DCIT 6 (3)(2), MUMBAI V. M/S KILITCH HEALTHCARE INDIA LTD., MUMBAI

ITA 7061/MUM/2019

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 6214 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 4 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-03-2022
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: H
• Assessment Year: 2015-2016
• Appeal Filed On: 17-11-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Opportunity of being heard; Principle of natural justice; Earning of tax free income; Fair market value; Valuation report; Scheme of amalgamation; Capital expenditure; Rule 8D; Set aside
• Section: 32; 131; 56; 56(2)(vii)(b); 154; 143(3); 56(2); 14A; 208

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL “H” Bench, Mumbai Shri Shamim Yahya (AM) & Shri Amarjit Singh (JM) I.T.A. No. 7061/Mum/2019 (A.Y. 2015-16) DCIT-6(3)(2) Aayakar Bhavan Room No. 576 M.K. Road Mumbai-400 020. Vs. M/s. Kilitch Healthcare India Ltd. 902, B Godrej Coliseum Off Eastern Express Highway, Sion East Mumbai-400 022. (Appellant) (Respondent) C.O. No. 53/Mum/2021 (A.Y. 2015-16) M/s. Kilitch Healthcare India Ltd. 902, B Godrej Coliseum Off Eastern Express Highway, Sion East Mumbai-400 022. Vs. DCIT-6(3)(2) Aayakar Bhavan Room No. 576 M.K. Road Mumbai-400 020. (Appellant) (Respondent) PAN : AAACN7796H Assessee by Shri Yogesh Thar Department by Smt. Vatsala Jha Date of Hearing 25.01.2022 Date of Pronouncement 22.03.2022 O R D E R Per Shamim Yahya (AM) :- This appeal by the Revenue and cross objection by the assessee arise out of the order of learned CIT(A) dated 20.8.2019 for A.Y. 2015-16. Revenu’s appeal : 2. Grounds of appeal read as under : 1. "On the facts and circumstances of the case and in law, the ld. CIT(A) erred in deleting the addition of Rs. 33,26,40,000/- u/s 56(2)(viib)of the Act" M/s. Kilitch Healthcare India Ltd. 2 2. "On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in deleting the addition of depreciation on goodwill of Rs 2,49,51,468/- u/s 32(l)(ii) of the Act." 3. "On the facts and circumstances of the case and in law t the Ld.CIT(A) erred in deleting the addition of Rs. 41,94,79,280/- u/s 56(2)(viia) of the Act." 4. "On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in deleting the addition of Rs. 3,99,127/- u/s 14A r.w.r. 8D(2)(ii) of the Act. 5. The appellant prays that the order of the Ld. CIT(A) on the above grounds be set aside and that of the AO be restored. 6. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary. 3. Brief facts of the case are that the assessee is a private limited company engaged in the business of manufacturing of pharmaceuticals mainly injections. The assessee filed its return of income for A.Y. 2015-16 on 30.09.2015 declaring total income of Rs.94,75,400, subsequently revised its return of income on 11,02,2016 declaring total income at Nil The case was selected under scrutiny. The AO completed assessment u/s. 143(3) on 27.12.2017 assessing total income at Rs.77,80,74,240 after making addition of Rs.33,26,40,000 u/s. 56(2)(viib), disallowance of depreciation on goodwill of Rs.2,49,51,468, disallowance of Rs.40,03,820 u/s. 14A and addition of Rs.41,94,79,280 u/s. 56(2)(viia) of the Act. 4. Apropos issue of addition under section 56(2)(vii)(b) of the Act :- During the course of assessment proceedings the AO observed that the assessee issued 4,20,000 shares of Rs.10 each at a premium of Rs.990 to Vulcan Developers Pvt. Ltd (VDPL) during the year under consideration. The Assessing Officer opined that since the provision of section 56(2)(viib) were applicable to this year which lays down that any consideration received for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares, the difference is to be taxed as income. A.O. noticed that in this case M/s. Kilitch Healthcare India Ltd. 3 the book value of share as per NAV method was Rs.208, whereas value as per the method employed by the assessee was worked out FMV of preferential share at Rs.1000. A.O. called for the valuation report and noticed from the report that accountant had taken dividend as appropriate measure of future cash flow as represented and certified by the management of the company. AO show caused the assessee as to why the excess amount than the share value worked out by her received should not be taxed as income under section 56(2)(viib) of the Act. 5. Assessee during the assessment proceedings submitted that, the company issued 'preference shares' not the equity shares. Preference shares are securities which can be thought of as being mid way between debt and equity. The AR submitted that the Chartered Accountant, in his valuation report prepared under Rule 11UA mentioned that for valuation of preference shares, he adopted a model similar to the Discounted Cash Flow model for arriving at the value of preference share, by considering dividend and redemption premium as the appropriate measure of future cash flows. The assessee also stated that dividend discounting model adopted by them uses the same analogy as discounted cash flow method. Assessee further, stated that the Rule 11UA of the Income Tax Rules prescribes NAV or DCF method specifically for valuation of equity shares and in Rule 11UA(1)(c)(c) which applies to 'preference shares' no specific method is prescribed. As there is no specific method prescribed, the assessee obtained a valuation report from a Chartered Accountant who used Dividend discounting model for valuation of 'preference shares' which used the same analogy/logic as used in discounted cash flow (DCF) method. 6. The AO in the assessment order held that valuation made on the basis of unverified dividend and redemption premium, given by management had inflated the value of shares @ Rs.1000 and the same was not as per recognized methods as mentioned in the technical guide on share valuation, but it was made as per whims & fancies of the management to arrive at higher value to M/s. Kilitch Healthcare India Ltd. 4 issue shares at huge premium, hence not reliable. AO further held that, preference shares are also like equity shares, with certain benefits of receiving their fixed rate dividend before equity share holders. That preference share holders do not have voting right or any say in the management of the company but there is no differentiation of equity shares and preference shares in the section. Therefore, considering the valuation report filed by the assessee, AO held that the dividend rate for the shares was estimated arbitrarily no verification of projections and assumptions adopted by management was made by the valuer. That as per the technical guide on share valuation published by the Institute of Chartered Accountants of India, Dividend Discount Model is not used in most practical situations as dividend may not reflect the true profitability of a business and payment is a management decision. That it suffers from a number of issues like forecasting of dividend pay outs, non applicability of the model to non-dividend paying companies, retention of profits for capital expenditure etc and is generally considered as limited and outmoded model. That however, two basic ingredients of the model are expected dividends and the cost of equity. That to estimate dividends, assumptions about expected future growth rates in earnings and payout ratios have to be made, which is not done by the assessee company. That the required rate of return on a share is determined by its riskiness, as per the logic of Discounted Cash Flow Model, however, in the present case, the assessee as not considered any risk factors for assuming the required rate of return and instead, assumed a random ERR. That however, none of the above factors were considered by the valuer in his report and did not make any assumption about future growth rates in earnings. That the rate of dividend and term years have been determined on random basis, as provided by the management without taking into consideration macro and micro economic factors affecting the business. AO mentioned that the assessee never paid dividend in earlier or in subsequent years. Therefore, she concluded that the valuer did not make educated valuation of the shares by not considering past performance, growth prospects, earnings, capacity, expansion etc but merely M/s. Kilitch Healthcare India Ltd. 5 adopted the values provided by the management. That thus, the method adopted by the valuer was not scientific and did not follow the logic and principle of the standard methods as per the technical guide on share valuation. She concluded that the assessee infringed the section 56(2) (viib) of the Act. 7. Further A.O. issued summons u/s. 131 to the Proprietor of M/s. Manish P. Jain and Associates, CA, who had done the valuation of preference shares of the assessee company. After perusing the statement on oath of Mr. Manish Jain, A.O. asked the assessee as to why the addition should not be made on account of share premium valuation in the light of statement of Mr. Manish Jain since, the assumptions were not scientific and the method was in contrast to the ICAI guidelines. In reply, assessee submitted the method stipulated is in line of Technical Guide of ICAI. Further, Dividend discounting method is the most scientific method for valuation of preference shares and quoted the questions raised by Hon'ble ITAT, Mumbai in the case of Madhurima International Pvt. Ltd. Vs. PCIT, Mumbai on whether the rules of valuation of equity shares to be extended to valuation of convertible preference share and no counter verification was required and done by the valuer. After considering the submission of the assessee, A.O. held that at least the assessee needed to substantiate the value determined by any other method to the satisfaction of the AO, as per the Explanation of section 56(2)(viib) of the Act, which the assessee failed to do, therefore, the valuation of shares provided was unreliable and highly suspicious. Therefore, she held that the valuation report was prepared by the valuer viz Mr. Jain to the satisfaction of the management of the assessee company, without any independent verification of the facts and the projections provided to him and the rejected the Valuation Report submitted by the Appellant. In view of the above, A.O. determined the fair market value of the share under Rule 11UA of the Income Tax Rules by reducing the liabilities from the assets and computed the same to be Rs.208 (198+10) by using the formula prescribed for valuation of unquoted equity shares. She worked out Rs.33,26,40,000 as excess amount charged in terms of M/s. Kilitch Healthcare India Ltd. 6 provisions of section 56(2)(viib) of the I.T. Act, 1961 and added to the income of the assessee under the head Income from Other Sources. 8. Upon assessee’s appeal learned CIT(A) reproduced the assessee’s submission. He noted that in this case A.O. was of the opinion that preference shares are also like equity shares and that there was no differentiation of equity shares and preference shares in the section. He held that AO has failed to appreciate the fact that the Preference Shares and Equity shares stand on different footing, which has been explained by the assessee before the AO based on provisions of the Company Act and judicial pronouncements. That as per the provisions of Companies Act, 1956, Preference Shares has preferential right over equity shares in respect of dividend and repayment of capital on winding up. That further, another major difference is that Preference Share holders do not participate in the profits of the company. That following are the differences between Equity shares and Preference shares. Basis of difference Preference share Equity Share 1 Rate of dividend The rate of dividend on preference share is fixed by the issuing company/Board of the company. The rate of dividend on equity share is changed from year to year depending upon the availability of profits. 2 Payment of dividend They have a right to receive dividend before any divided is paid on equity shares Dividend on equity shares is paid, after any dividend is paid on preference shares. 3 Participation in management Preference shareholders are not entitled to participate in management. Equity share holders are entitled to participate in management. 4 Winding up On the winding up, they have a right to return of capital before the capital is returned on equity shares Equity share holders are paid only after preferences capital is paid in full. 5 Voting rights Preference shareholders do not have any voting rights Equity shareholders enjoy voting rights. 9. Learned CIT(A) observed that from the above, it is evident that preference shares are different from equity shares. That preference shares are like quasi- debt instruments whereas equity share holder are participating real shareholders of the company. Valuation of 'equity shares' is dependent on the intrinsic value of the company as the shares create right in assets/funds of the company whereas valuation of 'preference shares' depends on the terms of M/s. Kilitch Healthcare India Ltd. 7 issue of the said shares by the issuing company. That one cannot judge the actual value of equity shares from its face value. That for instance, an equity share of face value of Rs. 10 can even fetch Rs. 1000 on winding up of a company, if sufficient funds are left for the equity share holders. That however, preference shares being quasi debt instruments, the holders do not have such rights. Preference share holders can at the most receive face value of the preference shares and premium (which is decided at the time of issue of shares) on redemption or winding up. That for instance, a preference share of face value of Rs.100 redeemable at a premium of 20% at the time of redemption will fetch Rs. 120 irrespective of the value of the assets of the company. That therefore, valuation of equity shares is different from valuation of preference shares. That the valuation of quasi debt instruments is entirely made on the basis of the returns receivable by the investors on such instruments. That at the cost of repetition it has to be mentioned that while the equity share holders are the real owners of the company, the preference share holders are not the owners of the company. That they get preference over the equity share holders on payment of dividend and repayment of equity but the return is fixed by terms of issue. That hence the net asset value of the company really represents the value of 'Equity shares' and not 'Preference shares'. Hence, learned CIT(A) held that the AO has misdirected herself in working out the Net Asset value of the company and adopting the same as the value of Preference Shares issued. 10. He observed that in the instant case, the AO has accepted that the assessee received money by issuing Preference Shares, but tried to hold that there is no difference between the equity shares and preference shares and there is no difference between the equity shares and preference shares in the section. 11. Thereafter learned CIT(A) referred to section 56(2)(viib) of the Act. He further referred to the Explanation a(i) thereto and the Rule 11UA pursuant thereto. Referring to the above he held as under :- M/s. Kilitch Healthcare India Ltd. 8 “It is clear from the above table that 11UA(2) specifically lays down that for the purpose of valuation of unquoted equity shares under 56(2) (viib) Explanation (a)(i), the assessee has an option of choosing one among the NAV method or DCF method. Whereas the Rule 11UA(1) lays down the method to be followed for valuation of share for other purposes under section 56. Sub- clause (a) applies for quoted shares and securities. Sub-clause (b) applies for unquoted equity shares and sub-clause (c) applicable to unquoted all other shares and securities other than equity shares, which are not listed in any recognized Stock Exchange. Therefore, it is clear that the 'preference shares' issued by the assessee company which are unquoted and not listed in any recognized Stock Exchange fall under sub-clause (c) of 11UA(l)(c). The method prescribed under 11UA(l)(C)(c) is as under. (c) the fair market value of unquoted shares and securities other than equity shares in a company which are not listed in any recognized stock exchange shall be estimated to be price it would fetch if sold in the open market on the valuation date and the assessee may obtain a report from a merchant banker or an accountant in respect of which such valuation. 3.12 As can be seen the FMV of the preference shares is estimated price which it would fetch if sold in the open market on the valuation date. The assessee can obtain a report from a merchant banker or an accountant for the valuation. Therefore, the section 56(2)(viib) r.w. Rule 11UA does not provide a specific method and it is left to the assessee to obtain a valuation report from a merchant banker or a chartered accountant. Therefore, it is held that the Dividend discount method used by the Chartered Accountant for valuation of preference shares is not an infringement of the section 56(2)(viib) r.w.Rules 11UA and the AO's finding in this report is erroneous. 3.13 Another issue is whether the AO has jurisdiction to get his own report on valuation of shares or replace the method adopted by the appellant under the provisions of section 56(2)(viib). It is observed that in the instant case, the assessee company had exercised an option to value the share by Dividend Discount Method, however the AO worked out the value based on NAV Method. It has to be noted here that the option of getting one of the NAV or DCF method given to the assessee is only for Unquoted equity shares by Rule 11UA(2), which is not applicable to preference shares. From the facts thus, it is clear that the AO wanted to impose upon the method of valuation of his own choice, completely disregarding the legislative intent which has given an option to the assessee to get the estimated price which it would fetch if sold in the open market on the valuation date for which the assessee can obtain a report from a merchant banker or an accountant. When the law has specifically provided an option and the assessee exercised the option by choosing a particular method (Dividend Discount Method), changing the method or adopting a different method would be beyond the powers of the AO. Permitting the AO to do so will render the clause (c) of Rule 11UA(l)(c) as nugatory. Thus, to this extent the action of the AO is not justified and it is held that the assessee has got all the right to choose a method which, cannot be changed by the AO. M/s. Kilitch Healthcare India Ltd. 9 3.14 Now coming to the compliance with the conditions laid down under Rule 11UA(1)(c)(c). It is clear that to comply with this rule the assessee was required to obtain a certificate of a Merchant Banker or Chartered Accountant, which the assessee complied. Further, though the AO can scrutinize the valuation report, only if some arithmetical mistakes are found, he may make necessary adjustments. But if he finds the working of the C.A. or the assumptions made as erroneous or contradictory, he may suggest the necessary modification and alterations therein provided the same are based on sound reasoning and rational basis and for this purpose the AO may call for independent expert valuer's report or may also invite comment on the report furnished by the assessee's valuer as the AO is not an expert. Further in this case the valuation relates to preference shares, which depends on the terms of issue of such reference shares by the company which issued. It is seen that the valuer has valued the preference shares based on the terms of issue by the assessee company, which is in order. Further, from the scheme of the section, it is clear that it is not open for the AO to change the method of valuation, once opted by the assessee and to modify the figures as per her own whims and fancies. 3.15 It is seen that the A.O. listed out the shortcomings/deficiencies in the valuation report submitted by the Valuation Report submitted by the assessee. It appears that the AO referred the 'Guidelines of ICAI for valuation of Equity shares' and gave the deficiencies of valuation Report As already mentioned, method of valuation of 'equity shares' and that of valuation of 'preference shares' are different The ICAI also gives guidelines separately.” 12. Referring to the ICAI guidelines for valuation of preference shares be held as under :- As can be seen, the guidelines for valuation preference shares are different from the guidelines for valuation of equity shares. The mistakes/short comings/problems mentioned by the A.O. on the Valuation Report are not correct as are made considering the 'ICAI Guidelines for valuation of Equity Shares'. Therefore, it is held that the Valuation Report of the Preference Shares is as per the guidelines given by the ICAI and based on the terms of issue of preference shares. The risk factor, past history of issue of dividend on equity shares, past performance of the company is relevant for valuation of equity shares but not relevant for valuation of preference shares, as preference shares are quasi debt instruments and the dividend and premium on redemption is pre decided by the Board of the company while issuing the preference shares. The valuation of preference is done Dividend Discount method by discounting the promised dividend and premium to the present value, than any other method not particularly with NAV method, which the A.O. adopted. Further, the NAV method is not one of the methods given under sub clause (c) of Rule 11A(1)(c). 'Therefore, the rate of 208 per share adopted by the A.O. based on NAV method is not applicable to preference shares. Therefore, the addition made by the AO using the NAV method is not correct as per the Act. The A.O. is directed to delete the addition made. The assessee gets relief.” M/s. Kilitch Healthcare India Ltd. 10 13. Against the above order Revenue is in appeal before us. 14. We have heard both the parties and perused the records. We note that in the present case the issue is addition under section 56(2)(vii)(b) of the Act read with Rule 11UA, for the premium on preference shares which are unquoted. Before proceeding further we may gainfully refer to the provisions of section 56(2(vii)(b) of the Act and Rule 11UA which read as under :- Section 56(2) provides for addition in certain cases. Sub-section (viib) thereof reads as under : (viib) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares: Provided that this clause shall not apply where the consideration for issue of shares is received— (i) by a venture capital undertaking from a venture capital company or a venture capital fund [or a specified fund]; or (ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf. Following second proviso shall be inserted after the existing proviso to clause (viib) of sub-section (2) of section 56 by the Act No. 23 of 2019, w.e.f. 1.4.2020: Provided further that where the provisions of this clause have not been applied to a company on account of fulfilment of conditions specified in the notification issued under clause (ii) of the first proviso and such company fails to comply with any of those conditions, then, any consideration received for issue of share that exceeds the fair market value of such share shall be deemed to be the income of that company chargeable to income-tax for the previous year in which such failure has taken place and, it shall also be deemed that the company has under-reported the income in consequence of the misreporting referred to in sub-section (8) and sub-section (9) of section 270A for the said previous year. Explanation. —For the purposes of this clause,— (a) the fair market value of the shares shall be the value— (i) as may be determined in accordance with such method 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 M/s. Kilitch Healthcare India Ltd. 11 its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher; Following clauses (aa) and (ab) shall be inserted after clause (a) of Explanation to clause (viib) of sub-section (2) of section 56 by the Act No. 23 of 2019, w.e.f. 1.4.2020 : (aa) "specified fund" means a fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which has been granted a certificate of registration as a Category I or a Category II Alternative Investment Fund and is regulated under the Securities and Exchange Board of India (Alternative Investment Fund) Regulations, 2012 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992); (ab) "trust" means a trust established under the Indian Trusts Act, 1882 (2 of 1882) or under any other law for the time being in force; (b) "venture capital company", "venture capital fund" and "venture capital undertaking" shall have the meanings respectively assigned to them in clause (a), clause (b) and clause (c) of Explanation to clause (23FB) of section 10.” Rule 11UA of the Act provides for valuation. Relevant sub-rule applicable for this assessment year with regard to valuation of shares and securities read as under : 11UA(1)(c) valuation of shares and securities,— (a) the fair market value of quoted shares and securities shall be determined in the following manner, namely,— (i) if the quoted shares and securities are received by way of transaction carried out through any recognized stock exchange, the fair market value of such shares and securities shall be the transaction value as recorded in such stock exchange; (ii) if such quoted shares and securities are received by way of transaction carried out other than through any recognized stock exchange, the fair market value of such shares and securities shall be,— (a) the lowest price of such shares and securities quoted on any recognized stock exchange on the valuation date, and (b) the lowest price of such shares and securities on any recognized stock exchange on a date immediately preceding the valuation date when such shares and securities were traded on such stock exchange, in cases where on the valuation date there is no M/s. Kilitch Healthcare India Ltd. 12 trading in such shares and securities on any recognized stock exchange; (b) the fair market value of unquoted equity shares shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner, namely:— the fair market value of unquoted equity shares = (A-L) × (PV), (PE) where, A = book value of the assets in the balance-sheet as reduced by any amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act and any amount shown in the balance-sheet as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset; L = book value of liabilities shown in the balance-sheet, but not including the following amounts, namely:— (i) the paid-up capital in respect of equity shares; (ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company; (iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation; (iv) any amount representing provision for taxation, other than amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto; (v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities; (vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares; PE = total amount of paid up equity share capital as shown in the balance- sheet; PV = the paid up value of such equity shares. (c) the fair market value of unquoted shares and securities other than equity shares in a company which are not listed in any recognized stock exchange shall be estimated to be price it would fetch if sold in the open market on the valuation date and the assessee may obtain a report from a merchant banker M/s. Kilitch Healthcare India Ltd. 13 or an accountant in respect of which such valuation. [(2) Notwithstanding anything contained in sub-clause (b) of clause (c) of sub- rule (1), the fair market value of unquoted equity shares for the purposes of sub-clause (i) of clause (a) of Explanation to clause (viib) of sub-section (2) of section 56 shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner under clause (a) or clause (b), at the option of the assessee, namely:— (A-L) x (PV) (a) the fair market value of unquoted equity shares = (PE) Where , A= book value of the assets in the balance-sheet as reduced by any amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act and any amount shown in the balance-sheet as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset; L= book value of liabilities shown in the balance-sheet, but not including the following amounts, namely:— (i) the paid-up capital in respect of equity shares; (ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company; (iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation; (iv) any amount representing provision for taxation, other than amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto; (v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities; (vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares; PE = total amount of paid up equity share capital as shown in the balance-sheet; PV = the paid up value of such equity shares; or (b) the fair market value of the unquoted equity shares determined by a merchant banker [***] as per the Discounted Free Cash Flow method.]” 15. We note that the assessee has issued Preference shares which fall under the category of unquoted shares and securities in (c) above. This has been issued at a premium of Rs. 990/-. The assessee had obtained valuation M/s. Kilitch Healthcare India Ltd. 14 report from a Chartered Accountant who valued the same on the basis of dividend discounting model. The Assessing Officer was not satisfied. He applied net asset value and accordingly made disallowance. 16. First aspect noted in this regard is that the Assessing Officer in preface on this addition has held that equity shares and preference shares are almost the same. This we note in on the cusp of lack of proper understanding on the part of the Assessing Officer. By no stretch of imagination equity shares and preference shares can be said to be on the same footing. As a matter of fact Rule 11UA of the Act which provides method for valuation of shares duly make distinction in the valuation of equity shares and other shares. Hence, it is quite apparent that the Assessing Officer has misled himself with regard to provisions contained in income tax Rules and Act in this regard itself. 17. Now coming to the mandate of the Act, it is noted that section 56(2)(vii)(b) provides for addition in case of premium obtained from shares exceeds the fair market value of the shares. Fair market value is defined to be the value as may be determined in accordance with such a method as may be prescribed or as may be substantiated by the company to the satisfaction of the Assessing Officer based on certain aspect specified in the rule. Rule 11UA of the Act provides the necessary rule. Rule 11UA(1)(C)(c) which is the relevant here, provides that the fair market value of unquoted shares and securities other than equity shares in a company which are not listed in any recognized stock exchange shall be estimated to be price it would fetch if sold in the open market on the valuation date and the assessee may obtain a report from a merchant banker or an accountant in respect of which such valuation. Admittedly, this rule is applicable in the present case and as provided in the said rule the assessee had option to obtain fair market value on the basis of valuation done by the accountant. Now the assessee has obtained valuation of accountant. Section 56(2)(vii)(b) provides fair market value of shares to be the one as may be determined in M/s. Kilitch Healthcare India Ltd. 15 accordance with the method as may be prescribed or as may be substantiated to the satisfaction of Assessing Officer. Hence, if the method adopted by the assessee is not in accordance with the Rules contained in Explanation (a)(i) to section 56(2)(vii)(b), above any other method to the satisfaction of the Assessing Officer can be adopted. The obvious corollary is that if the method adopted by the assessee is in accordance with the method contained in the Act read with Rules, the Assessing Officer cannot disregard the same without cogent reasoning. Admittedly in this case the assessee has adopted a method which is in accordance with that prescribed in the Act read with the Rules. As noted above prescribed method for unquoted shares is not any specific method but it provides that assessee may obtain valuation report from merchant banker or accountant. In this case the assessee has obtained valuation report of the accountant. To this extent, valuation adopted by the assessee cannot be said to be not in accordance with law. 18. Now we deal with the shortcoming observed by the Assessing Officer in the valuation method adopted by the assessee. We note that there is reference by the Assessing Officer for non-acceptability of dividend discount method adopted in Accountant’s report. For this we note that as rightly pointed out by learned CIT(A) the Assessing Officer is not an expert. He can substitute the report obtained from an expert for cogent reasoning. The Assessing Officer has sought to take support from the Technical Guide of ICAI for the proposition that dividend discount model is not used in most practical situation as dividend may not reflect the true profitability of a business and payment is a management decision. That it suffers from a number of the issues like forecasting of dividend pay outs etc. We find that this reference by the Assessing Officer to this technical guide is itself misplaced as it runs contrary to the mandate provided under Rule 11UA which itself provides permission to the assessee to use dividend discount model in the scheme for valuation rules. Moreover, as regards the Assessing Officer’s reliance upon Technical Guide of ICAI, learned CIT(A) has pointed that the reference in the said guide is with regard to valuation of the equity M/s. Kilitch Healthcare India Ltd. 16 shares, which is not the case here. Hence it does not support the case of the Assessing Officer. Moreover as noted above it is not the case that the Assessing Officer has obtained the valuation report from the expert in this field. 19. Now we deal with the method adopted by the Assessing Officer. The Assessing Officer has adopted net asset value method which has been lifted from the method adopted for valuation of equity shares in Rule 11UA(c)(a). This is not at all a method prescribed for other shares and securities in which category the present issue of preference shares falls. The method applicable in the present case is as contained in Rule 11UA(C)(c). Hence the Assessing Officer’s adoption of this method does not have the sanction of law. Once it is clear that the method adopted by the Assessing Officer is not permissible in law and the method adopted by the assessee is one permissible in law which has not been cogently rebutted by the Assessing Officer. It is crystal clear that the addition in this case has been made by the Assessing Officer on whims and fancies not sustainable in law. 20. In this view of the matter valuation obtained by the assessee is as per the mandate provided under 56(2)(vii)(b) read with rule 11UA of the Act. The Assessing Officer’s substitution thereof is not in accordance with law and the same is not sustainable. Hence, we do not find any infirmity in the order of learned CIT(A). Hence, we uphold the same. 21. Apropos issue of addition of depreciation under section 32(1)(ii) This issue relates to A.O.'s action in denying depreciation on goodwill u/s. 32(1)(ii) arising to the Appellant pursuant to a scheme of amalgamation sanctioned by the Jurisdictional High Court, contending that the denial of depreciation ought to be restricted to the claim made by the Appellant in its books of accounts which was Rs.1,24,75,734 only. AO held that the company VDPL was formed only to issue preference shares by the assessee company at M/s. Kilitch Healthcare India Ltd. 17 more than FMV, so that on amalgamation, the investment of VDPL of amount of Rs.53,06,85,960 in the assessee company, which was the only major asset in the books of VDPL, stands cancelled and the liabilities of VDPL stand intact. AO held that the value of Goodwill as an asset had arisen only because of the reason that the investments in the books of VDPL were valued at a value more than the FMV as mentioned in ground number 1 above. Had the shares been transferred at fair/market value, there would not be any question of goodwill arising as a balancing figure upon merger. That it is mentioned in the High Court order that it had accounted for the amalgamation in its books in accordance with the purchase method of accounting as prescribed by the AS- 14. That under the purchase method, two alternatives suggested in AS-14 are incorporating the assets and liabilities at the existing carrying amounts and allocating the consideration identified individual assets and liabilities at their fair re-values, however, the same were not followed in this case. 22. The A.O. asked the assessee to explain why the depreciation claimed on goodwill, which had never been acquired due to the amalgamation, should not be disallowed u/s. 32(1)(ii) of the Act as the goodwill created in the books of the transferee company had never been obtained due to the excess of the book value of liabilities over assets, nor any consideration had been paid by the assessee for incorporating the assets and liabilities of the transferor company, also to justify the valuation of the asset goodwill created due to the amalgamation. In reply, assessee submitted that in the assessee's case the liabilities were in excess of asset to the extent of Rs.9,98,05,871. Section 32(1)(ii) of the Act prescribes that in respect of knowhow, patents, copyrights, trademarks, licences franchises or any other business or commercial rights of similar nature that are owned wholly or partly by the assessee and used for the purpose of business or profession shall be eligible for depreciation according to the prescribed rates. However, the A.O. did not accept the contention of the assessee as the assessee had issued shares to VDPL, before amalgamation, at more than market value, which when stand cancelled, lead to increase of liabilities over assets, after amalgamation. A.O. held that the M/s. Kilitch Healthcare India Ltd. 18 assessee was not able to substantiate as to what exactly the intangible assets were received by it upon merger, which could be classified as goodwill. Therefore, the goodwill created in the books of the assessee company, was considered to be fictitious and the depreciation of an amount of Rs.2,49,51,468 claimed @ 25% on the value of Goodwill of Rs.9,98,05,871 was disallowed u/s. 32(1)(ii) of the Act and added to e profits and gains of the business of the assessee. As the assessee claimed depreciation at 50% of 25% only, on application u/s 154 of the Act, the depreciation disallowed was reduced to Rs. 1,24,75,734 which is the amount in the ground of appeal. 23. Upon assessee’s appeal learned CIT(A) noted the assessee’s submission. He found the issue covered by Hon'ble Supreme Court decision in CIT Vs. Smifs Securities Ltd. (348 ITR 302). He held as under :- “I have carefully gone through the assessment order, written submissions made by the assessee as well as case laws cited. It is seen that Vulcan Developers Pvt. Ltd. (VDPL) got merged with Appellant, pursuant to scheme of amalgamation sanctioned by the Jurisdictional High Court, vide its order dated 30.04.2015, with effect from 01.11.2014. The appellant accounted for the amalgamation in its books in accordance with the "Purchase Method of Accounting" as prescribed by the AS-14 "Accounting for Amalgamation". The assessee stated that as per para 6.5 of the scheme of merger, the excess of liabilities over assets will be result into goodwill in the books of the Appellant Thus, the appellant has recorded goodwill of Rs.9,98,05,871 on merger and claimed depreciation on goodwill at 50% of eligible 25% for the half year, i.e. Rs. 1,24,75,734 u/s. 32(1)(ii) of the Act. However, AO rejected the claim of the assessee on the ground that the company VDPL was formed only to issue shares by the assessee company at more than FMV, so that on amalgamation the investment of VDPL in the assessee company, which was the only major asset in e books of VDPL, stands cancelled and the liabilities of VDPL stand intact. Thus the A.O. held that the depreciation claimed on goodwill, has never been acquired due to the amalgamation and disallowed the claimed of depreciation on goodwill. The appellant has relied on various court's decisions in support of its contention that it is eligible for claiming depreciation on goodwill created due to merger u/s. 32(1)(ii) of the Act. It is seen that the Revenue had tiled appeal before the Hon'ble Supreme Court of India on this issue in the case of Smifs Securities Ltd. v. CIT. The Hon'ble Supreme Court, while interpreting the said provision, held dismissing the appeal as under: Explanation 3 to s. 32 states that the expression "asset" shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of M/s. Kilitch Healthcare India Ltd. 19 similar nature. The words "any other business or commercial rights of similar nature" in clause (b) of Explanation 3 indicates that goodwill would fall under the expression "any other business or commercial right of a similar nature". The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). Consequently, "Goodwill" is an asset under Explanation 3(b) to s. 32(1) & eligible for depreciation. Though the AO held that the assessee had not "paid" anything for the goodwill, this cannot be accepted because (a) the CIT (A) & Tribunal (correctly) held that that the difference between the cost of an asset and the amount paid in the process of amalgamation constituted "goodwill" and (b) this aspect was not challenged by the department before the High Court. 4.4 The above mentioned decisions of the Hon'ble Supreme Court is squarely applicable to the facts of the appellant's case as goodwill arising on amalgamation or any merger or acquisition is eligible for depreciation under section 32(1)(ii) of the Income Tax Act, 1961. Further, to the same effect are the following decisions, wherein it has been held that the goodwill arising out of merger and acquisitions is eligible for depreciation: 1. Areva T & D India Ltd. v. DOT (Delhi High Court) 2. CIT v. Techno Shares & Stocks (Bombay High Court) 3. CIT v. Hindustan Coca Cola Beverages Pvt. Ltd,( Delhi High Court) 4. ACTT v. GE Plastics India Ltd.( ITAT Ahmedabad) 4.5 Further in this context, courts have held that it is open for everyone to arrange its affairs in a manner so as to reduce its tax liabilities to the minimum, and such tax planning shall not be considered to be illegitimate, provided it is within the framework of law. Scheme of tax planning has been explained by the Hon'ble Supreme Court in the case of Azadi Bachao Andolan [2003] 263 ITR 706 (SC), wherein it was held that the decision in McDowell's case cannot be read as laying down that every attempt at tax planning is illegitimate or that every transaction or arrangement which is perfectly permissible under the law, but has the effect of reducing the tax burden of the assessee must be looked upon with disfavour. Keeping in view the totality of facts and circumstances of the case and respectfully following the above decisions, it is held that appellant is eligible for claiming depreciation on goodwill created due to merger. Accordingly, the A.O. is directed to delete the disallowance u/s. 32(1)(ii) of the Act, made in the order. The appellant gets relief. This ground is allowed.” 24. Against the above order the Revenue is in appeal before us. 25. We have heard both the parties and perused the records. We note that learned CIT(A) has decided the issue in favour of the assessee by placing reliance on the decision of the Hon'ble Supreme Court in the case of Smifs Securities Ltd.(supra). We agree with learned CIT(A) that the same is M/s. Kilitch Healthcare India Ltd. 20 fully applicable in the present case. Hence, on this issue also we uphold the well reasoned order of learned CIT(A). 26. Apropos issue of addition under section 56(2)(viia) of the I.T. Act : During the course of assessment proceedings, the A.O. held that the assessee bought 100% shares (i.e. 19,160 shares) of Impetus Healthserve Pvt. Ltd.(hereafter referred to as IHPL or Impetus) And in turn became the 100% shareholder of VDPL as well. The shares of Imeptus were bought from a company named as Monarchy Healthserve Pvt. Ltd.(MHPL) and paid only a consideration of Rs.10,000. Thus, the assessee company received shares of Impetus, which had the underlying value of the shares of VDPL, for a consideration, which was less than the aggregate fair market value of the shares. Therefore, the AO asked the assessee to provide details explaining the change of shareholding of Impetus from MHPL to NBZ Pharmna Ltd.,(the earlier name of the appellant company) along with the Financial Accounts of the IHPL. In the assessment order the AO mentioned that in reply, the assessee submitted the ledger copy of NBZ Pharma Ltd, reflecting the payment made for the purchase of shares of Impetus, along with the Bank Statement highlighting the payment and Financials of Impetus. A.O. found that assessee 100% shares of Impetus as well as of VDPL for a consideration lesser than the aggregate fair market value (FMV) of the shares. 27. AO asked the assessee to explain why the aggregate FMV of the shares of IHPL and VDPL, exceeding the consideration should not be added as Income from Other Sources u/s. 56(2)(viia) of the Act. The assessee submitted that the book value of shares Impetus Healthserve Pvt. Ltd. was negative and produced working thereof. The assessee transacted the shares at a nominal value of Rs.10,000 which was more than book value of the shares. That therefore, it was evident that the consideration was more than the fair market value (FMV) of the shares. That further, as per section 56(2)(viia) of the Act and Rule 11UA of the Income Tax Rules, 1962 it had M/s. Kilitch Healthcare India Ltd. 21 acquired shares of IHPL and in turn got the shares of VDPL. However, the A.O. did not accept the contention of the assessee and held that section 56(2)(viia) of the Act talks about the aggregate fair market value of the property, being shares of a company not being a company in which the public are substantially interested, which had been received by a company, for a consideration lesser than aggregate fair market value. She held that the contention of the assessee that since the book value of shares of Impetus as on 31.03.2014 was negative, therefore, the consideration of Rs.10,000 was more than the book value of the shares could not be accepted as the book value of shares of Impetus, had the underlying book value of the shares of VDPL. Further, since the balance sheet of the Impetus on valuation date was not available and as the last audited balance sheet of Impetus for year ending 31.03.2014, did not reflect the net worth of VDPL, after acquiring the shares of the assessee company, therefore, AO held that the aggregate fair market value needed to be calculated based on the book value of the assets and liabilities of Impetus as on 31.03.2014 and the book value of the assets and liabilities of VDPL as on 31.10.2014. In view of the above, A.O. calculated the aggregate FMV of the 19,160 shares of Impetus and 11,560 shares of VDPL as acquired by the assessee were Rs. (41,94,89,280+NIL)=41,94,89,280. Since, the assessee had paid a consideration of Rs.10,000 for acquiring the shares of Impetus and in turn acquiring the shares of VDPL, therefore the aggregate FMV exceeding the consideration i.e. Rs. 41,94,79,280/- (Rs. 41,94,89,280-10,000) was added u/s. 56(2)(viia) of the Act. 28. Upon assessee’s appeal learned CIT(A) held that the Assessing Officer has invoked amended provisions contained in sub-clause (b) of Rule 11UA(1)(c) which is not applicable for this assessment year. He held as under : “I have carefully gone through the assessment order and the written submission of the appellant. There is no dispute of the fact that the appellant company purchased total 19,160 shares of Impetus Healthcare Pvt. Ltd. (IHPL) from Monarchy Healthcare Pvt Ltd. for Rs.10,000. It is also a fact that M/s. Kilitch Healthcare India Ltd. 22 as IHPL Holds shares of VDPL and by acquiring all shares of IHPL, the appellant acquired VDPL also for Rs.10,000. There is dispute regarding the fact that the book value of share of IHPL was negative as on 31.03.2014, therefore, the consideration of Rs.10,000 was paid was more than book value of shares. However, the AO did not accept the argument because she was the opinion that the shares of IHPL have underlying value of shares of VDPL. However, it is seen that the shares of Impetus are valued based on the last audited balance sheet which is 31.03.2014 as per the definition of Balance Sheet given in Rule 11U. It is also noted that Impetus acquired VDPL on 07.08.2014. In other words the VDPL was not subsidiary of Impetus as on 31.03.2014, Assessee argued that it purchased Impetus based on the last audited balance sheet dated 31.03.2014 and the AO did not accept the facts and therefore argued that as per formula, the aggregate fair market value of the Impetus has to be worked out which includes the underlying shares of VDPL. Therefore, she took balance sheet of Impetus Healthcare Pvt. Ltd as on 31.03.2014 and book value of assets and liabilities of VDPL as on 31.10.2014 as mentioned in para 6.10 of the order and assessed at Rs.41,94,59,280/- as aggregate Fair Market Value of shares of Impetus Healthcare Pvt. Ltd. and added the same to the total income of the appellant u/s.56(2)(viia) of the Act 5.4 As per the definition of balance sheet in Rule 11U, if the audited balance sheet is not available as on the valuation date, the audited balance sheet as on the date immediately preceding the valuation date can be taken. Therefore, when the balance sheet of Impetus was not available as on the valuation date, the audited balance sheet as on the date immediately preceding the valuation date, which has been approved and adopted in the AGM of the shareholders of the company was taken by the assessee for valuation of shares, which appears to be in order. Be that as it may, the sub- clause (b) of 11UA(1)(c) that is applicable from 29.11.2012 to 31.03.2017 is as under: “(b) the fair market value of unquoted equity shares shall be the value, on the valuation date of such unquoted equity shares as determined in the following manner, namely:— the fair market value of unquoted equity shares = (A-L) X (PV) (PE) Where, A = book value of the assets in the balance-sheet as reduced by any amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Incomes-tax Act and any amount shown in the balance-sheet as asset including the unamortised amount of deterred expenditure which does not represent the value of any asset; L = book value of liabilities shown in the balance-sheet, but not including the following amounts, namely:— (i) the paid-up capital in respect of equity shares; (ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been M/s. Kilitch Healthcare India Ltd. 23 declared before the date of transfer at a general body meeting of the company; (iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation; (iv) any amount representing provision for taxation, other than amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto; (v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities; (vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares; PE= total amount of paid up equity share capital as shown in the balance-sheet; PV=the paid up value of such equity shares;" 5.5 As can be seen from the method/formula applicable to the AY 2015-16, the 'A' is book value of the assets in the balance-sheet. There was as amendment by Income Tax (20 th Amendment) Rules 2017 w.e.f. dated 01.04.2018, where in the 'A' in the formula is substituted with A+B+C+D to include the book value/market value of jewellery, Artwork and as stamp duty value of immovable property and Fair Market Value of shares. As already mentioned this amendment is applicable from 01.04.2018, and the amended formula cannot be applied retrospectively. Therefore, the value of shares of VDPL cannot be included in the FMV formula applicable for the AY 2015-16 under consideration. In other words, the inclusion of the assets and liabilities of VDPL is not as per the formula applicable for the year. Further, the AO mentioned that the word 'Aggregate FMV' is used in the section 56(2)(viia). Perusal of the clause (viia) shows that this clause applies to all properties received including shares received for no consideration or inadequate consideration. Therefore, the word aggregate is used to mean to sum of all the properties received by the assessee during the year. Further, Explanation under clause (viia) provides that FMV in respect of shares will have the same meaning assigned to it in the Explanation to clause (vii). Explanation under clause (vii) defines FMV as the value determined in accordance with the method as may be prescribed. The method is prescribed in Rules 11UA. Therefore the FMV of shares is as per method given in Rule 11UA(1)(b) for unquoted equity shares, which is already discussed above. 5.6 In view of the above, the argument of the AO that the assets and liabilities of VDPL have to be included in valuation of shares of Impetus appears to be against the formula given in the procedure laid down for determination of FMV applicable for the year 2015-16, and the method applicable for AY 2018-19 cannot be applied retrospectively. Therefore, the AO is directed to delete the addition made. Assessee gets relief. This ground of appeal is allowed.” M/s. Kilitch Healthcare India Ltd. 24 29. Against the above order Revenue is in appeal before us. 30. We have heard both the parties and perused the records. Learned Counsel of the assessee pointed that application of valuation method adopted by the Assessing Officer is not applicable for A.Y. 2015-16 and the said method is applicable only from A.Y. 2018-19. That learned CIT(A) has rightly held that it cannot be applied retrospectively. We note that the Assessing Officer has invoked the provisions of section 56(2)(viia) of the Act. The same read as under : [(viia) where a firm or a company not being a company in which the public are substantially interested, receives, in any previous year, from any person or persons, on or after the 1st day of June, 2010, any property, being shares of a company not being a company in which the public are substantially interested,— (i) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property; (ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration : Provided that this clause shall not apply to any such property received by way of a transaction not regarded as transfer under clause (via) or clause (vic) or clause (vicb) or clause (vid) or clause (vii) of section 47. Explanation.—For the purposes of this clause, “fair market value” of a property, being shares of a company not being a company in which the public are substantially interested, shall have the meaning assigned to it in the Explanation to clause (vii);] The fair market value which has been computed by the Assessing Officer is not as per the extant Rules. The Rules in this regard contained in section 11UA are already reproduced by us earlier. The same clearly provide for taking the book value of shares as in the balance sheet for the computation. The same was amended by the Income Tax Rules 2017 with effect from 1.4.2018 where instead of book value, fair market value of shares is mentioned. The Act does not provide that this amendment is retrospective. It is clearly mentioned that this amendment is with effect from 1.4.2018. Hence, Assessing Officer’s adoption of fair market value for making the computation which is not in accordance with the extant provisions has rightly been deleted by the learned M/s. Kilitch Healthcare India Ltd. 25 CIT(A). It is not disputed that when the book value of the shares is adopted as per the extant rules the addition will not be justified. Hence, we do not find any infirmity in the same. We note that nothing has been brought before us by the revenue as to why the Assessing Officer has applied the same retrospectively. Hence, we do not find any infirmity in the order of learned CIT(A). Accordingly, we uphold the same. 31. Apropos issue of addition under section 14A of the Act During the course of assessment proceedings, the A.O. noticed from the computation of income that the assessee company claimed exempt income in the form of dividend income of Rs.4,61,97,831. Further, in the balance sheet, the assessee had shown investment to the tune of Rs.76,09,47,445 which yield/may yield exempt income, not forming part of the total income. Therefore, A.O. concluded that assessee had not worked out the disallowance to earn the exempt income as per the provisions of section 14A r.w.r. 8D. Following the decision of the Hon'ble ITAT, Special Bench, Mumbai in the case of Daga Capital Management Pvt. Ltd. and the Hon'ble Bombay High Court in the case of Godrej Boyce Manufacturing Co. Pvt., A.O. worked out the disallowance as per section 14A r.w.r. 8D of Rs. 40,03,820/-. 32. Upon assessee’s appeal as regard disallowance as per Rule 8D(2)(ii) learned CIT(A) gave a finding that the assessee has sufficient interest free funds. By referring to Hon'ble Bombay High Court decision in Reliance Utilities & Power Ltd. 313 ITR 340 & HDFC Bank Ltd. Vs. DCIT (383 ITR 529). He deleted the addition 33. As regard of Rule 8D(2)(iii) he held as under :- “Appellant also filed a copy of the order of the ITAT Mumbai in its own case for AY 2011-12 in ITA No.368/Mum/2015 where in the addition under Rule 8D(2)(iii) is restricted considering the investment which yielded exempt income during the year. I have gone through the decisions relied including the assessee's own case. Respectfully following the order of the Hon'ble ITAT Mumbai in assessee's own case for AY 2011-12, the AO is directed to take the average investments which yielded the exempt income during the year M/s. Kilitch Healthcare India Ltd. 26 and workout the disallowance under Rule 8D(2)(iii). The AO is directed to modify the addition accordingly.” 34. Against the above order Revenue is in appeal before us. 35. We have heard both the parties and perused the records. We note that as regards the disallowance under Rule 8D(ii) of the Act learned CIT(A) has given a finding that the assessee has sufficient interest free funds. The same has not been disputed by the revenue. In this view of the matter no disallowance under rule 8D(2)(ii) can be done on the touchstone of the Hon'ble Bombay High Court decision in the case of Reliance Utilities & Power Ltd. (supra) and HDFC Bank Ltd.(supra). As regards rule 8D(2)(iii) is concerned learned CIT(A) has directed to take average value of the investment on which no exempt income has been earned for making the computation. This view is supported by Special Bench decision of ITAT in the case of Vireet Investments (165 ITD 27). Hence we do not find any infirmity in the order of learned CIT(A) in this regard. Hence, we uphold the same. 36. In the result, appeal filed by the Revenue stands dismissed. Assessee’s cross objection : 37. Grounds of appeal raised in cross objection are as under : “On the facts and circumstances of the case and in law, learned CIT(A) erred in upholding the action of the Assessing Officer of disallowing certain sums on the direction of the Additional Commission of Income Tax without providing an opportunity of being heard to the cross objection as mandated by the provisions of section 144A of the Income Tax Act, 1961, in spite of such directions being prejudicial to the cross objector. The cross objector prays that the disallowance made pursuant to such directions be deleted.” 38. The issues involved have been dealt with by learned CIT(A) as under : “Ground No.5 raised by the assessee relates to A.O/s action in making certain disallowance on the directions of the Additional CIT U/S. 144A, without providing opportunity of being heard. The A.O. mentioned in the order that disallowance had been made, considering the directions of the Addl.CIT., Range-6(3), Mumbai, however, the order is silent regarding the opportunity provided to the assessee or not. M/s. Kilitch Healthcare India Ltd. 27 I have carefully gone through the assessment order as well as the written submission made by the assessee. It is seen that the AO has taken guidance of the Range head u/s 144A before making the additions as mentioned in the order. It is seen that the proposals for each of the additions made in the assessment order were intimated to the assessee by way of show cause notice and the assessee filed detailed reply to the proposed additions. It is not the case of the appellant that the Range head proposed certain additions not mentioned by the AO in the show-cause notice and the said additions were made without giving opportunity of being heard. As there is no new addition as a result of reference u/s 144A, I do not find any reason to hold that the principles of natural justice are violated in the case. Assessee was given sufficient opportunity on each of the proposed addition by the AO, the submissions of the assessee are extracted in the assessment order and are fully considered. Therefore the ground of appeal is dismissed.” 39. Against the above order assessee has filed cross objection. 40. We have heard both the parties and perused the records. We note that we have already decided the issue in favour of the assessee in Revenue’s appeal, hence adjudication of this ground is only of academic interest. Hence, we are not dealing with the same. Hence, cross objection is dismissed as infructuous. 41. In the result Revenue’s appeal is dismissed and assessee’s cross objection is held to be infructuous. Order pronounced in the open court on 22.3.2022. Sd/- Sd/- (AMARJIT SINGH) (SHAMIM YAHYA) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated : 22/03/2022 Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. The CIT(A) 4. CIT 5. DR, ITAT, Mumbai 6. Guard File. BY ORDER, //True Copy// (Assistant Registrar) PS ITAT, Mumbai