The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) has directed re-adjudication for the Departmental Valuation Officer (DVO) report as the AO had merely rejected the valuation report without referring the matter for valuation to the DVO.
The assessee company, ND’s Art World Pvt. Ltd was engaged in the business of Art Direction, set construction, studio and equipment hire. The assessee’s case was selected for limited scrutiny under CASS and the assessment was completed under Section143(3) of the Income Tax Act, where the Assessing Officer (AO) determined the total income by making various additions/disallowances.
It is observed that the A.O. had called for calculation of share premium where the assessee company had issued 1780 shares with face value of Rs.10/- and premium. The assessee was also sought for to furnish financials of A.Ys. 2016-17 and 2017-18 and on perusal of the same, it was found that the assessee had increased value of the asset by calculating upward revaluation in the balance sheet of A.Y. 2015-16 thereby arriving at the valuation of the shares at higher value of the assets under Rule 11UA of the Income Tax Act.
The A.O. made an addition on the difference of share premium per share, thereby disallowing under Section 56(2)(viib) of the Income Tax Act on the ground that the premium value under Rule 11UA of the Income Tax Rules could not be taken using the revaluation of the assets thereby recomputing the premium value per share as against the assessee’s valuation per share. It was also observed that the assessee had written off bad debts.
The A.O. further contended that the assessee has increased the value of the assets in the previous year by creating an upward revaluation and as a result has determined the higher price per share. The A.O. stated that he had verified the valuation report filed by the assessee and found that the valuer has not considered the prevailing stamp duty value at the time of valuation of land and building of the assessee. The A.O. further contended that the valuer has not specified as to what methodology or reference was made to substantiate the value of the asssets.
The A.O. contended that the assessee has failed to substantiate the increase in the value. The A.O. further stated that the Rule specified that the revaluation of the assets was not to be considered for calculation of the share premium.
The A.O. observed that the assessee has shown the same amount for A.Ys. 2009- 10 and 2012-13 as the provision of bad debt and in the A.Y. 2012-13, the assessee had not shown any disallowance in the column for additional provision of bad and doubtful debts. As the assessee’s submission was not to the satisfaction of the A.O., the A.O. proceeded to make impugned addition (bad debt for A.Y. 2009-10 and A.Y. 2012-13) under Section 36(1)(vii) of the Income Tax Act.
Shashank Mehta, on behal fo the assessee contented that for the assessee would not be covered under Section 56(2)(viib) of the Income Tax Act for the reason that the shares were transferred only amongst the family members of the assessee and even otherwise neither the A.O. nor the CIT(A) had referred the matter to the DVO for the purpose of determining the valuation of the assets.
He further stated that Rule 11UA of the Income Tax Rules would not not mention that the revaluation reserve was to be reduced as liable and that only Rule 11UAA was inserted with effect from 01.04.2018 had laid down the Rules for valuation and that Rule 11UAA of the Income Tax Rules was not applicable to the assessee for the impugned year. He relied on the decision of the co-ordinate bench in the case of DCIT vs. Pali Fabrics Pvt. Ltd.
Samuel Pitta, on behalf of the revenue stated that the A.O. had challenged the validity of the valuation report and that the A.O. was entitled with the power of the valuer and could determine the valuer himself. Without prejudice, the Revenue stated that this issue should be remanded to the file of the A.O for determining the valuation after referring the same to the DVO, he relied on the decision in the case of Agro Portfolio Pvt. Ltd. vs.ITO
The two-member Bench of B R Baskaran, (Accountant Member) and MS. Kavitha Rajagopal, (Judicial Member) observed that the A.O. had failed to accept the valuation report of the assessee for the reason that the valuer had not adopted any methodology or reference for the purpose of calculation of the land value without considering the factors such as value of the land as per stamp authority, land market price, location factors and the value at which the neighbouring lands were sold during that period etc.
It was observed from the said fact that the A.O. had not referred the said matter for valuation to the DVO while he had merely rejected the valuation report submitted by the assessee. The Bench allowed the appeal filed by the assessee directing the A.O. for valuation of the assets by referring the same to the DVO and to consider the said issue in light of the valuation report of the DVO.
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