Narang Access Pvt. Ltd. v. The Dy. Commissioner of Income-tax Circle–13(1)(1), Mumbai
[Citation -2019-LL-0822-115]

Citation 2019-LL-0822-115
Appellant Name Narang Access Pvt. Ltd.
Respondent Name The Dy. Commissioner of Income-tax Circle–13(1)(1), Mumbai
Court ITAT-Mumbai
Relevant Act Income-tax
Date of Order 22/08/2019
Assessment Year 2013-14
Judgment View Judgment
Keyword Tags share premium • book value • reasonable basis • discounted free cash flow method • fair market value • addition to income • excess premium • issue of share • non-resident shareholder • resident shareholder • method of valuation • levy of penalty • furnishing inaccurate particulars of income • concealment of income • joint venture agreement • additional evidence • value of net assets • proportionate basis
Bot Summary: The only issue in this appeal of assessee is against the order of CIT(A) confirming the action of the AO in valuing the share premium on the basis of book value of shares as reasonable value instead of valuing on the basis of Discounted Cash Flow method and accordingly adding the share premium at 5,32,68,570/-. During the course of assessment proceedings, the AO on perusal of details filed, noticed that the assessee company has issued equity shares at the rate of 10 per share and premium at 180,985/- per share. As per Joint Venture Agreement during the year the company has issued 309 shares to Rahul Narang of Narang Group at the premium of 1,80,985/- and accordingly, Raul Narang subscribed to 309 shares at a premium of 1,80,985/- and paid share premium of 5,59,24,365/- and Danone Group subscribed 133 at same premium of 1,80,985/- and paid share premium of 2,40,71,005/-. 56(2)(viib) of the Act and erroneously calculated the value of shares on the basis of book value as per Balance Sheet and determined the value of shares of 8604.80 which is not the method prescribed under Sec. Now, the issue arises that in case the company issued shares to both resident and non-resident shareholders at a price of 1,80,195/- per share and the shares were issued to its existent shareholders on a proportionate basis, what method should be adopted for the purpose of valuation. The assessee has adopted the share valuation method i.e. 7Page I T A N o. 3 5 2 1 / MU M/ 2 0 1 8 DCF and valued the share at the rate of 1,880,470/- per share. The AO has valued shares on net asset valuation method and valued the share at the rate of 8,640.80 per share and added back the remaining share premium received from residential shareholders as income from other sources under section 56(2)(viib) of the Act.


B IN INCOME TAX APPELLATE TRIBUNAL B BENCH, MUMBAI BEFORE SRI MAHAVIR SINGH, JM AND SRI M BALAGANESH, AM ITA No. 3521/Mum/2018 (Assessment Year 2013-14) Narang Access Pvt. Ltd. Hall No.3, B-869, Sarkar Heritage, Kane Road . Appellant and B.J.Road, Bandstand, Bandra West, Mumbai-400050 PAN AACCN5922H v/s Dy. Commissioner of Income Tax Circle 13(1)(1), Aayakar Bhavan, .Respondent 2nd Floor, Mumbai-400020 Appellant by : Shri Prakash Jotwani, AR / Respondent by : Shri N. Hemlatha, DR Date of hearing: 22.08.2019 Date of pronouncement : 22.08.2019 ORDER PER MAHAVIR SINGH, JM: This appeal of assessee is arising out of order of Commissioner of Income Tax (Appeals)-21, Mumbai in appeal No. CIT(A)- 21/DCIT-13(1)(1)/IT-166/2016-17 dated 28.02.2018. Assessment was framed by Dy. Commissioner of Income Tax, Circle-13 (1)(1), Mumbai 2|Page ITA No. 3521/MUM/2018 (in short DCIT/ITO/ AO) for AY 2013-14 vide dated 28.03.2016, under section 143(3) of Income-tax Act, 1961 (hereinafter Act ). 2. only issue in this appeal of assessee is against order of CIT(A) confirming action of AO in valuing share premium on basis of book value of shares as reasonable value instead of valuing on basis of Discounted Cash Flow (DCF) method and accordingly adding share premium at 5,32,68,570/-. For this assessee has raised following two grounds: - In facts and circumstances of case and in law, learned Commissioner of income Tax (A) erred in confirming fair market value per share of Company at Rs. 8650.80 as calculated by Assessing Officer instead of value per share of Rs. 180995/- calculated as per DCF Method duly certified by Practicing Chartered Accountant and disallowed Rs. 53,268,570/- as income of Company uls.56(2)(viib). learned Commissioner of income Tax (A) erred in confirming said addition of Rs.53,268,570/- (after deducting fair market value of premium per share of Company at Rs. 8,640.80 as calculated by Assessing Officer) out of total share premium received of Rs. 79,995.370/-. Company had received Share Premium of Rs. 55,924,365/- from resident shareholder and Rs. 24,071,005/- from non-resident shareholder i.e. MIs. Myen Pte 3|Page I T N o . 3 5 2 1 / MU M/ 2 0 1 8 Ltd., Singapore (a Danone Group Company) at same price. - . 3. Briefly stated facts are that assessee company is engaged in business of beverage products like Red Bull, Evian, Perrier, Qua Blue and Orangina. During course of assessment proceedings, AO on perusal of details filed, noticed that assessee company has issued equity shares at rate of 10 per share and premium at 180,985/- per share. AO noted that since, shares were issued at very high premium, assessee was asked to justify high premium. assessee was also asked as to why provisions of section 56(2)(viib) of Act be not applied. assessee replied that provisions of section 56(2)(viib) of Act is applicable in regard to shares issued to resident but not to non-resident. It was contended that there has been amended being brought into Act vide Finance Act, 2012 by inserting new proviso in Act i.e. 56(2)(viib) pertaining to issue of shares to resident shareholders. assessee was also asked to substantiate as to how projections have been taken for purpose of valuation of shares and basis of projection was also asked. assessee submitted valuation report dated 07.08.2012, wherein, value per share has been arising at 1,80,475/- per share under DCF method. AO noted that assessee has not submitted basis of projections. Hence, AO instead of DCF method of valuation adopted book value of share for computing premium accordingly, computed fair market value of unquoted equity shares at 8640.40 per share. Therefore, added differential sum of 5,32,68,570/- as income from other sources under section 56(2)(viib) of Act by observing in Para 5.18 as under: - 5.18 From discussions ad detailed in above paras, it can be perused that assessee has 4|Page I T N o . 3 5 2 1 / MU M/ 2 0 1 8 failed to prove fair market value of shares as per DCF method as relief upon by assessee. In absence of reliable working of shares as per DCF method adoption of book value of shares as prescribed under Act at 8,640.80 is fair and reasonable in given case. Accordingly, sum of 5,32,68,570/- ( 1,80,995 per share [FMV as per assessee Rs.8,640.80 per share [FMV as calculated above] X 309 (Equity shares issued to resident) is added to total income of assessee under section 56(2)(viib) of Act. Penalty proceedings under section 271(1)(c) of Income-tax act, 1961 is initiated separately for furnishing inaccurate particulars of income and thereby concealing income. Aggrieved, assessee preferred appeal before CIT(A). CIT(A) also confirmed action of AO. Aggrieved, assessee is in appeal before Tribunal. 4. We have heard rival contentions and gone through facts and circumstances of case. We noted that assessee issued shares in following proportion to Indian shareholders and foreign shareholders as under:- Sr. Date of Name of No. of Face Premium Total No. Allotment Alotee shares value per per share share Face value Premium Total 1. 5.12.12 Rahul Narang 309 10 1,80,985 3900 5,59,24,365 5,59,27,455 2. 5.12.12 Myen Pte Ltd. 133 10 1,80,985 330 2,40,71,005 2,40,72,335 Singapore Total 442 4420 7,99,95,870 7,99,99,790 5|Page I T N o . 3 5 2 1 / MU M/ 2 0 1 8 5. learned Counsel for assessee stated that during course of assessment proceedings Narang Danone Access Private Limited filed letter dated 24.02.2016 and another letters dated 01.03.2016. He stated that AO has referred these three letters in assessment order and said three letters be considered part of present statement of fact. In spite of submission with necessary supporting, AO did not consider submission of company objectively while passing order under section 143(3) of Act. As per proviso read with explanation to Sec. 55(2)(viib) r.w.s. 56(2)(viib) of Act are not applicable in case where company has valued share at fair market value as prescribed method as per Rule 11UA i.e. DCF method. company is Joint Venture Company between Narang Group and Danone Group. Danone is French Multinational Food & Beverages based in Paris and Narang Group had introduced Evian Water for first time in India and later both group enters in to Joint Venture Agreement. As per Joint Venture Agreement Danone Group had invested 30% paid up capital in Company and 70% of paid capital was invested by Narang Group. As per Joint Venture Agreement during year company has issued 309 shares to Rahul Narang of Narang Group at premium of 1,80,985/- and accordingly, Raul Narang subscribed to 309 shares at premium of 1,80,985/- and paid share premium of 5,59,24,365/- and Danone Group subscribed 133 at same premium of 1,80,985/- and paid share premium of 2,40,71,005/-. AO accepted assessee submission that Sec. 56(2)(viib) of Act is not applicable to non-resident person as 56(2)(viib) of Act very clearly provide so and though said Sec. 56(2)(viib) read with Rule 11UA(2)(b) provides that Sec. 56(2)(viib) is not applicable to company if such company has valued shares as per DCF method but AO ignored proviso read with explanation to Sec.56(2)(viib) of Act. explanation to Sec. 56(2)(viib) of Act defines term fair market value as stated hereinabove. Further explanation provides that higher of (i) and (ii) would 6|Page I T N o . 3 5 2 1 / MU M/ 2 0 1 8 be considered fair market value of shares of unlisted Company. Assessing Officer ignored mandate of Sec. 56(2)(viib) of Act and erroneously calculated value of shares on basis of book value as per Balance Sheet and determined value of shares of 8604.80 which is not method prescribed under Sec. 56(2)(viib) of Act. 6. He also argued that documents filed as additional evidences really go to root of mater and these are very vital for deciding issue. According to him, method to be applied for valuation of shares is correct method i.e. DCF and method adopted by AO on account of Net Asset Valuation (NAV) method is wrong and this view is supported by co-ordinate Bench decisions of ITAT in cases of M/s Rameshwaram Strong Glass (P) Ltd. vs. ITO (2018) 172 ITD 571 (Jaipur) (Tirb.), DCIT vs. Ozoneland Agro Pvt. Ltd in ITA No. 4854/Mum/2016 for AY 2013-14 & M/s. Medplus Health vs. ITO in ITA.No.871/Hyd/2015, Regal Builtech Pvt. Ltd. vs. ACIT 7505/DEL/2018. When these facts were confronted to learned Sr. Departmental Representative, he agreed that matter has to be restored back to file of AO to examine additional evidences and this cannot be verified or carried out proper examination at this level. 7. After hearing both sides, we are in agreement of both sides that these additional evidences require detailed examination at level of AO. Hence, this matter has to go back to file of Assessing Officer. 8. Now, issue arises that in case company issued shares to both resident and non-resident shareholders at price of 1,80,195/- per share and shares were issued to its existent shareholders on proportionate basis, what method should be adopted for purpose of valuation. assessee has adopted share valuation method i.e. 7|Page I T N o . 3 5 2 1 / MU M/ 2 0 1 8 DCF and valued share at rate of 1,880,470/- per share. It is also to be noted that in 2010, shares originally were issued at price of 1 lacs per share. AO has valued shares on net asset valuation method and valued share at rate of 8,640.80 per share and added back remaining share premium received from residential shareholders as income from other sources under section 56(2)(viib) of Act. We also noted that co-ordinate Bench decision of this Tribunal has categorically held that while valuing share premium and to determine fair market value of shares in terms of section 56(2)(viib) of Act, assessee has option for adoption of valuation method and basis of valuation has to be DCF method. We noted that even Hon ble Bombay High court in case of Vodafone M-Pesa Ltd vs. PCIT [2018] 92 taxmann.com 73 (Bombay) held that in view of Income Tax Rules, method of valuation namely NAV method or DCF Method to determine fair market value of share in terms of section 56(2)(viib) of Act has to be done or adopted at assessee s option. AO was undoubtedly entitled to scrutinize valuation report and can tinker or determine fresh valuation after confronting assessee. However, basis of valuation had to be DCF method and it is not open to AO to change method of valuation which assessee has duly opted. Hon ble Bombay High Court has restored matter back to file of AO. 9. We noted that firstly in present case valuation done by assessee for valuing its shares is on basis of DCF method and AO could not have substituted it by NAV method rather he should have arrived at another value, if any, by applying DCF method only. We also noted that explanation and additional evidences produced before us shows that why projection has been made in that manner and have been substantiated by filing additional evidences/ papers on assessee s paper book volume 2 at pages 1 to 78. We noted that this issue has been 8|Page I T N o . 3 5 2 1 / MUM/ 2018 considering by Hon ble Bombay High Court and remanded back to file of AO issue regarding considering value of shares in term of section 56(2)(viib) of Act on basis of DCF method. Here, in this present case also, we direct AO to consider these additional evidences and then can arrive at correct value of share for charging of share premium in term of section 56(2)(VIIB) of Act. But on basis of DCF method only which is adopted by assessee. Hence, assessment order and order of CIT(A) is set aside and matter restore back to file of AO. In term of above, we restore this issue to file of AO. 10. In Result, appeal of assessee is allowed for statistical purposes. Order pronounced in open court on 22.08.2019. Sd/- Sd/- (M BALAGANESH) (MAHAVIR SINGH) (ACCOUNTANT MEMBER) (JUDICIAL MEMBER) Mumbai, Dated: 22.08.2019 Sudip Sarkar, Sr.PS Copy of Order forwarded to : 1. Appellant 2. Respondent. 3. CIT(A) 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. BY ORDER, True Copy (Asstt. Registrar), ITAT, Mumbai Narang Access Pvt. Ltd. v. Dy. Commissioner of Income-tax Circle13(1)(1), Mumbai
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