Assessing Officer cannot reject valid DCF valuation, treat resident shareholders differently, or disallow operational interest and marketing expenses based merely on non-receipt of an occupancy certificate.

ORDER

M. Balaganesh, Accountant Member. – The appeal in ITA Nos. 4606 to 4609/Del/2025 for AY 2013-14 to 2016-17 filed by the assessee and ITA Nos. 4677 and 4677/Del/2025 for AY 2014 and 2015 filed the revenue, arises out of the order of the ld National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘ld. CIT(A)’, in short] dated 27.05.2025 for AYs 2013-14, 2014-15 and 2016-17, 26.05.2025 for AY against the order of assessment passed u/s 147 r.w.s. 144B of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 29.05.2023 for AY 2013-14, 05.12.2018 for AY 2014-15, 29.12.2017 for AY 2015-16, 22.12.2018 for AY 2016-17 by the Assessing Officer, Assessment Unit, Income Tax Department (hereinafter referred to as ‘ld. AO’). Identical issues are involved in all these appeals and hence they are taken up together and disposed of by this common order for the sake of convenience. Both the parties mutually agreed that the appeal of the assessee for the Assessment Year 2013-14 in ITA No. 4606/Del/2025 may be taken as the lead case. ‘

2. The Ground Nos. 2 to 4 raised by the assessee in Assessment Year 2013-14 are challenging the addition made in under section 56(2)(viib) of the Act in respect of excess share premium over the fair market value.

3. We have heard the rival submissions and perused the materials available on record. The assessee is engaged in the business of development of Information Technology Special Economic Zone (SEZ) project at Gurugram and derives income from leasing of commercial buildings constructed in the SEZ. The assessee is a co-developer of the SEZ project pursuant to the approval granted by the Department of Commerce under the Ministry of Commerce and Industry, Government of India. In the year 2009, an Indian resident individual Shri V C Burman, coowner of Dabur India Limited and a dominant non-resident company i.e. Ascendas India Development II Pte Limited, Singapore collaborated to develop a SEZ land in Gurugram admeasuring 62.54 acres which was acquired at a cost of Rs 10.21 crores. In GTV Tech SEZ Private Limited, 56.71% of the shares were held by Ascendas India Development II Pte Limited, Singapore and 40.31% shares were held by Shri V C Burman. To develop the SEZ land, the company GTV SEZ Phase 1 Pvt Ltd was formed with Ascendas India Development II Pte Ltd, Singapore and Shri V C Burman holding 55% and 40% stake respectively. As a co-developer, GTV SEZ Phase 1 Pvt Ltd took a 30-year lease of 4.17 acres land from GTV Tech SEZ Pvt Ltd on nominal payment of Rs 6,500 per annum in financial year 2010-11. It was estimated that to develop the SEZ land, GTV SEZ Phase 1 Pvt Ltd needed a fund of Rs 120 crores over a period of 4 years. The assessee was to develop 690,000 square feet which was projected to earn a free cash inflow of Rs 24 crores per annum from financial year 2012-13. These funds were raised by the assessee from its shareholders and HDFC Bank of Rs 57 crores and Rs 75 crores respectively. The bank had given loan of Rs 75 crores based on the financial projection of the project. The main business of the assessee is to earn lease rent from SEZ property. Over the years, the assessee raised equity from its promoters and loan from HDFC Bank as per chart given below:-

4. The Learned AO sought to question the veracity of the share premium of Rs 90 per share to consider whether the same is at fair market value or not. The assessee was asked to justify the same. The assessee submitted that it had allotted equity shares to its existing shareholders (both resident and non-resident) at Rs 100 per share which includes premium of Rs 90 per share. The assessee submitted that equity funds are to be used for commercial building for earning the rentals. It was submitted that the share issue price for resident and non-resident shareholders were the same at Rs 100 per share. The non-resident shareholder followed RBI guidelines for investment in real estate in India. It was submitted that the funds are received only from the existing shareholders. It was submitted that the shares were allotted at Rs 100 per share with a premium of Rs 90 per share based on the valuation done using Discounted Cash Flow (DCF) Method in accordance with Rule 11UA of the Income Tax Rules. The assessee submitted the allotment of shares to both resident and nonresident shareholders by way of the following table:-

5. The Learned AO disregarded the valuation of shares of the assessee done by using DCF method as the projections used thereon did not match with the actual financials and assessee could never achieve the projected results in future at all. The Learned AO noted that since inception, the assessee company had incurred only losses and hence could not justify the share premium which was projected on the ground that the assessee would make profits. The Learned AO however computed the fair market value of share by applying Net Asset Value (NAV) method which is also one of the recognised methods prescribed in Rule 11UA of the Income Tax Rules. The share price as per NAV as worked out by the Learned AO was Rs 63 per share. The Learned AO accordingly proceeded to make an addition under section 56(2)(viib) of the Act for the differential sum of Rs 27 per share (9063) in respect of shares allotted to resident shareholders. It is pertinent to note that the Learned AO accepted the very same premium of Rs 90 per share in respect of shares allotted to non-resident shareholders. This action of the Learned AO was upheld in principle by the Learned CIT(A). The Learned CIT(A) however computed the NAV at Rs 82 per share as against Rs 73 per share adopted by the Learned AO and granted partial relief to the assessee. Aggrieved, only the assessee is in appeal before us.

6. The Learned AR before us submitted that the addition under section 56(2)(viib) of the Act has been made by the revenue in a mechanical manner without factoring the business and revenue dynamics and failing to note that the share premium is received from the existing shareholders. The assessee was required to construct a building (Ground plus 7 floors) of 5,50,000 square feet at a cost of Rs 120 crores for which Rs 75 crores was taken from bank and Rs 57 crores was received from shareholders. It was projected that this rental business will earn a positive cash inflow of Rs 24 crores per annum initially and then increase progressively over the years based on market conditions. The initial lease term is of 30 years with renewal options. The building is star rated and one of the top buildings in SEZ area of Gurugram. Gurugram is house to many fortune 500 companies and commercial rentals was a promising business. On trial basis, the assessee company just developed 4.17 acres out of 64 acres of SEZ land. The value per share has been arrived at Rs 100 per share based on potential rental income for 5,50,000 square feet area on DCF method . Based on DCF valuation of Rs 100 per share, both the nonresident and resident shareholders subscribed to the shares of the assessee company by investing Rs 31.41 crores and Rs 22.33 crores respectively. The non-resident shareholder i.e. Ascendas is one of the Asia’s largest diversified real estate groups with a global AUM of over 136 billion dollars as of December 2024 and Shri V C Burman, co-promoter of Dabur India Limited, have a proven track record of integrity and their respective sources of money could never be in doubt nor did the revenue authorities had doubted in the instant case. Per Contra, the Learned DR relied on the decision of the Hon’ble Supreme Court in the case of Sumati Dayal v. CIT 214 ITR 801 (SC) to apply the preponderance of probability theory. This decision cannot be applied in all the cases as is usually been advocated by the revenue. It has to be applied based on the facts and circumstances of each case. We find that the decision of Sumati Dayal referred supra is factually distinguishable with the assessee facts herein and does not come to the rescue of the revenue.

7. In our considered opinion, the very fact that the Learned AO himself had arrived at the fair market value per share at Rs 73 which includes premium of Rs 63 per share, goes to prove that the assessee company has indeed potential to make profits. Justification of share premium is not dependent on assessee company making profits in the near future. The long term investors enter the market with long term perspective and in any event, the DCF method adopted by the assessee is also one of the recognized methods prescribed in Rule 11UA of the Income Tax Rules. While this is so, the Learned AO cannot summarily reject the same and adopt the other alternative method provided in the Rules viz NAV method. Further we find that the very same share premium price of Rs 90 per share had been issued by the assessee in Assessment Years 2011-12 and 2012-13 which stood accepted by the revenue. Moreover, the revenue for the Assessment Year 2013-14 had indeed accepted the issuance of shares at premium of Rs 90 per share in respect of non-resident shareholders. Hence the revenue is not justified in taking a divergent stand in respect of shares allotted on the same terms and conditions to the resident shareholders and make an addition under section 56(2)(viib) of the Act. We find that the Learned CIT(A) applied the decision of the Co-ordinate Bench of Delhi Tribunal in the case of Agro Portfolio (P.) Ltd. v. ITO [2018]  171 ITD 74 (Delhi – Trib.)/ITA No. 2189/Del/2018 dated 14.5.2018. It is pertinent to note that this decision has been reversed by the Hon’ble Jurisdictional High Court in ITA 1385/2018 in Agra Portfolio (P.) Ltd. v. Pr. CIT 464 ITR 348 (Delhi) wherein it was held that the Learned AO cannot alter the valuation method as adopted by the assessee. Further, we find that Hon’ble Jurisdictional Delhi High Court in the case of PCIT v. Cinestaan Entertainment Pvt. Ltd. [2021] 433 ITR 82 (Del) had observed that the learned AO cannot match actual performance with the projections and therefore, this approach lacks material foundation and is irrational since the valuation made by the assessee is intrinsically based on the projections which can be affected by various factors. It was also held that valuer makes the forecast or approximation based on the potential valuation of the business. Hence, the learned AO cannot rework the projections at the time of assessment by replacing the projections with the actuals for the purpose of rejecting the DCF method adopted by the assessee.

8. In view of the aforesaid observations and respectfully following the judicial precedents relied upon hereinabove, we direct the Learned AO to delete the addition made under section 56(2)(viib) of the Act in respect of shares issued a premium of Rs 90 per share for the Assessment Year 201314. Accordingly, the Ground Nos. 2 to 4 raised by the assessee are allowed.

9. Since relief is granted to the assessee on merits, the adjudication of Ground No. 1 for the Assessment Year 2013-14 become academic in nature and it is left open.

10. The Ground No. 5 raised by the assessee for the Assessment Year 2013-14 is general in nature.

11. In the result, the appeal of the assessee in ITA No. 4606/Del/2025 is partly allowed.

12. The Ground Nos. 1 to 3 raised by the assessee and Ground No. 5 raised by the revenue for the Assessment Year 2014-15 are identical to the Ground Nos. 2 to 4 raised by the assessee for the Assessment Year 2013-14 and hence the decision rendered by us in Assessment Year 2013-14 shall apply mutatis mutandis to Ground No. 1 to 3 of Assessment Year 2014-15 also except with variance in figures. Accordingly, the Ground Nos. 1 to 3 raised by the assessee are allowed and Ground No. 5 raised by the revenue is dismissed.

13. The Ground No. 4 raised by the assessee and Ground Nos. 2&3 raised by the revenue for the Assessment Year 2014-15 is challenging the confirmation of disallowance of interest under section 36(1)(iii) of the Act and its consequential depreciation on the ground that occupancy certificate of the building is not taken by the assessee during the year under consideration.

14. We have heard the rival submissions and perused the materials available on record. It is not in dispute that the borrowed funds had been utilized by the assessee for the construction of commercial buildings. The assessee company GTV SEZ Phase 1 Private Limited (formerly known as Dr. Fresh SEZ Phase 1 Private Limited) is the co-developer of the SEZ promoted by GTV Tech SEZ Private Limited (formerly known as Dr. Fresh Health Care Private Limited) [hereinafter to be called as ‘Developer’]. The co-developer approval was granted by the Department of Commerce, Ministry of Commerce and Industry on 19-02-2010, was for the codeveloper to construct buildings and requisite infrastructure on 1.16 hectares of land based on the co-developer agreement between the two companies dated 10-12-2009. The Developer has applied for occupancy certificate for Phase 1 of IT / ITES SEZ at village Ghamroj, Thesil Sohna, Gurgaon, Haryana vide its letter number AOG / PJ / NSEZ / 260312 dated 26-03-2012. It is important to mention here that building completion certificate from the registered / licensed architect Mr. Rajinder Kumar having valid license number CA / 2490 /75 has also been accompanied with the application for occupancy certificate mentioned as above. The building completion certificate i.e. Form BR – IV(B) was also placed on record. It was submitted that the occupancy certificate has been allotted on the basis of the report submitted by the licensed architect Mr. Rajinder Kumar and the same was inspected by Mr. Anand Mittal, nominated architect by the Department. The Developer again made an application for grant of occupancy certificate in the name of co-developer i.e. Dr. Fresh SEZ Phase 1 private limited vide its letter dated 23-09-2013, because the earlier application was applied in the name of developer only instead of in the name of both the companies.

15. As stated earlier, the loan borrowed from banks has been utilized for construction of commercial buildings. The interest cost and other cost which is included in the ‘financial expenses’ in the total sum of Rs 11,81,48,116 is not eligible for capitalization as per the Accounting Standard 16 (AS-16) [‘Borrowing Costs’] issued by the Institute of Chartered Accountants of India (ICAI). As per clause 19 of AS-16, which relates to cessation of capitalization of borrowing cost, capitalization of borrowing cost should cease when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. Further clause 20 of AS-16 explains that “An asset is normally ready for its intended use or sale when its physical construction or production is complete even though routine administrative work might still continue. If minor modifications, such as the decoration of a property to the user’s specification, are all that are outstanding, this indicates that substantially all the activities are complete. The assessee company has disclosed the borrowing cost in its financial statements for the assessment year 2014-15 vide Note No. 8. Further, the policy regarding borrowing cost has been mentioned in Note No. 2 (d) attached with the said balance sheet. Where borrowing cost includes interest, amortization of ancillary cost incurred in connection with the arrangement of borrowings and exchange differences arising from foreign currency borrowings to the extent they are regarded as an adjustment to the interest cost. Therefore, as per the financial statements of assessment year 2014-15, borrowing cost directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale or capitalized as part of the cost of the requisite respective asset. Hence, all other borrowing cost amounting to Rs 11,81,48,116 incurred in the period not capitalized.

16. The Learned AO stated that the interest taken on loan for construction of the building would be capital in nature as the asset in question was not ready for ‘put to use’ in view of the fact that occupancy certificate had not been obtained by the assessee. The Learned AO noted that the occupancy certificate for the project was issued only during the end of March 2015 in the succeeding financial year. Consequently, the commercial building was not capable of being put to use during the year under consideration. Since the building had not become operational for want of occupancy certificate, the building was incapable of commercial exploitation and hence the Learned AO concluded that the asset was not put to use and accordingly stated that the interest paid on loan would become pre-operative expenditure requiring capitalization and disallowed the claim of deduction of the assessee in the assessment.

17. Before the Learned CIT(A), the assessee contended that the borrowing had been utilized only for business purposes and that the commercial project had substantially been completed. The business had already commenced; the expenditure represented normal business finance cost and that the proviso to section 36(1)(iii) of the Act would not be attracted at all in the instant case. The assessee further contended that commercial readiness and business use cannot be made dependent exclusively upon the date of issuance of the occupancy certificate. The Learned CIT(A) held that the Learned AO had proceeded primarily on the basis that occupancy certificate had been issued only in March 2015. The Learned CIT(A) held that the absence of occupancy certificate was not decisive of the question whether the asset had been put to use for the purpose of business ; the project had reached a stage where it formed part of the business infrastructure of the assessee. With these observations, the Learned CIT(A) held that the interest on loan upto the date of occupancy certificate i.e. upto 18-3-2015 is required to be capitalized and since the Learned AO had not granted depreciation for the same having held to be capital in nature, the Learned CIT(A) granted depreciation on the same. Aggrieved, both the assessee as well as the revenue are in appeals before us.

18. In our considered opinion, the grant of occupancy certificate cannot be made as a determinative factor for allowability of the interest on loan as a deduction. It is not in dispute that the loan borrowed by the assessee had been utilized only for the purpose of construction of commercial buildings. The buildings has been put to use during the year under consideration itself as the rental income derived thereon had been treated as business income by the revenue. Hence we are not in agreement with the arguments advanced by the Learned DR that occupancy certificate constitute a vital indicator that the building was not ready for commercial use. Hence we direct the Learned AO to allow the interest paid on loan in the sum of Rs 11,81,48,116 as a revenue expenditure and re-compute the total income of the assessee accordingly. The Ground No. 4 raised by the assessee is allowed and Ground Nos. 2 & 3 raised by the revenue are dismissed.

19. The Ground No.1 raised by the revenue for the Assessment Year 2014-15 is general in nature.

20. The Ground No. 4 raised by the revenue for the Assessment Year 2014-15 is challenging the deletion of disallowance of advertisement expenses in the sum of Rs 4,14,949.

21. We have heard the rival submissions and perused the materials available on record. The Learned AO examined the profit and loss account and noticed that assessee had claimed advertisement and marketing expenditure amounting to Rs. 4,14,949 as a revenue deduction. The said expenditure had been incurred towards publicity, advertisement and marketing of the commercial space developed by the assessee. The Learned AO found that commercial building in respect of which such expenditure had been incurred was still under construction and had not been put to use during the relevant previous year, as the occupancy certificate in respect of the building had been obtained only in the subsequent financial year, thereby indicating that the project had not attained operational readiness during the year under consideration. Accordingly, the Learned AO held that advertisement and marketing expenditure is to be construed as not incurred for the purpose of existing business or since the business activity is not capable of commercial exploitation here. With these observations, the Learned AO noted that the expenditure was intrinsically connected with the commercial project which was yet to become functional and consequently proceeded to disallow the same.

22. The Learned CIT(A) noted that the advertisement expenditure had been incurred in the ordinary course of its business with the object of marketing the commercial space developed by the company. The said expenditure is to be construed as wholly and exclusively incurred for the purpose of business of the assessee as a normal business outlay allowable under Section 37(1) of the Act. The Learned CIT(A) noted that the allowability of advertisement expenditure could not be made dependent solely upon the date of issuance of the occupancy certificate. Aggrieved, the revenue is in appeal before us.

23. On perusal of the audited financial statements of the assessee company which are placed on record by the Learned AO, we find that the revenue had allowed all other business expenditure claimed by the assessee as a deduction and had sought to disallow only the advertisement and marketing expenditure of Rs 4,14,949 on the ground that building is not having the occupancy certificate and accordingly incapable of commercial exploitation. As stated earlier, the assessee had duly already offered rental income as business income and had claimed various other business expenditure in the return under the income from business which has been allowed as deduction. We have already held that occupancy certificate cannot be the determinative factor for deciding the fact as to whether the building is capable of commercial exploitation. Hence, we hold that assessee would be entitled for deduction of advertisement and marketing expenditure of Rs 4,14,949 in the facts and circumstances of the instant case. Accordingly, the Ground No. 4 raised by the revenue is dismissed.

24. In the result, the appeal of the revenue for the Assessment Year 2014-15 is dismissed and appeal of the assessee for the Assessment Year 2014-15 is allowed.

25. All the grounds raised by the assessee and revenue for the Assessment Year 2015-16 are identical to those raised for the Assessment Year 2014-15. Hence the decision rendered by us hereinabove for the Assessment Year 2014-15 shall apply mutatis mutandis for Assessment Year 2015-16 also except with variance in figures.

26. All the grounds raised by the assessee for the Assessment Year 201617 are identical to those raised for the Assessment Year 2014-15. Hence the decision rendered by us hereinabove for the Assessment Year 2014-15 shall apply mutatis mutandis for Assessment Year 2016-17 also except with variance in figures.

27. To sum up,

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