TMI Blog2020 (1) TMI 684X X X X Extracts X X X X X X X X Extracts X X X X ..... to them. Since Ld. CIT(A) has already addressed the issue of method of valuation which has to be adopted, therefore we do not intend to go into which method has to be adopted and accordingly, we notice that the department is in appeal against Ld. CIT(A) and in our considered view, Ld. CIT(A) has properly rejected the method adopted by the AO and proceeded to accept the DCF method adopted by the assessee. Therefore, we are inclined to dismiss the ground raised by the department. CIT(A) has accepted the DCF method adopted by the assessee and he analyzed the factual performance of the assessee subsequent to issue of shares. The valuation of shares are for that matter any valuation is itself is a projection of future events or activities and no doubt it has to be done with some accuracy, however no person in the world at the time of projecting events or result to project with 100% of accuracy and actual events are highly volatile and highly dependent on so many factors. Assessee has projected based on the fact that software of wallet and association of ICICI bank will increase the market share and accordingly, they have projected the figures and further the valuer has adopted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r under consideration, the assessee company has issued 10,12,14,568 shares of face value of ₹ 10/- each at a premium of ₹ 14.70 per share, accordingly received share premium of ₹ 148,78,54,000/-. During assessment proceedings, assessee was asked to furnish the working of premium and valuation report in respect of the intrinsic value of shares issued during the year under consideration. Assessee vide letter dated 24.08.2017 furnished valuation report from Ernst Young Merchant Banking Services Pvt. Ltd. dated 11.03.2015. AO observed that in the valuation report, the valuer has relied on company specific information with respect to various projections up to March 2024 and this information was provided to the Valuer by the Management of the assessee. When the AO asked assessee to furnish the information provided by the assesse to the Valuer in order to conduct the valuation and it was provided to the AO and AO came to the conclusion that valuer has not independently valued the prospects of the assessee company and has merely relied on information supplied by the assessee. Further, he observed that the valuer has recorded the following sentences in the valuation repo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent, we wish to highlight that the above clAOse is a standard clAOse used in all valuation reports and there is nothing unusual or atypical about it. Further, it may be appreciated that a valuer is required to rely on the information provided by the Company in terms of its historical data and projections and is not required to verify the AOthenticity of the data, unlike an AOditor who is required to examine and verity the details in an AOdit process. For determining the fair value of shares as per the Discounting Cash Flow ('DGF7 method, a valuer, basis the future projections of earnings provided by a company, is required to compare it to general industry/economy trends and associated risks and accordingly, arrive at a discounting factor that needs to be applied to future net cash flows. The valuer is not required to verify the AOthenticity of the historical and future projections of the company submitted but undertake a scientific exercise of determining the correct 'discounting factor' which indicates the minimum return from the asset being valued had the investor invested in the next best alternative. Please refer to pages 21 to 23 of the Valuation Report which provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly available information - Proprietary data bases subscribed to by EY In addition to the above, we have also obtained such other information and explanations from the Management as were considered relevant for the purpose of the valuation. - It may be mentioned that the Management has been provided opportunity to review factual information in our report as part of our standard practice to make sure that factual inaccuracies/omissions/etc, are avoided in our final report In addition, we wish to draw your attention to page 11 of the valuation report, which contains the 'Statement of Limiting Conditions wherein it has been clearly stated that as part of valuation, no AOdit function has been undertaken. For your ease of reference relevant clAOses are reproduced below: Provision of valuation opinions and consideration of the issues described herein are areas of our regular valuation practice. The services do not represent accounting, assurance, accounting/tax due diligence, consulting or tax related services that may be provided by us or our affiliates. The valuation has relied on the unAOdited accounts of the Company dated 31 January 2015. In accorda ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... based payment instruments like mobile wallets, linked cards, etc. to customers for enabling payments through mobile phones in a convenient and secure manner. VMPL has built a Mobile Wallet, which is a virtual wallet residing on a customer's mobile phone containing virtual money under the brand name of M-Pesa. By using M-Pesa, the customers can make c-commerce or mobile commerce transactions ie, buy products/ avail services at defined outlets registered with VMPL, deposit and withdraw cash, transfer money to mobile phone or bank account, etc., thereby, reducing the need to carry cash. Thus, the operating revenues of VMPL principally comprise of wallet revenues on account of transactions carried out by M-Pesa subscribers (ie. online bill payments, money transfers etc) and commission receivable as a business correspondent. The above services were started in India couple of years back and VMPL with couple of other operators are the pioneer who started such services in India. Further, these services/facilities is still at nascent stage and are likely to grow exponentially with the growth of economy and as and when Indian customers start using such services/facilities on a lar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... representing provisions made for meeting liabilities, other than ascertained liabilities; (vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares; PE = total amount of paid up equity share capital as shown in the balance-sheet, PV = the paid up value of such equity shares; or (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. From the perusal of the above rule, it is apparent that the valuation can be computed by the aforementioned two method i.e., either by the methodology prescribed under clAOse (a) or Discounted Free Cash Flow ('DCF9 Method [clAOse (b)] at the option of assesse. Thus, DCF method is accepted method of computing the fair value of unquoted shares as per the prescribed Rules. In the instant case, the valuation report has been obtained by VMPL for the purpose of filing with the Reserve Bank of India/AOthorized dealer for complying with FEMA regulations. Since VIL (the holding company of VMPL), is a subsidiary of a non-resident company, any infusion of capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtaken any independent enquiry with respect to the claim made by the assessee for the purpose of valuation. Further AO observed that M-pesa business was bought by the assessee company from Mobile Commerce Solutions Ltd. (another group company) w.e.f. 7.11.2014 and the projected actual figures of sales for F.Y. 2015, 2016 2017 is as under: A. Y Net sales Projected (Amt in millions) Net sales Actual (Amt in millions) 2015-16 290.5 128.70 2016-17 801.8 520 2017-18 1661.40 837.80 7. From the above statistics, AO observed that the projections made by the assessee are nowhere near to the actual state of affairs and he came to the conclusion that the management has provided the valuer the figures in projections as are suitable to their own requirement of charging premium on shares and further observed that the predictions/forecast made by the assessee are not based on any scientific calculatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s provided by the management which is in the best position to provide such data. If the whole exercise of verification of data and the future projections is to be done by the valuation team, it will be very time consuming and will turn out to be costly. There will always be some element of subjectivity in the forecast data provided by the management and the actual results will always differ from the forecasts. This is more so in the cases like that of the appellant where the business is new and the results are unpredictable. It is the general experience that in the same line of business some companies do extraordinarily well and others fail because their marketing strategy was not good or their competitors were better. If we accept the reasons given by the AO, no new company or company with a new idea would ever be able to choose DCF method for determination of fair market value of its shares because there would be insufficient or no background data and projections would always be questionable. Clearly, this is not the intention of the legislature or else they would have prescribed that only companies with certain years of business behind them would be allowed to use DCF ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant at 40% of the projected value of ₹ 1158 mn i.e. at ₹ 463.2 mn. Therefore, equity value of the enterprise would be ₹ 558.5 million (as per the working given by the EYMBSPL in the report) and value per equity share would work out to ₹ 11.17 per share. The appellant has received consideration at the rate of ₹ 24.7 per equity share. Accordingly, the excess amount charged per equity share is ₹ 13.53. Total number of equity shares issued at premium are 10, 12,14,568. Accordingly, the amount taxable tinder section 56(2)(viib,) works out to ₹ 136,94,33,1051-. The AO is directed to restrict the addition to this amount. This ground of appeal is, accordingly, partly allowed. 9. Aggrieved with the above order, assessee preferred the appeal before us with the following grounds:- GROUNDS OF APPEAL The Appellant respectfully submits that: On the facts and circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) -14 ['CIT(A)], Mumbai has erred in partly confirming the additions made by the Deputy Commissioner of Income Tax, Circle 8(3)(2), Mumbai ('A 09 in the assessment order passed under se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here shares were issued to the parent company in compliance with the Reserve Bank of India ('RBI') regulations. 2.3. On the facts and in the circumstances of the case and in law, while the learned CIT(A) has correctly observed that there will always be some element of subjectivity in the forecast data provided by the management and actual results will always differ from the forecasts , he has erred in completely disregarding his own observation and computing an ad hoc enterprise value of the Appellant basis a random comparison of projected net sales and actual net sales. 2.4. On the facts and in circumstances of the case and in law, the learned CIT(A) has erred in disregarding the valuation report issued by Category -1 Merchant Banker without providing any rationale basis for the same. 2.5. Without prejudice to ground 3.4 above, on the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in recomputing the enterprise value of the Appellant at INR 463.2 million, by applying an ad hoc percentage (ie, 40%) to the enterprise value of INR 1,158 million computed by a Category -I Merchant banker without providing cogent reasons. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lue the fair market value of the shares based on net assets value rejecting the DCF method adopted by the valuer. However, he brought to our notice the order of Ld. CIT(A) in which Ld. CIT(A) has accepted that as per rule 11UA, assessee has two options available to it, as per which, DCF valuation is one of the method prescribed in the above said rule. However, Ld. CIT(A) after accepting the valuation report proceeded to compare the projections adopted by the valuer with the actual results or actual performance of the company in the subsequent years and arbitrarily he holds that the business is growing at 40% and hence the enterprise value of the assessee should also be taken up what the merchant banker has determined. In the result, he determined the share value at ₹ 11.17 per share and the excess of the amount received by the assessee was treated as addition u/s 56(2)(viib) of the Act. 12. Ld. AR strongly objected to the findings of Ld. CIT(A) and submitted that actual results cannot be replaced for the valuation of shares when the shares were actually issued. In this regard, he brought to our notice grounds of appeal raised by the assessee. He further submitted that asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would be an issue which would be subject matter of consideration in the appeal and would be appropriately dealt with by him in appeal. Further, it is the petitioner's contention that the assessment order is without jurisdiction as it has ignored the DCF method to arrive at fair market value of its shares, it would be open to the petitioners to file an application for stay of the order dated 21 December 2017 passed by the Assessing Officer to the CIT(A) in its pending Appeal. In the above circumstances, there would be a stay of the order dated 21't December 2017 to the extent of the demand raised for a period of 4 weeks from today. In case, the petitioner files a stay application to the GIT (A) within a period of 4 weeks from today, the demand of ₹ 62.38 crores arising consequent to the impugned order dated 21 December, 2017 is stayed till the stay application is disposed of and for a further period of 2 weeks thereafter. 11. It is made clear that, the above direction will not inhibit CIT(A) to dispose off the entire Appeal alongwith the stay application after notice to the parties. This is so as the controversy appears within a narrow compass. 14. He further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;ble Delhi High Court in the case of CIT vrs. Jansampark Advertising Marketing Pvt. Ltd. (2015), wherein it was held as under:- Section 68 of the Income-tax Act, 1961 - Cash credits (Burden of proof) -Assessment year 2004-05 - Whether when Assessing Officer sets about seeking explanation for unaccounted credit entries in books of account of assessee in terms of section 68, it is legitimately expected that exercise would be taken to logical end, in all fairness taking into account material submitted by assessee in support of his assertion that person making payment is real, and not non-existent, and that such other person was actually source of money forming subject matter of transaction and that transaction is real and genuine - Held, yes - Whether however as two appellate Authorities, viz., Commissioner (Appeals) and Tribunal, are also forums for fact-finding, in event of Assessing Officer failing to discharge his functions properly, obligation to conduct proper inquiry on facts would naturally shift to door of said appellate Authorities and they having noticed want of proper inquiry, cannot close chapter simply by allowing appeal and deleting additions made - Held, yes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the world at the time of projecting events or result to project with 100% of accuracy and actual events are highly volatile and highly dependent on so many factors. Assessee has projected based on the fact that software of wallet and association of ICICI bank will increase the market share and accordingly, they have projected the figures and further the valuer has adopted the projection figures provided by the assessee and it is left to the wisdom of valuer to accept or reject or to carry out independent investigation raised with the valuer and legislature in more than one place depends on the skills of the professionals like merchant banker only to value the valuation of shares or other volatile securities. Since, Ld. CIT(A) has compared the factuals with projections and assessee has achieved 40% of the actual results is too harsh to the assessee and the valuation is done in order to carry out certain activities by the management. In this case, the valuation was used to issue of rights shares. The AO or Ld. CIT(A) is trying to evaluate the accuracy of the valuation at the time of assessment, this is not proper and also the factuals are based on so many factors subsequent to adop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. Shri Rakesh Jhunjhunwala 24.03.2015 19,207 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/- 26. The assessee before issuing the shares had got the share valued by Chartered Accountant, i.e., 'Accountant' as provided under Rule 11UA(2) by using the 'DCF Method' which is one of the prescribed method in Rule HUA(2)(b) r.w.s. 56(2)(viib). Based on the said valuation report dated 15.12.2014, the assessee company had issued the shares to the aforesaid equity partners on premium. The Ld. Assessing Officer has discarded the valuation report of the CA mainly on the ground that valuation of the equity shares carried out by the assessee was based on projection of revenue which did not match with the actual reyenues of the subsequent year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and submitted that such a provision cannot be invoked on a normal business transaction of issuance of shares unless it has been demonstrated by the Revenue authorities that the entire motive for such issuance of shares on higher premium was for the tax abuse with the objective of tax evasion by laundering its own unaccounted money. His main contention was that, being a deeming fiction, it has to be strictly interpreted and there is no mandate to the Assessing Officer to arbitrarily reject the valuation done by the assessee on his own surmises and whims. We are in tandem with such a reasoning of the Id. Counsel, because the deeming fiction not only has to be applied strictly but also have to be seen in the context in which such deeming provisions are triggered. It is a trite law well settled by the Constitutional Bench of Supreme Court, in the case of Dilip Kumar Sons (supra) that in the matter of charging section of a taxing statute, strict rule of interpretation is mandatory, and if there are two views possible in the matter of interpretation, then the construction most beneficial to the assessee should be adopted. Viewed from such principle, here is a case where the shares have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost 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 - (Bombay HC)] 48.6 Thirdly, it is a well settled position of law with regard to the valuation, that valuation is not an exact science and can never be done with arithmetic precision. The attempt on the part of SEBI to challenge the valuation which is bu its very nature based on projections by applying what is essentially a hindsight view that the performance did not match the projectio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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