Mazars Tax Update | Edition 02.19

Direct Tax News

CIT (A) can't impose Rule 11UA when taxpayer 'substantiated' valuation u/s. 56(2)(viib) before AO

Background  

• This tax focus summarizes a recent judgement of the Delhi ITAT in case of India Today Online Pvt. Ltd (‘assessee’) for the AY 2013-14 and AY 2014-15.
• Delhi ITAT holds when AO has accepted the valuation method, then Ld. CIT(A) cannot acquire jurisdiction to tinker with such a valuation or valuation method.

Facts of the Case

• The assesse company which is engaged in the business of development, design and maintenance of website received share application money from Living Media India Ltd in the AY 2011-12, AY 12-13 and AY 13-14 which were issued in the AY 13-14 and AY 14-15.
• The assesse company valued the shares at Rs.30 per share, i.e., face value of Rs.10 and premium of Rs.20.

Issue under consideration before AO

• During the scrutiny for AY 2013-14, AO required the assessee to justify the difference between premium charged and the book value of the shares and why the difference should not be added back in terms of section 56(2)(viib).
• The balance sheet and valuation reports issued by Independent Chartered accountant showed an investment in Mail Today News Paper Private Limited (‘Mail Today’) by the assessee. The value of this investment by assesse in Mail Today was recalculated to Rs 270.08 instead of R 286.16. This recalculation was done on the basis of some change in percentage shareholding.

Order of the AO

• Excess value of share of assessee company comes to Rs 2.25 per share which is taxable as income from other source as per the provision of section 56(2)(viib). This resulted in addition of Rs 11,42,86,626 @ 2.25 per share on 5,07,94,056 shares which was added back by AO to the income of the assessee.
• But nowhere, AO has disturbed the method or value substantiated by the assessee, except for the aforesaid reason.
• Thereafter the AO also made addition in AY 2014-15 as well. 

Assessee’s contentions before CIT (A)

• The company submitted that the provisions of section 56(2)(viib) of the Act are applicable from 1.4.2013 i.e. AY 2013-14 and onwards. The company had also argued that since the section 56(2)(viib) was not on statute at the time of receipt of Share Application Money, therefore, same is not applicable at the time of actual allotment of shares i.e. during AY 2013-14. As regards to the applicability of section 56(2)(viib) of the Act on the Share Application Money of Rs. 135.42 crores received during the AY 2013-14, the company vide the same letter dated 18.03.2016 had argued that the applicability of section 56(2)(viib) of the Act should be examined in AY 2014-15 (in the year of allotment) and not in the AY 2013-14 (in the year of receipt of money).

 
CIT (A) observation

• Ld. CIT (A) has deleted the said addition on the ground that, since 5,07,94,056 (out of 7,48,77,389) shares were actually allotted in the financial year pertaining to next assessment year, therefore, no addition can be made in terms of section 56(2)(viib) as same cannot be made in the year of the receipt of the funds but can only be made in the year when shares were issues or allotted.
• However CIT(A) further observed, though, the assessing officer did not per se challenge the Valuation Report during the AY 2013-14, however, during the assessment proceedings for AY 2014-15, the assessing officer examined the valuation report including the person who prepared the valuation report for the shares of M/s Mail Today News Paper Private Limited.

 
During the current year, the Mail Today has incurred losses of Rs. 29,68,96,659 (Previous year52,79,24,628) thereby resulting in accumulated losses of Rs. 3,20,39,42,192 against shareholders funds of Rs. 3,10,65,04,984, which has substantially eroded its net worth as on date. Hence, FMV of assessee was re worked as its value of investment in Mail Today was reduced.
 
CIT (A) held that during AY 2013-14, shares were issued at a price more than FMV of shares of the assessee company. Thus, the provisions of section 56(2)(viib) are applicable with reference to shares issued during AY 2013-14. Since 2,40,83,333 shares @ 30 per share having face value of Rs. 10 per share were issued during AY 2013-14, therefore, CIT (A) made an enhancement of Rs. 48,16,66,660 (Rs. 20 x 2,40,83,333) for the AY 2013-14.
 
Assessee’s contention before ITAT

• The assessee first of all objected to the jurisdiction to make enhancement on the ground that this issue was never discussed by the AO or arises from the assessment order, because the valuation and valuation method submitted by the assessee has been accepted by the AO and the only reason for making the addition by the AO was on account of the difference in percentage of holding of shares in the share holding of assessee in Mail Today and accordingly he has reduced the value per share from Rs. 30 to Rs. 27.75.

• Also, the AO of M/s. Mail Today has accepted the value of Rs. 43.29 while making the assessment u/s 143(3)
• Another objection of the assessee was that the share application money has been received in the earlier years and same were allotted in the month of September, 2012 and till that period neither the provision of section 56(2)(viib) was there in the statute nor Rule 11U & 11UA was prescribed

The Hon’ble ITAT held as under

• Once the computation mechanism as per new prescribed method was not available at the time of issuance of shares, then it is unfathomable to apply such method so as to reject the assessee's valuation and assessee cannot be expected to comply with the method when it was notified subsequent to the date of allotment of the shares.
• Mail Today New Paper Private Ltd was valued as per DCF method and value of shares of Assessee Company was based on NAV method. This substantiation prima facie has not been tinkered with by the AO except for the factors already stated in the foregoing paragraphs. When law envisages that the FMV can be determined in either of the two manners, whichever is higher, so as to demonstrate that the value of shares does not exceeds the FMV, then AO cannot insist upon to follow only one particular method. Here the assessee had substantiated the fair market value which was much higher and the shares have been issued at lower price. It would be incorrect to hold that substantiation made by the assessee has to be only in accordance with Rule 11U and 11UA. Ld. CIT (A) cannot impose Rule 11U/11UA to hold that assessee's substantiation is incorrect, simply because the value adopted for the shares as per 11UA is less.
• ITAT did not find any justification for reducing the value of shares to Rs. 10 and disallowing premium  as assessee was able to substantiate and consequently the enhancement made the Ld. CIT(A) for making the addition of Rs. 48,16,66,660/- u/s 56 (2)(viib) is set aside and the addition by him is deleted.
• Further, for AY 2014-15, the value of shares of Mail Today as calculated on the basis of DCF method were rejected by  the AO as there were huge financial losses in Mail Today. Accordingly AO has taken the value of shares at Rs.10 and rejected the DCF.  This has been confirmed by the Ld. CIT(A). ITAT deleted the adjustment since the method adopted by assesssee company is substantiated and the FMV as per DCF is higher.

Indirect Tax News

Rajasthan AAAR upheld the order of AAR stating that cleaning activities undertaken on agricultural produce in factory does not qualify as job work on agricultural produce - In M/s Rara Udhyog

Facts
•    Appellant is engaged in cleaning of agricultural produce.
•    Appellant is having cleaning plant and they remove various impurities.
Observations
•    AAAR observed that in order to claim exemption, either all conditions reproduced below must be satisfied or the activity should qualify as job work as per exemption notification:
(a) Activity should be carried out at agricultural farm
(b) Activity should not alter the essential characteristics of agricultural produce
(c) Activity should make the produce marketable for primary market
•    Cleaning activity is conducted at factory away from agricultural farm making the produce marketable for secondary market. 
•    Furthermore, mechanized cleaning does not come within the ambit of “intermediate production process” as specified in exemption notification.
Ruling
•    Therefore, synchronizing the relevant entries of exemption notification AAAR denied the benefit of exemption in respect of cleaning activities undertaken the same not being covered within the ambit of exemptions provided.
For more information, Click here.

Amendment in the format of Shipping Bill and Bill of Exports (Forms) Regulation, 2017 has been carried out vide Notification No.25/2019 – Customs Non-Tariff dated 25th March, 2019

Summary of revised formats is as under:
1.    Form SB – I under Regulation 2 i.e. Shipping Bill for Export of goods (original)
2.    Form SB – I under Regulation 2 i.e. Shipping Bill for Export of goods (quadruplicate/ export promotion copy)
3.    Form SB – III under Regulation 3 i.e. Bill for Export of goods (original)
4.    Form SB – III under Regulation 3 i.e. Bill for Export of goods (quadruplicate/export promotion copy)
For revised formats, Click here.

Exemption from IGST and Compensation Cess on goods imported against EPCG/Advance Authorization Scheme extended till 31st March, 2020

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Exemption from IGST and Compensation Cess to EOU’s on imports extended till 31st March, 2020

For more information, Click here.