TMI Blog2022 (10) TMI 217X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted the working of cash flow statement for F.Y 2014-15 to 2018-19 and the AO has not made adverse comments that the cash flow statements are false and not in accordance with the accounting principles. The cash flow statements are estimates of business and also it is not the case of the revenue that future results of the assessee is wayward compared to the projections. At this stage, there is no point in referring back to the old track record and to examine the future projections of the company. There cannot be a direct relation of assets base of the assessee company with financial future cash flows from business operations as the assessee is engaged in the business of trading in shares and derivatives transactions. The projected future financials are prepared by the management persons, who understands the business operations and the duty of the valuer is to perform due diligence of such estimates and apply the relevant criteria based on the business of the assessee. Therefore we are of the considered view that the rejection of valuation of shares as per the DCF method is also without any evidence on record. Accordingly, we set aside the order of the CIT(A) and direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. The assessee has filed the working of discounted free cash flow statement for the F.Y 2014-15 to 2018-19. Whereas the A.O on perusal of the valuation report observed that the assessee has not furnished the basis / working of the projected figures of the free cash flow of the company for the above financial years. The AO further called for the information and the basis of issue of shares and working of discounted free cash flow (DCF). The assessee has submitted the details vide letter dated 11.12.2017 mentioning that the certificate as per DCF method has been issued considering the future business and profitability of the company and the company has done the good business in the succeeding years but the profitability remains low and the copy of the profit and loss account for the F.Y 2016-17 was also filed. Whereas the AO on perusal of the facts and the information submitted was not satisfied with the explanations and is of the opinion that the assessee company does not have strong financial or commercial strength nor any track record to support the premium charged against the shares and no fixed assets have been part of the company assets which support the charging of the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provisions of Sec. 56(2)(viib) of the Act and accordingly uphold the addition made by the AO and dismissed the assessee appeal. Aggrieved by the CIT(A) order, the assessee has filed an appeal before the Hon ble Tribunal. 6. At the time of hearing, the Ld. AR submitted that the CIT(A) has not upheld the addition u/s 68 of the Act but u/s 56(2)(viib) of the Act that shows that there is no doubt on the investors as well as genuineness of the transaction and the shares were issued at a premium considering the fair market value(FMV) and the Ld. AR substantiated the submissions with the judicial decisions and factual paper book covering the various submissions in respect of the transactions and prayed for allowing the appeal. Contra, the Ld.DR supported the order of the CIT(A) and submitted that the CIT(A) has rightly considered the addition u/s 56(2)(viib) of the Act. 7. We heard the rival submissions and perused the material on record. The Ld. AR submissions are that the CIT(A) has erred in substantiating the addition u/s 56(2)(viib) of the Act which is not a matter of facts/addition before the AO and whereas the AO has made the addition u/s 68 of the Act. The contentions of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of shares of face value of Rs. 10 each at a premium of Rs. 490 per share It had credited said amount in balance-sheet under head share premium account It claimed that share premium was a capital receipt not exigible to tax Assessing Officer had taxed share premium under section 56(1) as assessee's income from other sources Whether since expenditure and receipts directly relating to share capital of a company are of capital in nature, share premium collected by assessee could not be taxed under section 56(1) as income from other sources - Held, yes Whether since entire transaction relating to allotment of shares had been done through banking channel and assessee had invested share premium in its three subsidiary companies, provisions of section 68 as suggested by revenue had also not applicable to instant case - Held, yes [Paras 10.3, 11.28 12] [In favour of assessee] II. Section 37(1), read with section 32, of the Income-tax Act, 1961 Business - expenditure - Allowability of [Commencement of business] - Assessment year 2009-10 Assessing Officer had disallowed expenses claimed by assessee and also depreciation on ground that assessee had not commenced its business duri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing sufficient authorized share capital to issue shares to investor Whether under Income-tax Act, there is no requirement for increasing share capital for allotment of shares and since Assessing Officer had not carried out any inquiry except recording fact that there no authorized share capital and, hence, concluded that entire transactions genuine, no additions could be made under section 68 - Held, yes [Paras 11 and 12) in favour of assessee] II. Section 68, read with section 56, of the Income-tax Act, 1961 - Cash (Sub-section (viib)) - Assessment year 2011-12 Whether amendment in section 56(2)(viib) inserted vide Finance Act, 2013 with effect from 1-4-2013 is prospective in nature and could not be applied in assessment year 2011-12 for making addition under section 68 - Held, yes - Assessee-company received share application money from several investors - Assessing Officer noted that assessee had charged share premium at Rs. 990 per share from investors whereas under rule 11UA fair market value of share of assessee was worked out to Rs. 37.87 per share as on 31-3-2010 and Rs. 166.54 per share as on 31-32011 - Accordingly, relying on amended provision of section 56(2)(viib) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r sources Chargeable as (Share premium) - Assessment year 2015-16 Whether assessee has an option to do valuation of shares and determine fair market value either on DCF Method or NAV method and Assessing Officer cannot examine or substitute his own value in place of value determined Held, yes Whether Income Tax Department cannot sit in armchair of businessman to decide what is profitable and how business should be carried out; Commercial expediency has to be seen from point of view of businessman Held, yes Assessee-company was engaged in business of production and distribution of feature film In initial phase of setting up its business, it had approached accredited investors to join in as equity partners and raised funds by issuing shares to said investors Shares were issued at premium based on valuation from prescribed expert i.e. Chartered Accountant using DCF method which was a prescribed method under section 56(2)(viib) read with rule 11UA(2)(b) and assessee invested said fund in compulsorily convertible debenture of associate companies - Assessing Officer disregarded valuation report of CA mainly on ground that valuation of equity shares was based on projection of revenue whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeals) were trying to evaluate accuracy of valuation at time of assessment, and this was not proper and also factual results of company were based on so many factors subsequent to adoption of projection and valuation and, thus, finding of Assessing Officer and Commissioner (Appeals) could not be upheld Held, yes [Paras 18 to 20] [In favour of assessee] (v) ITO Vs. Singhal General Traders (P.) Ltd, [2020] 115 taxmann.com 119 (Mumbai - Trib). 1. Section 68 of the Income-tax Act, 1961 Cash credit (Share premium) - Assessment year 2012-13 Assessee-company issued shares of face value of Rs. 10 at a very high premium of Rs. 190 per share - Assessing Officer had no doubt about genuineness of source of funds of share applicant and he accepted identity and creditworthiness of share applicants - Still he had drawn adverse inference merely on ground that assessee company's performance did not justify high value of share premium - Whether additions so made under section 68 for undisclosed income were unjustified - Held, yes [Para 15] [In favour of assessee] II. Section 56 of the Income-tax Act, 1961 - Income from other sources - Chargeable as (Share premium) - Assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A) has dealt on the provisions, judicial decisions and various factual aspects. At this juncture, we consider it appropriate to refer to the findings of the CIT(A) who has considered the valuation basis page 4 Para 2.5.6 to 2.5.9 of the order read as under 2.5.6 In the case of Innoviti Payment Solutions Private Limited, Hon'ble Bangalore Tribunal addressed the issue on the application of DCF methodology and the powers of the AO to inquire into it. In the said case, the assessee could not conclusively establish that the projections used for DCF valuation were prepared scientifically. The Tribunal referred to the Technical Guide on share valuation by a research committee of the ICAI, wherein it was stated that the DCF value is good as the assumptions used in developing the projections, and these projections should consider various factors affecting the business. The Tribunal held that if the assessee has opted for the DCF method, the AO cannot discard it and adopt another method; however, the AO is well within his rights to examine the methodology adopted by the assessee and the underlying assumptions and if he is not satisfied, he can challenge the same and suggest necessary ..... X X X X Extracts X X X X X X X X Extracts X X X X
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