TMI Blog2019 (6) TMI 1367X X X X Extracts X X X X X X X X Extracts X X X X ..... e purposes of Section 271AAB. It has come on record that the Revenue seeks to rely upon the same very material as it was used in assessee s sister concern s case pertaining to the very search wherein its identical grievance stands declined vide above extracted detailed discussion. We adopt the said reasoning mutatis mutandis in the instant case as well as no distinction on facts and law has been pointed out at the Revenue s behest. The CIT(A) s order under challenge deleting the impugned penalty is confirmed accordingly. - This Revenue s appeal is dismissed. - I.T.A. No. 8113/DEL/2018 - - - Dated:- 27-5-2019 - SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI L. P. SAHU, ACCOUNTANT MEMBER For The Appellant : Shri Pradeep Dinodia, CA Shri Ravi Kumar, CA For The Respondent : Ms. Nidhi Srivastava, CIT-DR ORDER PER AMIT SHUKLA, JM: The aforesaid appeal has been filed by the assessee against order, dated 24.09.2018, passed by Ld. CIT (Appeals)-2 for the quantum of assessment u/s 143(3) for the assessment year 2015-16. Following grounds have been raised to challenge the impugned order: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 UA(2) of Income Tax Rules] which amounts to dereliction of their statutory duty under the Income Tax Act. Rejection of valuation methodology 4. That Ld. AO and subsequently Ld. CIT (A) have erred in law and on facts and circumstances of the case in not appreciating the fact that the valuation of the shares of the assessee is based on the prescribed method (DCF Method) under Rule 11UA (2)(b) by a prescribed expert, i.e., Chartered Accountant, and the same can neither be varied nor disregarded by the Ld.AO for determination of fair market value for the purposes of section 56(2)(viib). Questioning the commercial wisdom 5. That Ld. CIT(A) has grossly erred in law and on facts and circumstances of the case by upholding the action of Ld. AO of making the aforesaid addition by challenging the assessee s commercial wisdom and questioning the investment made by the assessee in compulsorily convertible debentures. Penalty Interest 6. The Ld. AO has grossly erred in initiating penalty proceedings under section 271(1)(c) of the Act mechanically and without recording any satisfa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9,207 2602 4,99,80,793/- 3. Shri Radhakishan Damani 24.03.2015 19,207 2602 4,99,80,793/- Total 4,53,799 90,95,46,200/- *The shares issued to Sh. Anand Mahindra at discount of 25% of valuation, in view of he being an Anchor and early strategic investor and he has also provided comfort letter to assessee s banker. 5. The above funds were required by the assessee for film production and were raised by way of issue of equity shares to aforesaid equity investors. The shares were issued based on the valuation from the prescribed expert i.e. Chartered Accountant using the DCF method which is a prescribed method under section 56(2)(viib) read with Rule 11UA(2)(b). Based on the said valuation report dt.15.12.2014, the assessee issued the shares to aforesaid equity investors at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reasons which are extraneous, arbitrary and unjustifiable. The Ld. Counsel further contended that it is the prerogative of assessee as to how much capital is to be raised based on its long term and short term funding requirements for the purpose of running its business. The capital has been raised by issuing certain number of shares at certain price, which is again within the domain of assessee to decide. The assessee in captioned case issued shares at premium based on the value arrived at by an independent valuer prescribed under the law (i.e. Chartered Accountant) using the prescribed methodology (DCF Methodology). He further stated that it is a well settled legal position that I.T. authorities cannot dictate the terms as to how a businessman/assessee should have conducted its business. I.T. authorities cannot decide whether assessee should have collected premium on its shares or not. It is completely the businessman s discretion, business requirement and investor s willingness which determines the premium that should be collected on issue of shares. He submitted that the provisions of section 56(2)(viib) aimed to check the menace of unaccounted money and are antiabuse provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT v Vaidya 224 ITR 186 (SC); Loka Shikshana Trust v CIT 101 ITR 234 (SC). The counsel further highlighted the subsequent statement of Hon ble Finance Minister made on 12.02.2019 wherein it was said that no action of any kind was taken against honest companies that had brought genuine money at premium; we will protect honest people . Thus, emphasizing that said provisions were never meant to be applied on genuine transactions. The ld counsel then referred CBDT circular no.10/2018 dated 31.12.2018 and CBDT Circular no.03/2019 dated 21.01.2019 wherein the position of department on interpretation of provisions of section 56(2)(viia) dealing with the transfer of shares was clarified. The CBDT while explaining the legislative intent behind introduction of provisions of section 56(2)(viia), inter-alia, stated that said provisions are anti-abuse provisions to prevent the practices of transferring shares of specified company for no or inadequate consideration. The CBDT while interpreting the aforesaid provision followed the settled law that tax statute should be interpreted strictly. The relevant extract of the latter circular were also reproduced as Keeping in view t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Para 7.2 ..In the absence of the provisions of Section 56(2)(viia) Section 56(2)(viib) of the Act it was possible for any company either closely held or otherwise to introduce unaccounted money as investment in equity share of the company with inflated share premium through a deploy as investor. However in the case of the assessee company, the investors source of investment is genuine and not in dispute. The only other lone shareholder of the assessee company is the daughter of late Mr. B.G. Raghupathy and Mrs. Sasikala Raghupathy who is the new entrant in the business of her parents with no scope of possessing undisclosed cash. From these facts, it is evident that in the case of the assessee company, there is no possibility of generation and use of unaccounted money resulting from the transaction of infusing cash by Mrs. Sasikala Raghupathy into the assessee company in the form of equity share premium. The Ld. Counsel also highlighted that pre-requisite of discharging onus under section 68 on the part of assessee is to establish identity, credit worthiness and genuineness of the transaction. The assessee in the present case has submitted the details ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AR argued that law leaves no discretion, option or mandate with the AO under explanation (i) to section 56(2)(viib) to interfere or vary the option exercised by the assessee as well as the valuation done by the prescribed expert following the prescribed valuation methodology. 11. He further submitted that cardinal principle of interpretation of fiscal statute is that they should be construed strictly and so long as the provision is free from ambiguity, there should be no need to draw any analogy. In support of his submission he relied upon the judgments in the case of CIT v Kasturi237 ITR 24 (SC); Fed of APCCI v State of AP 247 ITR 36 (SC); CIT v Trivedi 183 ITR 420; Greatway v CIT 199 ITR 391; BM Parmar v CIT 235 ITR 679; Modipon v CIT 247 ITR 40;CWT v TulsiDass 256 ITR 73; Vivek Jain v ACIT 337 ITR 74 ; Rajasthan SEB v DCIT 200 ITR 434).(CIT v Surat Cotton 202 ITR 932; Caltex Oil Refining India Ltd. v CIT 202 ITR 375; CIT v Khimji Menshi 194 ITR 192;CITvsKaimal 123 ITR 755; Malik v CIT 124 ITR 522;). 12. The counsel further to substantiate his submission about the strict interpretation of the statute, strongly relied upon the following judgments an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed and beyond the powers provided under statute. The provisions of section 56(2)(viib) read with Rule 11UA(2) nowhere give the right to assessing officer to examine the valuation report submitted by the assessee. The provisions only require the assessee to get the valuation of shares done by an expert (Chartered Accountant) using the prescribed methodology. In the present case, the assessee has obtained a valuation report from a Chartered Accountant which is based on DCF methodology. The very purpose of getting the valuation done by a Chartered Accountant is to ensure that the valuation is fair and reasonable. Such valuation is to be done by an expert of the subject matter only, which an assessing officer is not expected to be. The Rule nowhere permits the AO tinker with the valuation or methodology applied, assumptions used or to make any adjustment whatsoever. It is submitted that FMV determined in such a manner as prescribed by law is binding upon the revenue 14. On a query being put by the bench as to whether AO had done any of his own valuation, the Ld. Counsel clarified that no such attempt has been made and whole of the premium received by the assessee has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ably wrong approach or a fundamental error going to the root of the matter. iv. ITO v. SBS Properties FinvestPvt. Ltd. (ITA 278 and 2164/Del/2008) v. Dr.RenukaDatla (Mrs.) v. Solvay Pharmaceuticals B.V. and Ors. [2004] 265 ITR 435 (SC) If the valuer applied the standard methods of valuation, considered the matter from all appropriate angles without taking into account any irrelevant material or eschewing from consideration any relevant material, his valuation could not be challenged on the ground of its being vitiated by fundamental error. vi. Duncans Industries Ltd. v. State of U.P. and Ors. 2000 ECR 19 (SC) The question of valuation is basically a question of fact and this court is normally reluctant to interfere with the finding on such a question of fact if it is based on relevant material on record. 16. The Ld. Counsel submitted that CIT(A) has made unwarranted and serious allegations on the assessee without pointing any fundamental fallacy in the projections or methodology used by the assessee. These are mere bald allegations without any evidence. Further, he submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s till 2020 in accordance with the DCF valuation methodology. It was submitted that basis of projections were very scientific based on the number of movies to be released in upcoming years. Such movies were segregated in Big, Medium, Small and Micro Films, with reasonable number of movies each year viz., 1 Big Film, 2 Medium Film, and 1 or 2 small or micro film a year. Further, the estimates of projected revenue were also very reasonable and conservative keeping in view the engagement of highly successful directors like Rakesh Om Prakash Mehra (ROPM) who has given block bluster films like Bhaag Milkha Bhaag which made a box office collection of INR 164 Crores, Rang De Basanti which made a box office collection of INR 97 Crores etc and also super hit like Delhi-6 . The ld counsel took us through the comparative chart of Track records of above movies as also the projections for movies signed with ROPM to demonstrate that projections were quite reasonable and conservative. Engagement of veteran writers and music directors- Like Gulzar and Shankar Ehsaan Loy, interesting start cast, including the launch of -Anil Kapoor's son- Harshvardhan Kapoor and Shabana Azmi's niece Sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earlier back to back flop films Rangoon and Chef . 20. The counsel then summarized his argument related to the above ground by stating that nature of film industry is such that nobody can predict the success or failure of the film and how much business a film would do. Sometimes big fat movies with super star casts flop, while budget movies with no budgets and not so popular casts do wonders. The nature of business of the assessee was stated to be highly risky, full of promises and pitfalls. The nature of the risk of film business is that of either feast or famine. Neither the AO nor CIT(A) were correct in questioning of commercial wisdom/ expediency wherein the assessee s commercial wisdom of making investment of funds raised in zero percent compulsorily convertible debentures (CCDs) of group companies was questioned by stating that that assessee should have investment in some instruments which would have yield the return/profits/revenue in accordance with the projections made at time of issue of shares. The counsel argued that the AO and consequently CIT (A) failed to appreciate that these are strategic investments which are made to foray in certain business an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n support of her arguments the DR strongly relied upon the judgement of Hon ble Delhi ITAT in the case of Agro Portfolio Private Limited [(2018) 94 taxmann.com 112 (Delhi-Trib.)] wherein it was pointed out that the merchant banker who was appointed by the assessee to carry out the valuation, conducted no independent enquiry to verify the truth or otherwise the figures furnished by the assessee. The merchant bankers solely relied upon an assumed without independent verification the truthfulness accuracy and completeness of the information and the financial data provided by the company. A perusal of this long disclaimer clearly shows that the merchant banker did not do anything reflecting their expertise, except mere applying the formula to the data provided by the assessee. 22. The DR further highlighted the clause of the valuation report which contained a disclosure of limitation by the valuer wherein the valuer has stated that: The Valuation report has been prepared on the basis of the Certified Projected Financials and information provided by the management of the company. Although we have reviewed such data for consistency and reasonableness, we have not.... . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discussed the same in their orders. 2. Procedural non-compliance and best judgement order. ITAT order (para 13) notes that assessee (Agro Portfolio) did not respond to multiple notices issued by the Assessing Officer and therefore AO proceeded to apply NAV method under best judgement assessment. ITAT order notes (Para 14) that no evidence to justify projections was produced even before the CIT(A). Assessee only argued that a valuation report could not be disturbed by AO. Assessee has complied with each and every notice of the AO providing detailed explanation on each aspect. Detailed submission was filed with AO explaining the basis of projections with reference to track record of the crew, caste etc. Even reasons for deviation from actual projections were explained. All backups for projections were placed on record (both before AO and CIT(A)) While there has been no non-compliance by Assessee, it is the AO/ CIT(A) who have cursorily brushed aside the voluminous defence put forward by assessee. 3. Past Performance of Assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the appellant assessee relates to the addition of ₹ 90,95,46,200/- made by the AO, by invoking the deeming provisions of Section 56(2)(viib) by adopting fair market value of the share premium received by the Assessee Company from the investors at Nil. What has been sought to be taxed is mainly the share premium issued on equity shares which according to the AO far exceeded the FMV of the shares. Though facts have been discussed in detail in the foregoing paragraphs, however in the succinct manner, the relevant facts and background are reiterated in order to appreciate the controversy and the issue for adjudication. The assessee company was incorporated on 19th September, 2013, i.e., in the Assessment Year 2014-15, with the objective of carrying of business of production and distribution of feature film, tele films, video films, documentary films etc. During the year under consideration assessee company was in the initial phase of the setting up of the business, therefore, there was no business of film production as such. The assessee company to start its venture of its film production approached accredited ace investors of India to join in as equity partners, namely, Shri R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is for projection. Instead, AO held that assessee should have invested the share premium amount to earn some income, whereas assessee has made investment in debentures of its associate company and hence the basic substance of receiving the high premium was not justified. After invoking the provision of Section 56(2)(viib), AO took fair market value of premium at Nil and face value of ₹ 10/- per share. 27. From the perusal of the records and the impugned orders, it transpires that Assessing Officer had also issued notices u/s.133(6) to all the 3 investors to seek confirmation, information and documents pertaining to transaction of issuance of shares. In response to the said notices, Assessing Officer has received all the details and replies directly from these investors confirming the transaction. The venture agreement between the assessee and the investors were also filed before the Assessing Officer and in this regard, our attention was also drawn by the ld. counsel that the investment was to be made by these investors in various phases and transactions and it was only after they have gone by the projection and satisfied with the potentials and credentials of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port and future prospect of the company, have chosen to make investment as an equity partners in a start-up company like assessee, then can it be said that there is any kind of tax abuse tactics or laundering of any unaccounted money. It cannot be the unaccounted or black money of investors as it is their tax paid money invested, duly disclosed and confirmed by them; and nothing has been brought on record that it is unaccounted money of assessee company routed through circuitous channel or any other dubious manner through these accredited investors. If such a strict view is adopted on such investment as have been done by the Assessing Officer and by ld. CIT(A), then no investor in the country will invest in a start-up company , because investment can only be lured with the future prospects and projection of these companies. 29. Now, whether under the deeming provision such an investment received by the assessee company be brought to tax. The relevant provision of Section 56 for the sake of ready reference is reproduced hereunder: Income from other sources. 56. (1) Income of every kind which is not to be excluded from the total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2) Notwithstanding anything contained in sub-clause (b) of clause (c) of sub-rule (1), the fair market value of unquoted equity shares for the purposes of sub-clause (i) of clause (a) of Explanation to clause (viib) of sub-section (2) of section 56 shall be the value, on the valuation date. of such unquoted equity shares as determined in the following manner under clause (a) or clause (b), at the option of the assessee, namely:- (b) the fair market value of the unquoted equity shares determined by a merchant banker or an accountant as per the Discounted Free Cash Flow method. 30. Ergo, the assessee has an option to do the valuation and determine the fair market value either on DCF Method or NAV Method. The assessee being a start-up company having lot of projects in hand had adopted DCF method to value its shares. Under the DCF Method, the fair market value of the share is required to be determined either by the Merchant Banker or by the Chartered Accountant. The valuation of shares based on DCF is basically to see the future year s revenue and profits projected and then discount the same to arrive at the present value of the business. Before us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... small, 1 Micro 1 Big, 2 Medium, 3 small, 2 Micro Total revenue projected (Rs. Crores) 121.62 142.50 197.68 238.16 274.76 Average revenue per movie (Rs. crores) 24.32 28.5 32.95 34.02 34.35 31. It has been submitted that the assessee had made all the efforts to achieve these projects and in fact had received 100 films scripts out of which it had short listed its initial stage of movies. The ld. counsel has also drawn our attention on various agreements for production of these films. He also pointed out that the assessee was projected to make five movies which it had actually commenced and released and has also pointed out that assessee has worked upon with 25 movies inception. Not only that, assessee had also taken into account the cost incurr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax Department cannot sit in the armchair of businessman to decide what is profitable and how the business should be carried out. Commercial expediency has to be seen from the point of view of businessman. Here in this case if the investment has made keeping assessee s own business objective of projection of films and media entertainment, then such commercial wisdom cannot be questioned. Even the prescribed Rule 11UA (2) does not give any power to the Assessing Officer to examine or substitute his own value in place of the value determined or requires any satisfaction on the part of the Assessing Officer to tinker with such valuation. Here, in this case, Assessing Officer has not substituted any of his own method or valuation albeit has simply rejected the valuation of the assessee. 33. Section 56(2) (viib) is a deeming provision and one cannot expand the meaning of scope of any word while interpreting such deeming provision. If the statute provides that the valuation has to be done as per the prescribed method and if one of the prescribed methods has been adopted by the assessee, then Assessing Officer has to accept the same and in case he is not satisfied, then w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... information is available on the date of the valuation and a projection of future revenue that valuer may fairly make on the basis of such information. ii) Rameshwaram Strong Glass Pvt. Ltd. v. ITO [2018-TIOL- 1358-ITAT- Jaipur] 4.5.2. Before examining the fairness or reasonableness of valuation report submitted by the assessee we have to bear in mind the DCF Method and is essentially based on the projections (estimates) only and hence these projections cannot be compared with the actuals to expect the same figures as were projected. The valuer has to make forecast on the basis of some material but to estimate the exact figure is beyond its control. At the time of making a valuation for the purpose of determination of the fair market value, the past history may or may not be available in a given case and therefore, the other relevant factors may be considered. The projections are affected by various factors hence in the case of company where there is no commencement of production or of the business, does not mean that its share cannot command any premium. For such cases, the concept of start-up is a good example and as submitted the income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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