DCIT Vs Ozoneland Agro (P) Ltd. (ITAT Mumbai)
In this AO had ‘tampered’ with provisions of the Act. It was beyond jurisdiction of AO to insist upon a particular system, which especially allows assessee to choose one of the two methods. Until and unless legislature amends provision of the Act and prescribes only one method for valuation of the shares, the assessees were free to adopt any one of methods. Therefore, order of the FAA does not suffer from any factual or legal infirmity. AO should have given some reasons for not accepting valuation for the year under consideration, whereas for the earlier year he had accepted valuation. It is a clear violation of principle of consistency. AO had violated the rule of consistency for the year under appeal without any reason, so, order of the FAA was confirmed and issue was decided against the AO.
FULL TEXT OF THE ITAT JUDGMENT
1. Challenging the order,dated 21/04/2016,of the CIT(A)2,Mumbai the Assessing Officer(AO)has filed the present appeal. Assessee-company,engaged in the business of developing and cultivating land for agricultural purposes,filed its return of income on 18/09/2013,declaring income at Rs. 4.83 crores. The AO completed the assessment u/s.143 (3) of the Act,on 29/01/2016,determining its income at Rs. 9.85crores.
2. First ground of appeal is about deleting the addition made on account of excess share premium of Rs.4.99 crores,u/s. 56 of the Act. During the assessment proceedings, the AO found that the assessee had issued 1941 equity shares to Shapoorji Palonji Ltd.(SPL) at face value of Rs. 10 and premium of Rs.25,749/-,that the assessee had received total share premium of Rs.4,99,99,733/-, that the share premium was charged on the basis of valuation report of a chartered accountant, that the CA had valued the shares by adopting Discounted Cash Flow (DCF) method, that as per the valuation report value of each share was Rs.25,759.78, that the assessee had also carried out project analysis by an Estate Consultant Firm,that the consultant had valued the project at Rs. 1, 47,39.39 millions and the valuation of land was fixed at Rs. 66,000.98 millions,that the valuation was made basis to adopt future cash flow.The AO directed the assessee to file explanation in this regard.Vide its letters dated 23/10/2015 and 19/11/2015,the assessee made submissions about the share premium.After considering the explanation of the assessee,the AO held that there was no business activity carried out during the year,that the premium received by the assessee was disproportionate to the business activities,that the purported nature of business was not undertaken,that the profit projections even for the first year were astronomical,that the applicability of DCF method was for limited period of only five years,that it had made projection of profits without any calculation or cash flow for 15 years from the date of valuation, that the method adopted by the assessee was deeply flawed,that the valuers had not done any germination of historical financial statement/prospective results to make an unbiased evaluation,that the projections made by the assessee had been incorporated in toto in the valuation report,that the valuer had not applied his mind independently.While completing the assessment, the AO adopted the NAV method and valued one share at Rs.26.4 as against Rs 25,749/-for a township project on 1000 acres.He determined the value of the project at Rs.4.70crores and made an addition of Rs 4.99 crores,under the head excess premium received.
3. Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA) and made elaborate submissions. It also relied upon certain case laws.After considering the available material,he held that the Finance Act,2012 inserted a new clause to section 56 of the Act,that as per the clause income arising out of excess consideration received for issue of shares by a closely held company was to be taxed with effect from AY. 2013-14,that the excess consideration was to be determined by comparing consideration with fair market value of shares. He reproduced the fair market valuation of the shares and held that out of the two options prescribed by the Act for calculating FMV, the assessee had chosen one of the option by calculating the FMV of shares in accordance with the method prescribed. He referred to the new amendment to Income Tax Rules, 1962 specially clause 2 to Rule 11 and held that the clause was specifically inserted for valuation of unquoted equity shares for the purpose of section 56(vii),that the assessee had applied by specific clause, that the Rule provided that the assessee had an option to select any one of the methods for valuing the equity shares,that the assessee had opted one of,that the AO would not deviate from the method selected by the assessee and determining FMV of the shares by adopting another method would, that the AO had chosen the Net Value Method (NAV) to determine the value of the shares.He further observed that the AO had not followed the consistency of the earlier assessment orders wherein similar issue had arisen, that the purchaser had paid premium to the assessee keeping in mind the expected future gains,that
the premium could not be termed as excessive or unreasonable.
3.1.With regard to business activities not being carried out during the year under consideration it was submitted before the FAA that the matter was subjudice due to “forest” remark at that point of time,that the assessee could not initiate preliminary activities,that the assessee was paying agriculture tax till the year 2016, that most part of the plot of land was under cultivation, that it could not be termed as forest,that the Hon’ble division High Court
has decided the issue in favour of the assessee on 18/06/2015,that the AO did not provide sufficient opportunity to the assessee to substantiate its stand about carrying on of business activities.
3.1.1.The FAA,after considering the submissions of the assessee and the assessment order,held that the AO had made the addition on the ground that no business activity was carried out during the year under appeal,that he had held that NAV method was preferable to DCF method. He referred to the provisions of section 56(viib)of the Act and Rule 11UA (2) (b) and held that the assessee had liberty to exercise the option of valuing the shares as per the DCF method, that during the AY. 2012-13,the assessee had issued 17,801 shares at a premium of Rs.25,550/- to SPL,that while completing the assessment u/s.143(3)of the Act,the AO had accepted the valuation,that the shares in that year were valued as per DCF method,that the AO had verified the valuation report. Finally, he held that as per the provisions of Rule 11UA of the Rules the selection of the method for valuation of shares was at the option of the assessee, that the AO had no right to deviate from the method selected by the assessee, that there was no justification for making the addition of Rs. 4.99 crores to the income of the assessee.
4. Before us,the Departmental Representative(DR)contended that that there was no relation between the premium received by the assessee its business activities,that the method adopted by the assessee was highly inflated,that the valuers had not made an unbiased evaluation,that the AO had rightly adopted the NAV method and valued one share at Rs.26.4 as against Rs 25,749/-.The Authorised Representative(AR)supported the order of the FAA and stated that
the assessee had adopted one of the methods provided in the section,that AO could not compel it to rely on a particular method,that in the earlier year also shares were issued on premium to the same party,that the AO had accepted the valuation,that the rule of consistency demanded that he should have followed the same method..He relied upon the cases of Bharat Hari Singhania(207 ITR 1),Medplus Health Services P.Ltd.(158 ITD 105).
5.We have heard the rival submissions.We find that the assessee had issued 1941 equity shares to SPL at premium of Rs.25,749/- per share,that face value of the share was Rs.10/- ,that the assessee had received total share premium of Rs.4.99 crores from an unrelated party,that the share premium was charged on the basis of a valuation report wherein the shares were valued as per the DCF method,that in earlier year the AO had accepted the similar valuation,that the assessee had also carried out project analysis by an Estate Consultant Firm,that the AO held that NAV method of valuation was to adopted for valuation of the shares.Thus,the basic issue to be decided is validity of the method to be adopted to value the share price for the year under consideration.As stated earlier,the assessee had adopted DCF method as per the provisions of section 56(viib)r.w.rule 11UA(2)whereas the AO was of the opinion that NAV method was appropriate method,as envisaged by Rule 11 UA(c)(b)of the Rules.
Before proceeding further,we would like to reproduce the provisions of section 56 of the Act and the relevant rule and the same read as under:
Section 56
“(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(ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf.
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 ; 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 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
(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
For the purposes of section 56 of the Act, the fair market value of a property, other than immovable property, shall be determined in the following manner, namely :-
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(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 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 :-
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(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 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 :-
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(b) the fair market value of the unquoted equity shares determined by a merchant banker or an accountant as per the Discounted Free Cash Flow method.
5.1.In our opinion,the valuation has been left to the discretion of the assessee.In other words the AO cannot adopt a method of his choice.In the case under consideration the whole controversy has arisen because of the AO has rejected the method adopted by the assessee. We find that in the case of Medplus Health Services P.Ltd.(supra)similar issue was deliberated upon and decided. We are reproducing the relevant portion of the order which
reads as under:
“3.During the assessment proceedings u/s 143(3) of the Act, AO observed that the assessee company is a wholesale supplier of goods mainly to its group company M/s. Optival Health Solutions P. Ltd., which in turn is engaged in retail business of pharmaceuticals and general goods and further that both the companies have more than 67% common shareholdings. It was observed that during the F.Y. 2010-11, a major restructuring of the group had taken place wherein almost all the shares of M/s. Optival Health Solutions P. Ltd., were taken-over by the assessee company and the wholesale operations from the assessee were taken-over by M/s. Optival Health Solutions P. Ltd., resulting in the assessee company becoming the holding company of M/s. Optival Health Solutions P. Ltd., and both the wholesale and retail operations coming under the assessee company indirectly. He further observed that majority of the small shareholders of M/s. Medplus Health Care P. Ltd., transferred their shares to Mr. G. Madhukar Reddy, promoter and one of the major shareholders of assessee company and Mr. Madhukar Reddy along with other major shareholders transferred their majority of shareholdings at an attractive price to some local and international institutional investors. Out of these transactions, the A.O. observed that two persons i.e., Mr. C. Srinivasa Raju and Chintalapati Holdings P. Ltd., transferred their shares to the assessee on 04.03.2011 at Rs.75.49 per share whereas, on the same day and also on 08.03.2011 all the other shareholders transferred their shareholdings to the assessee at Re.1 per share. He observed that when the market rate is Rs.75.49 ps, the assessee has purchased the shares at less than the market price i.e., Re.1 per share and therefore, the transactions attract provisions of section 56(2)(viia) of the I.T. Act. Therefore, the A.O. issued a show cause notice dated 27.02.2014 requiring the assessee to explain as to why the difference amount of Rs.74 per share should not be treated as a deemed gift/income and taxed in the hands of the company. The assessee, vide letter dated 07.03.2014, submitted a detailed note as to why the provisions of section 56(2)(viia) are not applicable to the assessee’s case. It was submitted that as per Explanation to Section 56(2)(viia) of the Act, the ‘fair market value’ (FMV in short) has to be computed in accordance with Rule 11UA of I.T. Rules and that the assessee had computed the fair market value as per the prescribed rule according to which, the fair market value of the share is less than Re. zero and hence, payment of Re.1 per share by the assessee to acquire the shares is more than the fair market value computed under Rule 11UA. Thus, according to him, the provisions of section 56(2)(viia) of the Act do not apply. The A.O. however, was not convinced with the assessee’s contentions and held that the ‘market value’ mentioned in the rule means “price which it would have fetched if sold in the open market.”
He observed that the valuation of any property is based on the fact as to what value the property would fetch if sold in the open market and since in the assessee’s own case there are certain transactions to clearly establish market value of the shares sold, resorting to estimation/calculation of market value of the unlisted shares as per the formula under Rule 11UA of I.T. Rules does not arise. He observed that as per the computation of fair market value under Rule 11UA(c)(b) of I.T. Rules, the value of M/s. Optival Health Solutions P. Ltd., was (-) Rs.64.48 ps (i.e., the value of M/s. Optival share is at negative figure) whereas, assessee has paid Re.1 per share and the basis for adopting Re.1 per share by the assessee is not provided. He further observed that one of the shareholders Mr. Kalyana Bhaskara sold his shares in Optival to Mr. Madhukar Reddy at Rs.63.79 ps per share and the basis for adopting this rate is also not known but since it was much more than what is claimed by the assessee at Re.1 per share, he held that it was so shown to defraud the Revenue by transacting at abnormally low price. He therefore, held that the provision of deemed gift under section 56(2)(viia) of the I.T. Act is applicable. Thus, he adopted the price of Rs.75.49 ps paid to unrelated parties to be the market price of the unquoted shares of the company M/s. Optival Health Solutions P. Ltd., and the difference of Rs.74.49 ps per share was treated as “Income from other sources” in the hands of the company. Further, vide its letter dated 19.03.2014, the assessee submitted that as on 3rd March, 2011, the total value of equity shares of M/s. Optival Health Solutions P. Ltd., was Rs.45,44,740, out of which, the shares of Rs.15,90,000 were partly paid i.e., only up to Rs.0.50 ps and that these partly paid up shares were also acquired by the company from the shareholders. It was submitted that in the case of partly paid up shares, an amount of Rs.9.50ps is still to be paid by the purchaser and hence, the value of deemed gift in the case of partly paid shares is to be calculated accordingly. After considering the assessee’s contentions, the A.O. computed the value of the deemed gift of partly paid up shares at Rs.10,33,34,100 and of fully paid up shares at Rs.10,89,39,465 and brought it to tax. Aggrieved, assessee preferred an appeal before the Ld. CIT(A) who confirmed the order of the A.O. and against the order of the Ld. CIT(A), the assessee is in second appeal before us.
4. The Ld. Counsel for the assessee, Mr. Kanchan Kaushal, while reiterating the submissions made by the assessee before the authorities below, drew our attention to the provisions of section 56(2)(viia) of the I.T. Act, to demonstrate that the said provisions would apply to the assessee only if the price paid by the assessee was less than the fair market value computed under Rule 11UA of I.T. Rules. He submitted that where the legislature prescribes a particular method to be adopted, then the said method alone should be adopted. He has submitted that in the case of assessee before us, neither the provisions of section 56(2)(viia) nor the Rules prescribe for adoption of the market value of the shares as the fair market value for the purpose of deemed gift under section 56(2)(viia) of the I.T. Act since the provisions relates to anti-abuse provisions. He submitted that where a specific method is prescribed, the A.O. is precluded from adopting any other method. He further drew our attention to the decision of Hon’ble Allahabad High Court in the case of Dr. Shashi Kant Garg v. CIT [2006] 285 ITR 158/ 152 Taxman 308 in support of his contention that a prescribed method has to be strictly followed. He has also placed reliance upon the following other judgments in support of his contention :
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5. The Ld. D.R. on the other hand, supported the orders of the authorities below and submitted that where the market price of the shares at which the assessee has purchased the shares on the very same day is available, the A.O. has rightly adopted the same instead of resorting to the valuation of the fair market value of the shares under Rule 11UA of the I.T. Act.Thus, according to him, the assessment order is to be upheld.
6. Having regard to the rival contentions and the material on record, we find that ground No.1 is general in nature and hence needs no adjudication. With regard to ground No. 2, we find that though the assessee has raised this ground of appeal before the Ld. CIT(A), it was rejected on the ground that the assessee did not press the said ground of appeal. Even before us, the assessee did not advance any arguments on this issue at the time of hearing. In view of the same, ground No. 2 of the assessee is not adjudicated and treated as rejected.
7.As regards grounds No. 3 to 5 are concerned, we find that the undisputed facts are that the assessee has purchased the shares of M/s. Optival Health Solutions P. Ltd., at Re.1 on 4/3/2011 and 8/3/2011 while some of the shareholders have sold the shares of the very same company to the assessee on the very same day at Rs. 75.49 per share. It is also not disputed that the assessee company and M/s. Optival Health Solutions P. Ltd., are related to each other. The only dispute is whether the provisions of section 56(2)(viia) of the I.T. Act are applicable to the facts of the case before us. For the sake of convenience and ready reference, the relevant provisions are reproduced hereunder :
Explanation. For the purposes of this clause, “fair market value” of a property, being shares of a company not being a company in which the public are substantially interested, shall have the meaning assigned to it in the Explanation to clause (vii);]’
7.1 Further, the Explanation to clause (vii) to 56(2) of the Act reads as under : EXPLANATION:
‘(b) “fair market value” of a property other than an immovable property, means the value determined in accordance with the method as may be prescribed.’
7.2 The prescribed method for valuation of the fair market value is under Rules 11U and 11UA(c)(b) of I.T. Rules. Rule 11UA (c)(b) reads as under :
7.3 From the literal reading of the above provision, it is clear that to apply the above provision, the following conditions have to be satisfied:
i. there is transfer of shares a company not being a company in which the public are substantially interested:
ii. the purchaser of the shares is a company not being a company in which the public are substantially interested;
iii. the consideration is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees; and
iv. the deemed income in the hands of the transferee shall be the aggregate fair market value of such property as exceeds such consideration.
8. From the facts of the case before us, it is seen that the property i.e., shares which are transferred are the shares of a company in which the public are not substantially interested. Since the transaction of sale and purchase of shares is between related parties and both the companies are companies in which the public are not substantially interested, we are of the opinion that the AO was justified in examining the applicability of the provisions of section 56(2)(viia) of the Act to the transaction of transfer of shares.
9. The next step for application of this provision is to arrive at the fair market value of the shares before comparing it with the consideration at which the shares are purchased by the assessee to examine if it was less than the aggregate fair market value of the property exceeding Rs. 50,000. In the case before us, the AO had adopted the price at which the assessee has purchased the shares from two of the shareholders at a higher price of Rs. 75.49 ps as the fair market value of the share. The question before us is, whether this is valid and as prescribed under the Act? Clause
(b) of the explanation to clause (vii) to section 56(2) defines ‘fair market value‘ to be the value as computed under the prescribed rule i.e., rule 11UA. According to the ld counsel for the assessee, where the Act prescribes a rule, it has to be strictly and mandatorily followed and further if the statute has conferred a power to do an act and has laid down the method in which that power is to be exercised, it necessarily prohibits the doing of the act in any other manner than that has been prescribed.
In support of this contention, the assessee has relied upon various decisions cited supra. Let us now examine the applicability of the said decisions to the facts of the case before us.
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Though the facts and circumstances under which the above rulings have been given are distinguishable,we find that the legal principles laid down in the above judgments are clearly applicable to the facts of the case before us. Therefore the question before us is whether the A.O. can adopt the value at which the assessee acquires the shares of the same company on the same day for a higher consideration as the fair market value of the shares or whether FMV is compulsorily to be valued under Rule 11UA of the Act before applying the provisions of Sec. 56(2)(viia) of the Act.
