Keva Industries Pvt. Ltd Vs ITO (ITAT Mumbai)
We find that there is no dispute that the assessee company had acquired the shares of a foreign company from its directors. We also find the provisions of section 56(2)(viia) of the Act refers to transaction of acquisition of any property being shares of a company not being a company in which public are substantially interested. Since foreign company does not fall in the above category, the provisions of Section 56(2)(viia) of the Act cannot be said to apply to the above transaction. In any case, at the cost of repetition, the ld AO ought not to have considered the balance sheet as on 31.12.2014 for determining the value per share using NAV method , in view of the fact that the Rule specifically provides that balance sheet as on the date of valuation i.e 11.2.2015 should be considered for valuation. Rule 11 U defines valuation data as the date on which the property or consideration, as the case may be, is received by the assessee. Since the shares were acquired by the assessee company on 11.2.2015 (being the valuation date) , the valuation arrived at by the ld AO relying on financial statements as on 31.12.2014 deserves to be ignored and disregarded as not being in consonance with the Rule.
We hold that the provisions of section 56(2)(viia) of the Act cannot apply to a foreign company as the relevant Rule 11U which defines “balance sheet” was not applicable to a foreign company. We find that the amendment in this regard was brought in Rule 11U with effect from 1.4.19 under Rule 11U(b)(ii) of the Rules. This amendment is only prospective in nature and cannot apply to the year under appeal.
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$
