A B Propmart Pvt.Ltd. vs ITO

1.

“That the addition of Rs.8, 19,09,656/- u/s 56(2)(viib) of the Income-tax Act, 1961 (the Act) on account of issuance of shares at a premium to the holding company M/s Gyan Enterprises Pvt. Ltd. is arbitrary, unjust and at any rate very excessive. 2) That the addition of Rs.8,19,09,656/- u/s 56(2)(viib) of the Act by invoking the provision of Rule 11-UA of the Income Tax Rules, 1962 instead of working out the value of its assets as defined in Explanation (a)(ii) to Section 56(2) (viib) of the Act is arbitrary, unjust and at any rate very excessive.

2.

That the Assessing Officer and CIT (Appeals) both ought not to have rejected the market value of the shares worked out by the registered valuer based on the value of assets owned by the company in spite of the fact that the DVO vide his report dated 26th December 2016 had worked out the value of land owned by the company at Rs.20 crore (much higher) and consequently the addition of Rs.8,19,09,656/- u/s 56(2)(viib) as made by the Assessing Officer and sustained by CIT (Appeals) is arbitrary, unjust and very excessive.

3.

That the above grounds of appeal are independent and without prejudice to one another. Your appellant craves leave to add, alter, amend or withdraw any of the grounds of appeal at the time of hearing.”

The Taxpayer unsuccessfully contested before the CIT(A) who dismissed the appeal on 28.11.2024 stating the tax payer has supplied the purchase deed and that fact the revaluation of asset has no effect on valuation of asset u/r 11UA. The CIT(A) recorded its finding in para 6.2 and 6.3 of the order.

Prayer of the Taxpayer

1.

The Appellant submits, that two main grievances of both Ld CIT(A) and Ld AO is that purchase deed has not be submitted and no proof has given to support the proof of Rs 13 crs valuation report. Further, the CIT(A) has also stated that increase in value of property has no bearing on the NAV as per Rule 11UA. Before, we dwell on these factual grievances it's worth noting that in terms of Parent- subsidiary, section 56(2)(viib) cannot be invoked and for this purpose it wishes to rely upon the following Judgements of this Court and Hon'ble Delhi High Court.

Sl.no	CITATION	Ruling
1	FIS PAYMENT SOLUTIONS AND SERVICES INDIA PRIVATE LIMITED VERSUS UOI & ORS W. P. (C) 10289/2024 & CM APPL. 42097/2024 dated July 29, 2024. Delhi High Court	Delhi High court relying on BLP Vayu and Kissandhan Agri, remanded the matter back to DRP on issue of 56(2)(viib).
2	BLP Vayu (Project-1) (P.) Ltd. vs. PCIT 2023 SCC OnLine ITAT 397- Delhi ITAT 2023. Which had followed DCIT v. Ozone India Ltd. in ITA No. 2081/Ahd/2018 order dated 13.04.2021	The object of deeming an unjustified premium charged on issue of share as taxable income u/s 56(2)(viib) is wholly inapplicable for transactions between holding and its subsidiary company where no income can be said to accrue to the ultimate beneficiary, i.e., holding company.
3	DCIT vs. Kissandhan Agri Financial Services (P.) Ltd. ITA No. 8734/Del/2019. Del ITAT.	Bringing the premium received from holding company to tax net under these deeming fictions would tantamount to stretching provision to an illogical length and will lead to some kind of absurdity in taxing own money of shareholders without any corresponding benefit."

2.

Coming of the factual objections to sustain the additions both Ld CIT(A)/ AO has stated that Appellant failed to produce the purchase deed of the agricultural land. This question was never asked and basing the assessment/ FAA on this information is NOT material to the valuation of unlisted equity shares. We have enclosed the copy of the same with the paper book index now.

3.

The next objection of Ld CIT(A)/ AO is that the Appellant failed to provide instances of third-party sale deeds in the same vicinity. The Taxpayer submits that DVO vide its report dated 26.12.2016 had arrived valuation of Sarangpur New Delhi agriculture land at Rs 20.74 crs. The DVO based its valuation on the basis on actual sale deeds in the same vicinity . Relevant portion of DVOs finding is given below: -

“To work out the fair market value of the subject land sale instances wiz, Agriculture land at village Daultpur, Najafgarh Delhi has been adopted which is registered in the Office of Sub-Registrar – IX, Delhi as under: -

Regn. No.	Description of Property	Date of Agmt.	Total Sale Consideration	Land Area	Land Rate in Rs. Per Sq Mtr.	Average Land Rate in Rs. Per Sqm.
R- dated 13.09.2013	Mustail No. 22, Killa No. 15/2(2-8), 16(4-16), 25(2-0), Mustail No 23, Killa No. 11(4-16), 20(4-6), 21/1 (2-7) Village Daulatpur, Tehsil Najafgarh, New Delhi	23.09.2013	19,65,18,750/-	21 Bighas & 03 Biswas i.e. 17,829.027 Sqm	11,022.40	11,019.15
R-dated 27.09.2013	Mustail No. 22, Killa No. 17/3(0-16), 23 (5-1), 24/3 (1-8), Mustail No. 18, Killa No. 2(4-2), 39(4-16), 5/1(1-19), 8(4-16), 9/1(2-12), 10/1 (1-2), 13 94-16) & 26(0-4) Village Daulatpur, Tehsil Najafgarh, New Delhi	27.09.2013	16,90,08,334/-	18 Bighas & 04 Biswas i.e. 15,342.236 Sqm	11,015.89

From above the land rate of sale instance property at the end of month i.e. 30.09.2013 Rs.11,019.15

Time Gap

From 01.10.2013 to 04.03.2014 i.e. 05 months Hence, enhancement on a/c of time gap from 01.10.2013 to 04.03.2014 The land rate of sale instance property as on 04.03.2014 5% 11570.1 11,570.00 (A)

A. Adjustment Factors:

1.

Location/Situation: The Sale Instance property is situated about at a distance of 10 Km from Tehsil Najafgarh, whereas the subject property is situated about a

distance of 17 Km Tehsil Najafgarh. Hence adjustment on this a/c: less 20% of (A)	-2314	(B)
2. Future Potential: Since the SIP is situated about a distance of 05 km from the nearest semi-urban place, Whereas the Subject property is about 14 KM away from the nearest Semi-urban area. Hence in SIP more commercial potential available in respect of the subject property.
Hence adjustment on this a/c add 20% of (A)	-2314	(C)
3.Size: Since the SIP is small in size as compared to the subject property.
Hence adjustment on this a/c: add 10% of (A)	-1157	(D)
The land rate of the Subject Property as on 14.03.1997 (i.e. (A)+(B)+(C)+(D)	5785
Fair Market Value of land of the subject property as on 14.03.1997 (Land area in sqm X X Rate of per sqm)
Land Area in Sqm	Rate Per Sqm
35,861.837	5,785.00	207,460,726.47
		Say Rs.207,460,700 “

4.

The Appellant submits, that the report of the DVO made u/s 142A is binding on assessing authority and the CIT(A) wrongly ignored the actual evidence as per DVO report. For these purposes, the Appellant wishes to place reliance on following orders.

In support of this claim, the appellant placed reliance on the judgment of the hon'bleKolkata IT AT, in the case of [2012] 19 taxmann.com 121 (Kol.) in the IT AT Kolkata Bench 'C' where in the hon'ble IT AT held as under:

Section 50C, read with section 48, of the Income Tax Act, 1961 - Capital gains - Special provision for full value of consideration in certain cases- Assessment Year 2005-06 - Assessee sold a property and disclosed sale consideration for her half share at ₹ 20 Lakhs and computed long term capital gains at nil by taking indexed cost of acquisition at ₹ 30.81 Lakhs - Assessing Officer noticed that stamp valuation of property was at ₹ 1.3 Crores - Accordingly, adopting stamp duty valuation, | Assessing Officer computed long term capital gain at ₹ 50.70 Lakhs towards share of assessee = On appeal, Commissioner (Appeals) referred matter to DVO for ascertaining fair market value of snid property and directed Assessing Officer to adopt value of property as per valuation by DVO - Fair market value as assessed by DVO was lower than value adopted by Stamp Duty Authorities - Whether value adopted by DVO had to be adopted by Assessing Officer for the purpose of Computation of LTCG - Held, Yes [In favour of assessee]

Reliance is also placed on the judgment of hon'ble of High Court of Allahabad in the case of [2013] 30 taxmann.com 293 (Allahabad) where in the hon'ble High Court held as under:

Section 50C of the Income-Tax Act, 1961 - Capital gains - Full value of consideration in certain cases, special provision for - DVO's report - Assessment year 2003-04 - Assessee sold a property for certain consideration - Assessing officer rejected valuation of property done by assessee's registered valuer and referred matter to DVO to obtain fair market value - He also rejected full valuation done by DVO and adopted valuation done by Stamp valuation authorities as full value of consideration received and accordingly calculated Capital gains - Whether when Assessing Officer had obtained DVO's report, same was binding on him - Held, Yes

Whether, therefore, valuation done by DVO was to be adopted as sale consideration Held, Yes

Further reliance is placed on the judgment of hon'ble of IT AT Kolkata in the case of [2014] 43 taxmann.com 29 (Kolkata - Trib.) where in the hon'ble IT AT held as under:

Section 50C of the Income-Tax Act, 1961 - Capital gains - Special provision for full value of consideration in certain cases (Valuation of Asset) - Assessment year 2009-10 - Whether where DVO, on reference being made to him under section 50C(2) had value property lower than that of Registration Authority, Assessing Officer had to proceed with assessment in conformity with estimate given by Valuation Officer –Held, Yes [Para 7] [In Favour of Assessee]

Further reliance is placed on the judgment of hon'ble of IT AT Vishakhapatnam in the case of [2014] 45 taxmann.com 141 (Vishakhapatnam- Trib.) where in the hon'ble IT AT held as under:

Section 50C of the Income-Tax Act, 1961 -Capital gains - Special provision for full value of consideration in certain cases (Valuation made by DVO) - Assessment year 2006-07 - Whether where fair market value determined by DVO on a reference made by Assessing Officer in terms of sub-section (2) of Section 50C is less than value adopted or assessed by Stamp Valuation Authority then such fair market value determined by DVO has to be treated as full value of consideration received by assessee for purpose of computing capital gain - Held, yes [Para 10] [In Favour of Revenue]

Reliance is also placed on the judgment Hon'ble of IT AT - Pune Bench "SMC" in the case of Shri Anil MurlidharDeshmukh v/s. The Income Tax Officer Ward 3 (2), Nashik [ITA No.1821/Pun/2017 - A.Y.- 2013-14] where in the hon'ble IT AT held as under:

It is crystal clear that generally, when the A.O has obtained the DVO report then the same is binding. It is thus clear that the report of the DVO is binding on the AO, unless the assessee shows some glaring mistakes in such valuation.

The facts of the appellant are similar to the facts of the cases decided by Hon'ble ITATs and High Courts as discussed in the foregoing paras. Therefore respectfully following the above discussed judgments of Hon'ble ITATs and High Court, AO is directed to take the value of sale as determined by the DVO and not the value determined by the Registering Authority. AO is also directed to allow any exemption claimed by the appellant, if allowable as per the provisions of the Income Tax Act, 1961. In view of the above discussion, AO is further directed to re-compute the Long Term Capital Gain and consequently interest liability u/s234|A,234B'& 234C of the Income Tax Act, 1961. :

11.1

“As per case records, it is an undisputed fact that the shares have been allotted at a premium to its 100% holding company. Thus, applicability of Section on 56(2)(viib) has to be seen in this perspective. The Co-ordinate Bench of Tribunal in DCIT vs. Ozone India Ltd. in ITA No.2081/Ahd/2018 order dated 13.04.2021 in the context of Section 56(2)(viib) has analyzed the deeming provisions of Section 56(2)(viib) of the Act threadbare and inter alia observed that the deeming clause requires to be given a schematic interpretation. The transaction of allotment of shares at a premium in the instant case is between holding company and it is subsidiary company and thus when seen holistically, there is no benefit derived by the assessee by issue of shares at certain premium notwithstanding that the share premium exceeds a fair market value in a given case. Instinctively, it is a transaction between the self, if so to say. The true purport of Section 56(2)(viib) was analyzed in Ozone case and it was observed that the objective behind the provisions of Section 56(2)(viib) is to prevent unlawful gains by issuing company in the garb of capital receipts. In the instant case, not only that the fair market value is supported by independent valuer report, the allotment has been made to the existing shareholder holding 100% equity and therefore, there is no change in the interest or control over the money by such issuance of shares. The object of deeming an unjustified premium charged on issue of share as taxable income under Section 56(2)(viib) is wholly inapplicable for transactions between holding and its subsidiary company where no income can be said to accrue to the ultimate beneficiary, i.e., holding company. The chargeability of deemed income arising from transactions between holding and subsidiary or vice versa militates against the solemn object of Section 56(2)(viib) of the Act. In this backdrop, the extent of inquiry on the purported credibility of premium charged does not really matter as no prejudice can possibly result from the outcome of such inquiry. Thus, the condition for applicability of Section 263 for inquiry into the transactions between to interwoven holding and subsidiary company is of no consequence. We also affirmatively note the decision of SMC Bench in the case of KBC India Pvt. Ltd. vs. ITO in ITA No.9710/Del/2019 order dated 02.11.2022 (SMC) where it was observed that Section 56(2)(viib) could not be applied in the case of transaction between holding company and wholly owned subsidiary in the absence of any benefit occurring to any outsider.”

13.

“From the aforesaid extract of the impugned order, it becomes clear that the learned ITAT has followed the dicta of the Hon'ble Supreme Court in matters relating to the commercial prudence of an assessee relating to valuation of an asset. The law requires determination of fair market values as per prescribed methodology. The Appellant-Revenue had the option to conduct its own valuation and determine FMV on the basis of either the DCF or NAV Method. The Respondent-Assessee being a start-up company adopted DCF method to value its shares. This was carried out on the basis of information and material available on the date of valuation and projection of future revenue. There is no dispute that methodology adopted by the Respondent-Assessee has been done applying a recognized and accepted method. Since the performance did not match the projections, Revenue sought to challenge the valuation, on that footing. This approach lacks material foundation and is irrational since the valuation is intrinsically based on projections which can be affected by various factors. We cannot lose sight of the fact that the valuer makes forecast or approximation, based on potential value of business. However, the underline facts and assumptions can undergo change over a period of time. The Courts have repeatedly held that valuation is not an exact science, and therefore cannot be done with arithmetic precision. It is a technical and complex problem which can be appropriately left to the consideration and wisdom of experts in the field of accountancy, having regard to the imponderables which enter the process of valuation of shares. The Appellant-Revenue is unable to demonstrate that the methodology adopted by the Respondent-Assessee is not correct. The AO has simply rejected the valuation of the Respondent-Assessee and failed to provide any alternate fair value of shares. Furthermore, as noted in the impugned order and as also pointed out by Mr. Vohra, the shares in the present scenario have not been subscribed to by any sister concern or closely related person, but by outside investors. Indeed, if they have seen certain potential and accepted this valuation, then Appellant-Revenue cannot question their wisdom. The valuation is a question of fact which would depend upon appreciation of material or evidence. The methodology adopted by the Respondent-Assessee, accepted by the learned ITAT, is a conclusion of fact drawn on the basis of material and facts available. The test laid down by the Courts for interfering with the findings of a valuer is not satisfied in the present case, as the Respondent-Assessee adopted a recognized method of valuation and Appellant-Revenue is unable to show that the assessee adopted a demonstrably wrong approach, or that the method of valuation was made on a wholly erroneous basis, or that it committed a mistake which goes to the root of the valuation process.

14.

In view of the foregoing, we find that the question of law urged by the Appellant-Revenue is purely based on facts and does not call for our consideration as a question of law.”