA No. 1007/Del./2019) D. M/s. India Convention and Culture Centre Pvt. Ltd. vs. ITO (ITA No. 7262/Del/2017) E. Rockland Diagnostics Services Pvt. Ltd. vs. ITO (ITA No. 316/Del/2019) F. Narang Access Pvt. Ltd. vs. DCIT (ITA No. 3521/Mum/2018) G. India Today Online Pvt. Ltd. vs. ITO (ITA No. 6453 AND 6454/Del/2018) All the citations relied upon (supra) by the assessee are not applicable to the facts of the present case. Theses citations are with reference to a situation where AO was not agreed with the method adopted by the assessee and tried to plant his/her own method of valuation. Where as in the present appeal AO has not challenged the method of valuation adopted by the assessee. He simply tried to 11 ITA 6924/Mum/2018 rectify the figures wrongly adopted by the assessee as discussed in detail with the help of tables demonstrating funds movement of the assessee. 20. In our considered opinion looking at the records before us and facts of the case, we find no defect in the order of the authorities below and the order passed by the CIT (A) is confirmed 21. In the result appeal of the assessee is dismissed. 22. Ground Nos. 3 & 4 are inter-related, hence, discussed, analyzed and disposed of as under: “3. On the facts, and in circumstances of the case, and in law, learned Commissioner of Income-tax (Appeal) erred in appreciating that Rule 11UA of Income Tax Rules, 1962, which determines the valuation of unquoted shares and being a provision which purports to determine the income which is chargeable to tax was introduced by Income Tax (Fifteenth Amendment) Rules, 2012, came into effect on November 29, 2012, and so the said valuation rules cannot be applied. 4. On the facts, and in circumstances of the case, and in law, without prejudice to grounds of appeal considered elsewhere, addition u/s 56 of the Income Tax Act, 1961, ought to be restricted to the amount received by the appellant on or after November 29, 2012, and not for amounts received in earlier years and also for amounts received prior to November 29, 2012 during the previous year 2012-13. 23. Above two grounds of appeal taken by assessee has been considered and found to be baseless as Rule 11UA of Income Tax Rules, 1962 falls under chapter- H-determination of Fair Market Value of the property other than immovable property. Chapter-H inserted by the I.T. (Second Amdt.) Rules, 2010, w.e.f. 01.10.2009. Rule 11UA (1) was simply renumbered as Sub-Rule-1 by the I.T. (fifteenth Amdt.) Rules, 2012 w.e.f. 29.11.2012. 12 ITA 6924/Mum/2018 24. So the argument of the assessee that Rule 11UA of Income Tax Rules, 1962 which determines the valuation of unquoted shares and being a provision which purports to determine the income which is chargeable to tax was introduced by Income Tax (Fifteenth Amdt.) Rules, 2012 came into effect on 29.11.2012 and said valuation rules cannot be applied and addition under section 56 of the Income Tax Act, 1961 ought to be restricted to the amount received by the appellant on or after 29.11.2012 and not for amounts received in earlier years and also for amount received prior to 29.11.2012, is not acceptable because rules are applicable to year under assessment. As the shares were allotted during the year under consideration, i.e. 2013-14 itself, Rule 11UA become applicable from 2013- 14 itself. 25. In the result, appeal of the assessee is dismissed and order of Ld. CIT (A) is confirmed. Order pronounced in the open court on 25 th March, 2022. Sd/- Sd/- (KULDIP SINGH) (GAGAN GOYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, DT: 25 th March, 2022 Sharwan /True copy/ Assistant Registrar / Senior Private Secretary ITAT, Mumbai Benches