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Assistant Commissioner Of Income Tax v. Safe Decore Pvt. Ltd. .
Summarized Legal Opinion
Factual and Procedural Background
This is an order (dated as recorded in the source) by Vijay Pal Rao, Judicial Member, concerning an appeal filed by the Revenue (ITA No. 716/JP/2017) and a cross-objection filed by the assessee (CO No. 36/JP/2017) against the order of the Learned Commissioner of Income Tax (Appeals)-22, Alwar dated 14.07.2017 pertaining to the Assessment Year 2014-15.
The Assessing Officer (AO) had made: (a) an addition of Rs. 66,55,000 under section 56(2)(vii)(b) read with Rule 11UA of the Income Tax Rules in respect of equity shares issued by the assessee; and (b) a disallowance of handling charges/commission of Rs. 3,94,044 invoking section 40(a)(ia) for alleged failure to deduct tax at source under section 194C. The Ld. CIT(A) deleted both these adjustments. The assessee filed a cross-objection challenging a disallowance of entry tax of Rs. 1,35,313 made by the AO and sustained by the Ld. CIT(A).
Legal Issues Presented
- Whether the addition of Rs. 66,55,000 made by the AO under section 56(2)(vii)(b) read with Rule 11UA of the Income Tax Rules in respect of shares allotted to M/s Jasmine Barter Private Limited was correct, or whether the deletion of that addition by the Ld. CIT(A) should be sustained.
- Whether the AO was justified in disallowing handling charges/commission of Rs. 3,94,044 by invoking section 40(a)(ia) on account of alleged violation of the provisions of section 194C read with section 40(a)(ia) of the Income Tax Act, 1961, or whether the deletion of that disallowance by the Ld. CIT(A) should be sustained.
- Whether the disallowance of entry tax of Rs. 1,35,313 made by the AO (and sustained by the Ld. CIT(A)) should be sustained, or whether the assessee's production of an e-Challan establishes payment and warrants allowance of the claim.
Arguments of the Parties
Revenue's (Appellant's) Arguments
- On valuation: The AO relied on Net Asset Value (NAV) of the company which yielded a per-share value of Rs. 26.69 and considered the assessee's valuation (discounted cash flow method) to lack merit because the NAV was substantially lower and the DCF inputs (e.g., modest average net profit growth of about 4–5%) did not support the higher valuation; the AO's approach was defended by the Departmental Representative (Ld. D/R).
- On tax deduction: The Revenue challenged the deletion of the disallowance under section 40(a)(ia) contending that tax should have been deducted at source as per section 194C; accordingly the AO had disallowed the handling charges for non-deduction of tax at source.
Assessee's (Respondent's) Arguments
- On valuation: The assessee produced a Chartered Accountant's certificate showing valuation by the discounted cash flow (DCF) method, which is one of the methods prescribed under Rule 11UA(2) of the Income Tax Rules. The assessee argued that Rule 11UA permits adoption of any prescribed method and that the fair market value is to be taken as the higher of the value determined by a prescribed method and the NAV; the DCF-based value (Rs. 54.98 per share) exceeded the NAV (Rs. 26.69), and the allotment price of Rs. 40 per share was within that fair market value. Alternatively, the assessee contended that section 56(2)(vii)(b) did not apply because the share application money was received in Assessment Year 2011-12 (prior to the effective applicability date asserted by the assessee).
- On tax deduction: The assessee contended that the payments of handling charges were made to shipping agents of non-resident ship owners, that such remittances were not taxable in the hands of the non-resident ship companies by reason of the relevant DTAAs (Indo-UK and Indo-UAE), relied upon CBDT Circular No. 723 dated 19.09.1995, and produced exemption certificates issued by the Director, International Taxation exempting those non-resident ship owners from tax deduction at source; therefore there was no obligation on the assessee to deduct tax at source on payments made to the shipping agents of these non-resident ship owners.
- On entry tax: In response to the AO's disallowance for want of proof, the assessee produced an e-Challan dated 26/04/2014 (for Rs. 1,37,635) which the assessee said includes the entry tax amount Rs. 1,35,313 and which, according to the assessee, contains its name and address.
Table of Precedents Cited
No precedents were cited in the provided opinion.
Court's Reasoning and Analysis
The Tribunal considered the rival contentions and the material on record and proceeded issue by issue, applying the statutory provisions and the record as follows:
On the valuation/addition under section 56(2)(vii)(b) read with Rule 11UA
- The Tribunal noted that Rule 11UA of the Income Tax Rules prescribes methods for determination of fair market value of unquoted equity shares, and sub-rule (2) specifically includes the discounted cash flow (DCF) method among the prescribed methods. The statutory scheme (section 56(2)(vii)(b) read with Explanation) requires that the fair market value be determined in accordance with the prescribed methods and compared with the value based on the assets of the company, with the higher of the two to be adopted.
- Because the assessee had adopted the DCF method (a prescribed method) and arrived at a per-share value of Rs. 54.98 which was higher than the NAV-derived value of Rs. 26.69 used by the AO, the allotment price of Rs. 40 per share was within the fair market value determined by the DCF method. The AO had not found any serious defect in the facts and details used for the DCF valuation.
- On that basis, the Tribunal found no error or illegality in the Ld. CIT(A)'s deletion of the addition made by the AO under section 56(2)(vii)(b).
On disallowance under section 40(a)(ia) for non-deduction under section 194C
- The Tribunal observed that the payments in question were made to shipping agents of non-resident ship owners. It relied on CBDT Circular No. 723 dated 19.09.1995 which provides that payments made to shipping agents of non-resident ship owners do not require deduction of tax at source.
- The Tribunal also noted that exemption certificates were produced (Director International Taxation certificates dated 23/06/2011 and 28/03/2013) granting exemption to the non-resident ship owners from deduction of tax at source. Given the existence of such exemption certificates and the nature of the recipients (shipping agents of non-resident ship owners), the Tribunal found that there was no obligation on the assessee to deduct tax at source in relation to these payments.
- Accordingly, the Tribunal found no error in the Ld. CIT(A)'s deletion of the disallowance made by the AO under section 40(a)(ia).
On the assessee's cross-objection regarding entry tax disallowance
- The AO had disallowed the entry tax claim of Rs. 1,35,313 on the ground that the assessee did not furnish credible proof of payment; the Ld. CIT(A) sustained that disallowance noting that a challan produced during appellate proceedings did not mention the name of the assessee company and therefore could not be verified.
- The assessee pointed to an e-Challan dated 26/04/2014 (for Rs. 1,37,635) placed at page 17 of the paper book, asserting that the e-Challan contains the assessee's name and address and that the amount includes Rs. 1,35,313 as entry tax and the balance as interest.
- The Tribunal examined the material and found that the e-Challan dated 26/04/2014 did contain the assessee's details and the relevant amounts. On that basis, the Tribunal directed the AO to verify the details of the e-Challan and then allow the claim made for entry tax if verification is satisfactory.
Holding and Implications
Final Disposition: The Tribunal dismissed the Revenue's appeal (ITA No. 716/JP/2017) and allowed the Assessee's Cross Objection (CO No. 36/JP/2017) for statistical purposes.
Direct consequences for the parties (as recorded in the order):
- The addition of Rs. 66,55,000 made by the AO under section 56(2)(vii)(b) read with Rule 11UA was deleted and the deletion by the Ld. CIT(A) was sustained (assessee's DCF valuation accepted as within prescribed methods and higher than NAV).
- The disallowance of handling charges/commission of Rs. 3,94,044 under section 40(a)(ia) for alleged non-deduction under section 194C was deleted and the deletion by the Ld. CIT(A) was sustained, in view of CBDT Circular No. 723 and exemption certificates for the non-resident ship owners.
- As to the entry tax disallowance of Rs. 1,35,313, the Tribunal allowed the assessee's cross-objection for statistical purposes and directed the AO to verify the e-Challan (dated 26/04/2014) which the Tribunal found contains the assessee's name and the relevant amounts; the AO was directed to verify details and then allow the claim if verified.
Broader implications: The order rests on application of the statutory scheme in section 56(2)(vii)(b) read with Rule 11UA and administrative guidance (CBDT Circular No. 723) and on documentary verification. The opinion does not purport to lay down any novel legal precedent; it applies existing statutory provisions and administrative circulars to the facts before the Tribunal.
End of summary based exclusively on the provided opinion text.
ORDER
Vijay Pal Rao, Judicial Member - This Appeal by the Revenue and Cross-Objection by the Assessee are directed against the order of Ld. CIT (A)-22, Alwar dated 14.07.2017 pertaining to the Assessment Year 2014-15.
2. First, we take up Revenue's appeal wherein the Revenue has raised the following grounds of appeal:—
"Ground of appeal
Appeal is filed on the following grounds against the order of Ld. CIT (A), Alwar in appeal no. 258/2016-17 dated 05-06-2017 in the case of M/s Safe Decore (P) Ltd., SP-812, E-6, Phase-III, Industrial Area, Bhiwadi, Distt. Alwar (PAN: AAFCS0374R) for the A.Y. 2014-15:-
That the appellant craves leave to add, amend or alter the grounds of appeal on or before the date the appeal is finally heard for disposal."
3. Ground no. 1 is regarding the deletion of addition made by the AO u/s. 56(2)(vii)(b) of the Income Tax Act read with Rule 11UA of the IT Rule, in respect of the equity shares issued by the assessee company.
3.1 The AO noted that during the year under consideration the assessee company has allotted shares and there is increase in the paid up capital amounting to Rs. 50,00,000/-. Further, Rs. 1,50,00,000/- was share premium on these shares. The AO asked to assessee to furnish the name and complete details of the investors and confirmation with copy of ITR, copy of bank statement etc. for verification of identity, creditworthiness and genuineness of transaction. In reply, the assessee submitted that the share application money in question was received in the Assessment Year 2011-12 and therefore the provision of section 56(2)(vii)(b) are not applicable in respect of this amount received. This provision has come into force with effect from 29/01/2012. The assessee has also submitted valuation per equity share computed on the discounted cash flow method as per the certificate of Chartered Accountants wherein the value per shares was arrived at Rs. 54.98 per share. The AO did not accept the said valuation and had applied Net Asset Value of the company which came to Rs. 26.69 per share. Applying the said value the AO made addition of Rs. 66,55,000/- u/s. 56(2)(vii)(b) of the Act. The assessee challenged the action of the AO before the Ld. CIT (A) and contended that as per Rule 11UA of IT Rules, the Fair Market Value of unquoted equity shares shall be the value, on the allotment date, of such unquoted equity shares as determined as per method provided or Net Asset Value whichever is higher. The Ld. CIT (A) accepted the contention of the assessee and held that the shares allotted to M/s Jasmine Barter Private Limited are within the fair market value as determined under the prescribed method under Rule 11UA of the IT Rules, 1962, and accordingly the addition was deleted.
3.2 Before us the Ld. D/R has submitted that assessee has submitted the valuation by adopting the discounted cash flow method whereas as per net asset value of the company, the value per share undisputedly is Rs. 26.69. Therefore, the AO has held that the value adopted by the assessee does not hold any merit when the value as per the net asset method is substantially low in comparison to the value adopted by the assessee. Further, the computation of the fair market value of the share is not based on any real data when the AO has specifically stated the net profit has increased only an average of 4 and 5%. She has relied upon the order of the Assessing Officer.
3.3 On the other hand, Ld. A/R of the assessee has referred to the certificate of the Chartered Accountant at page 9 to 11 of Paper Book and submitted that the valuation has been done by using the discounted cash flow method which is one of the prescribed methods under Rule 11UA of the Income Tax Rules. Further, as per the provision of section 56(2)(vii)(b) the fair market value share shall be the value as may be determined in accordance with method prescribed and for this purpose Rule 11UA has prescribed the method for determination of fair market value of the shares or the value as may be substantiated based on the value of its assets to the satisfaction of the AO, whichever is higher. He has supported the impugned order of the Ld. CIT (A). Alternatively, the AR of the assessee submitted that provision of section 56(2)(vii)(b) are not applicable in the case of the assessee as shares application money was received in the Assessment Year 2011-12 and this provision of section 56(2)(vii)(b) has been newly inserted w.e.f. 1/4/2013.
4. We have considered the rival contentions as well as the relevant material on record. There is no dispute that the assessee has issued the shares to M/s Jasmine Pvt. Ltd., during the year under consideration. Further, the fair market value as per the provision of section 56(2)(vii)(b) has to be determined in accordance with the method prescribed under Rule 11UA of the IT Rules and as per sub-Rule (2) of Rule 11UA, discounted cash flow method is one of the prescribed method. Therefore, it is the option of the assessee to adopt any of the prescribed method under Rule 11UA(2) of the IT Rules Section 56(2)(vii)(b) read with Explanation has specifically provided that the fair market value of the unquoted shares shall be determined as per the prescribed methods and shall be taken whichever is higher fair market value by comparing the value based on the asset of the company. Therefore, the Net Asset Value method as well as any of the other methods prescribed under Rule 11UA of the IT Rules, whichever is higher shall be adopted as per the option of the assessee.
4.1 In view of the statutory provisions giving options to assessee to adopt any of the methods which can be compared with the Net Asset Value Method and the AO shall adopt the value whichever is higher. In the case of the assessee the Fair Market Value determined as per the discounted cash flow method at Rs. 54.98 per share which is higher than the valuation adopted by the AO as per the Net Asset Value at Rs. 26.69 per share. Therefore, the share allotted at Rs. 40 per share is within the fair market value as determined by adopting the discounted cash flow method. The Assessing Officer has not found any serious defect in the facts and details used in determining the fair market value under discounted cash flow method. Hence, we do not find any error or illegality in the impugned order of the Ld. CIT (A) qua this issue.
5. Ground no. 2 is regarding disallowance made by the AO u/s. 40(a)(ia) and deleted by the Ld. CIT (A).
5.1 The AO found that the assessee has claimed expenses of handling charges to M/s Evergreen Shipping Agency India Pvt. Ltd. and Emirates Shipping Agencies Pvt. Ltd. without deduction of tax at source as per the provisions of Section 194C of the Act. Accordingly, the AO invoked the provision of Section 40(a)(ia) of the Act and disallowed the payment of handling charges of Rs. 3,94,000/-. The Assessee challenged the action of the AO before the Ld. CIT (A) and submitted that these payments were made to the shipping agents of non-resident shipping companies of UK and UAE. As per DTAA between Indo UK and Indo UAE the said remittance is not taxable in the hands of the Non-Resident shipping companies. The assessee also relied upon CBDT Circular No. 723 dated 19.09.1995 and submitted that the payments have been made through shipping agents of Non-Resident ship owners shipped at the port in India. Further, the assessee also produced the certificate issued by the Department whereby exemption was granted to these shipping companies/ship owners for non deduction on tax at source. The Ld. CIT (A) accepted these explanations and contentions of the assessee and deleted the disallowance made by the AO on this account.
5.2 We have heard the rival contentions and considered the relevant material on record. The Revenue has not disputed that the assessee has made the payment in question to the shipping agents of Non-Residents ship owners. Therefore, as per the CBDT Circular No. 723 dated 19/09/1995 payment made to the shipping agents of Non-Resident ship owners does not require deduction of tax at source. We further note that the Director International Taxation vide Certificate dated 23/06/2011 and 28/03/2013 respectively granted the exemption to the Non-Resident ship owners in question from deduction of tax at source. The assessee filed these certificates which are placed at page no. 13 and 14 of the paper book. Therefore, when the Department has already granted the exemption certificate to the Non- Resident ship owners then there is no obligation on the assessee to deduct tax at source in respect of the payment made to the shipping agents of these Non-Resident ship owners. Accordingly, we do not find any error or illegality into the order of the Ld. CIT (A) qua this issue.
6. Now, we take Assessee's Cross Objection i.e. C.O. No. 36/JP/2017 wherein the assessee has raised the following grounds of Cross objection.
6.1 Only issue raised by the assessee is regarding disallowance of entry tax.
6.2 We have heard the Ld. AR as well as Ld. D/R and considered the relevant material on record. The Assessing Officer disallowed the claim of entry tax of Rs. 1,35,313/- on the ground that the assessee has not furnished any proof of payment. The Ld. CIT (A) has confirmed the disallowance made by the AO in para 6.3 of the impugned order as under:—
"6.3 I have considered the order passed by the AO and submissions filed by the appellant. I have considered the copy of Challan submitted during the appellate proceedings. However, the challan does not mention the name of the assessee company. Therefore, it is not possible to verify whether the entry tax belongs to the appellate company. Accordingly, the addition of Rs. 1,35,313/- is sustained for want of credible proof. Appellant's ground of appeal on the issue is dismissed."
6.3 Thus, it is clear that Ld. CIT (A) observed that it is not possible to verify whether entry tax belongs to assessee company, as the e-Challan produced by the assessee does not mention the name of the assessee's company. Ld. A/R of the assessee has drawn our attention to page No. 17 of the Paper Book and submitted that as per E-challan dated 26/04/2014 the name of the assessee has been mentioned. We find that the E-challan dated 26/4/14 for sum of Rs. 1,37,635/-contains the details of assessee i.e. its name as well as address. The assessee has clarified that this amount of Rs. 1,37,635/- includes Rs. 1,35,313/- as entry tax and balance as interest. The AO has disallowed this amount for want of proof of payment whereas the assessee had produced this e-Challan dated 26/04/2014 having all the details. Accordingly, in view of the fact that, the e-Challan dated 26/4/2014 contains all relevant details including name of the assessee the AO is directed to verify details of the e-Challan and then allow the claims made on this account.
7. In the combined result, the appeal of the Revenue i.e. ITA No. 716/JP/2017 is dismissed whereas the Cross Objection of the Assessee i.e. CO No. 36/JP/2017 is allowed for statistical purpose.
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