ITO vs M/s. Leela Tourism And Heritage Pvt. Ltd.

1.

Whether CIT(A) has erred in not considering the judgement of Hon'ble ITAT which was confirmed by the Hon'ble High Court of Delhi in deciding that computation method for the relevant A.Y. be based on Book value and not on Market Value of asset.

2.

The appellant craves leave to add, amend and alter the grounds of appeal during appellate proceedings.

3.

Whether CIT(A) has erred in permitting assessee to determine the Fair market value of unquoted shares computed as per assessee's choice of method (i.e.DCF) which is on the higher side and not applying the NAV method book value based method as per section 56(2)(viib) read with Rule 11UA(2)(a) applicable in the case.

4.

Whether CIT(A) has erred in not deciding the case on merits 5 and based the judgement merely on the judgement given by Hon'ble ITAT in earlier A.Y.2016-17.

5.

Whether CIT(A) has erred in ignoring the fact that Explanation (a)(ii) of Section 56(2)(viib) of the Act has not 6 made any distinction on the type of shares issued, stating necessary condition viz" (a)Substantiated to the satisfaction of AO and (b)Based on the value, on the date of issue of shares.

“6. Decision: -

6.1

Statement of fact, grounds of appeal, submission filed by the appellant, and the assessment order have been perused. The appellant is a company, engaged in the business activity of designing, developing, managing and leasing of real estate properties, filed its ITR on 31.10.2017for A.Y. 2017-18.As per the assessment order, the case was selected under CASS for ‘Complete Scrutiny’. Accordingly, the AO issued notice u/s. 143(2) dated 23.08.2018, which was duly served upon the appellant. Thereafter, the AO issued notice u/s. 142(1) along with questionnaire on 23.07.2019 and 05.09.2019. In response, the AR of the appellant filed requisite information/details called for by the AO through e-proceedings portal.

6.2

On perusal of the submissions filed by the appellant, it is noted that the appellant’s appeal No. CIT(A), Delhi-5/10280/2018-19 for A.Y. 2016-17was allowed by Hon’ble ITAT Delhi ‘E’ Bench vide ITA No. 3685/Del/2023 dated 05.09.2024. The relevant portion of the said order is quoted below:

“6.

We have carefully considered the rival submissions and perused the first appellate order and the assessment order. The documents referred to in the course of hearing by the respective sides have also been taken into account.

7.

In the present case, the assessee has challenged the additions made under Section 56(2)(viib) towards consideration received by way of allegedly excess share premium on issue of equity shares by the assessee-company.

8.

As noted earlier, the assessee in the instant case has issued 10 lakh equity shares of Rs.10/- at a premium of Rs.70/- for each share. The AO has reworked and determined the FMV at Rs.19 per share as against Rs.80 claimed by assessee and consequently held that the assessee has received excess premium over fair value of equity shares issued with reference to Section 56(2)(viib) r.w. Rule 11UA of the Income Tax Rules. The AO accordingly treated excess premium receipt of Rs.6,10,00,000/- as deemed income as per the provisions Section 56(2)(viib) of the Act.

9.

The amount received by way of share premium is essentially a capital receipt. However, Section 56(2)(viib) seeks to treat such consideration received as deemed income by a closely held company. Section 56(2)(viib) is one of the anti-abuse provision which brings to tax such excess consideration deemed to have been received by the closely held company while issuing shares at premium if such consideration is found to exceed the FMV of such shares. The rationale behind the introduction of deeming provisions of Section 56(2)(viib) in the statute is to deter generation and use of black money.

9.1

In the instant case, the assessee has issued shares to one M/s. Legacy Food Pvt. Ltd. for a consideration of Rs.80 per share including Rs.70 per share towards premium on face value of Rs.10 per equity share. The assessee seeks to justify the premium of Rs.70 per share as fair market value on the touchstone of Section 56(2)(viib) r.w. Rule 11UA of I.T. Rules, 1962.

9.2

For this purpose, the assessee submits that it owns overseas subsidiary by holding 100% shares thereon and thus have complete control over such entity. The investment value in such subsidiary company shown in its books at book value requires to be substituted by the intrinsic value of the shares of the overseas subsidiary company.

9.3

To assert such substituted valuation above book value, the assessee contends that the subsidiary company holds valuable asset in the form of ‘Hotel Residence AG, Switzerland’. The value of investment by subsidiary in M/s. Hotel Residence AG Switzerland has been determined as per the valuation of the private valuer as on June, 2014. The assessee has advanced a justification that the valuation of hotel asset proposed to be used as hotel building stood substantially converted to hotel apartment and this change in the building plan leading to high earning potential and revenue generation has lead to higher valuations determined equivalent to INR 51.92 crore of value of shares of subsidiary company as against INR 21.24 crore reflected in its books. The assessee has thus rightly modified the value of investment and enhanced the book value of the assessee-company based on increase in the value of shares of subsidiary which justifies the share premium charged on issue of shares.

9.4

The AO has declined to admit the claim of assessee towards substitution of the investment value in the subsidiary company, as according to him, Rule 11UA do not permit the substitution of the book value for the purpose of determination of NAV which is the recognized method of valuation adopted by the assessee. Secondly, the value report is based on a disclaimer on the correctness of the valuation of the property in subsidiary company for the purpose of re-working the book value is based on the representations from management. The CIT(A) has also upheld the action of the AO citing constraints laid down by Rule 11UA whereby no option has been provided to modify the figures appearing in the balance sheet for the purposes of determination of NAV.

9.5

The assessee, on the other hand, contends that apart from the recognized methods of valuation contemplated in Rule 11UA, the assessee is also entitled to determine the FMV of the shares subject to the satisfaction of the AO on the date of issue of shares. In terms of Explanation appended to Section 56(2)(viib), once it is demonstrated to the satisfaction of the AO that the FMV stands at a higher figure, the NAV method can be suitably modified. It is an option given to the assessee company to demonstrate higher fair market value. If the option is exercised, it needs to be substantiated to the satisfaction of the AO. The assessee thus submits that while the investment value shown in its books towards 100% subsidiary company has been shown at book value but the intrinsic value / real worth of the subsidiary company is much higher owing to the revaluation of the hotel building held by the subsidiary company backed by valuation report obtained in the case of subsidiary company too. The assessee thus contends that the assessee rightly deserves to substitute the book value of the investment in subsidiary company while determining the NAV of the assessee company.

10.

On perusal of extant provision of Section 56(2)(viib) r.w. Explanation thereto, it is noticed that for the purposes of the aforesaid provision, the FMV of the shares shall be the value as determined in accordance with such method as may be prescribed under Rule 11UA of the Income Tax Rules. Coupled with this and in addition thereto, the assessee is also entitled to substantiate the FMV to the satisfaction of the AO based any rational basis. The modification in the value of shares in subsidiary company appears rational in the context of the case. The law provides for an alternative option to the assessee to substantiate the FMV in the manner as may be considered expedient. Both AO and the CIT(A) thus have proceeded on misconception that while determining the FMV as per NAV, the book value cannot at all be substituted even on some rational basis. As noted, in view of Explanation to Section 56(2)(viib), the assessee is entitled to suitably modify the NAV as long as the NAV is capable of being substituted by some proof or competent evidence. On facts, the assessee has produced the valuation report as well as the market valuation of Hotel Residence AG Switzerland in German currency. The valuation of shares of subsidiary company to determine the FMV of the holding company, i.e., the assessee company for the purposes of issuance of shares at premium thus is in accord with the deeming provision. The CIT(A), as noted earlier, has proceeded on misconception of law and facts and erroneously proceeded on the assumption that while determining the FMV as per NAV method, the component of different assets held by the assessee company cannot be modified. This approach is contrary to the Explanation (a)(ii) of Section 56(2)(viib) of the Act.

11.

The method adopted for reworking of the subsidiary company by applying the DCF method or any known method is permissible as long as the assessee is able to establish the correctness of the valuation in the light of the valuation report furnished.

12.

The assessee, in our considered view, is free to adopt the FMV of the asset held by the subsidiary company and rework the value of investments held in the subsidiary company. Such approach do not run contrary to the object and purpose of Section 56(2)(viib).

13.

We thus set aside the action of the CIT(A) and reverse the additions made by the AO.

14.

In the result, the appeal of the assessee is allowed.” Page 11 of 12 AABCL3681N- LEELA TOURISM AND HERITAGE PRIVATE LIMITED A.Y. 2017-18 ITBA/NFAC/S/250/2025-

26/1076467316(1) As the issue has been squarely covered by the decision of Hon’ble ITAT in the assessee’s own case for A.Y. 2016-17, respectfully following the decision of the Hon’ble Jurisdictional ITAT Delhi in the case of the appellant, the appeal is hereby allowed.”