Case Law Details
Go Fashion (India) Ltd. Vs PCIT (ITAT Chennai)
Conclusion: The difference in the fair market value and the issue price of compulsory convertible preference shares was only 0.65%, therefore as per Rule 11UA issue price was deemed to be fair market value and hence no scope for addition required to be made u/s. 56(2)(viib).
Held: Assessee-company had issued compulsory convertible preference shares raising Rs. 100 crore under a private equity investment made by ICICI Venture through India Advantage Fund S4-I. The shares were issued for Rs. 416.69 per share, while the Fair Market Value ( FMV ) of the shares was determined to be Rs. 414 per share. During the assessment process, AO accepted the valuation of shares and made no addition under Section 56(2)(viib) for the difference in issue price and FMV of the shares. The Principal Commissioner of Income Tax ( PCIT ) found that AO did not make any additions regarding the differences and issued a revision order under Section 263, contending that AO’s order was erroneous and prejudicial to the interest of the Revenue because of insufficient inquiry into the valuation difference. Assessee challenged the PCIT’s revision order arguing that Rule 11UA permits a 10% variation between the issue price and FMV and the difference was just 0.65% in their case. Therefore, no addition was required under Section 56(2)(viib). It was held that ITAT, Delhi Bench in ITAT No.8389/Delhi/2019 in the case of Sakshi Fincap Ltd. dated 16.04.2024 had held that the amendment brought in Rule 11UA was introduced to mitigate hardship faced by taxpayers by the unintended invocation of section 56(2)(viib) r/w Rule 11UA and therefore, the same was a curative amendment. The difference in the fair market value and the issue price of compulsory convertible preference shares was only 0.65%, therefore as per Rule 11UA issue price was deemed to be fair market value and hence no scope for addition required to be made u/s. 56(2)(viib). In order to invoke Section 263 the twin condition of erroneous and prejudicial to the interest of Revenue were to be satisfied. In the present case, the second condition that order was prejudicial to interest of revenue was not being satisfied. Therefore, the order passed by AO was not prejudicial to the interest of revenue.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
Aforesaid appeal filed by the assessee for Assessment Year (AY) 2018-19 arises out of the order of Learned Principal Commissioner of Income Tax, Chennai-1 [hereinafter “PCIT”] dated 29.02.2024 passed u/s. 263 of the Income-tax Act, 1961 (hereinafter “the Act”).
2. The grounds of appeal raised by the assessee are as under:
“1. The order of the learned Principal Commissioner of Income Tax is opposed to law and the facts and circumstances of the case.
2. For that in the facts and circumstances of the case, the Ld. PCIT. erred in violating the principles of natural justice by not the mentioning the specific grounds for initiating action u/s 263 of Income Tax Act, 1961 in the show cause notice As such, the order passed u/s 263 is void ab-initio. The action of the Ld. CIT was wholly unreasonable, uncalled for and bad in law.
3. For that in the facts and circumstances of the case, the Ld. PCIT erred in not passing a speaking order against all the submissions of your appellant. As such, the order passed u/s 263 is void ab-initio. The action of the Ld. PCIT was wholly unreasonable, uncalled for and bad in law.
4. For that in the facts and circumstances of the case, the order u/s 263 is merely ‘change in opinion’. The order u/s 143(3) passed by the Ld. AO does not in any way represent erroneous order. The action of the Ld. PCIT was wholly unreasonable, uncalled for and bad in law.
5. For that in the facts and circumstances of the case, the order u/s 263 is not for the reason of the Ld.AO has not made inquiries or verification, The Ld. PCIT has passed the order u/s 263 for the reason that complete verification and enquiry was not done. The action of the Ld. PCIT was wholly unreasonable, uncalled for and bad in law.
6. For that in the facts and circumstances of the case, the order u/s 263 has not properly appreciated the sub-rule 4A of Rule 11UA of the Income Tax Rules, which is applicable retrospectively with effect from 01.04.2003 as held in by the Honorable ITAT Chennai in the case of Thiduvil Balakrishnan DCIT in (2023] 151 taxmann.com 484, where in the variation not exceeding 10% in the valuation price, is deemed to be the fair market value. The action of the Ld. PCIT was wholly unreasonable, uncalled for and bad in law.
7. The Appellant craves leave to add, amend. alter vary and / or withdraw any or all the above grounds of appeal at the time of hearing and the appellant prays that the Hon’ble Tribunal be pleased to allow the appeal and render ”
3. The assessee , private limited company has issued compulsory convertible preference share of 100 Cr. on 16.01.2018 under private equity category, contributed by ICICI venture through India Advantage Fund S4-I. The shares were issued at price of Rs. 416.69 per share against the Fair Market Value of share of Rs. 414. The Assessing Officer in assess passed under section 143(3) after verification has not made any addition u/s 56(2)(viib) for difference in issue price and FMV of shares. The Ld PCIT has held the order erroneous and prejudicial to the interest of revenue and set aside the assessment order. The Ld PCIT has held that the A.O has not made complete verification and inquiry in respect of consideration received by the assessee in excess of fair market value to be charged as income from other sources u/s. 56(2) (viib) of the Act and passed order without application of mind.
4. The Ld. Authorized Representative (A.R) of the assessee has submitted that the A.O during assessment proceedings has called for particulars including the valuation of shares under Rule 11UA in the notice u/s. 142(1) of the Act. The Ld. AR has submitted that the A.O has specifically raised question on the issue of share and therefore, in view of the decision of Hon’ble ITAT, Delhi Benches in the case of Vaan Infra (P) Ltd. vs. PCIT [2024] 159 taxmann.com 29 (Delhi-Trib.), the Ld. PCIT was not justified in setting aside the order of A.O u/s. 263 of the Act on the ground that the A.O had merely accepted the claim of share premium. The Ld. AR has further submitted that investment in the assessee’s case has been made by ICICI venture through India Advantage Fund S4-I and therefore, in view of Notification GSR 685(E)[No.81/2023/F.No.370142/9/2023-TPLpart(1)]dated 25.09.2023, no addition is to be made in case the fund received from investment made by venture capital company. The Ld. AR has further submitted that as per sub clause (4) of Rule 11UA there is a tolerance limit of 10% permitted on the issue price and FMV as per valuation u/s 11UA and in assessee’s case difference between the issue price and fair market value is only 0.65%, which is less than 10% allowed by Rule 11UA. The Ld. AR has submitted that though Rule 11UA has been inserted w.e.f 25.09.2023 , it has been held by Hon’ble ITAT, Delhi Bench in ITA No.8289/Delhi/2019 dated 16.04.2024 that the Rule is to be treated as retrospective. The Ld. AR has further submitted that earlier there was no provision to value the compulsory convertible preference shares and the valuation of compulsory convertible preference shares has been brought in only w.e.f 25.09.2023 and therefore, section 56(2)(viib) has no application in such share.
5. The Ld. CIT-Departmental Representative (DR), on the other hand, relied on the order passed by PCIT.
6. We have heard the rival submissions, and perused the materials available on record. The assessee has issued compulsory convertible preference shares at a price of Rs. 416.69 per share as against the fair market value of 414 determined as per Rule 11UA. There is difference of 0.65% only in the issue price and FMV . The A.O during the course of assessment proceedings has issued notice u/s. 142(1) and in question No.9 has asked for a detailed note on determination of the fair market value of the issued share as per section 56(2)(viib) and the assessee has submitted the details after which the A.O has not made any addition. It is also seen that Rule 11UA has been amended w.e.f 25.09.2023 as under:
“(i) sub-clause (a) or sub-clause (b) of clause (A), for sub-clause consideration received from a resident, by an amount not exceeding ten per cent of the valuation price, the issue price shall be deemed to be the fair market value of such shares:
(ii) sub-clause (a) or sub-clause (b) or sub-clause (d) of clause (A), for consideration received from anon- resident, by an amount not exceeding ten per cent of the valuation price, the issue price shall be deemed to be the fair market value of such shares.”
7. The ITAT, Delhi Bench in ITAT No.8389/Delhi/2019 in the case of Sakshi Fincap Ltd. dated 16.04.2024 has held that the amendment brought in Rule 11UA was introduced to mitigate hardship faced by taxpayers by the unintended invocation of section 56(2)(viib) r/w Rule 11UA and therefore, the same is a curative amendment. The difference in the fair market value and the issue price of compulsory convertible preference shares is only 0.65%, therefore as per Rule 11UA issue price is deemed to be fair market value and hence no scope for addition required to be made u/s. 56(2)(viib) of the Act. In order to invoke Section 263 of the Act the twin condition of erroneous and prejudicial to the interest of Revenue are to be satisfied. In the present case, the second condition that order is prejudicial to interest of revenue is not being satisfied. We, therefore do not agree with the Ld PCIT that order the order passed by AO is prejudicial to the interest of revenue. We, therefore set aside the order passed by Ld. PCIT .
8. In the result, the appeal filed by the assessee is allowed statistical
Order pronounced on 30th September, 2024.
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