Income Tax Appellate Tribunal – Hyderabad
Apollo Sugar Clinics Limited , … vs Dy. Commissioner Of Income Tax , … on 12 April, 2019 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH ‘ A’, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA No. 2045/Hyd/2018 Assessment Year: 2015-16 Apollo Sugar Clinics Ltd., vs. Dy. Commissioner of
Hyderabad. Income-tax, Circle – 1(1), Hyderabad.
PAN – AAKCA6933D Appellant Respondent Assessee by: Shri Sriram Seshadri Revenue by: Shri Y.V.S.T. Sai Date of hearing: 04/02/2019 Date of pronouncement: 12/04/2019 O RDE R PER S. RIFAUR RAHMAN, AM:
This appeal filed by the assessee is directed against the
order of CIT(A) – 1, Hyderabad, dated, 21/08/2018 for AY
2. Brief facts of the case are, the assessee company,
dealing in the business of diabetic clinics filed its return of
income on 29/09/2015 for the AY 2015 -16 declaring loss at
Rs. (-) Rs. 7,49,45,944/- under normal provisions and book
profit of Rs. (-)7,49,45,944/- u/s 115JB, which was processed
u/s 143(1) of the Income-tax Act, 1961 ( in short ‘the Act’).
Subsequently, the case was selected for scrutiny under CASS
and notices u/s 143(2) and 142(1) were issued calling for
information. In response to the said n otice, the AR of the
Assessee furnished the information as called for.
2 I.T.A. No. 2045/Hyd/18
Apollo Sugar Clinics Ltd., Hyd.
2.1 During the assessment proceedings, the Assessing
Officer noticed that the assessee company collected an
amount of Rs.70,54,53,000/- towards share premium. The
assessee received share capital of Rs. 21.09 crores on
16/12/2014 with face value of Rs. 10/ – each and with premium
of Rs. 990/-. Similarly, on 29/01/2015 received Rs. 50.07
crores, which are issued to M/s Sanofi Synthelabo (India)
Limited and M/s Apollo Health & Life S tyle Limited. The
allotment of shares is as under:
Date of Nam e of the No of Face Prem ium Share Security in
allotm ent allottee shares value in in Rs. capital in Rs.
29/01/2 015 M/s Sanofi 406504 10 1220 4065040 495934880 Synthela bo (India ) Ltd.
29/01/2 015 M/s Apollo 596 10 1220 5960 727120 Health & Lifestyle Ltd.
16/12/2 014 -do – 210900 10 990 2109000 208791000
29/11/2 014 -do – 3000000 10 Nil 3000000 300 Total 3618000 36180000 705453300 2.2 The Assessing Officer asked the assessee to justif y and
substantiate with evidences in arriving the share premium of
Rs. 990/- and at Rs.1,220/- in the first year of its operations
and the allotments made to M/s Sanofi Synthelabo (India)
Limited and M/s Apollo Health & Life Style Limited . The
assessee was asked to furnish the valuation report as per rule
2.3 In response, the assessee company submitted the
valuation report carried out by BSR and Associates and they
stated that the “valuation carried out by us is solely for
regulatory /nonfinancial reporting purposes and it is the
prerogative of the parties to the transaction to decide the
transaction price”. According to assessee, the auditors
expressed their opinion that the valuation applies only to
comply with RBI regulations and not to the commercial
transaction. It is therefore incorrect to read the valu ation as
applicable to all transactions, the share price evaluated is
3 I.T.A. No. 2045/Hyd/18 Apollo Sugar Clinics Ltd., Hyd.
wholly indicative and has no bearing whatsoever on the
ultimate price at which these were issued. However, it is
emphasized that there is no requirement under the income tax
law to get the shares valued. Thus, the company is free to
determine its own price with the intending purchaser after due
negotiations and deliberations.
2.6 Further it was stated that the assessee is a public
limited company and its shares are not listed on a recognized
stock exchange and the value of its shares can be determined
under Rule 11UA for the purposes of section 56(1) of the IT
Act by applying fair market value.
2.7 The AO opined that the assessee has stated that the
company was free to determine its own price with the
intending purchaser after due negotiations and deliberations is
not acceptable. The provisions of Rule 11UA for the purposes
of section 56 of the IT Act, says that there is a prescribed
method for value of shares at a share premium is under Rule
11UA(1)(b) for the purposes of section 56 of the IT Act, which
is as follows:
“The fair market value of unquoted equity shares shall be the value on the valuation date of such unquoted equity shares as determined in the following manner:
The fair market value of unquoted equity shares= (A -L2 x (PV) (PE)”
2.8 Accordingly, the Assessing Officer concluded that from
the Rule 11UA it is clear that the fair market value of the
shares has to be determined in the prescribed manner and the
assessee is not at liberty to determine its own price with the
intending purchaser after due negotiations and deliberations,
there should be some basis to evaluate the shares of the
company at a premium, it cannot be evaluated by
imaginary/surmises. On one side it has evaluated its shares by
4 I.T.A. No. 2045/Hyd/18 Apollo Sugar Clinics Ltd., Hyd.
following DCF method, while, on the other side it is stating
that it need not follow the valuation report.
2.9 According to the AO, the assessee has neither adopted
the value of Rs.741/- reported in the valuation report given by
the chartered accountant under DCF method as it was
evaluated by its own company nor adopted the method
prescribed under the IT Act i.e., Rule 11UA. On the other
hand, it has taken a stand that the company is free to
determine its own price with the intending purchaser after due
negotiations and deliberations. It shows that the assessee
company has scant respect for the legislation passed by the
Government of India. The intention of the legislation for
determination of fair market value of the shares is to curb the
misdeeds of the company who will involve in dubious methods
for valuation of its shares and also to protect the monies of
the investors who invest as a share premiu m.
2.9.1 In view of the above observations, the Assessing Officer
concluded that the valuation report submitted by the assessee
for determination of share premium is not from facts and it is
imaginary with surmises and moreover there is very huge gap
between the projections and actuals. Hence, the Assessing
Officer did not accept the contention of the assessee that it is
free to determine its own price and determined the share
premium under Rule 11UA(1)(b) as follows:
The figures adopted as at 31.03.201 5 as the figures as on
allotment date of shares are not available.
The fair market value of unquoted
equity shares = (A-L) X PV/PE 72,42,65,650 X 10 = 196.20 366,80,000
No of shares is 6,18,000 x 196.20 = 12,12,51,600
5 I.T.A. No. 2045/Hyd/18 Apollo Sugar Clinics Ltd., Hyd.
Share premium collected = 70,54,53,300 70,54,53,300-12,12,51,600= 58,42,01,700 In view of the above, the Assessing Officer disallowed the
excess share premium collected amounting to
Rs.58,42,01,700/- u/s 56 of the IT Act and added to the total
3. Aggrieved by the order of AO, the assessee preferred an
appeal before the CIT(A).
4. Before the CIT(A), the assessee submitted that the
name of the company was changed from M/s. Apollo Clinics
(Gujarat) Limited to M/s. Apollo Sugar Clinics Limited. It h ad
allotted equity shares to M/s. Apollo Health and Lifestyle
Limited (AHLL) and M/s. Sanofi Synthelabo (India) Limited
(SSIPL) at a premium and thereby received total amount of
Rs.70,54,53,300/- towards share premium. The allotment of
shares is as under:
Name of the No of shares Share capital Premium (Rs.) party (Rs.) SSIPL 4,06,504 40,65,040 49,59,34,880 AHILL 3,11,496 3,21,14,960 20,95,18,120 Total 3,61,80,000 70,54,53,000 4.1 The assessee submitted that clause (b) item (B) to
Section 2(18) is that where the shares of the company,
carrying not less than 50% of the voting power have been held
by and were throughout the relevant previous year beneficially
held by (a) government, or(b) the sta tutory corporation, or (c)
a widely held company or a wholly owned subsidiary of such
widely held company. The assessee submitted that Apollo
Hospitals Enterprise Limited (AHEL) is a parent company
which is a public company listed on the Bombay Stock
Exchange (Security Scrip : APOLLOHOSP) and the National
6 I.T.A. No. 2045/Hyd/18 Apollo Sugar Clinics Ltd., Hyd.
Stock Exchange (Security Scrip: APOLLOHOSP). Since Apollo
Hospitals Enterprise Limited (AHEL) is a listed company, the
same is a company in which public are substantially interest
within the meaning of Section 2(18)(b)(A) of the Act. The
assessee submitted that M/s. Apollo Health and Lifestyle
Limited (AHLL) is a wholly owned subsidiary of AHEL, wherein
100% of the shares of AHLL were held by AHEL during the FY
2014-15. Since AHLL is a 100% subsidiary of AH EL (a listed
company), AHLL is also a company in which public are
substantially interested within the meaning of Section
2(18)(b)(B)(c) of the Act. The assessee is a subsidiary of M/s.
Apollo Health and Lifestyle Limited (AHLL) wherein 80% of
shares of the assessee were held by AHLL during the FY
2014-15. Since AHLL is a 100% subsidiary of AHEL (a listed
company), and the assessee is 80% of subsidiary of AHLL,
the assessee satisfies the condition laid down in Section
2(18)(b)(B)(c) of the Act. Hence, the a ssessee submitted that
it is a company in which public are substantially interested
within the meaning of Section 2(18) of the Act.
4.2 The assessee submitted that Section 56(2)(viib) of the
Act are not applicable where premium on issues of shares is
received by a company in which public are substantially
interested. The assessee submitted that since specific
provisions of Section 56(2)(viib) dealing with taxability of
share premium are not applicable in the instant case, the
general provisions of Section 56(1) of the Act also cannot be
invoked. The assessee submitted Section 56(1) covers all
those income which are otherwise not taxable under other
heads of income. However, for section 56(1) to apply , the
amount received by an assessee must be “income” under the
Act. The assessee also submitted that Section 2(24) defines
the term as “income”, which does not include ‘receipts on
7 I.T.A. No. 2045/Hyd/18 Apollo Sugar Clinics Ltd., Hyd.
issue of shares’. The only exception to this is sub-clause (xvi)
to Section 2(24) which covers share premium as in Section
56(2)(viib) of the Act. The assessee submitted that based on
the above, the receipt of share premium is not taxable under
the Act. Hence, the share premium may not be treated as
5. After considering the submissions of the assessee, the
CIT(A) upheld the addition made by the AO by observing as
“6.9 The submissions of the appellant have been carefully considered. The issue before me is whether the share premium has been calculated as per the market valuation and based on due diligence report. It is seen the premium has varied from 12990 in different cases. On scrutiny, the Assessing Officer pointed out that from M/s.Sanofi Synthelabo (India) Limited, appellant charged share premium of Rs.1220/- while on majority share purchase in case of M/s. Apollo Health & Life Style Limited is Nil. The Assessing Officer has raised the calculation/valuation of share premium with actuals with regard to profit before taxes and found there is a huge gap between projections and actuals available of the company account. The valuation report submitted by BSR Associates also has lacunae and specifically based on ‘…financial information and underlying management assumptions provided by the management for the valuation analysis of the company’.
” …For the purpose of this engagement and report, we have made no investigation and assume no responsibility for the title to, or liabilities against ASCL. ”
” ….. valuation carried out by us is solely for regulatory /nonfinancial reporting purposes and it is the prerogative of the parties to the transaction to decide the transaction price”.
The above extracts from the findings of the Assessing Officer and the submissions made by the BSR Associates pin points the finding that
8 I.T.A. No. 2045/Hyd/18 Apollo Sugar Clinics Ltd., Hyd.
a) The calculation / valuation is made on basis of management assumption b) The calculation / valuation is made for statutory provision of RBI and SEBI.
During the appeal proceedings, the appellant was asked to submit the due diligence report on the issue raised by the Assessing Officer regarding the share premium. No such report was submitted before me, hence the finding of the Assessing officer, who is very specific to show that Section 56(2)(viib) is in applicable. On verification, it Is correct that provision of Rule 11UA for the purpose of Section 56 of IT Act, there is prescribed method for valuation of share premium under Rule 11UA(I)(b) for the purpose of Section 56 of Income Tax Act. The Appellant has not accepted the valuation of Rs.741/given by the Chartered Accountant under DCF Method nor under Rule 11UA of IT Act. It is to be noted that the Income Tax Act is very specific regarding the issue. The appellant may have used negotiations and deliberations during the transactions. But for Income Tax procedures the Rule 11UA will apply.
6.10 In the background of this, the appellant has not been able to support its stand. The addition made regarding the excess share premium collected is disallowed u/s.56 of IT Act. 1 have verified the issue and find that the Assessing officer is correct in disallowing Rs.58,42,01,700/- as excess share premium. The addition of Rs.58,42,01,700/- is upheld.”
Disallowance of expenditure u/s.14A is Rs.6, 27,749/-
6. Further, during the assessment proceedings, the
Assessing officer noticed that the assessee company earned
exempt income of Rs.10,99,520/-. He observed that in terms
of provisions of section 14A of the Act, any expenditure
incurred directly or indirectly for earning income which does
not form part of taxable income is not allowable. The assessee
company has not disallowed any expenditure that might have
or is incurred for earning the exempted income. Therefore, the
Assessing Officer asked the assessee to file objections if any,
as to why the provisions of Rule 8 D could not be applied for
9 I.T.A. No. 2045/Hyd/18 Apollo Sugar Clinics Ltd., Hyd.
disallowance of expenditure u/s 14A of the Act though there
are no borrowings and no direct interest expenditure during
the year under consideration. In response, the assessee
submitted as under:
“It is clarified that a sum of Rs.25 crores was invested in the mutual funds during the year. At the year end, the fair market value of the investment showed the value at Rs.25,10,99,520/-.Thus the investment yield unrecognized income of Rs. 10,99,520/- which was offered for taxation. No expenditure has been incurred to earn this income, hence no amount qualifies for any disallowance under this section. However the same was included under the head income from business and profession instead of being offered for taxation under the head income from other sources.”
The Assessing Officer relying upon the Honourable Bombay
High Court’s decision in the case of CIT Vs. Godrej Boyce
Mfg. Co. Ltd. vis DCIT (2010) reported in 328 ITR 81
disallowed expenditure incurred in relation to earning the
exempt income and by applying Rule 8D worked out the total
disallowance at Rs. 6,27,749/-.
7. When the assessee preferred an appeal before the
CIT(A), the CIT(A) upheld the disallowance made by the AO
u/s 14A of the Act.
8. Aggrieved by the order of CIT(A), the assessee is in
appeal before us raising the following grounds of appeal:
“1. The lower authorities erred, on facts and in law, in enhancing the returned income of the App ellant.
2. The lower authorities erred in finalizing an order of assessment which suffers from legal defects, such as
10 I.T.A. No. 2045/Hyd/18 Apollo Sugar Clinics Ltd., Hyd.
being passed in violation of principles of natural justice
and the provisions of the Act and is devoid of merits and
are contrary to facts on “cord and applicable law, and
has been completed without adequate inquiries and as
such is liable to be quashed.
Addition of receipt in the nature of share premium:
3. The law” authorities have erred in law and on facts, in
treating the securities premium received by the
Appellant (‘share premium’), on allotment of its shares
during the subject AY, as income taxable under section
56 of the Act.
4. The lower authorities have erred in law and on facts,
in subjecting the alleged excess-receipt of share
premium to tax, despite concluding that section
56(2)(viib) of the Act dealing with taxability of excess
premium received by specified companies for allotment
of shares is not applicable to the impugned transaction.
5. The lower authorities have erred in law and on facts,
in holding that the Appellant is not free to determine the
issue price of its shares, when the said transaction is
outside the purview of any charging provisions under the
Act and as such, the action of the lower authorities is
6. The lower authorities have erred in law an d on facts,
in holding that the value of ‘he Appellant’s shares can be
determined under rule 11UA for the purpose of section
56(1) of the Act since the same a re unquoted shares.
7. The lower authorities have erred in law and on facts,
in making an addition towards the alleged excess receipt
of share premium, by disregarding the Appellant’s
commercial contracts, negotiations and valuation
reports, and also the applicable exchange c ontrol
8. The lower authorities have erred in law and on facts,
in comparing the actual profits earned by the Appellant
with the projected profits, based on which the valuation
of shares of the Appellant was undertaken.
Disallowance under section 14A of the Act:
9. The lower authorities have erred in law and in facts,
in disallowing expenses incurred and allowable by
invoking section 14A of the Act.
11 I.T.A. No. 2045/Hyd/18
Apollo Sugar Clinics Ltd., Hyd.
The grounds of appeal raised by the Appellant herein are without prejudice to each other . The Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time of hearing of this Appeal.
8.1 Ground Nos. 1 & 2 are general in nature.
9. As regards ground Nos. 3 to 8 regarding addition of
receipt in the nature of share premium, the ld. AR submitted
that the year under consideration is the first year of operation
and assessee-company is the second level subsidiary of M/s.
Apollo Hospitals Enterprises Ltd., (AHEL). At the time of
issue of shares, assessee-company was a 99.99% subsidiary
of M/s. Apollo Health and Life Style Ltd., (AHLL) which is
subsidiary of AHEL. Since AHEL is a public limited company
and by virtue of Section 2(18)(vii) of the Act, the assessee –
company also a company in which public are substantially
interested. Hence, the provisions of Section 56(2)(viib) will
not attract. This fact was also acknowledged by the Assessing
Officer in his order. However, the Assessing Officer invoked
provisions of Section 56(1) to bring this transaction as income
from other sources. He has not considered the fact that this
transaction is capital investment and not an income within the
meaning of Section 14 of the Act. For this proposition, he
relied on the following case law:
1. Vodafone India Services (P) Ltd.,  368 ITR 1 (Bombay)
2. D.P. Sandu Bros. Chembur (P) Ltd.,  273 ITR 1 (SC)
3. CIT Vs. Allahabad Bank Ltd.,  73 ITR 74 5 (SC)
4. Nalinikant Ambalal Mody Vs. CIT,  61 ITR 428 (SC).
9.1 With regard to Section 14A disallowance, he submitted
that assessee has not claimed any exempt income. Therefore,
the provisions of Section 14A will not apply.
12 I.T.A. No. 2045/Hyd/18
Apollo Sugar Clinics Ltd., Hyd.
10. Ld. DR relied on the orders of Revenue authorities.
11. Considered the rival submissions and material on
record. We noticed that assessee -company is step-down
subsidiary of Apollo Hospitals Enterprises Ltd., The AHEL is a
listed company in Stock Exchange in India with the Securities
Contracts (Regulations) Act, 1956. Therefore, this company
falls under the category of the company in which public are
substantially interested. The subsidiary companies viz. AHLL
and assessee-company come under the definition of Section
2(18)(b)(B) of the Act, as per which public are substantially
interested. This fact was also acknowledged by the Assessing
Officer in his order at Pg. 6, para 3.2 as it was agreed that the
assessee’s case does not fall u/s. 56(2)(viib). In order to
invoke the provisions of Section 56(2)(viib), the assessee –
company should be a company in which public are not
11.1 The Assessing Officer instead of invoking Section
56(2)(viib), he went ahead by disallowing the excess of the
premium received by assessee by invoking the provisions of
Section 56(1) of the Act. In order to invoke Section 56(1), the
income earned by the assessee should be classified as
revenue income as per Section 14 but should not fall within
any of the head of income A,C,D or E. Since section 56(1) is
residuary head of income, it falls in the head of income ‘F’ i.e. “income from other sources”. This head of income consists of
two parts i.e. section 56(1) and section 56(2). The first part
i.e. sub-section (1) deals with income of every kind, which
does not fall in any of the head of income A – E and also
which is not to be excluded from the total income under this
Act. The important thing is, it should fall within the definition of
13 I.T.A. No. 2045/Hyd/18 Apollo Sugar Clinics Ltd., Hyd.
income u/s 2(24) of the Act. At the same time, sub -section (2)
of section 56, deals with specific income which is not income
as per section 2(24) but specifically brought under the
definition of income by the Legislature. Therefore, the income
which cannot be brought to tax under section 56(2), under
specific head, AO cannot bring to tax even u/s 56(1). As held
in the case of Mercantile Corporation Vs. CIT, 83 ITR 700
(SC), “where there is a specific head for the income in
question and specific section providing for the head, this
residuary section cannot be called in aid”. Similarly, when
there is specific provision introduced by the Legislature to
bring the specific transaction as income in section 56(2)(viib)
because the transaction of issue of shares is capital in nature
but under the circumstances as mentioned in above section,
this transaction will be considered as income.
11.2 In the given case, the fact is clear that assessee has
received share premium and Assessing Officer has mandate to
invoke only Section 56(2)(viib) and no other section. This
transaction will never fall in any of the heads of income as per
Section 14 of the Act. Therefore, in our considered view,
Assessing Officer is not correct in bringing this capital
investment as income of the assessee after satisfying himself
that assessee’s case does not fall u/s. 56(2)(viib) of the Act.
Therefore, the addition made by Assessing Officer is d eleted.
11.3 With regard to 14A disallowance, we notice that
assessee made investment in mutual funds and the value as
on Balance Sheet date stood at Rs. 25,10,99,520/ -. The
difference between actual investment and value as on Balance
Sheet was declared as dividend income. In our view, this is
not actual receipt of dividend during this year, it is only
difference in valuation of investment. The position will ke ep
14 I.T.A. No. 2045/Hyd/18 Apollo Sugar Clinics Ltd., Hyd.
changing every year. The same will be recognized in the
Profit and Loss A/c. The investme nt value may increase
compared to previous year status or decrease depending upon
the performance of the fund. The actual inc rease in value will
be determined only when it is transferred or matured.
11.4 In our view, this income recognised by assessee is not
real dividend income and the real dividend income alone is
exempt from tax net, not the notional recognition of the income
at the Balance Sheet date. The value difference at the time of
disposal will be chargeable to tax as Long Term Capital Gain
not as dividend income. Therefore, in our view, this
recognition of difference in value of investment is not the
dividend income and hence, Assessing Officer cannot invoke
Section 14A in this transaction.
11.5 Accordingly, grounds raised by assessee are allowed.
12. In the result, appeal of the assessee is allowed.
Pronounced in the open court on 12 th April, 2019.
Sd/- Sd/- (P. MADHAVI DEVI) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad, dated 12 th April, 2019. kv
Copy forwarded to: 1. Apollo Sugar Clinics Ltd., 1-10-60/62, 5 th Floor, Ashoka Raghupathi Chambers, Begumpet, Hyderabad – 500 016
2. DCIT – 1(1), AC Guards, IT Towers, Masab Tank, Hyderabad – 500 004.
3. CIT(A) – 1, Hyderabad
4. Pr. CIT – 1, Hyderabad
5. The DR, ITAT, Hyderabad
6. Guard File