KBC India Pvt. Ltd., New Delhi V. ITO ward-14(3), New Delhi

ITA 9710/DEL/2019

• Counselvise Citation: [2022] 103 COUNSELVISE.COM (IT) 9118 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 10 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-11-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Next Hearing Date: 03-08-2022
• Assessment Year: 2016-2017
• Appeal Filed On: 22-12-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Wholly owned subsidiary; Fair market value; Valuation report

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH: ‘SMC’ NEW DELHI BEFORE SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA No.9710/Del/2019 Assessment Year: 2016-17 M/s. KBC India Pvt. Ltd., 4 th Floor, Punjabi Bawan, 10, Rouse Avenue, New Delhi Vs. Income Tax Officer, Ward-14(3), New Delhi PAN :AAACK0088M (Appellant) (Respondent) ORDER This is an appeal by the assessee against order date 27.09.2019 of learned Commissioner of Income Tax (Appeals)-5, New Delhi, pertaining to assessment year 2016-17. 2. The dispute in the present appeal is confined to addition of an amount of Rs.41,70,000/- under section 56(2)(viib) of the Income-tax Act, 1961 (for short ‘the Act’)/ 3. Briefly the facts are, the assessee is a resident corporate entity. For the assessment year under dispute, assessee filed its Appellant by Sh. M.P. Rastogi, Advocate Respondent by Sh. Om Parkash, Sr. DR Date of hearing 04.08.2022 Date of pronouncement 02.11.2022 ITA No.9710/Del/2019 AY: 2016-17 2 | P a g e return of income on 11.10.2016 declaring nil income. Assessee’s case was selected for limited scrutiny to examine large share premium received during the year. In course of assessment proceeding, the Assessing Officer noticed that the assessee, in the year under consideration, had allotted 10,000 equity shares having face value of Rs.100 per share at a cost of Rs.1,500/- per share, including premium of Rs.1,400/- per share, to its holding company M/s. Puran Associates Pvt. Ltd. Noticing this fact, the Assessing Officer called upon the assessee to justify the share premium of Rs.1,400/- per share and to further explain, why the share premium received being in excess of the Fair Market Value (FMV) of shares as on date of sale, should not be treated as income of the assessee under section 56(2)(viib) of the Act. In response to the query raised, the assessee submitted that as per section 56(2)(viib) read with rule 11UA, the fair market value of share can be either as per rule 11UA or on the basis of face value of asset, including, intangibles, whichever is higher. In support of such claim, the assessee furnished a valuation report of a registered valuer to justify the FMV of share, wherein, the registered valuer has valued the FMV of share by taking the value of the asset, i.e., the land determined at Rs.26,75,00,000/-. The ITA No.9710/Del/2019 AY: 2016-17 3 | P a g e Assessing Officer, however, was not convinced with the submission of the assessee. He observed that the assessee itself has not adopted the methodology prescribed under rule 11UA and DCF method to value FMV of shares. Referring to rule 11UA, the Assessing Officer observed that FMV of shares can be determined by Net Asset Value (NAV) method or as per DCF method and there is no other method prescribed under the statute. On the aforesaid premises, he rejected assessee’s valuation of shares. Having done so, he proceeded to determine the fair market value of shares by applying NAV method and determined the FMV of shares at Rs.1083 per share. Thus, he concluded that the share price received by the assessee is in excess of the FMV by Rs.417 per share. Accordingly, multiplying Rs.417/- to 10,000 equity shares allotted during the year, the Assessing Officer made addition of an amount of Rs.41,70,000/- under section 56(2)(viib) of the Act. Though, the assessee contested the aforesaid addition before learned Commissioner (Appeals), however, the addition was sustained. 4. Before me, learned counsel appearing for the assessee submitted that section 56(2)(viib) of the Act is an anti-abuse provision introduced by the legislature, keeping in mind the ITA No.9710/Del/2019 AY: 2016-17 4 | P a g e devices adopted by public at large to convert unaccounted money as accounted money. He submitted, if the transaction undertaken is not meant for the purpose of tax avoidance or converting unaccounted money to accounted money, then the provision cannot be attracted to make any addition or disallowance. In this context, learned counsel drew my attention to the speech of Hon’ble Finance Minister while introducing the Finance Bill, 2012, wherein section 56(2)(viib) was brought into the statute for the first time. He submitted, in the present case, the shares were allotted to the holding company and not to any outsider from whom any unaccounted money could have flown to the assessee. He submitted, section 56(2)(viib) of the Act being a deeming provision has to be construed keeping in mind the purpose and object for which the provision was made. He submitted, it is not the case of the Revenue that holding company, which has been allotted the share is either not identifiable or has made investment of unaccounted money or it is unaccounted money of the assessee. He submitted, the sole beneficiary of the investment in shares is the holding company, M/s. Puran Associates Pvt. Ltd. Hence, it cannot be said that the owner has made the investment for the benefit of others. ITA No.9710/Del/2019 AY: 2016-17 5 | P a g e 5. That being the case, no addition under section 56(2)(viib) could have been made. In this context he relied upon the following decisions: 1. ACIT Vs. Y. Venkannachaudhary, 180 ITD 166 2. Vaani Estates Pvt. Ltd. Vs. ITO, [2018] 98 taxmann.com 92 6. Proceeding further, he submitted, as per section 56(2)(viib) read with its Explanation fair market value shall be the value as determined in accordance with the method prescribed or based on the value of the assets of the company, including, intangible assets. He submitted, in case of the assessee, the major asset is a land at Salarpur Brijwasan admeasuring 5.35 acres. He submitted, the registered valuer applying Net Value Asset method as prescribed in section 56(2)(viib) of the Act has determined the value of the land at Rs.26,75,00,000/- and on that basis he has determined the FMV of the shares. He submitted, while undertaking similar transaction of allotment of shares to the holding company in financial year 2013-14 corresponding to assessment year 2014-15, another registered valuer has determined the fair market value of the very same land at Rs.42,00,00,000/- by applying the circle rate prescribed by State ITA No.9710/Del/2019 AY: 2016-17 6 | P a g e Government for stamp duty purpose. He submitted, while dealing with the issue of identical addition made in assessment year 2014-15, learned first appellate authority deleted the addition, being convinced with the fact that the FMV of shares as determined by the assessee for allotment to holding company is correct. He submitted, assessee’s case is factually identical in the impugned assessment year, as well. Thus, he submitted, the addition made should be deleted. 7. Per contra, learned Departmental Representative strongly relied upon the observations of the Assessing Officer and learned Commissioner (Appeals). 8. I have considered rival submissions in the light of the decisions relied upon and perused the materials on record. On a reading of the assessment order as well as the order of learned first appellate authority, it is very much clear that the genuineness of the transaction relating to sale of shares by the assessee to its holding company has not been doubted. 9. The dispute between the assessee and the Revenue is only with regard to determination of FMV of the shares and the applicability of section 56(2)(viib) of the Act. Undisputedly, the assessee is an wholly owned subsidiary of M/s. Puran Associates ITA No.9710/Del/2019 AY: 2016-17 7 | P a g e Pvt. Ltd. and in the year under consideration, the assessee had allotted 10,000 equity shares to its holding company at a sale price of Rs.1,500/- per shares having face value of Rs.100 per share. In other words, the assessee has charged share premium of Rs.1,400/- over and above the face value of each share. As rightly contended by learned counsel appearing for the assessee, on a careful analysis of the speech of Hon’ble Finance Minister while introducing Finance Bill, 2012, section 56(2)(viib) is an anti- abuse provision introduced to the statute to check and regulate introduction of unaccounted money through share premium. 10. In the facts of the present appeal, the transaction relating to allotment of shares is between a holding company and its wholly owned subsidiary. Therefore, no outsider is benefited through such transaction. When the assessee-company has been promoted by the holding company, infusion of additional fund through share premium can only benefit either the holding company or the subsidiary and no third party is involved. In such a scenario, logically, no addition can be made under section 56(2)(viib) of the Act. For arriving at such conclusion, I draw support from the decisions of the Tribunal in the case of ACIT Vs. ITA No.9710/Del/2019 AY: 2016-17 8 | P a g e Y. Venkannachaudhary (supra) and Vaani Estates Pvt. Ltd. Vs. ITO (supra). 10. Even otherwise also, it requires consideration, whether the FMV of the shares allotted by the assessee can be taken at Rs.1,500/- per share as per the assessee or Rs.1082 per share as determined by the Assessing Officer. Undisputedly, the assessee has got the FMV of the shares valued through a registered valuer. As per the said valuation report, the registered valuer has applied the Net Asset Value method by considering the value of land at Delhi admeasuring 5.35 acres owned by the assessee. Applying the circle rate declared by the State Government, as on 31.03.2016, the registered valuer has determined the FMV of the land at Rs.26.75 crores as against the value of land as per the circle rate of Rs.50.40 crores. However, learned Commissioner (Appeals) has upheld the valuation made by the Assessing Officer primarily on the reasoning that the value of land determined by registered valuer at Rs.26.75 crores is much higher compared to the book value of land shown at Rs.16.88 crores. 11. In my view, book value of land cannot be equated to FMV of the land. When it is a proven fact that the value of land adopted by the registered value is based on circle rate of the State ITA No.9710/Del/2019 AY: 2016-17 9 | P a g e Government, rather much lower than the circle rate, there is no reason why such valuation should not be accepted. The reasoning of learned Commissioner (Appeals) while rejecting the valuation of land, in my view, is unacceptable when the fact that the circle rate of the land is much higher remains uncontroverted. 12. On a reading of Explanation to section 56(2)(viib) of the Act, it is very much clear that the FMV of shares shall be either the value determined under rule 11UA or based on the value of its assets, including, intangible assets on the date of issue of shares, whichever is higher. So the assessee can determine the FMV by adopting either of the two methods as provided under the Statute. The expression “substantiated by the company to the satisfaction of the Assessing Officer” as used in clause (a)(ii) of Explanation to section 52(b)(viib) does not speak of any subjective satisfaction but has to be considered objectively, keeping in view the value of the assets on the date of issue of shares. In the facts of the present case, the assessee has proved that the value of the asset, i.e., the land at Delhi as per circle rate is more than Rs.26.75 crores determined by the registered valuer. That being the factual position emerging on record, allotment of shares at Rs.1,500/- per share must be considered to be the FMV on the date of sale ITA No.9710/Del/2019 AY: 2016-17 10 | P a g e and not high and excessive compared to the FMV. It is relevant to observe, the assessee had entered into similar transaction with its holding company in assessment year 2014-15 wherein, shares having face value of Rs.100 per share were allotted to the holding company for a premium of Rs.1799 per share. While considering the issue relating to similar addition made by the Assessing Officer under section 56(2)(viib) of the Act, learned first appellate authority has deleted the addition taking note of the fact that the value of land held by the assessee as per the circle rate is Rs.42 crores. Thus, on overall consideration of facts and materials on record, I do not find any reason to sustain the addition of Rs.41,70,000/-. Accordingly, the addition is deleted. 12. In the result, the appeal is allowed. Order pronounced in the open court on 2 nd November, 2022 Sd/- (SAKTIJIT DEY) JUDICIAL MEMBER Dated: 2 nd November, 2022. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi