×Latest Case Laws on Income Tax by various Income Tax Appellate Tribunals in India
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12-04-2019, Apollo Sugar Clinics, Section 56(1), 11UA(1)(b), Tribunal Hyderabad
This appeal filed by the assessee is directed against the order of CIT(A) – 1, Hyderabad, dated, 21/08/2018 for AY 2015-16.
2. Brief facts of the case are, the assessee company, dealing in the business of diabetic clinics filed its return of income on 29/09/2015 for the AY 2015-16 declaring loss at Rs. (-) Rs. 7,49,45,944/- under normal provisions and book profit of Rs. (-)7,49,45,944/- u/s 115JB, which was processed u/s 143(1) of the Income-tax Act, 1961 ( in short ‘the Act’). Subsequently, the case was selected for scrutiny under CASS and notices u/s 143(2) and 142(1) were issued calling for information. In response to the said notice, the AR of the Assessee furnished the information as called for.
2.1 During the assessment proceedings, the Assessing Officer noticed that the assessee company collected an amount of Rs.70,54,53,000/- towards share premium. The assessee received share capital of Rs. 21.09 crores on 16/12/2014 with face value of Rs. 10/- each and with premium of Rs. 990/-. Similarly, on 29/01/2015 received Rs. 50.07 crores, which are issued to M/s Sanofi Synthelabo (India) Limited and M/s Apollo Health & Life Style Limited. The allotment of shares is as under:
2.2 The Assessing Officer asked the assessee to justif y and substantiate with evidences in arriving the share premium of Rs. 990/- and at Rs.1,220/- in the first year of its operations and the allotments made to M/s Sanofi Synthelabo (India) Limited and M/s Apollo Health & Life Style Limited. The assessee was asked to furnish the valuation report as per rule 11UA.
2.3 In response, the assessee company submitted the valuation report carried out by BSR and Associates and they stated that the "valuation carried out by us is solely for regulatory /nonfinancial reporting purposes and it is the prerogative of the parties to the transaction to decide the transaction price". According to assessee, the auditors expressed their opinion that the valuation applies only to comply with RBI regulations and not to the commercial transaction. It is therefore incorrect to read the valuation as applicable to all transactions, the share price evaluated is wholly indicative and has no bearing whatsoever on the ultimate price at which these were issued. However, it is emphasized that there is no requirement under the income tax law to get the shares valued. Thus, the company is free to determine its own price with the intending purchaser after due negotiations and deliberations.
2.6 Further it was stated that the assessee is a public limited company and its shares are not listed on a recognized stock exchange and the value of its shares can be determined under Rule 11UA for the purposes of section 56(1) of the IT Act by applying fair market value.
2.7 The AO opined that the assessee has stated that the company was free to determine its own price with the intending purchaser after due negotiations and deliberations is not acceptable. The provisions of Rule 11UA for the purposes of section 56 of the IT Act, says that there is a prescribed method for value of shares at a share premium is under Rule 11UA(1)(b) for the purposes of section 56 of the IT Act, which is as follows:
"The fair market value of unquoted equity shares shall be the value on the valuation date of such unquoted equity shares as determined in the following manner: The fair market value of unquoted equity shares= (A-L2 x (PV) (PE)"
2.8 Accordingly, the Assessing Officer concluded that from the Rule 11UA it is clear that the fair market value of the shares has to be determined in the prescribed manner and the assessee is not at liberty to determine its own price with the intending purchaser after due negotiations and deliberations, there should be some basis to evaluate the shares of the company at a premium, it cannot be evaluated by imaginary/surmises. On one side it has evaluated its shares by following DCF method, while, on the other side it is stating that it need not follow the valuation report.
2.9 According to the AO, the assessee has neither adopted the value of Rs.741/- reported in the valuation report given by the chartered accountant under DCF method as it was evaluated by its own company nor adopted the method prescribed under the IT Act i.e., Rule 11UA. On the other hand, it has taken a stand that the company is free to determine its own price with the intending purchaser after due negotiations and deliberations. It shows that the assessee company has scant respect for the legislation passed by the Government of India. The intention of the legislation for determination of fair market value of the sha es is to curb the misdeeds of the company who will involve in dubious methods for valuation of its shares and also to protect the monies of the investors who invest as a share premium.
2.9.1 In view of the above observations, the Assessing Officer concluded that the valuation report submitted by the assessee for determination of share premium is not from facts and it is imaginary with surmises and moreover there is very huge gap between the projections and actuals. Hence, the Assessing Officer did not accept the contention of the assessee that it is free to determine its own price and determined the share premium under Rule 11UA(1)(b) as follows:
The figures adopted as at 31.03.2015 as the figures as on allotment date of shares are not available.