TMI Blog2021 (3) TMI 239X X X X Extracts X X X X X X X X Extracts X X X X ..... d the option to conduct its own valuation and determine FMV on the basis of either the DCF or NAV Method. Assessee being a start-up company adopted DCF method to value its shares. This was carried out on the basis of information and material available on the date of valuation and projection of future revenue. There is no dispute that methodology adopted by Assessee has been done applying a recognized and accepted method. Since the performance did not match the projections, Revenue sought to challenge the valuation, on that footing. This approach lacks material foundation and is irrational since the valuation is intrinsically based on projections which can be affected by various factors. We cannot lose sight of the fact that the valuer makes forecast or approximation, based on potential value of business. However, the underline facts and assumptions can undergo change over a period of time. The Courts have repeatedly held that valuation is not an exact science, and therefore cannot be done with arithmetic precision. It is a technical and complex problem which can be appropriately left to the consideration and wisdom of experts in the field of accountancy, having regard to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious persons, as encapsulated in the assessment order. The Respondent-Assessee filed return of income for the relevant AY i.e., 2015-16 on 28.09.2015, declaring nil income. The return was processed under Section 143(1) of the Act. Thereafter, the case was selected for Limited Scrutiny and the reasons for scrutiny selection were (a) Large share premium received during the year [verify applicability of Section 56(2)(vii)(b)]; (b) Low income in comparison to very high investment; and (c) Low income in comparison to very high loans/advances/investments in shares. 3. Notice under Section 143(2) of the Act was issued on 07.04.2016 and was followed by a detailed questionnaire along with the notice under Section 142(1) on 12.10.2017. In response thereto, the Respondent-Assessee filed a valuation report dated 15.12.2014. Thereafter, vide order dated 31.12.2017, assessment was framed under Section 143(3) of the Act and the total income of the Respondent-Assessee was assessed as ₹ 90,95,46,200/-. The findings of the Assessing Officer ( AO ) summarized by the Appellant are as follows: 1. No effort was made by the assessee for achieving the projections made in the report as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g those figures. iv. On perusal of letter dated 26.12.2017, under Note 7 of Balance Sheet for the period ending 31st March 2017, it is seen that 0% unsecured compulsorily convertible debenture of ₹ 1000 each in M/s Script Stories Media P. Ltd. has been reduced to NIL as compared to ₹ 71,99,74,000/- in the preceding year. Further, it is seen that as per P L account for the period ending 31st March201 7, assessee company has shown an amount of ₹ 71,99,40,002/- below the line in P L A/c on account of loss on sale of investment in unsecured compulsorily convertible debenture of ₹ 1000 each in M/s Script Stories Media P. Ltd. v. Since the investment was in zero percent debentures there was no scope of any income rather the transactions resulted in the loss of ₹ 71,99,40,002/-, it is clear that the assessee has made an investment with M/s Script Stories Media P. Ltd. without any interest to earn the income in future. Hence there was no effort on the part of the assessee to justify the projection made in the report under Rule 11 UA and premium as per Section56(2)(viib). vi. Ratio of share capital to share premium is 1:2602 by investors in asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for premium as per Section 56(2)(viib) of the Act. Mr. Sharma further submitted that the CIT(A) had concluded that no independent enquiry was done by the valuer to verify the truth or the figures furnished by the Respondent-Assessee and that the valuation was based on assumption without independent verification of the truth/accuracy and completeness of the information and data provided by the company. He further argued that the AO had conducted a detailed analysis of allotment of shares at premium and further investment by the Respondent-Assessee and noted that the ratio of allotment of shares at premium is 1:2602, whereas further investment made by Respondent-Assessee is in the ratio of 1:4. Further, the Respondent-Assessee failed to submit the basis of projection/estimated figures as represented in the valuation report, thus, justifying the additions made. In this situation, the AO analysed the business profitability of the Respondent-Assessee only to the extent that such profitability was not commensurate with the actual financials provided by the Respondent-Assessee during the course of assessment proceedings. Therefore, the financials of the Respondent-Assessee did not suppor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause (ii) of explanation to Section 56(2)(viib) is not applicable to the Respondent-Assessee's case and the assessee was not required to satisfy the Assessing Officer about the valuation done. In accordance with sub clause (i) of explanation, the Respondent-Assessee had an option to carry out a valuation and determine the fair market value (FMV) only on the discounted cash flow method (DCF), which was appropriately followed by the Respondent-Assessee. 8. We have heard and duly considered the arguments and contentions advanced by the learned counsel for both the parties. 9. In the present case, the Respondent-Assessee has received share premium from various subscribers/equity partners. These funds were required by the Respondent-Assessee for film production. The shares were issued based on the valuation received from the prescribed expert i.e., a Chartered Accountant who used the DCF method which is one of the methods stipulated under Section 56(2)(viib) read with Rule 11UA(2)(b).Based on the valuation report dated 15.12.2014, the Respondent-Assessee issued shares to various equity partners at a premium as per the following table: S. No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This fact stood fully established, before the AO and has not been disputed or doubted. Therefore, the nature and source of the credit stood accepted. 12. In this factual background, the learned ITAT then proceeded to examine whether the AO after invoking the deeming provision under Section 56(2)(viib), could have determined the FMV of the premium on the shares issued at nil after rejecting the valuation report given by the Chartered Accountant based on one of the prescribed methods under the Rules adopted by the valuer. On this aspect, after examining the statutory provisions and the factual position, the ITAT inter-alia observed as under: 32. What is seen here is that, both the authorities have questioned the assessee's commercial wisdom for making the investment of funds raised in 0% compulsorily convertible debentures of group companies. They are trying to suggest that assessee should have made investment in some instrument which could have yielded return/ profit in the revenue projection made at the time of issuance of shares, without understanding that strategic investments and risks are undertaken for appreciation of capital and larger returns and not simply divid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s assets based NAV method which is based on actual numbers as per latest audited financials of the assessee company. Whereas in a DCF method, the value is based on estimated future projection. These projections are based on various factors and projections made by the management and the Valuer, like growth of the company, economic/market conditions, business conditions, expected demand and supply, cost of capital and host of other factors. These factors are considered based on some reasonable approach and they cannot be evaluated purely based on arithmetical precision as value is always worked out based on approximation and catena of underline facts and assumptions. Nevertheless, at the time when valuation is made, it is based on reflections of the potential value of business at that particular time and also keeping in mind underline factors that may change over the period of time and thus, the value which is relevant today may not be relevant after certain period of time. Precisely, these factors have been judicially appreciated in various judgments some of which have been relied upon by the ld. Counsel, for instance: i) Securities Exchange Board of India Ors [2015 ABR 291 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee have been recognized as expert under the law. 35. There is another very important angle to view such cases, is that, here the shares have not been subscribed by any sister concern or closely related person, but by an outside investors like, Anand Mahindra, Rakesh Jhunjhunwala, and Radhakishan Damania, who are one of the top investors and businessman of the country and if they have seen certain potential and accepted this valuation, then how AO or Ld. CIT(A) can question their wisdom. It is only when they have seen future potentials that they have invested around ₹ 91 crore in the current year and also huge sums in the subsequent years as informed by the ld. counsel. The investors like these persons will not make any investment merely to give dole or carry out any charity to a startup company like, albeit their decision is guided by business and commercial prudence to evaluate a startup company like assessee, what they can achieve in future. It has been informed that these investors are now the major shareholder of the assessee company and they cannot become such a huge equity stock holder if they do not foresee any future in the assessee company. In a way Revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which can be appropriately left to the consideration and wisdom of experts in the field of accountancy, having regard to the imponderables which enter the process of valuation of shares. The Appellant-Revenue is unable to demonstrate that the methodology adopted by the Respondent-Assessee is not correct. The AO has simply rejected the valuation of the Respondent-Assessee and failed to provide any alternate fair value of shares. Furthermore, as noted in the impugned order and as also pointed out by Mr. Vohra, the shares in the present scenario have not been subscribed to by any sister concern or closely related person, but by outside investors. Indeed, if they have seen certain potential and accepted this valuation, then Appellant-Revenue cannot question their wisdom. The valuation is a question of fact which would depend upon appreciation of material or evidence. The methodology adopted by the Respondent-Assessee, accepted by the learned ITAT, is a conclusion of fact drawn on the basis of material and facts available. The test laid down by the Courts for interfering with the findings of a valuer is not satisfied in the present case, as the Respondent-Assessee adopted a recognized m ..... X X X X Extracts X X X X X X X X Extracts X X X X
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