M/s. Microfirm Capital Pvt. Ltd., Kolkata v. DCIT, Circle-8(1), Kolkata, Kolkata

ITA 513/KOL/2017 | 2013-2014
Pronouncement Date: 30-11-2017 | Result: Partly Allowed

Appeal Details

RSA Number 51323514 RSA 2017
Assessee PAN AABCM7322H
Bench Kolkata
Appeal Number ITA 513/KOL/2017
Duration Of Justice 8 month(s) 14 day(s)
Appellant M/s. Microfirm Capital Pvt. Ltd., Kolkata
Respondent DCIT, Circle-8(1), Kolkata, Kolkata
Appeal Type Income Tax Appeal
Pronouncement Date 30-11-2017
Appeal Filed By Assessee
Tags No record found
Order Result Partly Allowed
Bench Allotted B
Tribunal Order Date 30-11-2017
Assessment Year 2013-2014
Appeal Filed On 16-03-2017
Judgment Text
IN THE INCOME TAX APPELLATE TR IBUNAL KOLKATA B BENCH KOLKATA [BEFORE SRI J. SUDHAKAR REDDY ACCOUNTANT MEMBER & SRI ABY T. VARKEY JUDICIAL MEMBER] I.T.A. NO. 513/KOL/2017 ASSESSMENT YEAR: 2013-14 M/S. MICROFIRM CAPITAL PVT. LTD.. ...APPELLANT 24 PARK STREET KOLKATA - 700016 [PAN : AABCM 7322 H] THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-8 (1) ....RESPONDENT AAYAKAR BHAWAN P-7 CHOWRINGHEE SQUARE KOLKATA 700 069 I.T.A. NO. 963/KOL/2017 ASSESSMENT YEAR: 2013-14 THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-8 (1) ......APPELLANT AAYAKAR BHAWAN P-7 CHOWRINGHEE SQUARE KOLKATA 700 069 M/S. MICROFIRM CAPITAL PVT. LTD.. ...RESPONDENT 24 PARK STREET KOLKATA - 700016 [PAN : AABCM 7322 H] APPEARANCES BY: SHRI S.K. TULSIYAN ADVOCATE APPEARED ON BEHALF OF THE ASSESSEE. SHRI MD. USMAN CIT DR APPEARING ON BEHALF OF THE REVENUE. DATE OF CONCLUDING THE HEARING : NOVEMBER 08 TH 2017 DATE OF PRONOUNCING THE ORDER : NOVEMBER 30 TH 2017 O R D E R PER J. SUDHAKAR REDDY :- THIS CROSS APPEAL IS DIRECTED AGAINST THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS)-3 KOLKATA (HEREINAFTER THE L D. CIT (A)) PASSED U/S 250 OF THE INCOME TAX ACT 1961 (THE ACT) DT. 20/02/201 7 FOR THE ASSESSMENT YEAR 2013-14. 2 I.T.A. NO. 513/KOL/2017 ASSESSMENT YEAR: 2013-14 & I.T.A. NO. 963/KOL/2017 ASSESSMENT YEAR: 2013-14 M/S. MICROFIRM CAPITAL PVT. LTD 2. FACTS IN BRIEF:- THE ASSESSEE IS A COMPANY AND IS IN THE BUSINESS O F INVESTMENT AND FINANCING. IT FILED ITS RETURN OF INCOME FOR THE AS SESSMENT YEAR 2013-14 ON 28/09/2013 DECLARING TOTAL INCOME AT RS. 59 30 891 /-. THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE COMPANY HAD ALLOTTED 2 05 000 SHARES 0.1% REDEEMABLE NON-CUMULATIVE PREFERENCE SHARES (HEREINAFTER RNCP S) OF A FACE VALUE OF RS.10/- EACH AT A PREMIUM OF RS.1 990/- PER SHARE REDEEMA BLE ON EXPIRY OF 10 YEARS FROM THE DATE OF ALLOTMENT AT A REDEMPTIONS PRICE OF RS. 5 200/- PER PREFERENCE SHARE. AS PER THE TERMS AND CONDITIONS OF ISSUE OF THESE RNCP S CAN BE REDEEMED PRIOR TO THE REDEMPTION DATE ON MUTUAL CONSENT AND AGREED TERMS . THE ASSESSEE FILED A VALUATION REPORT FROM A CHARTERED ACCOUNTANT AS REQ UIRED UNDER RULE 11UA(C)(C) IN SUPPORT OF THE VALUATION OF RNCPS OF RS.10/- AT A PREMIUM OF RS.1 990/-. A TOTAL OF 75 000 0.1% RNCPS WERE ALLOTTED TO M/S ASHADEEP PROPERTIES PRIVATE LIMITED AND 1 30 000 0.1% RNCPS WERE ALLOTTED TO M/S. JAGU AR ADVISORY SERVICES PVT. LTD. THE ASSESSEE HAD RECEIVED AN AMOUNT OF RS.41 CRORES FROM THIS ALLOTMENT. THE ASSESSING OFFICER CONSIDERED THE VALUATION REPO RT FURNISHED BY THE ASSESSEE REGARDING THE FAIR MARKET VALUE OF RNCPS APPLIED SECTION 56(2)(VIIB) OF THE ACT AND CAME TO A CONCLUSION THAT THE ASSESSEE HAS RECEIVED CONSIDERATION FOR ISSUANCE OF SHARES IN EXCESS OF THE FACE VALUE OF S UCH SHARES AND THAT THE ASSESSEE COULD NOT SUBSTANTIATE DURING THE COURSE OF ASSESSM ENT PROCEEDINGS THAT THE FAIR MARKET VALUE FOR THE ISSUANCE OF PREFERENCE SHARES ADOPTED BY THE ASSESSEE IN THE FAIR AND CORRECT MARKET VALUE. HE DETERMINED THE MA RKET VALUE OF THE PREFERENCE SHARES ISSUED AT RS.1285.41/- PER SHARE AS AGAINST THE MARKET VALUE OF RS.2 000/- PER SHARE DETERMINED BY THE ASSESSEE AND THE DIFFER ENCE OF RS.14 64 90 950/- WAS ADDED AS INCOME. 2.1. THE ASSESSING OFFICERS CONCLUSIONS ARE LISTED BELOW:- A) DISCOUNTED CASH FLOW METHOD USED BY THE VALUER IS ACCEPTED. B) THE ASSESSEE COMPANY DOES NOT HAVE THE CAPABILIT Y TO GENERATE SUFFICIENT FUNDS TO TAKE CARE OF ITS CASH OUTFLOWS AND HENCE I S LIKELY TO SUFFER A LIQUIDITY CRUNCH. C) AS THE ASSESSEES PROFIT IS DIPPING OVER THE YEA RS AND ITS ONLY SOURCE OF GENERATION OF INCOME IS THROUGH DIVIDEND WHICH IS IN TURN CONTINGENT ON 3 I.T.A. NO. 513/KOL/2017 ASSESSMENT YEAR: 2013-14 & I.T.A. NO. 963/KOL/2017 ASSESSMENT YEAR: 2013-14 M/S. MICROFIRM CAPITAL PVT. LTD THE PERFORMANCE OF THE COMPANIES IN WHICH THE ASSES SEE HAS MADE INVESTMENTS. D) THE VALUER HAS ERRED IN ADOPTING DISCOUNT RATE O F 10 PER CENT BY TAKING POST TAX RETURN OF 9 PER CENT AND PRE-TAX RETURN OF 12 TO 13 PER CENT ON DEBT INSTRUMENTS. THE BURDEN OF DIVIDEND DISTRIBUTION TA X IS MINIMAL ON THE ASSESSEE AND THE TAXATION RATE IN THE HANDS OF THE ASSESSEE IS REQUIRED TO BE CONSIDERED AND NOT OF THE INVESTOR. E) THE PRIME LENDING RATE OF HOUSING FINANCE COMPAN IES MAY BE TAKEN AS A BENCH MARK AND THIS HAS TO BE TAKEN AS THE AVERAGE RETURN ON PREFERENCE SHARES. THUS A DISCOUNTED RATE OF 15 PER CENT SHOU LD BE APPLIED. THE ASSESSING OFFICER MADE AN ADDITION OF RS.14 64 90 950/- U/S 56(2)(VIIB) OF THE INCOME TAX ACT 1961. 2.1.1. THE LD. ASSESSING OFFICER FURTHER HELD THAT THE DISALLOWANCE MADE BY THE ASSESSEE U/S 14A IS INADEQUATE. HE COMPUTED THE DIS ALLOWANCE AT RS.11 88 000/- AS AGAINST RS. 2.46 LACS DISALLOWED BY THE ASSESSE E. AGGRIEVED THE ASSESSEE CARRIED THE MATTER IN APPEAL. 2.1.2 BEFORE THE LD. FIRST APPELLATE AUTHORITY THE ASSESSEE SUBMITTED THAT NO OPPORTUNITY WAS GIVEN TO IT BY THE ASSESSING OFFICE R AND THE VALUATION DONE BY A QUALIFIED AND AUTHORISED PERSON WAS ARBITRARILY DIS TURBED BY THE ASSESSING OFFICER. IT WAS SUBMITTED THAT A SHOWCAUSE NOTICE SHOULD HAV E BEEN GIVEN BY THE ASSESSING OFFICER AND THE ASSESSEE SHOULD HAVE BEEN GIVEN A C HANCE TO CLARIFY VARIOUS ISSUES RAISED BY THE ASSESSING OFFICER ON THE ISSUE OF VAL UATION. SUBMISSIONS WERE ALSO MADE ON THE DISALLOWANCE MADE U/S 14A OF THE ACT. T HE LD. FIRST APPELLATE AUTHORITY USING HIS CO-TERMINUS POWERS WITH THAT O F THE ASSESSING OFFICER GRANTED OPPORTUNITY TO THE ASSESSEE TO SUBMIT ITS OBJECTION S ON THE VARIOUS CONCLUSIONS DRAWN BY THE ASSESSING OFFICER ON THE ISSUE OF VAL UATION OF RNCPS. A REMAND REPORT WAS CALLED FROM THE ASSESSING OFFICER ON ALL THE SUBMISSIONS MADE BY THE ASSESSEE. AFTER CONSIDERING THE REMAND REPORT AND T HE REPLIES AND THE CONTENTION OF THE ASSESSEE THE LD. FIRST APPELLATE AUTHORITY HELD AS FOLLOWS:- (A) SECTION 56(2)(VIIB) OF THE ACT APPLIES TO THE FACTS OF THE CASE AS THE WORDS USED IS SHARES WHICH ALSO INCLUDES PREFEREN CE SHARES. 4 I.T.A. NO. 513/KOL/2017 ASSESSMENT YEAR: 2013-14 & I.T.A. NO. 963/KOL/2017 ASSESSMENT YEAR: 2013-14 M/S. MICROFIRM CAPITAL PVT. LTD (B) THE ASSESSING OFFICER HAS THE RIGHT AND DUTY TO EXAMINE THE VALUATION REPORT AND TO ADJUDICATE UPON ALL ASPECTS WHICH HAD A BEARING ON THE INCOME OF THE ASSESSEE. (C) THAT THE REASONING ADOPTED BY THE VALUER AS WEL L AS THE ASSESSING OFFICER SUFFERS FROM CERTAIN SHORTCOMINGS AND IT W OULD BE REASONABLE TO ADOPT 12.5 PER CENT DISCOUNT RATE AS AGAINST 10% AD OPTED BY THE ASSESSEE AND 15% ADOPTED BY THE ASSESSING OFFICER. (D) ON THE ISSUE OF DISALLOWANCE U/S 14A OF THE ACT HE GAVE CERTAIN DIRECTIONS TO THE ASSESSING OFFICER. 2.3. AGGRIEVED BOTH THE ASSESSEE AS WELL AS THE RE VENUE IS IN APPEAL BEFORE US. 3. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT SECTION 56(2)(VIIB) WAS BROUGHT INTO THE STATUTE WITH AN OBJECTIVE TO DETER GENERATION AND USE OF UNACCOUNTED MONEY THROUGH INFUSION OF FUND FROM SHA REHOLDERS BY WAY OF SHARE PREMIUM IN EXCESS OF FAIR MARKET VALUE. HE SUBMITTE D THAT RNCPS ARE QUASI DEBT INSTRUMENTS AND NOT SHARES PER SE AND HENCE THESE RNCPS ARE NOT COVERED BY THE PROVISIONS OF SECTION 56(2)(VIIB) OF THE ACT WHICH WAS INTRODUCED TO DEAL WITH EQUITY SHARES. HE ARGUED THAT IN THE CASE OF RNCPS THE COMPANY IS BOUND TO RETURN THE MONEY AS PER THE CONTRACT WHICH IS SIMILAR TO A DEBT. HE SUBMITTED THAT RISING CAPITAL IS VERY MUCH NECESSARY FOR ECONOMIC GROWTH INDUSTRIAL DEVELOPMENT AND INCREASE IN EMPLOYMENT OF THE COUNTRY. THUS HE SUB MITS THAT PURPOSIVE AND LIBERAL INTERPRETATION HAS TO BE GIVEN TO THE SECTI ON AND IN CASES WHERE THE COMPANY IS TO RETURN THE MONEY IT RECEIVED BY WAY O F RNCPS THE SECTION ITSELF SHOULD NOT BE APPLIED. 3.1. THE SECOND CONTENTION OF THE LD. COUNSEL FOR T HE ASSESSEE IS THAT THE STATUTE READ WITH THE RULES PROVIDE THAT THE FAIR MARKET V ALUE OF THE RNCPS SHOULD BE SUPPORTED BY REPORT FROM A MERCHANT BANKER OR AN AC COUNTANT WHO ARE EXPERTS IN THAT FIELD. HE SUBMITS THAT THE CHARTERED ACCOUNTAN T WHO IS AN EXPERT IN THE FIELD OF VALUATION OF SHARES HAS GIVEN A DETAILED REPORT AND THAT THE ASSESSING OFFICER WHO IS NOT AN EXPERT IN THE MATTER CANNOT INTERFER E AND TAMPER WITH THE FAIR MARKET VALUE AS DETERMINED BY THE VALUER. HE CONTEN DS THAT IN CASE THE ASSESSING OFFICER DOES NOT AGREE WITH THE VALUATION MADE BY T HE EXPERT THE ONLY ALTERNATIVE 5 I.T.A. NO. 513/KOL/2017 ASSESSMENT YEAR: 2013-14 & I.T.A. NO. 963/KOL/2017 ASSESSMENT YEAR: 2013-14 M/S. MICROFIRM CAPITAL PVT. LTD WOULD BE TO REFER THE MATTER TO AN EXPERT. FOR THE PROPOSITION THAT THE ASSESSING OFFICER CANNOT INTERFERE WITH THE VALUATION MADE BY A VALUER WHO IS AN EXPERT HE RELIED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF DR. MRS. RENUKA DATLA VS. SOLVAY PHARMACEUTICAL (2004) 265 ITR 435 (SC) AND THE CASE OF C.A. NO. 5929 OF 1997 DUNCANS INDUSTRIES LTD. VS. STATE OF U .P. AND ORS. . HE FURTHER SUBMITTED THAT SECTION 56(2)(VIIB) OF THE ACT SEEKS TO BRING NOTIONAL INCOME TO TAX AND HENCE STRICT INTERPRETATION HAS TO BE GIVEN AND NO INCOME CAN BE BROUGHT TO TAX UNLESS THE DEFINITE AND CONCRETE FINDINGS ARE BROUGHT ABOU T BY THE REVENUE. FOR THIS PROPOSITION OF LAW HE RELIED ON THE FOLLOWING CASE- LAW:- DHIRAJLAL GIRDHARILAL V. CIT REPORTED IN 26 ITR 737 CIT VS. DAULATRAM RAWATMULL REPORTED IN 87 ITR 249 DHAKESHWARI COTTON MILLS LTD. V. CIT REPORTED IN 26 ITR 775 3.2. ON MERITS THE LD. COUNSEL FOR THE ASSESSEE SU BMITTED THAT THE ASSESSING OFFICER WAS FACTUALLY INCORRECT IN COMING TO THE CO NCLUSION THAT THE ASSESSEE DOES NOT HAVE SUFFICIENT AVAILABILITY OF FUNDS FOR REDEM PTION OF RNCPS FOR THE REASON THAT IT HAD MADE INVESTMENT IN EQUITY SHARES OF M/ S MAGNA FINCORP LTD. AND THE BOOK VALUE AS ON 31/03/2013 OF THIS INVESTMENT WAS RS.119.46 CRORES AND THE MARKET VALUE AS ON THAT DAY WAS RS.280.46 CRORES. H E POINTED OUT THAT THE MARKET VALUE OF THIS INVESTMENT AS ON 31/10/2017 WAS RS.59 5.76 CRORES. HE SUBMITTED THAT THE ASSESSEE COMPANY CAN ANY DAY LIQUIDATE A FRACTION OF THIS INVESTMENT AND REDEEM THE RNCPS. ON THE FINDING OF THE ASSESSING O FFICER ON THE ISSUE OF ASCERTAINABLE CASH FLOW HE SUBMITTED THAT READILY SELLABLE INVESTMENT IN EQUITY SHARES ARE AVAILABLE WITH THE ASSESSEE AND WHEN THE MARKET VALUE OF THESE EQUITY SHARES IS VERY HIGH AS COMPARED TO THE VALUE OF RNC PS THE QUESTION OF THE ASSESSEE NOT HAVING AN ASCERTAINABLE CASH FLOW DOES NOT ARI SE. HE POINTED OUT THAT THE ASSESSEE COMPANY HAD EARLIER ISSUED REDEEMABLE PREF ERENCE SHARES AND HAD ALSO SUCCESSFULLY REDEEMED THEM. HE SUBMITTED THAT THE I NVESTORS IN RNCPS WHICH INCLUDED AN INDEPENDENT UNRELATED PARTY DID NOT HA VE ANY DOUBT ON THE CAPABILITY OF THE COMPANY TO MEET ITS CONTRACTUAL OBLIGATION O F REDEMPTION OF THE PREFERENCE SHARES. HE VEHEMENTLY CONTENDED THAT THESE CONCLUSI ONS OF THE ASSESSING OFFICER ARE NOT BASED ON FACTS AND ARE MERE PRESUMPTIONS AN D ASSUMPTIONS. 6 I.T.A. NO. 513/KOL/2017 ASSESSMENT YEAR: 2013-14 & I.T.A. NO. 963/KOL/2017 ASSESSMENT YEAR: 2013-14 M/S. MICROFIRM CAPITAL PVT. LTD 3.2.1. ON THE ISSUE OF CONSIDERING THE RATE OF RETU RN ON THE INVESTMENT AT 15 PER CENT BASED ON HOME LOAN RATES HE SUBMITTED THAT T HESE ARE LENDER DRIVEN. HE SUBMITTED THAT THESE RATES ARE APPLICABLE TO CUSTOM ERS DEPENDING ON THE INCOME DOCUMENTATION VALUATION OF PROPERTY ETC. AND CANNO T BE COMPARED WITH THE OUTLOOK OF AN INVESTOR. HE FURTHER SUBMITTED THAT H OUSING LOANS ARE GIVEN AT FLOATING RATES AND THE ASSESSE HAS NO CHANCE OF INV ESTING IN HOUSING LOANS AS THEY ARE REGULATED BY NATIONAL HOUSING BANK AND RESERVE BANK OF INDIA. HE ARGUED THAT THE RATE OF RETURN ON PREFERENCE SHARES SHOULD BE H IGHER THAN THE POST TAX RETURN ON DEBT INSTRUMENTS. HE POINTED OUT THAT THE PREVAI LING RATE OF RETURN ON DEBT INSTRUMENTS WAS 12 TO 13 PER CENT PRE TAX AND AFTER FACTORING TAXATION THE NET RATE OF RETURN WOULD BE 8.12 PER CENT TO 8.78 PER CENT. HE SUBMITTED THAT THE ASSESSEE HAS ISSUE RNCPS WHICH GIVES A RATE OF RETURN IN EX CESS OF 8.2 PER CENT TO 8.78 PER CENT. HE FURTHER POINTED OUT THAT THE FLOATING RATE ON HOME LOANS IS AROUND 12 TO 13 PER CENT AND WITHOUT PREJUDICE TO HIS ARGUMENTS HE SUBMITTED THAT THIS RATE MAY BE TAKEN AND IF TAX IS FACTORED THE POST RATE RETU RN WOULD BE AROUND 10.13 PER CENT AND THAT THIS IS THE RATE TAKEN BY THE ASSESSEE. 3.3. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THA T THE ASSESSING OFFICER HAS WRONGLY REJECTED THE VALUATION DONE BY AN INDEPENDE NT ACCOUNTANT. HE FURTHER SUBMITTED THAT THE ASSESSING OFFICER HAS IGNORED TH E PREVAILING RATE OF RETURN ON PREFERENCE SHARES OF OTHER COMPANIES AND THAT THE D URING THE RELEVANT PERIOD THE SAME RANGED FROM 8-10 PER CENT. HE CITED THE FOLLOW ING EXAMPLES:- A) EDELWEISS COMMODITIES SERVICES LTD. 9.75% B) TATA CAPITAL LTD. 8.33% C) L&T FINANCE HOLDINGS LTD. 8.75% 4. ON THE ISSUE OF DISALLOWANCE U/S 14A OF THE ACT HE SUBMITTED THAT THE DIVIDEND IN QUESTION WAS EARNED FROM M/S. MAGMA FIN CORP LTD. WHEREIN THE ASSESSEE IS A STRATEGIC INVESTOR HOLDING CONTROLLIN G INTEREST AND HENCE SECTION 14A DOES NOT APPLY. HE SUBMITTED THAT THE ASSESSEE OWNS DIRECTLY 17.91% OF THE EQUITY SHARES IN M/S. MAGMA FINCORP LTD. AND AN ADDITIONAL 15.50 PER CENT OF THE EQUITY SHARES THROUGH ITS GROUP COMPANY CELICA DEVELOPERS PT. LTD. TOTALLING TO 33.41% OF THE SHARE HOLDING. HE FURTHER SUBMITTED THAT THE AS SESSEE IS ENGAGED IN MONEY 7 I.T.A. NO. 513/KOL/2017 ASSESSMENT YEAR: 2013-14 & I.T.A. NO. 963/KOL/2017 ASSESSMENT YEAR: 2013-14 M/S. MICROFIRM CAPITAL PVT. LTD LENDING BUSINESS AND THAT IT HAS INTEREST INCOME OF 70.74 LACS AND THAT THIS FACT WAS IGNORED BY THE ASSESSING OFFICER AND NET EXPEND ITURE HAS BEEN ALLOWED BY THE SAME. HE FURTHER ARGUED THAT THE ASSESSEE HAD SUO MOTO DISALLOWED 2.46 LACS U/S 14A IN THE RETURN OF INCOME AND THAT THE ASSESSING OFFICER HAS NOT RECORDED SATISFACTION AS TO HOW THE ASSESSEE WAS WRONG IN OF FERING ONLY RS.2.46 LACS AS DISALLOWANCE U/S 14A AND THAT THE INVOCATION OF RU LE 8D IS BAD IN LAW. HE RELIED ON CERTAIN DECISIONS IN SUPPORT OF HIS CONTENTIONS WHICH WILL BE DEALT BY US AS AND WHEN NECESSARY. 5. THE LD. DR MD. USMAN CIT DR ON THE OTHER HAND VEHEMENTLY OPPOSED THE CONTENTIONS OF THE ASSESSEE. HE TOOK THIS BENCH THR OUGH SECTION 56(2)(VIIB) OF THE ACT AND SUBMITTED THAT THE LEGISLATURE HAS USED TH E WORD SHARES AND HENCE THE ARGUMENTS OF THE ASSESSEE THAT REDEEMABLE PREFERENC E SHARES ARE QUASI DEBT AND HENCE OUT OF THE SCOPE OF SECTION 56(2)(VIIB) OF TH E ACT IS WRONG. REFERRING TO THE CBDT CIRCULAR RELIED UPON BY THE ASSESSEE HE SUBMI TTED THAT THIS DOES NOT APPLY AS IT RELATES TO VALUATION OF EQUITY SHARES ONLY AN D NOT RNCPS. ON THE ARGUMENT AS TO WHETHER THE ASSESSING OFFICER HAS THE POWER TO E XAMINE THE VALUATION REPORT AND ASSESS THE FAIR MARKET VALUE HE SUBMITTED THAT THE ASSESSING OFFICER DOES HAVE THE POWER AND IS DUTY BOUND TO EXAMINE AS TO WHETHE R THE VALUER HAS BASED HIS VALUATION ON RELEVANT MATERIAL AND AS TO WHETHER TH E VALUATION IS PROPERLY DONE OR NOT. HE POINTED OUT THAT THERE IS NO PROVISION IN L AW TO REFER VALUATION OF SHARES TO ANOTHER EXPERT BY THE ASSESSING OFFICER FOR VALUATI ON. HE SUBMITTED THAT WHEN VALUATION REPORT CONTAINS ERRORS AND IGNORES RELEVA NT FACTS THE ASSESSING OFFICER CAN INTERFERE IN THE SAME. HE SUBMITTED THAT THE CA SE-LAW RELIED UPON BY THE ASSESSEE ON THIS ISSUE IN FACT SUPPORT THIS VIEW. 5.1. THE LD. DR SUBMITTED THAT THE ISSUE WAS REGARD ING RNCPS WHEREIN THE ANNUAL DIVIDEND PAYABLE IS ONLY 0.1 PER CENT OF THE FACE VALUE. HE SUBMITTED THAT THIS RATE OF RETURN BY WAY OF ANNUAL DIVIDEND IS RI DICULOUSLY LOW AND NO PRUDENT INVESTOR WOULD MAKE INVESTMENT FOR SUCH A RETURN. H E FURTHER SUBMITTED THAT THE ASSUMPTIONS MADE BY THE VALUER IN HIS REPORT ARE FU NDAMENTALLY WRONG AS IT WAS ASSUMED THAT THERE WOULD BE AN ASSURED CASH FLOW IN THE FUTURE. HE POINTED OUT THAT THIS ASSUMPTION IS NOT BASED ON FACTS AS THE PROFIT EARNED BY THE ASSESSEE 8 I.T.A. NO. 513/KOL/2017 ASSESSMENT YEAR: 2013-14 & I.T.A. NO. 963/KOL/2017 ASSESSMENT YEAR: 2013-14 M/S. MICROFIRM CAPITAL PVT. LTD DEMONSTRATES THAT IT DOES NOT HAVE AN ASSURED AND A SCERTAINABLE CASH FLOW IN THE FUTURE. HE RELIED ON THE OBSERVATIONS OF THE ASSESS ING OFFICER AND SUBMITTED THAT THE ASSESSEE WOULD HAVE CASH FLOW ISSUES IN THE FUT URE AND SUCH LIQUIDITY CRUNCH WOULD AFFECT THE CREDIT RATING OF THE ASSESSEE AND CONSEQUENTLY THE VALUATION OF THE PREFERENCE SHARES ISSUED AT A PREMIUM GETS AFFECTE D. HE RELIED ON EACH AND EVERY OBSERVATION OF THE ASSESSING OFFICER AND SUPPORTED THE SAME. ON A QUERY FROM THE BENCH AS TO HOW THE ASSESSING OFFICER FIXED A PREMI UM OF ABOVE RS.1 270/- PER SHARE WHEN IN HIS VIEW THE ASSESSEE HAS NO CREDIT RATING AND WOULD DEFAULT ON REPAYMENTS HE SUBMITTED THAT THIS WAS BASED ON RAT E OF RETURN. 6. ON THE ISSUE AS TO WHETHER THE POST TAX RETURN H AS TO BE TAKEN FOR BENCH MARKING THE RATE OF RETURN HE SUBMITTED THAT THERE IS NO TAX ON DIVIDEND FROM PREFERENCE SHARE AND THAT THERE IS HARDLY ANY DIVID END DECLARED DURING THE PERIOD ON THIS RNCPS AND HENCE IT IS NOT A FACTOR TO BE CO NSIDERED. ON THE ISSUE OF BENCH MARKING THE RATE OF RETURN WITH HOME LOAN INTEREST RATES HE SUBMITTED THAT THIS WAS A VERY CONSERVATIVE RATE TAKEN BY THE ASSESSING OFFICER AS THE HOME LOANS ARE GIVEN AT A CONCESSIONAL RATE AND THAT TOO WITH FULL SECURITY. THUS HE SAYS 15 PER CENT DISCOUNT RATE TAKEN BY THE ASSESSING OFFICER H AS TO BE UPHELD AND THE ORDER OF THE LD. CIT(A) REVERSED. ON SECTION 14 A OF THE AC T HE RELIED ON THE ORDER OF THE LD. CIT(A). 7. IN REPLY THE LD. COUNSEL FOR THE ASSESSEE SUBMIT TED THAT AN INVESTOR HAS NO OPTION OF ADVANCING MONEY AS A HOUSING LOAN TO PUBL IC AS THE SAME IS CONTROLLED BY NATIONAL HOUSING BANK AND RESERVE BANK OF INDIA. HE NCE HE SUBMITS THAT THE HOUSING LOAN RATES CANNOT BE TAKEN AS COMPARABLE IN VESTMENT OPPORTUNITIES. HE SUBMITTED THAT INVESTMENTS ARE MADE IN SHARES FOR T HE REASON THAT THE DIVIDEND EARNED FROM THE SAME ARE NOT SUBJECT TO INCOME TAX AND WHEREAS THE INTEREST EARNED ON DEBT INSTRUMENTS ARE SUBJECT TO INCOME TA X. SO HE SUBMITTED THAT TO MAKE THE RETURNS COMPARABLE THE TAX FACTOR HAS TO BE CONSIDERED. ON THE ARGUMENT OF THE LD. DR THAT THE ASSESSEE HAS NO LIQUIDITY AN D WOULD POSSIBLY DEFAULT IN REDEEMING THESE PREFERENCE SHARES HE SUBMITTED THA T THE VALUE OF HIS INVESTMENTS HAVE GROWN FROM RS.119.46 CRORES IN MARCH 2013 TO ABOUT RS.600 CRORES ON 31 ST OCTOBER 2017 AND THE COMPANY CAN ANY DAY LIQUIDATE ITS INVESTMENTS AND REDEEM 9 I.T.A. NO. 513/KOL/2017 ASSESSMENT YEAR: 2013-14 & I.T.A. NO. 963/KOL/2017 ASSESSMENT YEAR: 2013-14 M/S. MICROFIRM CAPITAL PVT. LTD THE PREFERENCE SHARES AS PER LAW. HE STRONGLY DISPU TED THE THEORY THAT THE ASSESSEE WOULD POSSIBLY FACE A LIQUIDITY CRUNCH WHICH WOULD IN TURN AFFECT ITS CREDIT RATING. HE POINTED OUT THAT ONE OF THE INVESTORS WAS A INDE PENDENT PARTY AND THIS DEMONSTRATES THAT THE ISSUE OF RNCPS WAS MADE AT MA RKET VALUE WHICH WAS AT ARMS LENGTH. 8. RIVAL CONTENTIONS HEARD. ON A CAREFUL CONSIDERAT ION OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND A PERUSAL OF THE PAPE RS ON RECORD ORDERS OF THE AUTHORITIES BELOW AS WELL AS THE CASE-LAW CITED WE HOLD AS FOLLOWS:- 8.1. SECTION 56(2)(VIIB) OF THE ACT READS AS FOLLO WS:- (VIIB) WHERE A COMPANY NOT BEING A COMPANY IN WHI CH THE PUBLIC ARE SUBSTANTIALLY INTERESTED RECEIVES IN ANY PREVIOUS YEAR FROM ANY PERSON BEING A RESIDENT ANY CONSIDERATION FOR ISSUE OF SHARES T HAT EXCEEDS THE FACE VALUE OF SUCH SHARES THE AGGREGATE CONSIDERATION RECEIVED F OR SUCH SHARES AS EXCEEDS THE FAIR MARKET VALUE OF THE SHARES: 8.2. RULE 11UA (1)(C)(C) READS AS FOLLOWS:- (C ) THE FAIR MARKET VALUE OF UNQUOTED SHARES AND SECURI TIES OTHER THAN EQUITY SHARES IN A COMPANY WHICH ARE NOT LISTED IN ANY REC OGNIZED STOCK EXCHANGE SHALL BE ESTIMATED TO BE PRICE IT WOULD FETCH IF SO LD IN THE OPEN MARKET ON THE VALUATION DATE AND THE ASSESSEE MAY OBTAIN A REPORT FROM A MERCHANT BANKER OR AN ACCOUNTANT IN RESPECT OF WHICH SUCH VALUATION . 9. A PERUSAL OF SECTION 56(2)(VIIB) OF THE ACT TAK ES US TO A CONCLUSION THAT ALL TYPES OF SHARES ARE COVERED BY THIS SECTION. THE AR GUMENT OF THE ASSESSEE THAT RNCPS IS A QUASI-DEBT AND THAT IT WAS NOT THE INTEN TION OF THE LEGISLATURE TO BRING SUCH INSTRUMENTS WITHIN THE AMBIT OF THIS SECTION IS DEVOID OF MERIT. WE ALSO DO NOT FIND ANY MERIT IN THE ARGUMENTS OF THE LD. COUN SEL FOR THE ASSESSEE THAT ECONOMIC CONSIDERATION THAT ARE RELATED TO CAPITAL FORMATION EMPLOYMENT INDUSTIALISATION ETC. SHOULD LEAD TO PURPOSIVE AND LIBERAL INTERPRETATION OF THE SECTION. RNCPS CANNOT BE EXCLUDED FROM THE AMBIT OF SECTION 56(2)(VIIB) OF THE ACT. HENCE WE REJECT THESE ARGUMENT OF THE LD. COU NSEL FOR THE ASSESSEE. 9.1 THE SECOND ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE IS THAT THE ASSESSEE HAS CATEGORICALLY FOLLOWED THE PRESCRIPTION OF LAW AND TAKEN A VALUATION REPORT FROM AN INDEPENDENT ACCOUNTANT AND THAT THE ASSESSI NG OFFICER IS NOT AN EXPERT IN 10 I.T.A. NO. 513/KOL/2017 ASSESSMENT YEAR: 2013-14 & I.T.A. NO. 963/KOL/2017 ASSESSMENT YEAR: 2013-14 M/S. MICROFIRM CAPITAL PVT. LTD THIS FIELD AND HENCE CANNOT INTERFERE IN THIS REPOR T AND ARRIVE AT A DIFFERENT VALUATION. WE DO NOT FIND ANY MERIT IN THIS CONTENT ION. THE HONBLE SUPREME COURT IN THE CASE OF DUNCANS INDUSTRIES LTD. VS. STATE OF U.P. AND ORS ( SUPRA) THE CASE-LAW WHICH WAS RELIED UPON BY THE ASSESSEE HAS AT PAGE 9 HELD AS FOLLOWS:- THESE VALUERS ARE TECHNICAL PERSONS WHO HAVE WHILE VALUING THE PLANT AND MACHINERY TAKEN INTO CONSIDERATION ALL ASPECTS OF V ALUATION INCLUDING THE LIFE OF THE PLANT AND MACHINERY. THE VALUATIONS MADE BOTH B Y THE ENQUIRY COMMITTEE AS WELL AS THE VALUERS ARE MOSTLY BASED ON THE DOCUMEN TS PRODUCED BY THE APPELLANT ITSELF. HENCE WE CANNOT ACCEPT THE ARGUMENT THAT T HE VALUATION ACCEPTED BY THE COLLECTOR AND CONFIRMED BY THE REVISIONAL AUTHORITY IS EITHER NOT BASED ON ANY MATERIAL OR A FINDING ARRIVED AT ARBITRARILY. ONCE WE ARE CONVINCED THAT THE METHOD ADOPTED BY THE AUTHORITIES FOR THE PURPOSE O F VALUATION IS BASED ON RELEVANT MATERIALS THEN THIS COURT WILL NOT INTERFE RE WITH SUCH A FINDING OF FACT. THAT APART AS OBSERVED ABOVE EVEN THE COUNSEL FOR THE APPELLANT BEFORE THE HIGH COURT DID NOT SERIOUSLY CHALLENGE THE VALUATION AND AS EMPHASISED BY THE HIGH COURT RIGHTLY SO. THEREFORE WE DO NOT FIND ANY FO RCE IN THE LAST CONTENTION OF THE APPELLANT ALSO. (EMPHASIS OURS) 16. FOR THE REASONS STATED ABOVE THIS APPEAL FAILS AND THE SAME IS DISMISSED WITH COSTS. 9.1.1. A PERUSAL OF THE SAME DEMONSTRATES THAT IF T HE VALUATION IS NOT BASED ON RELEVANT MATERIAL THE ADJUDICATING AUTHORITY CAN I NTERFERE WITH THE SAME. IN THE CASE OF DR. MRS. RENUKA DATLA VS. SOLVAY PHARMACEUTICAL (SU PRA) RELIED UPON BY THE LD. COUNSEL FOR THE ASSESSEE THERE IS NO FINDING T HAT THE ASSESSING OFFICER CANNOT INTERFERE WITH THE VALUATION DONE BY THE VALUER. IN THIS CASE VALUATION WAS DONE IN A DISPUTE BETWEEN SHAREHOLDERS HOLDING CONTROLLING INTERESTS AND THE MINORITY INTEREST AND THIS VALUATION REPORT WAS EXAMINED AND FOUND TO BE CORRECT. THE COURT OBSERVED AS FOLLOWS:- WE DO NOT THINK THAT THE VALUATION IN THE INSTANT CASE RUNS COUNTER TO THE PRINCIPLES LAID DOWN THEREIN. AS SEEN FROM ENCLOSUR ES 6.1 AND 6.2 TO THE VALUATION REPORT THE VALUER HAD ARRIVED AT MARKET BASED VALU ATION IN ADDITION TO THE OTHER MODES OF VALUATION AND OBSERVED THAT THE RECOMMENDE D VALUE IS THE HIGHER OF THE INTRINSIC VALUE OR THE MARKET BASED VALUE. THUS TH E PETITIONERS HAD THE BENEFIT OF HIGHER VALUATION. THE FIRST PRINCIPLE LAID DOWN IN THE ABOVE DECISION HAS BEEN KEPT IN VIEW. MOREOVER THE PROFIT-EARNING METHOD WHICH HAS BEEN REFERRED TO IN THE ABOVE DECISIONS IN THE CONTEXT OF VALUATION OF SHAR ES OF A PUBLIC LIMITED COMPANY HAS ALSO BEEN APPLIED THOUGH FUTURE EARNINGS BASED VALUATION HAS NOT BEEN DONE IN THE ABSENCE OF RELIABLE FIGURES. AS OBSERVED BY US EARLIER THE PROFIT-EARNING CAPACITY OF THE COMPANY HAS NOT BEEN EXCLUDED FROM CONSIDERATION. THUS THE VALUER'S MODE OF VALUATION DOES NOT IN ANY WAY INFR INGE THE PRINCIPLES LAID DOWN IN THE SAID DECISIONS TO THE EXTENT THEY ARE APPLICABL E. IN THE FINAL ANALYSIS WE ARE OF THE VIEW THAT THE VALUER APPROACHED THE QUESTION OF VALUATION HAVING DUE REGARD TO THE TERMS OF SETTLEMENT AND APPLYING THE STANDAR D METHODS OF VALUATION. THE 11 I.T.A. NO. 513/KOL/2017 ASSESSMENT YEAR: 2013-14 & I.T.A. NO. 963/KOL/2017 ASSESSMENT YEAR: 2013-14 M/S. MICROFIRM CAPITAL PVT. LTD VALUATION HAS BEEN CONSIDERED FROM ALL APPROPRIATE ANGLES. NO CASE HAS BEEN MADE OUT THAT ANY IRRELEVANT MATERIAL HAS BEEN TAKE N INTO ACCOUNT OR RELEVANT MATERIAL HAS BEEN ESCHEWED FROM CONSIDERATION BY TH E VALUER. THE PLEA THAT THE VALUATION IS VITIATED BY FUNDAMENTAL ERRORS CANNOT BUT BE REJECTED. IN THE RESULT IA NOS. 2 TO 4 OF 2002 ARE LIABLE TO BE REJECTED. HOWE VER THERE IS ONE DIRECTION CONCERNING THE INTEREST WHICH WE CONSIDER APPROPRIA TE TO GIVE IN THE GIVEN FACTS AND CIRCUMSTANCES OF THE CASE. THOUGH THE GRANT OF INTEREST AS PRAYED FOR BY THE PETITIONERS FROM 31ST MAY 2002-THE STIPULATED DAT E OF SUBMISSION OF VALUATION REPORT IS NOT CALLED FOR WE FEEL THAT THE ENDS OF JUSTICE WOULD BE ADEQUATELY MET IF THE RESPONDENTS CONCERNED ARE DIRECTED TO PAY THE I NTEREST AT THE RATE OF 9 PER CENT ON RS. 8.24 CRORES WHICH IS THE VALUE OF SHA RES FIXED BY THE VALUER FOR A PERIOD OF 12 MONTHS. TRUE THE PETITIONERS CONTESTE D THE VALUATION AND THEREBY DELAYED THE IMPLEMENTATION OF SETTLEMENT. HOWEVER HAVING REGARD TO THE BONA FIDE NATURE OF THE DISPUTE AND THE FACT THAT THE RE SPONDENTS HAVE RETAINED THE MONEY OTHERWISE PAYABLE TO THE PETITIONERS DURING T HIS PERIOD OF 12 MONTHS AND COULD HAVE PROFITABLY UTILIZED THE SAME WE HAVE GI VEN THIS DIRECTION TAKING AN OVERALL VIEW. IN THE RESULT I.AS. NOS. 2 3 AND 4 O F 2002 ARE DISMISSED SUBJECT TO THE ABOVE DIRECTION AS TO PAYMENT OF INTEREST. THE SLP( C). NOS. 18035 18041-18042 OF 2002 SHALL STAND DISPOSED OF IN TERMS OF THE SETTLE MENT ON RECORD COUPLED WITH THE DIRECTION TO PAY THE SUM OF RS. 8.24 CRORES REPRESE NTING THE VALUE OF 4.91 PER CENT SHARES TOGETHER WITH INTEREST AT 9 PER CENT FOR A PERIOD OF 12 MONTHS WITHIN A PERIOD OF FOUR WEEKS FROM TODAY SUBJECT TO THE RECE IPT OF SHARE TRANSFER FORMS AND THE FULFILMENT OF OTHER FORMALITIES BY THE PETITION ERS. THE SUITS WHICH HAVE GIVEN RISE TO THESE SLPS AND OTHER SUITS AND PROCEEDINGS MENTIONED IN THE MEMORANDUM OF SETTLEMENT SHALL STAND DISMISSED AS W ITHDRAWN. ACCORDINGLY THE SLPS ARE DISPOSED OF. NO ORDER AS TO COSTS.( EMPHASIS OURS ) 9.1.2. THE ABOVE SHOWS THAT THE VALUATION DONE BY A N EXPERT WAS UPHELD ON MERITS. A SPECIFIC OBSERVATION IS MADE THAT THE PRI NCIPLES OF VALUATION HAVE BEEN FOLLOWED AND RELEVANT MATERIAL CONSIDERED. HENCE T HIS ARGUMENT IS REJECTED AS DEVOID OF MERIT. THE CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE THAT IN CASE THE ASSESSING OFFICER IS NOT SATISFIED WITH THE VALUE D ETERMINED BY THE EXPERT VALUER THEN THE ONLY OPTION IS TO GET IT DONE BY ANOTHER E XPERT VALUER IS ALSO DEVOID OF MERIT. THE ASSESSING OFFICER CAN REPLACE THE IRRELE VANT MATERIAL IF ANY CONSIDERED BY THE VALUER WITH RELEVANT MATERIAL AND MODIFIED T HE VALUE IN A FICTITIOUS MANNER. THUS THIS ARGUMENT IS HEREBY REJECTED. IN OUR VIEW THE ASSESSING OFFICER HAS NOT ONLY A RIGHT BUT HE IS ALSO DUTY BOUND TO EXAMINE T HE VALUATION REPORT EVALUATE IT AND RECORD HIS FINDINGS ON THE SAME. SUCH FINDING S HOULD BE BASED ON RELEVANT MATERIAL AND RATIONAL VIEW TAKEN IN A JUDICIOUS MAN NER. 10. AS FAR AS THE ARGUMENT OF THE LD. COUNSEL FOR T HE ASSESSEE THAT SECTION 56(2)(VIIB) OF THE ACT BRING NOTIONAL INCOME TO TA X AS IT IS A DEEMING PROVISION AND HENCE HAS TO BE STRICTLY INTERPRETED WE ARE OF THE OPINION THAT THIS ARGUMENT HAS FORCE. THE NEED FOR SUCH INTERPRETATION HAS NOT ARISEN IN THE CASE ON HAND. 12 I.T.A. NO. 513/KOL/2017 ASSESSMENT YEAR: 2013-14 & I.T.A. NO. 963/KOL/2017 ASSESSMENT YEAR: 2013-14 M/S. MICROFIRM CAPITAL PVT. LTD 11. NOW WE CONSIDER THE RIVAL CONTENTIONS ON THE D ETERMINATION OF THE FAIR MARKET VALUE OF THESE RNCPS. THERE IS NO DISPUTE ON THE METHOD OF VALUATION OF THESE RNCPS. THE VALUER HAS ADOPTED DISCOUNTED CAS H FLOW METHOD OF VALUATION AND THE ASSESSING OFFICER HAS ACCEPTED THE SAME. 11.1. THE DIFFERENCE BETWEEN THE ASSESSEE AND THE R EVENUE ARE ON MATERIAL FACTS. THE ISSUES CAN BE SUMMARISE AS FOLLOWS:- A) WHETHER THE CASH FLOW OF THE ASSESSEE IS ASCERTA INABLE AND WHETHER THERE WOULD BE A LIQUIDITY CRUNCH LEADING TO DEFAULT IN C ONTRACTUAL OBLIGATION BY THE ASSESSEE IN THE FUTURE YEARS. B) WHETHER WHILE BENCH MARKING THE RATE OF RETURN TAX IS TO BE CONSIDERED AND FACTORED OR NOT. C) WHETHER INTEREST RATE OF A HOUSING LOAN CAN BE U SED AS A BENCH MARK THE RATE OF RETURN OR IS THERE ANY OTHER RELEVANT COMPARABLE . 11.2. ON THE FIRST ISSUE OF LIQUIDITY WE FIND THAT THE ASSESSING OFFICER HAS NOT CONSIDERED MARKET VALUE OF INVESTMENTS HELD BY THE ASSESSEE COMPANY. AGAINST THE BOOK VALUE OF RS.119.46 CRORES AS ON 31/03/2017 TH E MARKET VALUE HAS GROWN UP TO RS. 280.46 CRORES ON THE SAME DATE I.E. 31 ST MARCH 2017. THE OBSERVATIONS OF THE ASSESSING OFFICER AND THE ARGUMENTS OF THE LD. DR ON THE ISSUE OF CASH FLOW IN OUR VIEW ARE NOT BASED ON FACTS AND ARE MERE PRESUM PTIONS AND ASSUMPTIONS. THE ARGUMENTS THAT THE ASSESSEE WOULD SUFFER A LIQUIDIT Y CRUNCH AND WOULD DEFAULT ON ITS REPAYMENTS AND REDEMPTIONS AND HENCE THIS FACTO R WOULD REDUCE THE CREDIBILITY AND CREDIT RATING OF THE ASSESSEE IS ALSO BASED ON SURMISES AND CONJECTURES. WHEN THE ASSESSEE HAS SUCH GOOD INVESTMENT PORTFOLIO WHI CH HAS GROWN IN VALUE AND WHEN THE SAME CAN BE LIQUIDATED SUCH CONCLUSIONS A RE FACTUALLY INCORRECT. WHEN THE ASSESSEES OUTFLOW BY WAY OF DIVIDEND IS 0.1 PE R CENT ON RNCPS THE REQUIREMENT OF HAVING HUGE CASH INFLOWS DOES NOT AR ISE SPECIFICALLY WHEN THE ASSESSEE IS AN INVESTMENT COMPANY. THE CONTENTION O F THE ASSESSEE THAT THE CURRENT MARKET VALUE OF ITS INVESTMENTS IN EQUITY S HARES OF M/S.MANGA FINCORP LTD. IS RS.595.76 CRORES AND THAT HE CAN ANY DAY SELL T HESE INVESTMENT AND REDEEM THE PREFERENCE SHARES AMOUNTING TO RS.41 CRORES ONLY H AS FORCE AND THE CONCLUSION OF THE ASSESSING OFFICER ON THE ISSUE OF LIQUIDITY PO SSIBLE CASH CRUNCH RESULTING IN REDUCTION OF CREDIT RATING ETC. IS WRONG ON FACTS A ND HENCE DEVOID OF MERIT. THUS 13 I.T.A. NO. 513/KOL/2017 ASSESSMENT YEAR: 2013-14 & I.T.A. NO. 963/KOL/2017 ASSESSMENT YEAR: 2013-14 M/S. MICROFIRM CAPITAL PVT. LTD THIS FINDING OF THE ASSESSING OFFICER AND ARGUMENTS OF THE LD. DR IS REJECTED. WE ALSO FIND THAT THE ASSESSING OFFICER HAS TAKEN CONT RADICTORY STAND ON THIS ISSUE. ON THE ONE HAND HE HELD THAT THE ASSESSEE IS A POSSIBL E DEFAULTER AND ON THE OTHER HAND DETERMINED THE PREMIUM CHARGEABLE ON RCPS AT R S.1 270/- PER SHARE OF RS.10/-. THERE IS NO GAIN SAYING THAT A DEFAULTER C ANNOT COMMAND A PREMIUM ON ITS SHARES. IN FACT FROM AN INVESTORS PERSPECTIVE NO I NVESTMENT WOULD BE MADE IN SUCH CASES. IN THIS CASE AN UNRELATED 3 RD PARTLY ALSO INVESTED. IT CAN BE ASSUMED THAT SUCH INVESTMENTS ARE DONE AFTER DUE DILIGENCE. HENC E THIS CONTENTION OF THE ASSESSEE IS ACCEPTED. 12. THIS BRINGS US TO THE ISSUE AS TO WHETHER WHILE DETERMINING THE RATE OF RETURN INCOME TAX PAYABLE HAS TO BE FACTORED OR NOT . AN INVESTOR WHEN HE HAS TO MAKE A CHOICE AS TO WHETHER HE SHOULD INVEST IN A D EBT INSTRUMENT OR IN EQUITY SHARES THE TAX FACTOR IS NECESSARILY CONSIDERED A S WHAT IS CRUCIAL IS THE TAKE HOME RETURN ON INVESTMENT. THE GROWTH IN VALUE OF INVEST MENTS SAFETY AND OTHER FACTORS ARE ALSO THE BASIS OF DECISION MAKING. DIVIDEND ON EQUITY SHARES DOES NOT ATTRACT ANY TAX AND WHEREAS INTEREST ON DEBT INSTRUMENTS AN D EVEN INTEREST ON FIXED DEPOSITS DO ATTRACT INCOME TAX. THUS THE ARGUMENT S THAT INCOME TAX SHOULD NOT BE FACTORED WHILE CONSIDERING THE RATE OF RETURN FR OM DEBT INSTRUMENTS WHILE COMPARING THE SAME WITH THE RATE OF RETURN ON EQUIT Y INSTRUMENTS IS DEVOID OF MERIT. IN OUR VIEW TAX HAS TO BE FACTORED WHILE DE TERMINING THE NET RATE OF RETURN ON INVESTMENTS. 12.1. HENCE THIS ARGUMENT OF THE REVENUE IS HEREBY REJECTED AND THE CONTENTION OF THE ASSESSEE ON THIS ISSUE IS ACCEPTED. 13. COMING TO THE LAST ASPECT AS TO WHETHER HOME L OAN INTEREST RATE HAS TO BE TAKEN FOR THE PURPOSE OF BENCH MARKING WE ARE OF T HE VIEW THAT IT WOULD NOT BE CORRECT TO DO SO ON THE FACTS OF THIS CASE. HOME LO ANS CAN BE GIVEN BY BANKS AND OTHER NBFCS WHICH ARE IN THE BUSINESS OF GIVING LOA NS AND ADVANCES AND WHICH HAVE TAKEN REGULATORY APPROVALS TO DO SO. HOME LOAN S ARE GENERALLY SECURED LOANS. A GENERAL INVESTOR HAS NO CHOICE OF GRANTING HOME L OANS. THE RATE OF RETURN FOR AN INVESTOR SHOULD BE CONSIDERED AND COMPOSED OF INSTR UMENTS IN WHICH HE CAN DEPLOY HIS FUNDS. A CHOICE OF INVESTMENT CAN BE A F IXED DEPOSIT OR BONDS ISSUED BY 14 I.T.A. NO. 513/KOL/2017 ASSESSMENT YEAR: 2013-14 & I.T.A. NO. 963/KOL/2017 ASSESSMENT YEAR: 2013-14 M/S. MICROFIRM CAPITAL PVT. LTD THE GOVERNMENT OR THE RESERVE BANK OF INDIA OR DEBE NTURES ISSUED BY VARIOUS COMPANIES WHEN THE INVESTOR SEEKS TO INVEST IN DEB T INSTRUMENTS. IN EQUITY SHARES OR PREFERENCE SHARES ETC. IN CASE HE CHOOSES TO INV EST IN EQUITY. THUS TAKING HOME LOAN INTEREST RATES FOR THE PURPOSE OF BENCH MARKIN G IN OUR VIEW IS HIGHLY ERRONEOUS AS THE INVESTOR HAS NO CHOICE OR POSSIBIL ITY OF ADVANCING HOUSING LOAN. 14. NOW WE HAVE TO ARRIVE AT THE RATE OF RETURN TH AT HAS TO BE BENCH MARKED IN THIS CASE. THE RATE OF RETURN ON PREFERENCE SHARES ISSUED BY OTHER COMPANIES FOR THE RELEVANT PERIOD IN OUR VIEW ARE RELEVANT MATERI AL FOR ARRIVING AT SUCH A DECISION. THE ASSESSEE FURNISHED DATA FROM EDELWEISS COMMODITIES SERVICES LTD. TATA CAPITAL LTD. AND L&T FINANCE HOLDINGS LTD.. IN OUR VIEW THESE ARE PROPER COMPARABLES FOR THE PURPOSE OF BENCH MARKING THE RA TE OF RETURN. THE VALUER IN OUR CONSIDERED VIEW HAS FOLLOWED AN ACCEPTED METHOD OF VALUATION AND HAS BASED HIS DECISION ON RELEVANT MATERIAL. 14.1. IN THE CASE ON HAND THE ASSESSING OFFICER HA S NOT DISPUTED THE FACT THAT ON THE FACTS OF THE CASE THE ASSESSE IS ENTITLED TO IS SUE RNCPS AT A HUGE PREMIUM. THE ONLY DISPUTE IS THE QUANTUM OF PREMIUM. THE ASSESSI NG OFFICER WAS OF THE VIEW THAT 15 PER CENT DISCOUNT FACTOR WHICH GIVES A FAIR MARKET VALUE OF RS.1285.41 PER SHARE BE ADOPTED AND WHEREAS THE VALUER DETERMINED THE FAIR MARKET VALUE AT RS.2 000/- PER SHARE BY ADOPTING 10 PER CENT DISCOU NT FACTOR. THE LD. CIT(A) IN AN ARBITRARY MANNER PLACED THE DISCOUNT FACTOR AT 12.5 PER CENT. THE LD. CIT(A) HAS NOT GIVEN ANY MATERIAL OR REASON FOR ARRIVING AT TH IS RATE OF DISCOUNT. IN OUR VIEW THE CONCLUSION OF THE VALUER THAT 10 PER CENT DISCO UNT FACTOR IS APPROPRIATE IN THE CASE ON HAND IS UPHELD AS IT IS BASED ON PROPER COM PARABLE FOR BENCH MARKING. 14.1.1. AS ALREADY DISCUSSED THE DISCOUNT FACTOR A RRIVED AT BY THE ASSESSING OFFICER IN OUR VIEW IS NOT BASED ON RELEVANT MATER IAL. THE OBJECTIONS OF THE ASSESSING OFFICER TO VALUERS REPORT ARE DEVOID OF M ERIT AS POINTED OUT BY US IN THE EARLIER PARAGRAPHS OF THIS ORDER. THE LD. CIT(A)S VIEW IS AN AD-HOC VIEW AND HAS TO BE NECESSARILY REJECTED. WE ALSO GIVE WEIGHTAGE TO THE FACT THAT AN UNRELATED INDEPENDENT INVESTOR HAS INVESTED IN THESE RNCPS ON THE TERMS AND CONDITIONS AT THIS FAIR MARKET VALUE OF RS.2 000/- PER SHARE. THU S THIS RATE OF RS.2 000/- PER SHARE IS THE ARMS LENGTH PRICE ON THE FACTS OF TH IS CASE. HENCE WE HAVE TO HOLD 15 I.T.A. NO. 513/KOL/2017 ASSESSMENT YEAR: 2013-14 & I.T.A. NO. 963/KOL/2017 ASSESSMENT YEAR: 2013-14 M/S. MICROFIRM CAPITAL PVT. LTD THAT THESE RNCPS WERE ISSUED AT A FAIR MARKET VALU E. HENCE WE UPHOLD THE FAIR MARKET VALUE DETERMINED BY THE VALUER AND VACATE TH E VALUATION ARRIVED AT BY THE ASSESSING OFFICER AS WELL AS THE LD. CIT(A). 15. IN VIEW OF THE ABOVE DISCUSSION THE ADDITION OF RS.14 64 90 950/- MADE U/S 56(2)(VIIB) OF THE ACT BY THE ASSESSING OFFICER TO THE EXTENT SUSTAINED BY THE LD. CIT(A) IS HEREBY DELETED. ACCORDINGLY THESE GROUND S OF THE ASSESSEE ARE ALLOWED AND THE GROUNDS OF THE REVENUE ARE DISMISSED. 16. ON THE ISSUE OF DISALLOWANCE U/S 14A WE FIND T HAT THE ASSESSING OFFICER HAS RECORDED A SPECIFIC FINDING THAT HE IS NOT SATISFIE D WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE ON THE DISALLOWANCE U/S 14A OF THE ACT. THUS THIS ARGUMENT OF THE ASSESSEE THAT NO SATISFACTION IS RECORDED BY THE AS SESSING OFFICER IN NOT FACTUALLY CORRECT. HENCE THIS ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE IS REJECTED. WE FIND THAT THE LD. CIT(A) HAS SET ASIDE THE ISSUE OF QUAL IFICATION OF DISALLOWANCE U/S 14A TO THE ASSESSING OFFICER WITH CERTAIN DIRECTIONS. THE LD. CIT(A) HAS NO POWER TO SET ASIDE ANY ISSUE OR THE APPEAL ITSELF AFTER THE AMEN DMENT TO SECTION 251 OF THE ACT W.E.F. 01/06/2001. IN ANY EVENT THE ISSUE HAS TO B E CONSIDERED AFRESH BY THE ASSESSING OFFICER AS ALL RELEVANT FACTORS HAVE NOT BEEN CONSIDERED AS POINTED OUT BY THE LD. CIT(A). NO EXPENDITURE WAS ALLOWED AGAINST EARNING OF INTEREST INCOME. HENCE WE SET ASIDE THIS ISSUE TO THE FILE OF THE AS SESSING OFFICER FOR FRESH ADJUDICATION DE-NOVO IN ACCORDANCE WITH LAW. THE ASSESSING OFFICER SHA LL NOT BE INFLUENCED BY THE DIRECTION OF THE LD. CIT(A) IN HI S ORDER. THESE ARE VACATED. IN THE RESULT THIS GROUND IS ALLOWED FOR STATISTICAL PURP OSES. 17. IN THE RESULT THE APPEAL OF THE ASSESSEE IS AL LOWED IN PART AND THE APPEAL FO THE REVENUE IS DISMISSED. KOLKATA THE 30 TH DAY OF NOVEMBER 2017. SD/- SD/- [ ABY T. VARKEY ] [ J. SUDHAKAR REDDY ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 30.11.2017 {SC SPS} 16 I.T.A. NO. 513/KOL/2017 ASSESSMENT YEAR: 2013-14 & I.T.A. NO. 963/KOL/2017 ASSESSMENT YEAR: 2013-14 M/S. MICROFIRM CAPITAL PVT. LTD COPY OF THE ORDER FORWARDED TO: 1. M/S. MICROFIRM CAPITAL PVT. LTD 24 PARK STREET KOLKATA - 700016 2. THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-8 (1) AAYAKAR BHAWAN P-7 CHOWRINGHEE SQUARE KOLKATA 700 069 3. CIT(A)- 4. CIT- 5. CIT(DR) KOLKATA BENCHES KOLKATA. TRUE COPY BY ORDER SENIOR PRIVATE SECRETARY HEAD OF OFFICE/ D.D.O. ITAT KOLKATA BENCHES