M/s. Keva Industries Pvt. Ltd Vs Income Tax Officer (ITAT Mumbai)
Conclusion: Provisions of section 56(2)(viia) was not applicable on acquisition of shares of a foreign company from its directors because as per rule 11U(b)(ii) (prior to 01.04.2019) which defines “balance sheet‟ was not applicable to a foreign company and the amendment to Rule 11U with effect from 1.4.19 was prospective in nature. If the computation provisions could not apply, the charging section also could not apply as both sections should be read together in order to make the said provisions workable in accordance with law.
Held: Assessee company had acquired the shares of a foreign company from its directors. As per the revised RBI notification No. FEMA 263/RB-2013 dated 5.3.2013, it was notified that resident individuals were prohibited from making direct investment in a Joint Venture of wholly owned subsidiary abroad. In order to comply with the above legal requirement, directors of foreign company transferred the shares to assessee company in Asst Year 2015-16. The Directors of assessee company had acquired the shares in the year 2008 at Rs 34/- per share and they sold the shares to assessee company in Asst Year 2015-16 at the same rate of Rs 34/- per share on the basis of valuation done as per Discounted Cash Flow Method (DCF) of foreign company which was taken at USD 0.50 (Dollar rate considered at Rs 68). AO asked assessee company to submit the audited balance sheet and P&L account of foreign company for the years ending 2015 and 2016 (calendar year is followed in Singapore i.e January to December) and results were compared with the projection made during the valuation of share as per DCF method. AO observed that there was huge variation in the projection made for the DCF method. He therefore, concluded that the method of valuation of share as per DCF which was arrived upon at USD 0.50 should be rejected as the same was not in line with the projections and valuation to be taken as per Rule 11UA of the Rules for making addition u/s 56(2)(viia). It was held since the shares of a foreign company were acquired by assessee company in the instant case, AO ought to have relied on the balance sheet as audited by the auditor appointed under the Indian Companies Act. In the instant case, AO had relied on the balance sheet of foreign company which was prepared in accordance with Singapore Companies Act Admittedly, the case of assessee fell squarely on clause (ii) of the definition of „Balance Sheet‟ as defined in Rule 11U of the Rules. Hence it was mandatory to draw a balance sheet as on the valuation date i.e. 10.2.2015 /11.2.2015 (being the date of purchase of shares by the assessee company) and that the said balance sheet should have been audited by an auditor appointed under section 224 of the Companies Act, 1956. Hence it could be safely concluded that AO had applied the valuation method on a different date which was not in accordance with law and that since the computation mechanism provided in Rule 11UA of the Rules was not applicable to the facts of the instant case, the provisions of section 56(2)(viia) also could not be invoked. It was well settled that the charging provision and the computation provision should be read together in order to make the said provisions workable in accordance with law. Moreover, no method was prescribed earlier for valuation of shares of a foreign company prior to Asst Year 2019-20, which mischief was sought to be rectified by way of an amendment made in the rules under Rule 11U(b)(ii) of the Rules w.e.f. 1.4.19 having prospective applicability. The legislature had sought to rectify the mischief hitherto prevailing upto Asst Year 2018-19 in the statute / rule and had accordingly brought an amendment effective from Asst Year 2019-20 onwards to curb the loophole available in the Act / Rules, hence the pre-amended definition of balance sheet could not include foreign company therein. AO was directed to delete the addition made u/s 56(2)(viia).
FULL TEXT OF THE ITAT JUDGEMENT
This appeal in ITA No.1703/Mum/2019 for A.Y.2015-16 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-24, Mumbai in appeal No.CIT(A)-24/ITO-15(2)(1)/IT-242/2017-18 dated 11/03/2019 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 29/12/2017 by the ld. Income Tax Officer-15(2)(1), Mumbai (hereinafter referred to as ld. AO).
2. The Ground No. (A) raised by the assessee is with regard to challenging the validity of assessment framed u/s 143(3) of the Act dated 29.12.2017 on the ground that no notice u/s 143(2) of the Act was issued / served on the assessee after the filing of revised return by the assessee , which was also filed within the time prescribed u/s 139(5) of the Act. There is no dispute that notice u/s 143(2) of the Act was indeed issued and served on the assessee within the prescribed time limit after the filing of original return of income u/s 139(1) of the Act. Though the assessee had raised various grounds ( vide Sub Grounds 1 to 4 in Ground A) in this regard and though certain arguments were indeed made by both the parties before us, the ld Senior Counsel for the assessee stated that he would like to argue the issue on merits. In the peculiar facts and circumstances of the case before us, we treat the Grounds 1 to 4 raised by the assesee as not pressed.
3. The Ground No. (B) raised by the assessee is against the action of the ld CITA confirming the addition made in the sum of Rs 107,40,00,000/-u/s 56(2)(viia) of the Act.
4. The brief facts of this issue are that the assessee is a company engaged in the business of manufacturing and distribution of natural and synthetic essential oils and aromatic chemical resinoids. The return of income for the Asst Year 2015-16 was filed by the assessee on 15.9.2015 declaring loss of Rs 44,457/- . Later a revised return of income was filed on 20.9.2016 declaring the same loss figure of Rs 44,457/- with minor modification in the return. The reasons for revising the return was due to omission in showing investments of Rs 1,36,00,000/- in Schedule FA of original return of income made in M/s KNP Industries Pte Ltd , a Singapore based company. The shares of this company were purchased from assessee company‟s directors who are also directors in KNP Industries Pte Ltd. The Directors of assessee company had acquired the shares in the year 2008 at Rs 34/- per share and they sold the shares to assessee company in Asst Year 2015-16 at the same rate of Rs 34/- per share on the basis of valuation done as per Discounted Cash Flow Method (DCF) of M/s KNP Industries Pte Ltd which was taken at USD 0.50 (Dollar rate considered at Rs 68) . Both the Directors Mr Kedar Vaze and Mr Ramesh Vaze booked Long Term Capital Loss of Rs 51,64,854/- on the transaction due to indexation. The ld AO asked the assessee company to furnish the basis and justification for valuation of purchasing the shares from its directors. The assessee submitted that the valuation of the shares were done as per DCF method and submitted valuation report of M/s Kaveri Venkataraman & Associates dated 5.2.2015 as per which valuation was taken at USD 0.50 i.e Rs 34/- per share. The ld AO asked the assessee company to submit the audited balance sheet and P&L account of M/s KNP Industries Pte Ltd for the years ending 2015 and 2016 (calendar year is followed in Singapore i.e January to December) and results were compared with the projection made during the valuation of share as per DCF method. The ld AO observed that there was huge variation in the projection made for the DCF method as under:-
Amounts in US$
