ITO Vs LNB Renewable Energy Pvt. Ltd (ITAT Kolkata)
ITAT Kolkata held that company incorporated on 07.11.2012 and valuation of share done on 16.11.2012, therefore share premium on issue of equity share capital and issue of preference share capital are hit by provisions of section 56(2)(viib) of the Income Tax Act and hence addition towards share premium sustained.
Facts-
The case of the assessee was selected for scrutiny through CASS followed by serving of notices u/s 143(2) & 142(1) of the Act. During the course of assessment proceedings, AO after going through the financial statements and other details filed by the assessee observed that during the year share premium of Rs. 5 lakh was received @ Rs. 2.5/- per share on the issue of equity share equal and share premium of Rs. 8 Crore received @ Rs. 25/- per share on the issue of preference shares capital. AO observed that the assessee company incorporated during FY 2012-13 has charged share premium on issue of equity share capital and preference share capital.
On 28.03.2016 the case was referred to the District Valuation Officer, but on 30.03.2016 reply was received from the Asst. Valuation Officer-6, Kolkata stating that the Valuation Officer deals only with immovable property and has not dealt with the valuation of shares, debenture, jewellery, vehicle, machinery and plant. On the same day, AO completed the assessment making addition of Rs. 8.05 Cr for the alleged share premium received in excess of the face value of the shares invoking the provisions of Section 56(2)(viib) of the Act.
CIT(A) deleted the addition. Being aggrieved, revenue has preferred the present appeal.
Conclusion-
We are of the considered view that since the input needed for preparing the valuation report dated 14.03.2018 were not supplied correctly to the expert (CA), the results arrived at in the said valuation report dated 14.03.2018 cannot be accepted. Under these given facts and circumstances of the case we are of the considered view that since the company was incorporated on 07.11.2012 and cut off date of valuation of share was 16.11.2012 and the said acquisition of wholly owned subsidiary and step down subsidiary companies was after the cut off date of valuation of share, therefore as on 16.11.2012, the fair market value of the equity share capital remains at Rs. 10/- and that of the preference share capital remains at Rs. 100/-. Therefore, share premium of Rs. 2.50 per share on issue of equity share capital totalling to Rs. 5 lakh and share premium of Rs. 8 Cr received on issue of preference share capital at Rs. 25 per share along with face value of each equity share at Rs. 10/-and each preference share at Rs.100/- is in excess of the fair market value of Rs. 10/- per equity share and Rs. 100/- per preference share for preference and therefore, provisions of Section 56(2)(viib) of the Act have rightly been invoked by ld. AO for making the addition of Rs. 8.05 Cr received towards share premium in the hands of the assessee. Thus, the finding of ld. CIT(A) is reversed, addition at Rs.8.05 Cr. made by ld. AO is confirmed.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
This appeal filed by the Revenue and the Cross Objection filed by the assessee pertaining to the Assessment Year (in short “AY”) 2013-14are directed against the order passed u/s 250 of the Income Tax Act, 1961 (in short the “Act”) by ld. Commissioner of Income-tax (Appeals)-4, Kolkata [in short ld. “CIT(A)”] dated 13.06.2018 arising out of the assessment order framed u/s 143(3)of the Act dated 30.03.2016.
2. The Revenue is in appeal before the Tribunal raising the following grounds:
“1. That the Ld. CIT(A) had erred in deleting the addition of Rs. 8,05,00,000/- made u/s. 56(2)(viib) of the I.T.Act.
2. That the Ld. CIT(A) had erred in ignoring the absence of any details regarding the acquisition of the step down subsidiary companies, the value of whose shares formed the basis of valuation by the valuer regarding the equity share and compulsory convertible preference share of the assessee company in view of the fact that the date of incorporation of the assessee company was 07/11/2012 and the cut-off date for valuation of shares was 16/11/2012.
3. That the Ld. CIT(A) had erred in not calling for a remand specifying the issues to be enquired into and also accepting the remand report which mentioned only the valuer’s valuation of shares without any independent findings of the AO.
4. That the Ld. CIT(A) had erred in accepting the valuer’s report when the report itself was questionable since the subsidiary companies were acquired on 29/12/2012 and 10/01/2013 after the valuation date of shares (16/11/2012).
5. The appellant craves for leave to add, alter or modify the grounds of appeal.”
3. The assessee has raised the following grounds in the Cross Objection:
“1. That the order passed by the Ld. Commissioner of Income Tax (Appeals) was fully justified in deleting the addition of Rs. 8,05,00,000/- on account of premium on issue of shares of the company u/s 56(2)(vii b) of the Income Tax Act, 1961. The appeal filed by the Revenue in this respect is unjustified and without any substance and is liable to be dismissed in limine.
2. That the order passed by the Ld. Commissioner of Income Tax (Appeals) was fully justified in accepting the Valuation Report obtained from the Income Tax registered Valuer for issue of Compulsorily Convertible Preference Shares of the company. The appeal filed by the Revenue in this regard is unjustified and without any substance and is liable to be dismissed.
3. That the respondent be allowed to add/alter/amend/delete either, all or any of the grounds of cross objection either before or at the time of hearing.”
4. First, we will take up the Revenue’s appeal where the sole grievance of the Revenue is that ld. CIT(A) erred in deleting the addition of Rs. 8.05 Cr made by Ld. AO u/s 56(2)(viib) of the Act for receiving consideration against share issued in excess of fair market value.
5. Brief facts of the case as culled from the records are that the assessee is a private limited company engaged in the business of production and generation of renewable energy. Income of Rs. 17,95,200/- declared in the e-return filed for AY 2013-14 on 28.09.2013. Case selected for scrutiny through CASS followed by serving of notices u/s 143(2) & 142(1) of the Act. The reason for the case being selected for scrutiny was introduction of capital in the year and large share premium received. During the course of assessment proceedings, ld. AO after going through the financial statements and other details filed by the assessee observed that during the year share premium of Rs. 5 lakh was received @ Rs. 2.5/- per share on the issue of equity share equal and share premium of Rs. 8 Crore received @ Rs. 25/- per share on the issue of preference shares capital. Ld. AO observed that the assessee company incorporated during FY 2012-13 has charged share premium on issue of equity share capital and preference share capital. On being confronted, the assessee filed detailed submissions. Thereafter, record of the case was sent to Addl. CIT, Range-2, Kolkata and directions were received u/s 144A of the Act dated 22.03.2016 by ld. AO to refer the matter immediately to the Valuation Officer u/s 142A of the Act. On 28.03.2016 the case was referred to the District Valuation Officer, but on 30.03.2016 reply was received from the Asst. Valuation Officer-6, Kolkata stating that the Valuation Officer deals only with immovable property and has not dealt with the valuation of shares, debenture, jewellery, vehicle, machinery and plant. On the same day i.e 30/3/2016 ld. AO completed the assessment making addition of Rs. 8.05 Cr for the alleged share premium received in excess of the face value of the shares invoking the provisions of Section 56(2)(viib) of the Act observing as follows:
“1. Share Premium Charged on fresh issue of Equity Shares:
The assessee has credited a sum of Rs 5,00,000/- during the previous year as share premium under the head Reserves and Surplus in its Balance Sheet received on issue of equity share capital. From the details as furnished and valuation report as stated herein before it was noted that the company had appointed a firm of chartered accountants who had applied Discounted Free Cash Flow Method as per sub rule (2) of Rule 11UA in order to determine the Fair Market Value of the equity shares of the company. Now while going through the said report as obtained from the firm of chartered accountant, it was noticed that they have given details pertaining to 3 (three) Private Limited companies viz., Manifold Agricrops Private Limited, Sidhidata Solar Urja Private Limited and Palimarwar Solar Project Private Limited, none of whom has any business connection and or association with the assessee. Accordingly, there is no relationship and or logic to accept the said calculation sheet/valuation report as the determining basis for the share premium charged on equity shares by the company. In view of this fact, the entire share premium amounting to Rs.5,00,000/-is disallowed and added back with the net profit of the assessee under section 56 (2) (viib) of the I.T. Act.
[Addition of Rs. 5,00,000/- is made]
2. Share Premium Charged on fresh issue of Preference Shares:
The assessee has credited a sum of Rs 8,00,00,000/- during the previous year as share premium under the head Reserves and Surplus in its Balance Sheet received on issue of preference share capital. The terms of reference as set out in the valuation report of the firm of chartered accountant is limited to valuation of equity shares. However, the assessee company has taken that as the basis for justifying the share premium charged on issue of preference share issued by it during the year. It is pertinent to refer to the terms and conditions attached to the preference shares issued by the company. The terms and conditions of the preference shares as observed from the audited balance sheet states that preference shares are non-cumulative compulsorily convertible preference shares which would be deemed within 20 years from the date of issue into equity shares at par and as far as dividend is concerned, the shareholders would be entitled to receive dividend @ 8% which can go upto 12% in case dividend on equity shares are declared and not otherwise. Moreover, the preference shareholder has no right to vote. Further, attention is particularly invited to Section 56(2) (viib) read together with Rule 11UA of the Income Tax Rules and is reproduced hereunder:
[(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—; 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 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 (c), clause (b) and clause (c) of—[Explanation] to clause (23FB) of section 10;]
The method has been prescribed in Rule 11UA of the Income Tax Rules
Determination of fair market value.
11UA. [(1)] 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,—
(a) valuation of jewellery,—
(i) …;
(ii) …;
(iii) …date;
(b) valuation of archaeological collections, drawings, paintings, sculptures or any work of art,—
(i) ….;
(ii) ….;
(iii) ….;
(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 recognised 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 recognised 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 recognised stock exchange on lie valuation date, and
(b) the lowest price of such shares and securities on any recognised 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 recognised 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) 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 Income-tax Act and any amount shown in the balance-sheet as asset including the unamortized 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, ether 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, 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 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:—
(a) 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 Income-tax Act and any amount shown in the balance-sheet as asset including the un amortised 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 is 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;
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 or an accountant as per the Discounted Free Cash Flow method.]
Rule 11UA(1) (c) (b) deals with the valuation methods and procedure and also suggest alternative Sub rule (2) which gives the option to the assessee to apply either option (a) or option (b) in respect of equity shares. However, only Rule 11UA (1) (c) (c) 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 priced 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.
Accordingly, as stated herein before supra that the assessee has engaged a firm of chartered accountants for obtaining the valuation certificate but which was limited to valuation of equity shares. Hence the assessee is in default in compliance with the law in so far as it requires to obtain a valuation certificate from an accountant in respect of any share and securities other than equity share.
Moreover, the assessee has chosen to opt for alternative as provided in Rule 11UA (2) (b) which is again restricted to equity shares and for the reasons recorded herein before the valuation of equity shares as derived are also not relevant for the purpose of determination as the base for valuation of shares and ascertaining the share premium.
In the case of Singhal Credit Management Ltd. vs Assistant Commissioner of Income-tax, Central Circle, Alwar* [2012] 19 taxmann.com 49 (Jp) the issue of valuation has been dealt with.
After 1-10-2009, the fair market value of the unquoted equity shares is to be determined on the basis of book value of the assets for computing income u/s 56 of the Act. It has not been provided that fair market value of the assets as contained in balance sheet of the company should be considered for ascertaining the value of the shares. The share is bundle of right and is distinct from the assets of the company. Share also refers to the voting power and in case the assessee is having more than the particular number of shares, then it can have a controlling interest. However, in the instant case, the shares in question, is preference shares premium charged thereon and as mentioned herein before the preference shares does not carry any voting rigid. Hence, those shareholders cannot be treated at par with the equity shareholders. There is no doubt that the preference shareholders carry a right which mandatorily entitles them and the company to convert those preference shares into equity shares of the company at par, but that does not place them at par with the existing equity shareholders. Moreover, a value derived for the purpose of valuation of equity shares cannot and should not be taken as the basis for ascertaining the premium to be charged on a different class of share having altogether different set of rights.
In view of the above facts, the entire share premium amounting to Rs.8,00,00,000/- is disallowed and is added back with the net profit of the assessee under section 56(2)(viib) of the IT. Act.
[Addition of Rs.8,00,00,000/- is made]”
5. Aggrieved, the assessee preferred appeal before ld. CIT(A) and stated that the valuation report has been obtained from registered valuer on 14.03.2018 which justifies the share premium charged by the assessee on the issue of equity share capital and preference share capital. Considering the submissions of the assessee, ld. CIT(A) deleted the addition observing as follows:
“3.5 I have perused the Assessment Order, SOF, Submissions of the Assessee, Valuation Report and reply of the AO on the valuation report. It is seen that the Assessee has issued equity shares of Rs. 10/- at a premium of Rs. 2.5 and preference shares of Rs. 100/- at a premium of Rs. 25 per share. Total amount of premium is Rs 5 lakhs on equity shares and Rs. 8 crore on preference shares. Both the share capital has been raised from M/s. Placid Limited a group concern of the Assessee company. M/s. Placid Limited is a group concern of Bangar Group a reputed business house of Kolkata and the company is having a net-worth of more than Rs. 500 crore. During the course of Appellate proceedings, the source of source for investment by Placid Limited was also called hr and also found to be properly explained (vide Annexure A to the appeal order). Therefore, it is obvious that the subscription of preference shares and equity shares has come out turn reputed companies from explained sources. As far as compliance with provisions of Rule 11UA(2)(c) it concerned, the assessee during the Remand Proceedings has obtained report of the valuer. As per the valuer the value of each preference shares comes to Rs. 237.50 and value of equity shares is corning to Rs. 23.75. Since the assessee has issued the shares at a price less than the price determined by the valuer, therefore, u/s. 56(2)(viib) the shares has not been issued in excess of the fair market value of the shares under Rule 11UA, therefore, the addition made by the AO cannot be sustained.
4. In the result, appeal of assessee is ALLOWED.”
6. Aggrieved, the Revenue is now in appeal before this Tribunal. Ld. D/R vehemently argued referring to the detailed finding of ld. AO. He, further stated that the date of incorporation of the assessee company is 07.11.2012 and the cut-off date for valuation of share was 16.11.2012. Further, he stated that in the valuation report reference is made to the subsidiary companies and their net worth has been added to the assessee company’s net worth and valuation report has been prepared. However, such inclusion of subsidiary companies was not correct since they were acquired on 29.11.2012 and 10.01.2013 i.e. after the valuation date on 16.11.2012.
7. On the other hand, ld. Counsel for the assessee vehemently argued referring to the finding of ld. CIT(A) and further, referred to the following written submissions:
“Background: –
1. LNB Renewable Energy Private Limited (hereinafter referred to as ‘LNB Renewable’ or ‘the Respondent’ or ‘Assessee’), is into the business of power and energy.
2. The Assessee filed its return of income for the Assessment Year (‘AY’) 2013-14 declaring total income of Rs. 17,95,200/- under the normal provisions of the Income-tax Act, 1961 (‘Act’) and Book profit of Rs. 2,48,358/- under section (‘u/s’) 115JB of the Act.
3. During the captioned year, the Assessee has issued 2,00,000 equity shares of face value of Rs. 10/- each at a premium of Rs. 2.50/- per share and 32,00,000 preference shares of face value of Rs. 100/- each at a premium of Rs. 25/- per share, to its holding company.
4. The Assessee issued the shares basis the valuation report provided by an independent Chartered Accountant Firm. The valuation of the shares was based on the Discounted Free Cash Flow Method, which is in conformity with the provisions of Rule I lUA(2)(b) of the Income Tax Rules, 1962.
5. The Assessee’s case was thereafter selected for scrutiny assessment for the captioned year. Assessment Proceedings: –
6. During the assessment proceedings, the Assessing Officer (‘AO’) issued multiple notices, calling for information, which were duly provided by the Assessee, including a detailed explanation for issue of shares at premium along with valuation report of an independent Chartered Accountant Firm.
7. Thereafter, the Assessee vide its letter filed on March 16, 2016, requested the Joint/ Addl. Commissioner of Income-tax (‘Addl. CIT’), to issue appropriate directions u/s 144A of the Act. In response, the Addl. CIT had issued a specific direction to the AO vide its letter dated March 22, 2016, to complete the assessment after obtaining a valuation report from the Valuation Officer. (Directions from Addl. CIT are attached at Page 31-32 of the Paper book).
8. The AO without any further notice to the Assessee, completed the assessment by passing an order u/s 143(3) on March 30, 2016, wherein the total income was assessed at Rs. 8,22,95,200/-under the normal provisions of the Act, as against a returned income of Rs. 17,95,200/-, by making the following additions/ disallowances:
