Addition u/s 56(2)(viib) sustained as method for FMV of equity shares not as per rule 11UA

ITO Vs Quark Enterprises Private Limited (ITAT Hyderabad)

ITAT Hyderabad held that addition under section 56(2)(viib) of the Income Tax Act sustained as method adopted for determination of FMV of equity shares by the assessee is not as per method prescribed under rule 11UA of Income Tax Rules.

Facts- During the course of assessment proceedings the AO, on verification of the financials observed from the balance sheet that the assessee company has received share premium to the extent of Rs.23,98,74,430/- during the financial year under consideration. In order to verify the same and examine the applicability of section 56(2)(viib) of the IT Act, he asked the assessee to provide the details of parties from whom share premium was received along with details of the mode of receipt and to explain why the provisions of section 56(2)(viib) of the Act should not be applied.

Put verification, AO held that the assessee is eligible to receive a premium Rs.0.305/ – per share only whereas the assessee received an amount of Rs.190/ – per share as “Premium” which is Rs.189.695/ – (Rs.190-0.305) higher than eligible premium as calculated. Hence, he treated the excess premium of Rs.189.695/ – per share as “Income from other sources” and made addition of Rs.23,94,89,308/- to the total income of the assessee.

CIT(A) allowed the appeal of the assessee. Being aggrieved, revenue has preferred the present appeal.

Conclusion- Held that in our opinion, this is a colorable device applied by the assessee for inflating the value of its share. The valuation of the company in our opinion should be done based on the basis of fundamentals and economic conditions of the assessee and must be in accordance with the method prescribed for that purpose. It should be independently done as, the valuation of holding company shares done on the basis of DCF method cannot be yardstick to determine the valuation of shares of assessee company. Hence, valuation made by the assessee of NAV method is not in accordance with law. Further, neither market value of shares of the sister concern had been taken into consideration nor the valuation of sister concerns had been independently examined by the ld.CIT(A). Hence, the same is required to be rejected.

In view of the above discussion, it cannot be said that no fault was found in such valuation report by the AO or that the AO has not found any defect in the valuation of shares arrived at by the assessee. We find the ld.CIT(A) in the instant case without properly understanding the facts of the case was merely carried away by the submissions of the assessee and deleted the additions, which in our opinion is not justified under the facts and circumstances of the instant case. The various decisions relied on by the ld.CIT(A) are not applicable in the facts of the present case. Since, the AO has given valid reasons while making the addition, therefore, the order of ld.CIT(A) which is contrary to facts cannot be upheld. We therefore set aside the order of the ld.CIT(A) on this issue and the grounds raised by the revenue is allowed.

FULL TEXT OF THE ORDER OF ITAT HYDERABAD

This appeal filed by the revenue is directed against the order dated 07.05.2019 of Learned Commissioner of Income Tax (Appeals)-4, Hyderabad relating to AY 2016-17.

2. There is a delay of ‘1’ day in filing of this appeal by the Revenue for which the Revenue has filed a condonation application explaining the reasons for delay. After considering the contents of the condonation application and after hearing both sides, the delay in filing of this appeal by the Revenue is condoned.

3. Ground of appeal No.1 by the revenue reads as under:-

1. “Whether on the facts & in the circumstances of the case, the ld.CIT(A) was right in deleting the addition made u/s. 56(2)(viib) of the Act without appreciating that the method adopted for determination of FMV of the equity share by the assessee is not as per the method prescribed under Rule 11UA of the I.T.Rules.

4. Facts of the case, in brief, are that the assessee is a company and engaged in the business of investment. It filed its return of income on 27.09.2016 declaring loss of Rs.1,93,66,158/- under normal provisions and book loss u/s. 115JB at Rs.1,93,45,628/-. During the course of assessment proceedings the AO, on verification of the financials observed from the balance sheet that the assessee company has received share premium to the extent of Rs.23,98,74,430/- during the financial year under consideration. In order to verify the same and examine the applicability of section 56(2)(viib) of the IT Act, he asked the assessee to provide the details of parties from whom share premium was received along with details of the mode of receipt and to explain why the provisions of section 56(2)(viib) of the Act should not be applied.

5. In response to the same, the assessee submitted that it has issued 12,62,497 shares @Rs.200/- per share (with face value of Rs.10/ – per share and premium of Rs.190/ – per share) to four parties the details of which are as under:

6. The AO noted that the assessee submitted a document entitled Report on Valuation of Equity Shares as a valuation report according to which the assessee is a 100% holding company of M/s . CallHealth Services Private Limited and that the assessee company has no other business activities as on date. He noted that the share value of the subsidiary company has been valued at Rs.188.4/ – per share by their valuers, and accordingly the valuer of assessee company has remarked that “Taking into consideration of the facts and controlling stake of Callhealth Services Private Limited, the Investment value of the Company will be more than the subsidiary per share price”

6.1 The AO noted that the assessee submitted a Report on business valuation prepared by a private value wherein the valuer has qualified that the analysis is based on the facts presented to the valuer by the company (CallHealth) and their work did not constitute an audit, due diligence or validation of the financial statements of the company (CallHealth). He noted that the valuer has stated that in the case of CallHealth, as no operations have started, the only approach that can be adopted for valuation is DCF method which is one of the method prescribed under Rule 11 UA. However, the assessee could not substantiate that the actual income of CallHealth, for subsequent years i.e. FY 2016-17 & 2017-18 were as per the projected income figures. He, therefore, was of the opinion that in absence of such substantiation, DCF method cannot be accepted as the right method of valuation, since CallHealth has not started any operations. The AO further noted that the valuation has been done keeping in mind the value of the subsidiary company, and does not reflect the value of the assessee company’s equity value per share. Further, as per the provisions of the Act, the valuation of the shares must be done as per rule 11 UA prescribed. The valuation report submitted by the assessee does not substantiate its claim of the value of share premium received by it and is not in conformity with the valuation which must be done as per Rule 11 UA, as per the Act. He therefore confronted the same to the assessee. From the various details furnished by the assessee, he noted that the assessee company could not substantiate its claim of issue of share at a premium to his satisfaction. The assessee has no independent business activity, but has valued its price per equity at a premium of Rs.190/-. The valuation report of CallHelath provided is based on unsubstantiated DCF method, which is not in tandem as visualized as per rule 11UA and required by the provisions of the Act under explanation given defining fair market value as per section 56(2)(viiib). Moreover the valuation given is based on valuation of assessee company’s holding in M/s. Call Health Services, which are based on the fair value of each share. However, the valuation of the subsidiary company could not be substantiated with proper justification as per prescribed method. Further, the definition of fair market value clearly requires the valuation of the company’s assets as enlisted. He noted that as per the explanation to Section 56(2)(viib) FMV “as may be substantiated by the company to the satisfaction of the AO, 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.” Hence, he valued FMV of shares as per the method specified in Rule 11 UA of the IT Rules as follows:

The FMV of unquoted equity share =

(Assets-Liabilities) X Paid up value of equity share

(Paid up Equity)

The following values are to be represented in the above formula:

Assets (net) = RS.40,07,00,813 (40,07,29,479) – TDS Receivable

Rs.28,666) Liabilities = RS.13,68,80,511 (40,07,29,479 – 25,60,00.01 0-7,48, 958)

Paid up capital = RS.25,60,00,010

Premium per share FMV – Paid up Share value =Rs.10.305 – RS.10 = RS.0.305

6.2 He accordingly held that the assessee is eligible to receive a premium Rs.0.305/ – per share only whereas the assessee received an amount of Rs.190/ – per share as “Premium” which is Rs.189.695/ – (Rs.190-0.305) higher than eligible premium as calculated. Hence, he treated the excess premium of Rs.189.695/ – per share as “Income from other sources” and made addition of Rs.23,94,89,308/- to the total income of the assessee.

7. Before the ld.CIT(A), the assessee made elaborate arguments. It was submitted that during the financial year 2014-15, the assessee company had assets namely investments in M/s Call Health Services Pvt Ltd in the form of Equity Shares. Considering the percentage of holding of Equity Shares in Call Health Services Pvt Ltd., the assessee company became the Holding Company under the provisions of the Companies Act, 2013, and Call Health Services Pvt Ltd. became the subsidiary of the assessee company. It was further submitted that the assessee company does not have any other assets other than the Investments in Call Health Services Pvt Ltd. i.e. the value of the assessee company is lying in the underlying value of Equity Shares of Call Health Services Pvt Ltd., held by the appellant company as its investments. It was argued that Call Health Services Pvt. Ltd., has received investments from various investors including investors from abroad at a cost of Rs.200 per equity share (Rs.10 face value and Rs.190 premium). The assessee company has also invested into the equity shares of Call Health Services Pvt. Ltd., at a cost of Rs.200 per equity share in-turn, the assessee company has received investments from its investors at the same value i.e., Rs.200 per equity share. Accordingly, during the financial year 2015-16, the assessee Company has received an equity share subscription amount of Rs.25,24,99,400/-, representing share capital amount of Rs.1,26,24,970/- and share premium amount of Rs.23,98,74,430/- and against the said share subscription, equity shares of 12,62,497 were allotted by the assessee company at a face value of Rs.10 per share and at a premium of Rs.190/-per equity share to the investors. The entire share subscription money received by the assessee Company from its investors had been invested into its subsidiary company i.e., Call Health Services Pvt. Ltd., as equity shares at a value of Rs.200/- per equity share. Since, the underlying value of the Appellant Company investments are valued at Rs.200 per equity share, the equity shares were allotted to its investors at a cost of Rs.200 per equity share. It was argued that the Fair Market Value of Equity Shares allotted by the Appellant company relating to the Asst year 2016-17 is arrived on the basis of the Market value of its investments, i.e., Equity Shares of Call Health Services Pvt Ltd., which is a subsidiary company of the appellant company. Considering the underlying value of assets, i.e., equity shares held by the appellant in subsidiary company, the valuation was done under rule 11UA of Income Tax Rules,1962. It was submitted that the basis for Share premium and the valuation report was filed before the Assessing Officer, during the course of assessment proceedings and the AO without considering the submissions and brushing aside the valuation report completed the assessment by showing an addition of Rs.23,94,89,368/- under section 56(2)(viib) of Income Tax Act,1961 which is not correct

8. So far as the issue of invoking the provisions of section 56(2)(viib) is concerned, the assessee submitted that valuation report of Chartered Accountant (CA) valuing the fair market value of the share under Discounted Cash Flow method (DCF Method) was filed where in the assessee exercised the option given to appellant by the statute. The AO rejected the same on the reason that there were disclaimers by the CA and so the same cannot be accepted. He took the valuation date as on 31-03-2015 and valued the share under Net Asset Value Method (NAV Method) and made the addition ignoring the submissions of the Appellant. Moreover, the AO has not given any opportunity to examine the valuation as on allotment date.

9. So far as the allegation of the Assessing Officer that share premium being higher than the intrinsic worth/fair value of the equity shares is concerned, it was submitted that the assessee had supported the said fair value of equity shares being Rs. 200 per equity share as against face value of Rs. 10 per equity share with a certificate issued by a chartered accountant using DCF method which is an approved method as prescribed by RBI/ICAI. The assessee’s valuation is discredited by the AO on the reason that the valuer has made many disclaimers and has relied on management data without verifying the same. However, AO has not disputed the Assumption made or the data relied or projections made in the valuation report.

10. So far as, the issue of changing method of valuation by the AO is concerned, it was submitted that the assessee company has determined the Fair Market Value of shares issued at premium on basis of Discounted Cash Flow method in accordance with rule 11UA(2)(b) read with section 56(2)(viib) and valuation report was prepared as per guidelines given by ICAI and no fault was found in same. Therefore, the Assessing Officer was not justified in changing method of valuation of shares to Net Asset Value method.

11. Referring to the decision of the Jaipur Bench of the Tribunal in the case of Rameshwaram Strong Glass Pvt.Ltd vs ITO in ITA No.884/Jp/2016, order dated 12.07.2018, the assessee submitted that it is not open for the AO to challenge or change the method of valuation, once opted by the assessee and to modify the figures as per his own whims and fancies. Alternatively, it was argued that the underling assets i.e. Shares in subsidiary company at the same value justifies the premium in assessee company’s hands which argument AO has not considered at all. It was submitted that the NAV method, if correctly adopted, will justify the premium received as such on the valuation date.

12. Relying on various decisions, the assessee submitted that the AO is not justified in rejecting the method adopted by the assessee and substituting with NAV method when the statute gives an option to the assessee to choose the method.

13. Based on the arguments advanced by the assessee, the ld.CIT(A) deleted the addition by observing as under:-

“ 7. I have considered the assessment order, groudns of appeal and AR’s submission in this regard. The main issue involved in this appeal is with regard to AO’s action in considering the share premium of Rs.23,94,89,368/- u/s. 56(2)(viib) of the Act. After considering the facts of the case I am of the considered view that the action of the AO is not justified for the following reasons:

a) The basis for share premium and the valuation report was filed by the appellant before the AO. However, the AO rejected the Discounted Cash Flow Method (DCF) valuation method adopted by the appellant. The AO though in the assessment order has referred to provision of section 56(2)(viib) but did not doubt the method adopted by the appellant to value the shares to substantiate the fair market value. The AO has not found any defects in the method adopted by the appellant, except rejecting the same on the reason of disclaimers given by CA while valuing the share value on DCF method.

b) It is pertinent to mention here that the company has not started business operations and the figures given by the C.A. were mere projection/ estimations depending upon various factors which nobody could have anticipated or foreseen on the day when such valuation was made. Therefore, there was no justification in rejecting the method by the AO. Rule 11 UA(2)(b) require the C.A. to prepare a report on DCF Method only i.e. based on mere projections and not actuals as against the NAV Method prescribed under rule 11 UA(2)(a). Thus, in the instant case, the C.A. had considered various factors which formed a reasonable basis of projections. Moreover, it is not denied by the AO that the valuation reports were not as per the guidelines given by the Institute of Chartered Accountants of India.

c) Rule 11 UA gives an option to appellant to value the share on the valuation date either under Net asset value as prescribed or DCF method. In this case appellant chose the DCF method since option was given to appellant under the provisions of the Act and Rules. As per rule 11 UA of 1962 Rules, the Fair Market Value of unquoted equity shares would be the value, on the allotment date, of such unquoted equity shares as determined as per the method provided or Net Asset Value whichever was higher. Since DCF value is more, the higher of the two has to be considered. Hence the addition made by AO on net asset value is not according to the provisions of the Act.

d) Without prejudice to the above, the AO has taken the valuation date as on 31-032015, whereas the rule provides for adoption of valuation date as on the day of allotment of shares. In that way also the working of the AO is not according to the Provisions/Rule.

e) It was held in the case of Assistant Commissioner of Income-tax, Circle-2, Alwar. vs. Safe Decore (P.) Ltd. 169 ITO 328 (Jaipur) it was held that the fair market value as per the provision of section 56(2)(viib) has to be determined in accordance with the method prescribed under rule 11 UA of the IT Rules and as per sub-rule (2) of rule 11 UA, discounted cash flow method is one of the prescribed method. Therefore, it is the option of the appellant to adopt any of the prescribed method under rule 11UA(2) of the 1962 rules.

Section 56(2)(viib) read with Explanation has specifically provided that the fair market value of the unquoted shares shall be determined as per the prescribed methods and shall be taken whichever is higher fair market value by comparing the value based on the asset of the company. Therefore, the Net Asset Value method as well as any of the other methods prescribed under rule 11 UA of the 1962 Rules,whichever is higher shall be adopted as per the option of the appellant. In view of the statutory provisions giving options to appellant to adopt any of the methods which can be compared with the Net Asset Value Method and the AO shall adopt the value whichever is higher.

f) The Hon’ble ITAT Delhi Bench in the case of DCIT vs Ozone land Agro Pvt Ltd (ITA/MUM/4854/2016 dated 02-05-2018 has held that Rule 11UA allows the assessee the right to adopt the method of his choice for valuing shares (DCF, NAV, etc). The AO has no jurisdiction to insist that appellant should adopt only a particular method for determining the value of the shares.

g) Appellant chose the DCF method and justified the valuation. The method can only be rejected only when appellant could not substantiate the assumptions/projection . made while valuing the fair market value of share in the DCF method. However, in the instant case, the AO has not found any mistakes in the method followed by the appellant.

h) The Appellant’s valuation is discredited by the AO on the reason that the valuer has made many disclaimers and has relied on management data without verifying the same. However, the AO has not disputed the assumption made or the data relied or projections made in the valuation report. It is admitted that section 56(2)(viib) envisages that, any consideration received for issue of shares which exceeds the face value should not exceed the fair market value. The relevant provision provides that where a company (not being a company in which the public are substantially interested) receives in any previous year from any resident person, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration for receipt of shares should not exceed the fair market value of the shares. Such excess value shall be deemed to be the income of the concerned company chargeable to tax under the head “income from other sources” for the relevant financial year. In other words, the aggregate consideration received for such shares as exceeds the FMV of the shares shall be the income of the issuer company.

i) The statute provides that the fair market value of the shares can be determined, either in accordance with method prescribed, which now has been given in rules 11 U and 11 UA; or as may be substantiated by the company to the satisfaction of the Assessing Officer based on the value on the date of issuance of shares. The statute provides that in either of the method, whichever is the higher fair market value of the shares shall be adopted. Here in this case, appellant has submitted the value substantiated by the company to the satisfaction of the Assessing Officer under DCF method. Further, the entire share capital received by the Appellant had been invested into the equity shares of its Subsidiary company i.e., Call Health Services Pvt. Ltd., at a cost of RS.200 per equity share. Considering the underlying value of its investments, the Appellant Company value is arrived at Rs 200 per equity share.

j) The AO has not doubted the substantiation of the value of the shares and the valuation method, except disbelieving the report on the disclaimers made by CA which are general in nature. It is submitted that Appellant company has determined Fair Market Value of shares issued at premium on basis of Discount Cash Flow method in accordance with rule 11 UA(2)(b) read with section 56(2)(viib) and valuation report was prepared as per guidelines given by ICAI and no fault was found in same by the AO. As herd in the case of Assistant Commissioner of Income-tax, Circie-2, Alwar. Vs. Safe Decore (P.) Ltd. 169 ITO 328 (Jaipur), Where the AO did not find any defect in valuation of shares arrived at by appellant on basis of Discounted Cash Flow Method, impugned addition made by him on basis of net asset value method was to be set aside.

7.1 Respectfully following the above decision, the action of the AO in rejecting the DCF method is not justified. In view of the above, there is no rationale in rejecting the valuation report based on DCF Method. As a result, the grounds raised in this regard are allowed.”

14. Aggrieved with such order of the ld.CIT(A), the revenue is in appeal before the Tribunal.

15. The ld. DR heavily relied on the order of the AO. He submitted that the ld.CIT(A) is not justified in deleting the addition made by the AO u/s. 56(2)(viib) of the Act, without considering the method prescribed under Rule 11UA of the I.T.Rules. He submitted that the method adopted for determination of FMV of shares by the assessee is not as per the method prescribed under Rule 11UA. Therefore, the order of the ld.CIT(A) on this issue be reversed and that of the order of the AO be restored.

16. The ld. Counsel for the assessee on the other hand, heavily relied on the order of the ld.CIT(A). Referring to page 74 of the paper book, the ld. Counsel for the assessee drew the attention of the Bench to the valuation of shares by the Chartered Accountant according to which the value of equity shares as on09.09.2015 has been valued at Rs.200/-. He submitted that the AO in the instant case has not followed the provisions of Rule 11UA(2). Referring to page No.75 of the paper book, he submitted that the auditors of M/s Call Health Services Pvt.Ltd. has adopted the DCF method. Further, the ld.CIT(A) while deciding the issue has followed various decisions. Therefore, the same being in accordance with law, the order of the ld.CIT(A) should be upheld and the ground raised by the revenue should be dismissed.

17. We have heard the rival arguments made by both the sides, perused the orders of the AO and ld.CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the AO in the instant case made addition of Rs.23,98,74,430/- u/s. 56(2)(viib) of the I.T.Act, on the ground that assessee could not substantiate to his satisfaction regarding the receipt of share premium at Rs.190/-per share on the face value of Rs10/- on issue of 12,62,497 equity shares. We find the ld.CIT(A) allowed the claim of the assessee, the reasons of which have already been reproduced in the preceding paragraph. It is the grievance of the revenue that the ld.CIT(A), without appreciating the method adopted for determination of FMV of the equity shares by the assessee, deleted the addition which is not as per the method prescribed under Rule 11UA of the I.T.Rules.

17.1 We find sufficient force in the arguments advanced by the ld.DR on this issue. We find the ld.CIT(A) basically allowed the claim of the assessee on the ground that AO has not doubted the substantiation of the value of the shares and the valuation method, except disbelieving the report on the disclaimers made by CA which according to him are general in nature. As per 11UA of the I.T.Rules, it gives an option to the assessee to value the shares on the valuation date either under net asset value method or DCF method. The assessee in the instant case has valued the shares on the basis of NAV method. However, we find the same is done on the basis of the value of the shares of the subsidiary company on DCF method on certain projections. The Auditors themselves have given qualifications in the audit report according to which the same was on the basis of mere statements furnished by the assessee and not based on any scientific method especially when the company has not started its business operation. The observation of the ld.CIT(A) that AO has not doubted the substantiation of the value of the shares and the valuation method except disbelieving the report is contrary to facts. The observation of the ld.CIT(A) that assessee has submitted the value substantiated by the company to the satisfaction of the AO under DCF method is also faulty. In our opinion mere projections by the assessee and accepted by the auditors with qualifications cannot be considered as a proper valuation and especially when the auditors have qualified the report by observing as under:-

“In the course of the valuation, we were provided with both written and verbal information, including market, technical, financial and operating data. We have, however, evaluated the information provided to us by the company through broad inquiry, analysis and review(but have not carried out a due diligence or audit of the company for the purpose of this engagement, nor have we independently investigated or otherwise verified the data provided). The terms of our engagement were such that we were entitled to rely upon the information provided by the company  without detailed inquiry. Also, we have been given to understand by the management that it has not omitted any relevant and material factors and that it has checked out relevance and significance of information to the present exercise with us in case of any doubt. Accordingly, we do not express any opinion or offer any form of assurance regarding its accuracy and completeness. Our conclusions are based on these assumptions, forecasts and other information given by/on behalf of the company. The management of the company has indicated to us that it has understood that any omissions, inaccuracies or misstatements may materially affect our valuation analysis/results. Accordingly, we assume no responsibility for any errors omissions or mistakes in the above information furnished by the company and their impact on the present exercise. Also, we assume no responsibility for technical information furnished by the company and believe it to be reliable. We express no opinion on the achievability of the forecasts given to us. The assumptions used in their preparation, as we have been explained, are based on the managements present expectation of both-the most likely set of future business events and circumstances, and the management’s course of action related to them. It is usually the case that some events and circumstances do not occur as expected or are not anticipated. Therefore, actual results during the forecast period may differ from the forecast and such differences may be material.

Our report being provided solely for the use of the Company, its management and shall be treated in strict confidence and shall not confer any rights or remedies upon any person therein.

The report is meant to provide guidance to management in its discussion with various investors domestic and overseas. The report shall not be made available to any person(including potential investors) without prior permission of M.Bhaskara Rao &Co.

(Emphasis supplied by us)

17.2 From the above qualifications in the report by the auditors, while valuing the shares, it can be safely said that it is only a piece of paper with no evidentiary value. Therefore, in our opinion, this is a colorable device applied by the assessee for inflating the value of its share. The valuation of the company in our opinion should be done based on the basis of fundamentals and economic conditions of the assessee and must be in accordance with the method prescribed for that purpose. It should be independently done as, the valuation of holding company shares done on the basis of DCF method cannot be yardstick to determine the valuation of shares of assessee company. Hence, valuation made by the assessee of NAV method is not in accordance with law. Further, neither market value of shares of the sister concern had been taken into consideration nor the valuation of sister concerns had been independently examined by the ld.CIT(A). Hence, the same is required to be rejected. Therefore, the approach of ld.CIT(A) is incorrect and contrary to law laid down by the Hon’ble Supreme Court in the case of CIT vs. Durga Prasad More (1972) [82 ITR 540] (SC). In view of the above discussion, it cannot be said that no fault was found in such valuation report by the AO or that the AO has not found any defect in the valuation of shares arrived at by the assessee. We find the ld.CIT(A) in the instant case without properly understanding the facts of the case was merely carried away by the submissions of the assessee and deleted the additions, which in our opinion is not justified under the facts and circumstances of the instant case. The various decisions relied on by the ld.CIT(A) are not applicable in the facts of the present case. Since, the AO has given valid reasons while making the addition, therefore, the order of ld.CIT(A) which is contrary to facts cannot be upheld. We therefore set aside the order of the ld.CIT(A) on this issue and the grounds raised by the revenue is allowed.

18. Ground of appeal No.2 raised by the revenue reads as under:-

“Whether on facts and in the circumstances of the case, the ld.CIT(A) was right in allowing the ground relating to loss claimed by the assessee without appreciating that there is no commercial expediency for charging lower interest rate on loans advanced than the rate at which funds are borrowed?

19. Facts of the case, in brief, are that the AO during the course of assessment proceedings noted from the profit and loss account that the assessee has admitted interest income on loan to subsidiary of Rs.1,77,53,424/- and interest income on fixed deposits of Rs.1,78,807/-. The assessee has claimed total expenditure of Rs.3,72,77,857/-, which consist of Professional Fee of Rs.14,54,134/- interest on ICD of Rs.3,55,97920/- and other expenses of Rs.1,43,061/-, Rates and taxes Rs.31,244/-, Auditor’s remuneration of Rs.51,500/- and preliminary expenses u/s. 35D of Rs.20,530/-. Accordingly, the assessee computed business loss of Rs.1,93,66,158/-. According to the AO, since the assessee has no business activity during the year under consideration and the various expenditure claimed by the assessee against the interest income has not been incurred exclusively for the purpose of earning interest income, the AO proposed to disallow the expenditure claimed by the assessee from such interest income and disallowed the business loss of Rs.1,93,66,158/-. The AO accordingly controverted the assessee as to why the interest income of Rs.1,79,32,231/- should not be treated as income from other sources. The assessee explained that inter corporate deposits are taken for the purpose of business and as and when money was required by its subsidiary company M/s. Call Health Services Pvt.Ltd., loan was given to them and interest was charged on such loans. Since, the assessee has earned interest income and paid interest on ICD’s borrowed, therefore interest paid on ICD’s cannot be disallowed. From the various details furnished by the assessee, the AO noted that the assessee company has advanced loan of Rs. 30 crores to its subsidiary company M/s. Call Health Services Pvt Ltd and charged interest of Rs.1,77,53,425/-. Further, assessee has borrowed inter corporate deposits from others of Rs. 30.10 crores on which it paid interest of Rs.3,55,97,920/-. He noted that borrowed funds were used for advancing loans and making investment in its subsidiary company. The interest paid by the assessee on the loans borrowed is at higher rate and interest charged on the loan given to its subsidiary company is at a lower rate. Since the interest charged by the assessee on the loans advanced to its subsidiary company is not commensurate with the interest paid on loans borrowed from others, the AO restricted the interest expenses to the available interest income and the balance interest expenses of Rs.1,76,65,689/- was disallowed and the income from other sources was taken at ‘nil’.

20. In appeal, the ld.CIT(A) following the decision of Hon’ble Supreme Court in the case of S.A.Builders Ltd reported in 288 ITR 1 allowed the claim of the assessee by observing as under:-

“The appellant arranged finances for the effective management by way of inter corporate adjustment to ensure that subsidiary company could be operated without any financial difficulty. The arrangement of funds is according to the business necessity and commercial expediency of the appellant who is carrying on business. In the instant case the situation of commercial expediency has to be seen from the perspective of he business entity with the funds utilized and relative position of the funds required on the respective dates and no room for any assumptions and imputations. As it is clearly understood that no entity can admit a business failure as long as there is a scope to survive and it is the endeavor of the group as a whole to carry on the business without interruptions. In the instant case, the fact that the appellant has taken loans on which interest is being charged whereas the appellant has advanced amounts to subsidiary company is not in dispute. The amount is used by subsidiary company for its business is also not in dispute. The details of the ICDs were examined by the AO in detail. Applying the ratio laid down by the Hon’ble Supreme court in the case of S.A.Builders Ltd.(supra), it is held that no disallowance is called for an the addition made by the AO is deleted. As a result, the grounds raised in this regard are allowed.”

21. Aggrieved with such order of the ld.CIT(A), the revenue is in appeal before the Tribunal.

21.1 The ld. DR strongly challenged the order of the ld.CIT(A) in allowing the loss claimed by the assessee without appreciating that there is no basis for charging less interest on loan advance by taking loan at a higher rate of interest. He submitted that the justification given by the ld.CIT(A) is contrary to facts and therefore, the same should be reversed and that of the order of the AO be restored.

22. The ld. Counsel for the assessee on the other hand strongly supported the order of the ld.CIT(A). He submitted that the interest paid and received are at the same rate i.e. @12% p.a and the difference arose due to the holding period only. He submitted that the funds are kept in fixed deposits till they are advanced as ICD’s. The interest income from Fixed Deposits are also offered to tax. Therefore, the AO was not justified in rejecting the claim and the ld.CIT(A) has rightly allowed the claim of the assessee.

23. We have considered the rival arguments made by both the sides, perused the orders of the AO and ld.CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the AO in the instant case disallowed the interest expenses of Rs.1,76,65,689/- on the ground that assessee has borrowed funds at a higher rate and used the same for advancing loans and making investment in its subsidiary company and charged lesser rate of interest. We find the ld.CIT(A) deleted the disallowance, the reasons of which have already been reproduced in the preceding paragraph. It is the submission of the ld. Counsel for the assessee that the interest paid and received are at the same rate i.e at the @12% p.a and the difference arose due to the holding period only. It is the submission of the ld. Counsel for the assessee that the funds are kept in fixed deposits till they are advanced as ICD’s. It is also his submission that the interest income from fixed deposits are also offered to tax. In our opinion, the matter requires a revisit to the file of the AO to verify as to whether the assessee has charged the interest at the same rate at which it has obtained loans. If the interest paid on borrowed funds and charged from the subsidiary are at the same rate and the difference is only due to the period of holding only then the AO is directed to allow such interest expenditure from such interest income. The ground raised by the revenue is accordingly allowed for statistical purposes.

24. In the result, the appeal filed by the revenue is allowed for statistical purposes.

Order pronounced in the Open Court on 19th September, 2022.