Ita v. M/S I.a. Hydro Energy (P) Limited

IN THE HIGH COURT OF HIMACHAL PRADESH AT SHIMLA ITA No.4 of 2024Reserved on:27.05.2024Pronounced on:31.05.2024 Pr. Commissioner of Income Tax-1, Chandigarh …Appellant Versus M/s I.A. Hydro Energy (P) Limited …Respondent ________________________________________________________________ Coram: Hon’ble Mr. Justice M.S. Ramachandra Rao, Chief Justice.Hon’ble Mr. Justice Satyen Vaidya, Judge. Whether approved for reporting? For the appellant : Mr. Neeraj Shara & Mr. Ishan Kashyap,Advocates. For the respondent : Nemo. M.S. Ramachandra Rao, Chief Justice. This appeal is preferred by the Revenue under Section 260-A of theIncome Tax Act, 1961 (in short “the Act”), challenging the order dt.11.10.2023, passed by the Income Tax Appellate Tribunal (in short “the Tribunal”), Bench ‘A’, Chandigarh, for the Assessment Year 2018-19. 2.The respondent-assessee is engaged in the business of Generation andDistribution of Hydro Electricity in the State of Himachal Pradesh. 3.It filed a Return for the Assessment Year 2018-19 on 15.10.2018,declaring loss of Rs.67,15,30,280/-. 4. The assessee had issued 2.25 crores equity shares with face value of Rs.10/- per share for a premium of Rs.90/- per share to M/s Shri Bajrang Power &Ispat Ltd. and Shri Bajrang Energy Private Ltd. 5.In its reply to the Notices issued u/s 143 of the Act, the assessee statedthat prior to 23.02.2017, both the share subscribers were partners in theassessee-firm and the balances were showing as Partners Capital Account. 6.The assessee-company was having opening balance of unsecured loansas on 01.04.2017, which were converted into share capital as per agreement. 7.According to the assessee, the shares have been valued as per DiscountedCash Flow Method, prescribed in Rule 11UA of the Income Tax Rules and aCertificate was also obtained from the Chartered Accountant, as required underthe Income Tax Rules. 8.The case of the assessee was selected for Limited Scrutiny under the e-Assessment Scheme. 9.Assessment was completed by the Assessing Office (Faceless), videorder dt. 12.04.2021 u/s 143(3) read with Section 143(3A) & 143(3B) of Act, atan income of Rs.135,36,85,457/- by making an addition of Rs.202.50 croresunder the Head ‘Income from Other Sources’ under Section 56(viib) of the Act,on account of excess amount per share paid as premium. The said order isAnnexure P-2. 10.In the assessment order, the valuation report furnished by the assessee-company was rejected by the Assessing Officer (AO), holding that the Discounted Cash Flow (DCF) valuation used by the assessee, is bogus and hasno connection with the real figures. The said order stated that the valuation wasdone with fictitious figures having no correlation with actual affairs of theassessee-company. Thereafter, the Assessing Officer, National FacelessAssessment Centre, computed the fair market value of the unquoted shares onthe basis of balance sheet figures as per NAV method and passed his order. 11.This was challenged by the assessee-company before the CIT(Appeals),National Faceless Assessment Centre. 12.The CIT(Appeals) deleted the additions made by the Assessing Officer,in its order dt. 13.05.2022. The Appellate Authority held that since no money/consideration wasreceived by the assessee on issue of shares and the shares are allotted merely onaccount of conversion of outstanding loans received in earlier years and sourcewhereof was accepted to be satisfactorily explained into share capital, Section56(2)(viib) of the Act in absence of receipt of consideration, is not applicable. It also held that the valuation is done by the assessee as per DCF method,which is an internationally accepted method of valuation of shares, and is apermissible methodology as per Rule 11UA(2)(d) of the Rules. 11.This was challenged by the assessee-company before the CIT(Appeals),National Faceless Assessment Centre. 12.The CIT(Appeals) deleted the additions made by the Assessing Officer,in its order dt. 13.05.2022. The Appellate Authority held that since no money/consideration wasreceived by the assessee on issue of shares and the shares are allotted merely onaccount of conversion of outstanding loans received in earlier years and sourcewhereof was accepted to be satisfactorily explained into share capital, Section56(2)(viib) of the Act in absence of receipt of consideration, is not applicable. It also held that the valuation is done by the assessee as per DCF method,which is an internationally accepted method of valuation of shares, and is apermissible methodology as per Rule 11UA(2)(d) of the Rules. It held that the right to select the method of valuation (NAV or DCF), isvested with the assessee, and the Assessing Officer erred in substituting theassessee’s method of valuation, i.e. DCF, with his own method of valuation,i.e. NAV method, and had acted completely beyond his jurisdiction. It also held that the report of the Technical Expert is binding on theAssessing Officer, which cannot be disregarded/rejected without any cogentreasons, and the impugned addition of Rs.202.50 crores, made under Section56(2)(viib) of the Act, is required to be deleted. The decision of the ITAT 13.The Revenue Department challenged this order before the Income TaxAppellate Tribunal, Bench ‘A’, Chandigarh, by filing ITA no.548/CHD/2022.14.The Tribunal confirmed the finding of fact that the assessee did notreceive any consideration for allotment of shares in the previous year relevantto the current assessment year, and upheld the view of the CIT (Appeal) if noconsideration was received in the previous year under consideration, Section56(2)(viib) of the Act has no application. It held that the consideration in the form of unsecured loans were received from the partner of the erstwhile firm in the year 2010, as evidencedfrom loan agreement, and the Assessing Officer could not bring out anymaterial facts to show that such conversion of loans to equity shares was a ployto defraud revenue of the tax on such transaction. The Tribunal went further and observed that the Assessing Officer is notauthorized to pick and choose a particular method of valuation of shares, sincethe option in that regard is specifically given only to the assessee as per Rule11UA(2) of Income Tax Rules,that the AO can only verify method of valuationadopted by the assessee, but the same cannot be substituted by the AO by a different method i.e., NAV method, once the assessee has exercised option for the DCF valuation method. It held that the Assessing Officer was not correct in rejecting the DCFmethod and proceeding to value the shares by NAV method merely on theground that there was a huge difference in projected figures and actual resultsavailable for some years. 15.It relied on the judgment of Mumbai Income Tax Appellate Tribunal in Creditalpha Alternative Investment Advisors (Pvt.) Ltd.[1]. The ITA 16.Challenging the said order, this appeal is filed. 17.The counsel for the Department-Revenue sought to contend that the orders passed by the Tribunal are not legal and proper and pressed thefollowing contentions:- different method i.e., NAV method, once the assessee has exercised option for the DCF valuation method. It held that the Assessing Officer was not correct in rejecting the DCFmethod and proceeding to value the shares by NAV method merely on theground that there was a huge difference in projected figures and actual resultsavailable for some years. 15.It relied on the judgment of Mumbai Income Tax Appellate Tribunal in Creditalpha Alternative Investment Advisors (Pvt.) Ltd.[1]. The ITA 16.Challenging the said order, this appeal is filed. 17.The counsel for the Department-Revenue sought to contend that the orders passed by the Tribunal are not legal and proper and pressed thefollowing contentions:- “i)Whether the Hon’ble ITAT is right in law and on the facts and thecircumstances of the case in holding that there is no case of application ofSection 56(2) (viib) in the respondent’s case where pre-existing unsecuredloans of partners/shareholders were converted into equity shares atpremium and the facts of the assessment order do not indicate any case oftax abuse involved in such share conversions?circumstances of the case in holding that there is no case of application ofSection 56(2) (viib) in the respondent’s case where pre-existing unsecuredloans of partners/shareholders were converted into equity shares atpremium and the facts of the assessment order do not indicate any case oftax abuse involved in such share conversions? ii)Whether the Hon’ble ITAT is right in law and on the facts and thecircumstances of the case in holding that the unsecured loans received bythe assessee in earlier years but converted to shares in the assessmentyear under appeal will not fall under the definition of “any considerationfor issue of share received in the previous year” and therefore will notattract the provisions of section 56(2) (viib) of the Income tax Act, 1961?circumstances of the case in holding that the unsecured loans received bythe assessee in earlier years but converted to shares in the assessmentyear under appeal will not fall under the definition of “any considerationfor issue of share received in the previous year” and therefore will notattract the provisions of section 56(2) (viib) of the Income tax Act, 1961? iii) Whether the Hon’ble ITAT has erred in not considering the fact that theunsecured loans received in earlier years were in the nature of liability ofthe assessee while upon being converted to shares, the nature ofunsecured loans changed to consideration in lieu of shares during theassessment year and therefore will attract the provisions of Section 56(2)(viib) of the Income Tax Act, 1961? iv) Whether the Hon’ble ITAT is right in law and on the facts and thecircumstances of the case in holding that the unsecured loans wereverified during the assessment in previous year and there is no abuse oftax laws although, the color of unsecured loans was changed fromliability to ownership only upon allotment of shares in the year underappeal and therefore the provision of Section 56(2) (viib) will beapplicable in the current assessment year? v)Whether the Hon’ble Tribunal is right in law in holding that as thevaluation of shares had been based upon the valuation report. The samecould not be doubted by the Assessing Officer. The said finding smacks ofperversity and whether it is legally sustainable or not in the eyes of law?vi)Whether the Hon’ble ITAT erred in deleting the addition of Rs.202.50crores under the Head “Income from Other Sources” u/s 56(2) (viib) ofthe Act on account of excess amount per share paid as premium and notallowing the Assessing Officer’s decision to substitute DCF method ofshare valuation by NAV method in accordance with the Rule 11UA of theIncome Tax Rules?” v)Whether the Hon’ble Tribunal is right in law in holding that as thevaluation of shares had been based upon the valuation report. The samecould not be doubted by the Assessing Officer. The said finding smacks ofperversity and whether it is legally sustainable or not in the eyes of law?vi)Whether the Hon’ble ITAT erred in deleting the addition of Rs.202.50crores under the Head “Income from Other Sources” u/s 56(2) (viib) ofthe Act on account of excess amount per share paid as premium and notallowing the Assessing Officer’s decision to substitute DCF method ofshare valuation by NAV method in accordance with the Rule 11UA of theIncome Tax Rules?” 18. We are of the opinion that the orders passed by the Income TaxAppellate Tribunal as well as the CIT(Appeals), are fairly comprehensive. Bothof them have concurrently found that no consideration was received by theassessee-firm for allotment of the shares, therefore Section 56(2)(viib) of theAct would not apply, and that it would have applied only if consideration wasreceived for such a transaction. 19.Also, both the Tribunal and the CIT(Appeals) have held that theAssessing Officer had no jurisdiction to substitute the NAV method ofassessing the valuation of shares, once the assessee had exercised option of aDCF valuation method as per Rule 11UA(2) of the Income Tax Rules. 20.We agree with the reasoning adopted by the CIT(Appeals) confirmed bythe ITAT on all aspects and find that no substantial questions of law arise inthis appeal for consideration by this Court. the ITAT on all aspects and find that no substantial questions of law arise inthis appeal for consideration by this Court. 21.Accordingly, the appeal fails and is dismissed. 22.Pending miscellaneous application(s), if any, shall also stand disposed of. (M.S. Ramachandra Rao)Chief Justice May 31, 2024 (Yashwant) (Satyen Vaidya) Judge