ITO Vs Priya Estate Developers Private Ltd. (ITAT Chennai)

Assessee being a real estate developer, allotted 10060 equity shares as per the fair market value (FMV) computed in accordance with Sec.56(2)(viib) read with Rule 11U / 11UA. Money was not introduced in this year, but it was given in earlier years as promoter’s loans which were converted into equity share capital in this year. AO did not accept the valuation on the ground that the valuer did not mention the methodology of valuing the property. The purpose of issuing valuation certificate was not mentioned. Assessee submitted that one of the promotor was holding 50% shareholding as on 17-02-2014. She funded Rs.37.18 Crores as long-term borrowing for purchase of immovable property. Due to inordinate delay in development of property, promotor requested the assessee to convert the same into equity share capital. The valuation arrived based on value of assets on the
date of issue of shares in terms of explanation in clause (a)(ii) of Sec.56(2)(viib) and therefore, valuation report as per Rule 11UA was not required. AO rejected assessee’s submissions on the ground that the valuation report ignored the outstanding liabilities and accordingly, the amount of Share premium of Rs.3721.19 Lacs was brought to tax u/s 56(2)(vii) (b).

Before CIT (A) held that addition can be made in cases where the consideration received against issue of shares exceed the FMV of such shares.  AO must compute the value as per Rule 11UA and thereafter, make addition if the consideration received exceed face value. Hence, AO erred in not making this valuation as per Rule 11UA. CIT (A) directed assessee to get FMV from two agencies and to produce them before AO who was directed to examine the two reports in terms of section 56 (2) (vii) (b) r.w.r. 11UA.

Revenue filed appeal before ITAT where it was submitted that assessee submitted valuation on the pretext that same was in the nature of share capital advanced / share application money. Revenue, further, questioned the valuation on the ground that DCF based valuation was erroneous since the assessee had not carried out any business activities in subsequent there years viz. AYs 2017-18 to 2019-20 whereas this fact was known to the valuer as on the date of the valuation.

After considering the submissions, ITAT held that in terms of the extant provisions of Sec.56(2)(viib), it was the onus of the assessee to justify the valuation of shares. The report furnished by the assessee during regular assessment proceedings has not considered the loan liabilities and therefore, the same is clearly flawed. CIT(A) directed AO to carry out valuation from two valuers, at the option of the assessee and restricted the scope of enquiry which cannot be held to be justified. No option was given to the AO for valuation from independent valuers. ITAT placed reliance upon the decision of CIT vs. M/s Vaani Estates Pvt. Ltd. (TCA No.224 0f 2019) and held that AO would be required to undertake the exercise of fact finding by determining the FMV of shares in terms of Explanation to Sec. 56(2)(vii) (b). Hence, ITAT remanded matter to AO.

The tribunal allowed the appeal for statistical purposes.

FULL TEXT OF THE ORDER OF ITAT CHENNAI

1. Aforesaid appeal by revenue for Assessment Year (AY) 2016-17 arises out of an order passed by Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [CIT(A)] on 17-01-2024 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s. 143(3) of the Act on 30-12-2018. The registry has noted a delay of 40 days in the appeal, which stands condoned. The grounds raised by revenue read as under: –

1. The order of the Ld. CIT(A) in ITA No. ITBA/NFAC/S/250/202324/1059799418(1) dated 17.01.2024 for the AY 2016-17 is erroneous in law, facts and circumstances of the case.

2. The Ld. CIT(A) erred in holding that the addition made by the AO u/s 56(2)(viib) of Rs.37.21 Crores by treating it as excess share premium is not correct, without appreciating that:

a. the assessee company had received a loan of Rs.37.23 Crores from one of the shareholders which was required to be reduced from the total value of assets while determining the value per share.

b. The valuation of share carried out by V. Suresh is erroneous considering that the said loan liability of Rs.37.23 Crores on the date of valuation was not reduced while determining the value per share on the pretext that the same is of the nature of share capital advance/share application money,

c. The valuation of shares dated 27.07.2020 carried out by M/s Integrated Enterprises (India) P. Ltd. using Discounted Cash Flow (DCF) method is erroneous considering that the assessee in the subsequent 3 years, i.e., AYs 2017-18 to 2019-20, has not carried out any business activities and this fact was already known to the valuer on the date of valuation i.e. 27.07.2020.

d. Sub-clause (2) of Clause A of Explanation to the second proviso to Section 56(2)(viib) clearly stipulates that the assessee should satisfy the AO about the basis for the valuation of the shares and this was clearly not done.

3. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT(A) may be set aside and that the Assessing Officer be restored.

As is evident, the sole issue that arise for our consideration is addition as made by Ld. AO u/s 56(2)(viib) of the Act.

2. The Ld. CIT-DR advanced arguments and filed written submissions supporting the assessment order. The Ld. AR also advanced arguments and supported the findings given in the impugned order. Having heard rival submissions and upon perusal of case records, our adjudication would be as under.

Assessment Proceedings

3.1 The assessee being resident corporate assessee is stated to be engaged as real estate developer. It transpired that during this year (on 24-03-2016), the assessee issued 10060 equity shares of face value of Rs.10/- each to one of its promoters i.e., Smt. Sasikala Raghupati at a premium of Rs.36,990/- per share. The assessee submitted that the shares were allotted as per the fair market value (FMV) computed in accordance with Sec.56(2)(viib) read with Rule 11U / 11UA. In support of the same, the assessee furnished valuation report dated 24-02-2016 issued by a Chartered Accountant firm i.e., M/s Raghu & Gopal along with audited financial accounts. It also transpired that this money was not introduced in this year but it was given in earlier years as promoter’s loans which were converted into equity share capital in this year. The valuer valued the share at Rs.37073/- per share which is extracted in the assessment order.

3.2 However, Ld. AO did not accept the valuation on the ground that the valuer did not mention the methodology of valuing the property. The purpose of issuing valuation certificate was not mentioned. No liabilities were considered while making the valuation. The valuer had only given a certificate of valuation of asset as demanded by the director without any independent verification. Therefore, the valuation was found deficient.

3.3 The assessee defended the valuation on the ground that Mrs. Sasikala Raghupathy was holding 50% shareholding as on 17-02-2014. She funded Rs.37.18 Crores as long-term borrowing for purchase of immovable property. Due to inordinate delay in development of property, she requested the assessee company to convert the same into equity share capital. The valuation was arrived based on value of assets on the date of issue of shares in terms of explanation in clause (a)(ii) of Sec.56(2)(viib) and therefore, valuation report as per Rule 11UA was not required. The Ld. AO rejected assessee’s submissions on the ground that the valuation report ignored the outstanding liabilities. Accordingly, the amount of Share premium of Rs.3721.19 Lacs was brought to tax u/s 56(2)(viib). The provisions of this section provide that where specified company receives any consideration for issue of shares that exceeds the face value of such shares, such excess shall be deemed to be the income of the company. The explanation (a) provides that the FMV of the shares shall be higher of the value as determined in accordance with prescribed method or as may be substantiated by the company to the satisfaction of the Ld. AO based on the valuation of its assets on the date of issue of shares.

Appellate Proceedings

4.1 The assessee assailed the addition before first appellate authority. It was submitted that entire shareholding was held by the mother and daughter. The conversion of loan into equity could not be brought within the scope of Sec. 56(2)(viib). The assessee referred to the decision of Tribunal in the case of its sister concern M/s Vaani Estates Pvt. Ltd. (ITA No.1352/Chny/2018) to bolster its submissions.

4.2 The Ld CIT(A), after considering the extant provisions of Sec.56(2)(viib), held that addition can be made in cases where the consideration received against issue of shares exceed the FMV of such shares (determined in accordance with the prescribed method i.e., as per Rule 11UA). Therefore, AO must first compute the value as per Rule 11UA and thereafter, make addition if the consideration received exceed such value. The Ld. AO erred in not making this valuation as per Rule 11UA. It was essential to value the shares in terms of Rule 11UA. The Ld. CIT(A) had directed the assessee to get FMV of shares determined either from M/s Integrated Enterprises India Pvt. Ltd. (IEPL) or from Mr. CS Suresh (registered valuer) or from both of them, at the option of the assessee. The assessee produced both the valuations. IEPL valued the shares at Rs.37115/- per share whereas CS Suresh valued the shares at Rs.37162/- per share. Both the valuation reports have been extracted in the impugned order. Considering the same, Ld. CIT(A) observed that valuation ranges between Rs.37115/- to Rs.37,162/- per share. The assessee was directed to furnish both the valuation report to Ld. AO and Ld. AO was directed to examine the same and adopt fair market value as per these two reports in terms of Sec.56(2)(vii)(b) r.w.r. 11UA. The AO was further directed to compute the difference between the consideration received by the assessee against issue of shares and FMV of such shares as adopted by Ld. AO. The consideration amount exceeding the FMV would be added to total income of the assessee u/s 56(2)(viib). If the consideration does not exceed FMV, no addition could be made. Aggrieved, the revenue is in further appeal before us.

Our findings and Adjudication

5. From the facts, it emerges that the assessee has received promoter loan of Rs.37.18 Crores from Mrs. Sasikala Raghupati during the period from 10-01-2014 to 31-03-2014. A small loan of Rs.15 Lacs has been received subsequently. Out of this, amount of Rs.37.22 Crores has been converted into equity share capital on 24-03-2016 which include share premium of Rs.37.21 Crores. The Ld. AO has brought the same to tax u/s 56(2)(viib). During the course of assessment proceedings, the assessee, on its own, furnished valuation report from a valuer by the name M/s. Raghu & Gopal (CAs). The valuer valued the shares based on “asset method”, but they did not consider the promoter’s loan which was shown as liabilities. The AO, therefore, rejected the valuation and made additions u/s 56(2)(viib). The Ld. CIT(A) directed Ld. AO to obtain FMV of the shares either from IEPL or from Mr. CSV Suresh, IBBI Registered Valuer or from both of them, at the option of the assessee. The Ld. AO, vide its letter dated 20-02-2020, called the assessee company to furnish copies of valuation report from the aforesaid valuers. Accordingly, the assessee company furnished valuation report. IEPL valued the shares at Rs.37,115/- per share based on “discounted cash flow method” (DCF). On the other hand, Mr. Suresh valued the shares at Rs.37,162/- per share. After considering these two reports, the CIT(A) had directed the AO to re-examine and adopt the FMV as per these two reports in terms of Sec. 56(2)(viib) r.w. Rule 11UA.

6. The Ld. CIT-DR has submitted that the report of Mr. Suresh has not considered the promoter’s loan liability of Rs.37.23 Crores on the date of the valuation on the pretext that the same was in the nature of share capital advanced / share application money. The Ld. CIT-DR also questioned the valuation of IEPL on the ground that DCF based valuation was erroneous since the assessee had not carried out any business activities in subsequent there years viz. AYs 2017-18 to 2019­20 whereas this fact was known to the valuer as on the date of the valuation i.e., on 27-07-2020. Therefore, Ld. CIT-DR assailed both the valuations.

7. We find that in terms of the extant provisions of Sec.56(2)(viib), it was the onus of the assessee to justify the valuation of shares. The report furnished by the assessee during regular assessment proceedings has not considered the loan liabilities and therefore, the same is clearly flawed. The Ld. CIT(A) directed Ld. AO to carry out valuation from two valuers, at the option of the assessee and restricted the scope of enquiry which cannot be held to be justified. No option was given to Ld. AO to carry out valuation from independent valuers. It is quite clear that the valuation made by two valuers is much higher than the issue price of shares and the impugned addition has practically been deleted giving no option to Ld. AO. However, as rightly pointed out by Ld. CIT-DR, the report of CS Suresh has not considered the outstanding liability and the liabilities have been treated as share capital advance / share application money which is contrary to facts on record. The Ld. CIT-DR also questioned the valuation of IEPL on the ground that DCF based valuation was erroneous since the assessee had not carried out any business activities in subsequent there years viz. AYs 2017-18 to 2019­20 whereas this fact was much known to that valuer at the time of valuing the shares.

8. After going through the facts of the case and extant provisions and also by respectfully following the directions of Hon’ble High Court of Madras in similar case of CIT vs. M/s Vaani Estates Pvt. Ltd. (TCA No.224 0f 2019 dated 04-04-2019), we would hold that Ld. AO would be required to undertake the exercise of fact finding by determining the FMV of shares in terms of Explanation to Sec. 56(2)(viib). This exercise not having been done, the matter deserves to be remanded back to Ld. AO for undertaking the said fact-finding exercise. Keeping all the issues open, we remit this issue back to the file of Ld. AO for de novo assessment with a direction to the assessee to substantiate its case. All the issues are kept open.

9. The appeal stand allowed for statistical purposes.

Order pronounced on 3^rd December, 2024