SPL INFRASTRUCTURE PVT. LT,ALWARPET, CHENNAI V. ITO, CORPORATE CIRCLE 6(1), CHENNAI

ITA 325/CHNY/2023

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The case involves SPL Infrastructure Pvt. Ltd., which appealed against the order of the Commissioner of Income Tax (Appeals) confirming the addition made by the Assessing Officer under section 56(2)(viib) of the Income Tax Act, 1961 for the assessment year 2018-19. The primary issue was the valuation of shares issued by the company at a premium, which the Assessing Officer valued differently under Rule 11UA of the Income Tax Rules, 1962. The Tribunal found that the Assessing Officer and the CIT(A) correctly applied the law and rejected the valuation report provided by the Merchant Banker under the DCF method, as it was not substantiated with necessary documentation at the time of the share issuance.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 107438 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 8 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-11-2024
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 08-10-2024
• Assessment Year: 2018-2019
• Appeal Filed On: 15-03-2023
• Other Referred Cases: Agro Portfolio (P.) Ltd. Vs ITO, M/s. Brio Bliss Life Science P. Ltd. v. ITO
• Laws Referred To: Income Tax Act, 1961, Income Tax Rules, 1962
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: GOUTHAMI MANIVASAGAM
• Assessee Lawyers: N. ARJUN RAJ
• Keywords: Set aside; Fair market value; Valuation report
• Section: 56

Judgement Text

"आयकर अपीलीय अिधकरण, ’बी’ Ɋायपीठ, चेɄई IN THE INCOME-TAX APPELLATE TRIBUNAL ‘B’ BENCH, CHENNAI ŵी एस.एस. िवʷनेũ रिव, Ɋाियक सद˟ एवं ŵी अिमताभ शुƑा, लेखा सद˟ क े समƗ Before Shri S.S. Viswanethra Ravi, Judicial Member & Shri Amitabh Shukla, Accountant Member आयकर अपील सं./I.T.A. No.325/Chny/2023 िनधाŊरण वषŊ/Assessment Year: 2018-19 SPL Infrastructure Pvt. Ltd., 15, Kasturi Rangan Road, Alwarpet, Chennai 600 018. [PAN: AAICS0881N] Vs. The Income Tax Officer, Corporate Circle – 6(1), Chennai. (अपीलाथŎ/Appellant) (ŮȑथŎ/Respondent) अपीलाथŎ की ओर से / Appellant by : Shri N. Arjun Raj, Advocate ŮȑथŎ की ओर से/Respondent by : Ms. Gouthami Manivasagam, JCIT सुनवाई की तारीख/ Date of hearing : 08.10.2024 घोषणा की तारीख /Date of Pronouncement : 29.11.2024 आदेश /O R D E R PER S.S. VISWANETHRA RAVI, JUDICIAL MEMBER: This appeal filed by the assessee is directed against the order dated 06.03.2023 passed by the ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre [NFAC], Delhi for the assessment year 2018-19. 2. The assessee raised 11 grounds of appeal. The ld. AR Shri N. Arjun Raj, Advocate, drew our attention to ground No. 11 and submits that this matter requires to be remanded to the file of the Assessing I.T.A. No.325/Chny/23 2 Officer for fresh consideration for not acting upon the valuation report issued by the Merchant Banker. He drew our attention to the report of valuation of shares issued by Sundae Capital Advisors Pvt. Ltd. at page 1 of the paper book and submits that the said report was furnished before the Assessing Officer during the course of assessment proceedings and without considering the same, the Assessing Officer passed the assessment order on 19.04.2021. On perusal of the assessment order at page 5, which shows that the Assessing Officer issued show-cause notice dated 15.03.2021 incorporating draft assessment order for the proposed addition by giving an opportunity to the assessee in the form of show- cause why the assessment order should not be passed with the proposed addition. As it appears the assessee filed reply on 19.03.2021 and the relevant part is reproduced at page 5 & 6 of the assessment order. The Assessing Officer found the said submission as not acceptable, proceeded to add an amount of ₹.2,74,30,010/- being the difference between the value of shares shown by the assessee and as determined by the Assessing Officer, as excess fair market value, which is clear from page 5 of the assessment order. Therefore, we find no force in the argument of the ld. AR that no opportunity was given to the assessee during the course of assessment proceedings. Therefore, we find the submission of the ld. AR in remitting the matter to the file of the Assessing I.T.A. No.325/Chny/23 3 Officer is not acceptable, consequently rejected and ground No. 11 is dismissed. Thus, we proceed to decide the issue on merits. 3. The ld. AR submits that ground Nos. 1 to 10 raised by the assessee are relating to only one issue of challenging the action of the ld. CIT(A) in confirming the addition made by the Assessing Officer under section 56(2)(viib) of the Income Tax Act, 1961 [“Act” in short]. 4. We note that on an examination of the records during the course of assessment, the Assessing Officer found the assessee issued 317000/- shares to different persons at ₹.150/- per share including at a premium of ₹.140/- per share for an amount of ₹.4,75,50,000/-. The Assessing Officer reproduced the computation of fair market value shown by the assessee in page 2 & 3 of the assessment order. The Assessing Officer did not accept the said computation of the fair market value as adopted by the assessee. The Assessing Officer proceeded to compute fair market value as provided under Rule 11UA of the Income Tax Rules, 1962, which is reflecting in page 3 & 4 of the Assessing Officer’s order. Accordingly, the Assessing Officer fixed the fair market value of each shares at ₹.63.47 and proposed addition of ₹.2,74,30,010/-[150-63.47 = 86.53 x 317000]. The assessee submitted its objections for the proposed addition which are reproduced by the Assessing Officer in his order at page 5 of the I.T.A. No.325/Chny/23 4 assessment order. Having not satisfied with the objections as raised by the assessee, the Assessing Officer confirmed the proposed addition made on account of the difference between the value of the shares adopted by the assessee at ₹.150/- as against the fair market value as determined by the Assessing Officer by following Rule 11UA of the IT Rules at ₹.63.47. The assessee challenged the action of the Assessing Officer before the first appellate authority. The assessee’s submissions were reproduced by the ld. CIT(A) from page 5 to 8 of the impugned order. Further, the assessee filed 2nd submissions on 12.01.2022 and 23.01.2022, which are also reproduced at page 9 & 10 of the impugned order. The ld. CIT(A), considering the submissions of the assessee as well as provisions under section 56 of the Act r.w. Rule 11UA of the IT Rules, confirmed the order of the Assessing Officer by recording reasons from paras 4.4 onwards. The relevant portion from para 4.4 to 4.5 is reproduced herein below: 4.4 It is a matter of fact that the appellant company is a private limited company in which the public are not substantially interested. It is also a matter of fact that the appellant company had received share price over and above the face value of the shares and there is no exclusion clause for non- applicability of section 56(2)(viib) for receipts from family members. Therefore, the provision of section 56(2)(viib) is applicable in the instant case. Also, this section prescribes that the fair market value of the equity shares shall be the higher of the value of shares determined under Rule 110 & 11UA and value substantiated by the company to the satisfaction of the AO. Further, Considering facts of the present case and provision of Income Tax Rules, I find that the Rule 11UA(1)(b), is applicable in the instant case because the appellant had issued unquoted equity shares and not the rule 11UA(1)(c) as relied by the appellant in it's submission because Rule I.T.A. No.325/Chny/23 5 11UA(1) (c) is applicable for determination of 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. 4.5 In the present case, the FMV of the shares determined under rule 11UA comes to Rs. 63.47/- per share whereas the appellant had issued the shares at Rs. 150/- per share. The appellant has supported its valuation by furnishing a valuation report of Merchant Banker, which has been rejected by the AO stating that the valuation was done after the discussion with management of the appellant. During the assessment proceedings as well as appellate proceedings, the appellant had contended that the valuation of shares was determined on the market value of the land (immovable assets) whereas in the valuation report, this basis has not been considered and adopted discounted cash flow (DCF) method. It is also observed during the appellate proceedings that the so called Merchant Banker was appointed on 16th March, 2021 and it had submitted its valuation report on 18th March, 2021 in a very short span of time i.e. during the assessment proceedings and after the issuance of shares @Rs. 150/- to justify it's valuation. This clearly shows that the appellant didn't obtain any valuation report on or before arriving the FMV of the shares @ Rs. 150/- per share before issuing the equity shares, which is the pre-requisite condition for adopting DCF Method of valuation and the valuation report is an afterthought evidence created on projection, assumptions, etc. to support the fair market value of equity shares. Further, on examination of the valuation report submitted by the Merchant Banker, it is seen that the valuer claimed that the valuation was based on the audited financials, projections for subsequent financial years and inform available in public domain. It is also observed that the valuation is made on various assumptions and projections after discussion with the management of the appellant and therefore, it is not a reliable document. Further, this report was procured after the issuance of show cause notice dated 15.03.2021 by the AO during the assessment proceedings and the future data in the form of EBIT actually available in the ITRs for subsequent assessment years doesn't justify the projection by the valuer. Thus, this report is neither backed by futuristic development nor backed by proper analysis. Hence, this report doesn't carry any weight. In fact, the appellant had changed its stand on valuation during the assessment proceedings. It is true that the Rule 11UA(2) provides an option to the appellant for choosing the method of valuation but it has to be chosen at the time of issuance of equity shares and not during the assessment proceedings. This is a case, where the appellant didn't obtain any valuation report from Merchant Banker before determination of FMV for issuance of equity shares and thus, the valuation has to be made by adopting method as prescribed by Rule 11UA(2)(a) and not Rule 11UA(2)(b). During the course of appellate proceedings, the appellant submitted various case laws which is related to section 56(2)(vii)(c) pertaining to Individual and HUF but it is not related to any company, which has independent legal entity and having separate I.T.A. No.325/Chny/23 6 provision for determination of fair market value of shares. Also, the facts of the other case laws are different from the facts of the present case, hence, not applicable. On a similar facts, the Hon'ble ITAT Delhi Bench in the case of Agro Portfolio (P.) Ltd. Vs ITO [2018] 94 taxmann.com 112 (Delhi - Trib) [2018] 171 ITD 74 (Delhi - Trib.) held that where assessee allotted shares to a company and fair market value of shares was done by a Merchant banker only on basis of Direct Cash Flow (DCF) method depending on data supplied by assessee and no evidence was produced for verifying correctness of data supplied by assessee, Assessing Officer was justified in rejecting DCF method and adopting Net Asset Value method. The Court further held that since without any evidence, correctness of result of Discounted Cash Flow method could not be verified, it would serve no purpose even if matter was referred to Department's Valuation Officer and hence Assessing Officer was justified in rejecting DCF method and to go by NAV method to determine FMV of shares. In view of the above facts, legal provisions and judicial decision, I don't find any infirmity in the order of the AO by adopting the FMA calculated under Rule 11UA(2)(a) of the IT Rule. Thus, the sole issue involved in the present appeal is dismissed. 5. Before us, the ld. AR placed on record paper book containing 25 pages. He refers to page 1 and submits that the assessee furnished the report of Merchant Banker to the Assessing Officer during the course of assessment proceedings. He argued that Assessing Officer did not accept the value of unquoted equity shares determined by following DCF method at ₹.196.98. He vehemently argued that the Assessing Officer did not accept the value determined by the Merchant Banker and arbitrarily followed the method under Rule 11UA of the IT Rules. He submits that there is no statutory period for furnishing of valuation report showing the fair market value. He drew our attention to page 8 of the paper book and argued that the provisions under (3) of Income Tax [Twenty First Amendment], Rules, 2023] clearly provides an option to the assessee the I.T.A. No.325/Chny/23 7 date of valuation. The ld. AR challenged the action of the ld. CIT(A) and Assessing Officer in not considering the valuation of fair market value under DCF furnished by the assessee and vehemently argued that the assessee is at liberty to file the valuation of fair market value at any time before completing the assessment. 6. Further, he drew our attention to the decision of the Hon’ble High Court of Delhi in the case of Agra Portfolio (P.) Ltd. v. PCIT [2024] 161 taxmann.com 303 (Delhi). The ld. AR drew our attention to the question of law at “C” at page 1 of the said decision and argued that the assessee has the option to determine the fair market value either in accordance with the formula under Rule 11UA(2)(a) or on the basis of report of Merchant Banker as per DCF method. The ld. AR stressed upon that furnishing valuation report at the time of claim is not relevant and the assessee can furnish report during the course of assessment proceedings also and drew our attention to para 17 of the said decision. The ld. AR argued that the Merchant Banker valued under DCF method and determined fair market value, which requires to be followed by the Assessing Officer. He vehemently argued that the order of the ld. CIT(A) is not justified in not taking into consideration the valuation of fair market value determined by the Merchant Banker on the basis of DCF method. I.T.A. No.325/Chny/23 8 7. The ld. DR Ms. Gouthami Manivasagam, JCIT argued that there is no basis followed by the assessee in issuing shares at ₹.150/- per share at the time of issuance of shares and making claim and the report furnished during the course of assessment proceedings cannot be taken into consideration. The fair market value determined by the assessee under DCF method during the course of assessment proceedings relevant to the assessment year 2018-19 is not justified, but it should have been at the time of issuance of shares. The Assessing Officer correctly rejected the report on fair market value adopted by Merchant Banker under DCF method and proceded to value by the method under Rule 11UA of the IT Rules as it governs the determination of fair market value. She argued vehemently that there was no error in the order of the ld. CIT(A) as he correctly appreciated the value adopted by the Assessing Officer in following the method under Rule 11UA of the IT Rules. She submits that the arguments of the ld. AR are not acceptable in stating that there was no statutory period to file the valuation report of the fair market value and drew our attention to Rule 11UA of the IT Rules. She argued that the said Rule 11UA provides determination of fair market value of unquoted equity shares shall be the value on the valuation date. She submits that the assessee obtained valuation report during the course of assessment proceedings in 2021 for the financial year 2017-18 relevant I.T.A. No.325/Chny/23 9 to the assessment year 2018-19, which cannot be taken into account as there was no valuation of fair market value at the time of issuance of shares and she prayed to dismiss the ground of appeal raised by the assessee. 8. Heard both the parties and perused the material available on record. We find only issue involved in this appeal is in respect of invoking the provisions of section under section 56(2)(viib) of the Act regarding the shares allotted by the assessee to promoters/existing share holders at a premium of ₹.140/- for a face value of ₹.10/-. According to the ld. AR, the assessee determined the premium at ₹.140/- taking into consideration the fair market value totalling to ₹.150/- per share. Further, the ld. AR submits that the said FMV of each share at ₹.150/- on the basis of decision of Board of Directors’ and opinion rendered by the Chartered Accountant, consequently with the compliance of Registrar of Companies. The Assessing Officer did not accept the method of determining the premium of ₹.140/- for a face value of ₹.10/- per share by the assessee and proceeded to determine FMV in terms of Rule 11UA of the IT Rules, 1962 on the basis of net asset value. We find the Assessing Officer adopted method under Rule 11UA of IT Rules and determined the FMV of unquoted equity shares at ₹.63.47 which is reflected in page 4 of the assessment order. As it appears from the record that the assessee was I.T.A. No.325/Chny/23 10 show-caused as to why the assessment should not be passed taking into consideration the FMV as determined under Rule 11UA of the IT Rules. The assessee has given written reply pointing out the mistakes stated to have been committed by the Assessing Officer of which are reproduced in the assessment order reflected at page 5 of the assessment order. The Assessing Officer held that the reply of the assessee is not acceptable for the reason that there was no supporting document for the same. 9. The ld. AR referred to report on fair market value of shares under DCF method at pages 4 to 6 and brought to the notice of the Assessing Officer by way of letter dated 18.03.2021. The said letter is placed at page 1 to 3 of the paper book. On perusal of the same, we find no signature and date of the report, but only annexed as A & B to the letter dated 18.03.2021, wherein, it is contended that the DCF method as provided under Rule 11UA(2)(b) of IT Rules are based on the generally accepted principles and methods followed internationally and on arms- length basis. Further, it is contended the most common valuation approaches are on income based approach, market based approach and asset based approach. The ld. AR vehemently contended that as per the DCF method, the estimated FMV is at ₹.196.98 as on 16.03.2018 per share. We note that the assessment was passed on 19.04.2021, I.T.A. No.325/Chny/23 11 whereas, the above said letter dated 18.03.2021 along with report of pages 4 to 6 of index was before the Assessing Officer for his consideration during the course of assessment proceedings. The Assessing Officer, while considering the same and holding the same is not acceptable, determined the fair market value of shares under section 56(2)(viib) of the Act r.w. Rule 11UA of IT Rules. The assessee agitated the non-consideration of DCF method by the Assessing Officer before the ld. CIT(A). The ld. CIT(A) discussed the same in para 4.5 of the impugned order. According to him, the assessee did not obtain any valuation under DCF method on or before arriving at the FMV of the shares at ₹.150/- before issuing the same, held that it is a pre-requisite for adopting DCF method of valuation before issuing the shares. The ld. CIT(A) by placing reliance on the order of the ITAT Delhi Benches in the case of Agra Portfolio (P.) Ltd. confirmed the order of the Assessing Officer. In this regard, the ld. AR relied on the decision of the Hon’ble High Court of Delhi in the case of Agra Portfolio (P.) Ltd. v. PCIT (supra) and argued that the Hon’ble High Court of Delhi set aside the order of the Tribunal. He drew our attention to para 17 of the decision of Hon’ble High Court of Delhi and argued that it is not necessary to obtain DCF method of valuation before issuance of shares, but it can be submitted during the course of assessment proceedings. On careful reading of the decision of I.T.A. No.325/Chny/23 12 the Hon’ble High Court of Delhi, we note that the Hon’ble Court was pleased to hold that the option and choice stand vested solely in the hands of the assessee as it manifest from a conjoint reading of section 56(2)(viib) of the Act with Rule 11UA(2) in respect of DCF method. Further, the Hon’ble High Court of Delhi was pleased to hold vide para 17 that it could be open for the Assessing Officer to doubt or reject a valuation that it is submitted for his consideration under DCF method, in our opinion, in the present case, the Assessing Officer considered the DCF method as furnished by the assessee and rejected the same for the reason as stated in page 6 & 7 of assessment order that the assessee failed to produce supporting documents and it was prepared based on the discussion with the management of the company. Before us, no material filed supporting the DCF method, except annexure A & B annexed to letter dated 18.03.2021. Therefore, we find the Assessing Officer rightly adopted the method under Rule 11UA(2) of the IT Rules in determining the FMV of the unquoted shares at ₹.63.47. Further, we note from the impugned order of the ld. CIT(A) observed that the assessee obtained valuation of shares by DCF method only during the course of assessment proceedings in 2021 and there was no basis for claim of premium of ₹.140/- at the time of issuance of shares to its promoters/existing share- holders. Therefore, admittedly, there was no valuation by DCF method at I.T.A. No.325/Chny/23 13 the time of issuance of shares as rightly held by the ld. CIT(A) and we hold the same. 10. The ld. AR placed on record Income Tax (Twenty First Amendment), Rules, 2023 in respect of Rule 11UA regarding option of assessee to adopt the date of valuation. On plain reading of the sub-rule (3) of Rule 11UA clearly explains the date of valuation report by merchant bankers for the purposes of sub-rule (2) is not more than 90 days prior to the date of issue of shares which are subject matter of valuation of such date may at the option of the assessee be deemed to be the valuation date. As discussed above, the ld. CIT(A) held that there was no valuation report by merchant banker at the time of issuance of shares, since we agreed with the findings of the ld. CIT(A), we reject the arguments of the ld. AR that it is option left to the assessee to adopt any date i.e., the date of valuation report by merchant bankers for the purpose of sub-rule (2) be deemed to be the valuation date. 11. Further, the ld. AR placed reliance on the order of the Tribunal in the case of M/s. Brio Bliss Life Science P. Ltd. v. ITO in ITA No. 3067/Chny/2019 dated 22.02.2023. On perusal of the same, we note that the Tribunal remanded the matter to the file of the Assessing Officer for his reconsideration regarding the addition made towards share premium I.T.A. No.325/Chny/23 14 under section 56(2)(viib) of the Act in the light of various arguments including the valuation report submitted under DCF method by an independent auditor. We find, in the present case, the valuation report by merchant banker under DCF method was already on record before the Assessing Officer during the course of assessment proceedings and held not acceptable in terms of the decision of the Hon’ble High Court of Delhi. Therefore, the finding of the Tribunal in the case of Brio Bliss Life Science Pvt. Ltd. (supra) is not applicable to the facts of the present case. Therefore, we completely agree with the reasons recorded by the ld. CIT(A) in para 4.4 and 4.5 of the impugned order in holding that the Assessing Officer is fully justified in invoking the provisions of section 56(2)(viib) r.w. Rule 11UA of the Income Tax Rules and it is justified. Thus, the grounds raised by the assessee in ground No. 1 to 10 are dismissed. 12. In the result, the appeal filed by the assessee is dismissed. Order pronounced on 29th November, 2024 at Chennai. Sd/- Sd/- (AMITABH SHUKLA) ACCOUNTANT MEMBER (S.S. VISWANETHRA RAVI) JUDICIAL MEMBER Chennai, Dated, 29.11.2024 I.T.A. No.325/Chny/23 15 Vm/- आदेश की Ůितिलिप अŤेिषत/Copy to: 1. अपीलाथŎ/Appellant, 2.ŮȑथŎ/ Respondent, 3. आयकर आयुƅ/CIT, Chennai/Madurai/Coimbatore/Salem 4. िवभागीय Ůितिनिध/DR & 5. गाडŊ फाईल/GF. "