Sakthi Textiles Ltd Vs DCIT (ITAT Chennai)
Coming back to observations of the Assessing Officer regarding valuation report. The Assessing Officer never stated that assessee has not filed valuation report in support of fair market value of shares. In fact, Assessing Officer has categorically admitted that assessee has filed valuation report from independent Chartered Accountant as well as statutory auditor of Assessee Company. But, he has ignored valuation report filed by assessee only for the reason that such reports were not filed during original assessment proceedings or even during revision proceedings. We have gone through reasons given by the Assessing Officer for rejection of valuation report and we do not ourselves subscribe to the findings recorded by Assessing Officer, because he cannot reject valuation report merely for the reason such valuation report was not filed at the time of assessment proceedings. Further, timing of filing valuation report at the time of original assessment proceedings u/s.143(3) or during revision proceedings u/s.263 of the Act is not a relevant criteria to decide whether fair market value of shares issued by assessee is substantiated to the satisfaction of Assessing Officer or not. But, what is relevant is whether valuation report supports share price determined by the assessee or not. In this case, valuation report obtained by the assessee from independent Chartered Accountant supports share price. Therefore, when the assessee has substantiated share price to the satisfaction of the AO with the help of valuation report, even if, such valuation report is obtained subsequent to the date of issue of shares, it does not alter the situation. Therefore, we are of the considered view that Assessing Officer as well as learned CIT(A) were erred in rejecting valuation report filed by assessee on this count.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal filed by the assessee is directed against order of the learned CIT(A)-1, Coimbatore dated 15.03.2019 and pertains to assessment year 2013-14.
2. The assessee has raised the following grounds of appeal:-
1) The order of the Ld. Commissioner of Income Tax (Appeals)-1, Coimbatore is opposed to to law and facts.
2) The Ld, Commissioner of Income Tax (Appeals) has erred in simply repeating the fair market value of the shares determined by the assessing officer without appreciating the fact that your appellant had based the valuation of shares on the strength of a valuation report issued by a Chartered Engineer, who is an expert in matters relating to valuation.
3) The Ld. Commissioner of Income Tax (Appeals) has overlooked a vital fact that when a Chartered Engineers Valuation is not acceptable to the Assessing Officer as well as the Commissioner of Income Tax (Appeals) the right course would be to secure a valuation report from the District Valuation Officer of the Income Tax Department.
4) The Ld. Commissioner of Income Tax (Appeals) has thus violated the principle of Natural Justice by brushing aside the supporting material in the form of another experts opinion.
5) The Ld. Commissioner of Income Tax has also erred in coming to a unilateral conclusion that Assessing Officers Valuation was right without taking into the following factual position relating to the immovable assets owned by the Assessee and shown, at historical cost in the books of accounts.
a) The company owns 36 Acres of land on Coimbatore Pollachi Main road 3 Kilometres from Pollachi town.
b) 12.96 Acres of land belonging to Sri Sakthi Textiles B unit situated at Samatur Village of PollachiTaluk.
c) 5 Cents of prime Land in Chennai city (on St.Maris Road) which is in close proximity to Adyar Park Hotels in Adyar whose value would be easily 5 crores per ground.
6) The Ld. Commissioner of Income Tax (Appeals) by not securing an expert opinion and disregarding Chartered Engineers report, such action of the CIT(A) has to be set aside by the Hon’ble Income Tax Appellate Tribunal.
7) The LdCIT(A) has also overlooked the decision of the Hon’ble ITAT Kolkata Bench in the case of ASG Leather (P) Ltd. Vs Income Tax Officer in TA No.2562(KOL) of 2017 members have observed that the Fair Market value of the shares could be based on market value of assets as furnished by the assessee on the basis of a registered valuer’s report.
8) The AO has failed to consider a subtle point that any prudent businessman when allotting shares to a new party, In respect of land and buildings owned and held by theappellant company for over 5 decades, would arrive the market value of assets as on date of allotment and only after taking into account the market value of the assets the proposal to allot shares at a particular value would be adopted and in the appellants case vast stretch of industrial and situated in close proximity to Pollachi town and landin Samathur Village within PollachiTaluk and also vacant site located in Adyar, Chennai.
9) The Ld. Commissioner of Income Tax Appeals has also Failed to consider the observations of Hon’ble Mumbai Tribunal in the case of Green Infra Ltd. Vs ITO (2013)38 taxmann.com 253/ 145 lTD 240 Mum. — trib) wherein the Honble members have observed as under:
“The ITAT observed that no doubt a non-est company or a zero balance company asking for a share premium of Rs. 490 per share defies all commercial prudence but at the same time the fact cannot be ignored that it & a prerogative of the Board of Directors of the company to decide the premium amount and it is the wisdom of the shareholder whether they want to subscribe to such a heavy premium The Revenue authorities cannot question the charging of such huge premium, without any premium from any legislated law of the land.”
Though this decision was rendered prior to the amendment made in 2012, the observations are very relevant as in the appellant’s case there is absolutely no doubt as to the genuineness of the transaction, identity of the party and also the payment having been received through proper banking channels only.”
3. Brief facts of the case are that assessee company is engaged in the business of manufacturing of yarn, filed its return of income for assessment year 20013-14 on 28.09.2019 declaring loss of `31,27,463/-. During the year under consideration, the assessee has issued 7,69,260 equity shares having face value of Rs.10/- at a premium of Rs.142/- per share to Graghasakthi Infraservices Pvt.Ltd. and thus, received total share premium of `10,92,34,920/-. The assessment for, impugned assessment year was completed u/s. 143(3) of the Act, on 17.03.2016 accepting returned loss. Subsequently, PCIT-1, Coimbatore had initiated revision proceedings u/s.263 of the Act, and set aside order dated 17.03.2016 to the file of Assessing Officer to redo assessment afresh after verification of the issue of taxability of share premium collected by assessee u/s.56(2)(viib) of the Income Tax Act, 1961. Consequent to 263 proceedings, Assessing Officer has taken up the case for assessment and called upon the assessee to justify issue of shares at premium of ` 142 per share/-. In response, assessee vide filed letter dated 15.11.2018 submitted that value of shares has been arrived at considering fair market value of net asset of the company for which necessary valuation report from independent Chartered Accountant as well as from statutory auditor of the company has been obtained. Further, valuation report issued by independent Chartered Accountant is supported by valuation report of Chartered Engineer in respect of immovable properties owned by company. As per said valuation report, fair market value of shares is more than value of shares issued by assesse. Hence, there is no place for invoking provisions of section 56(2)(viib) of the Act.
4. The Assessing Officer was not convinced with explanation furnished by the assessee and according to him, valuation certificate obtained from independent Chartered Accountant as well as from statutory auditor of the company is being submitted by the assessee for first time. Neither during the course of original assessment proceedings nor during the course of revision proceedings did assessee state that it had valuation report from Chartered Accountant in support of share price. Therefore, he opined that at the time of issue of shares at premium, neither valuation report from independent Chartered Accountant nor Chartered Engineer report in support of value of immovable property was available. Therefore, the Assessing Officer opined that assessee has failed to substantiate value of shares to the satisfaction of Assessing Officer and accordingly, rejected valuation report furnished by assessee and has adopted net asset method, as prescribed under Rule 11UA(2) to determine value of shares. Further, as per net asset value method, net value of the company was negative and therefore, opined that issue of shares at premium of Rs.142 per share, does not support asset value of the company and accordingly, made addition towards share premium of `10,92,34,920/- under section 56(2)(viib) of the Act. The relevant findings of the Assessing Officer are as under :-
“5.. Submission filed by assessee is given due consideration.
5a. the information that valuation certification was obtained from an Independent Chartered Accountant as well as, from the Statutory Auditor of the company is being submitted for the first time now. Neither during the course of original assessment proceedings, nor during the course of revision proceedings did assessee state that she also had a Valuation Report from another Chartered Accountant in the matter, other than the Statutory Auditor. If there existed any such report then, she would had furnished the same before the Pr,CIT during the course of revision proceedings itself, Assessee has not provided any e-mail communication with the Chartered Accountant, or evidence that valuation fees was paid to him through cheque for the valuation Work, or TDS deducted from the professional fees, if any, paid for the work. etc. in order to establish that such a Valuation Report was really available at the time of issue of the shares at a premium.
The claim now made that she held another Valuation Report therefore is only an afterthought to wriggle out of the issue, Therefore, existence of the second Report at the time of issue of the shares at premium is reflected.
5b. Without prejudice 10 above, on examining both the Valuation Reports it is noticed that the valuation have been done on the basis of Net Asset Value. However, while adopting the value of fixed asset, the market value of certified by an engineer, is stated to be adopted. i.e. the value of Fixed asset have been taken at`. 7000 lakhs as against book value of Rs.1075 lakhs as on 31/3/12. As per Rule 11UA(2) of the IT Rule 1962, the book value of the assets have to be considered while ascertaining fair vaIue of unquoted equity shares as on a valuation date. Thus, if the method prescribed under Rule 11UA(2) is applied, the fair value, of assessees share will be below par value as worked out below;
