TMI Blog2022 (10) TMI 1109X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee in A.Y.2012-13 i.e. the earlier year. We find that assessee had duly explained the rationale behind making investment in the shares of Pyxis Systems Pvt. Ltd., at a premium, based on the advice given by certain parties and after analysing the various reports that are made available to her by her advisors and had also taken cognizance of the strength of the promoters of the said company and their capabilities. The assessee had also furnished the proper reasons for exiting out of her investment from the said company. None of these explanations furnished by the assessee were found to be false by the Revenue. Hence, it was only the failed investment deal of an assessee being a private equity investor, which had resulted in incurrence of loss for the assessee which is claimed as a long term capital loss by the assessee. There is absolutely no basis for the ld. AO to arrive at the revised book value per share at Rs.2.69 per share based on the financials as on 31/03/2011 of Pyxis Systems Pvt. Ltd., and concluding that the said rate should be the fair market value which the assessee ought to have paid for the purpose of making investment in shares. If this is to be accepted then ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.2,68,26,678/- on sale of shares of Pyxis Systems Pvt. Ltd., The ld. AO sought to examine the veracity of these losses and sought to verify the details of purchase as well as sales of these shares during the course of assessment proceedings. The assessee submitted on 11/10/2011 02/12/2011 that she had invested in 1944599 shares of Pyxis Systems Pvt. Ltd., at a cost of Rs.2,99,46,827/- on the basis of negotiated price as advised by her advisor to whom an advisory fee of Rs.10,09,451/- was paid. These shares were acquired by the assessee at a premium of Rs. 14.40 per share for the face value of Rs.1/- per share. It was submitted by the assessee, that being a private equity investor, she had been making investments in various start-up companies based on advices given by various people including her own advisors. Since this start-up company (i.e. Pyxis Systems Pvt Ltd) could not improve its performance after the investments made by the assessee, the assessee on 26/02/2013 sold these 1944599 shares at Rs.0.014 per share for consideration of Rs.27,224/- to Mr. Nandlal Bhatkar who is a promoter shareholder and Director of Pyxis Systems Pvt. Ltd. The assessee furnished the share valua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unction it treasuries, banks and corporates), InoPot (IT platform for pricing and mark-to-market for equities and forex) and EMS (Exposure Management System) The appellant invested based on the performance at the time of purchase and the expected performance / profitability over the years on the basis of the business plan. In FY 2010-11, the total revenue of the company was Rs. 8.68 Crores with loss of Rs. 3.44 Crores. Valuation of companies in early growth stage is an art and a science as most companies are loss making but command premium valuations based on its future growth potential. Companies like Snapdeal Flipkart has grown 680% and 531% respectively, in 2015 from 2014, while Ola's valuation rose 109% during the same period and are valued at 2x to 20x one year forward revenue despite incurring huge operating losses. These companies have been raising subsequent rounds of funding at substantially higher valuations despite their financials continuing to remain negative. 3.2. The assessee also submitted the investment at the time of purchase as under:- The assessee rolled upon the advisory services of its investment manager Lumis Consulting Private Limit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cutive Officer af Tata Asset Management Limited, also served as its Associate Director, Managing Partner at CAPM Consulting, Managing Director of Global Financial Markets at Bank of America, Treasurer at ANZ Grindleys, Head of Retail Banking at HSBC India, Associate in the firm's debt capital markets team and had also served as the Treasurer, Manager of Foreign Exchange at Grindlays Bank plc.Mr. Sethi earned an M.B.A. in Finance from INSEAD and an M.A. and a B.A. (Honors) degree in Philosophy, Political Science, and Economics from the Oxford University. 2. Janak Desai Janak Desai is the Country Head of Wholesale Banking. Previously head of Financial Markets, Mr Desal is now responsible for the overall Wholesale Banking platform including Corporate and Investment Banking, Emerging Corporates, Wholesale Banking Products, Banks and Financial Institutions, and the Financial Markets business. Desal joined ING Vysya Bank from IDBI Bank where he was Country Head of Treasury from January 2001. 3. Girish Kulkarni: An, alumnus of IIT (Bombay) and IIM (Ahmedabad), Girish has held several senior positions in different companies before starting his own Fund Management Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stors, considering the financial position of the company and need of the hour, the investors including the appellant (based on the advice of its Investment Manager-Internal note dated 05.02.2013 enclosed along with other marquee investors like Janak Desai, Arvind Sethi Girish Kulkarni agreed to sell their stake to Mr. Nandlal Bhatkar at NAV (Rs. 0.014/ Share) to facilitate this transaction. 3.4. Accordingly, it was submitted that assessee had proper rationale and justification for making investments in the shares of Pyxis Systems Pvt. Ltd., at Rs.15.40 per share considering the future potential of the said company. However, based on the macro factors and global turmoil experienced post 2012 which affected the start up companies like Pyxis Systems Pvt. Ltd., the said company was unable to achieve its target orders which lead to double reduction in its revenue. Under these special circumstances, the assessee had to sell its investment at a market price of Rs.0.014 per share only to the promoters as there were no buyers for the same. The assessee and the promoters of Pyxis Systems Pvt. Ltd., were not related in any manner whatsoever and hence, these transactions could not be con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es has been made by the assessee out of disclosed sources and there is absolutely no element of any undisclosed income thereon. Now, the primary question that needs to be addressed in this regard is as to whether the Revenue could at all disturb the purchase price of acquisition of shares within the mandate provided in the Act. In our considered opinion, the answer is an emphatic no in as much as there is no provision in the Act warranting to disturb the purchase price of shares by the assessee. What is required to be seen is whether the assessee had sufficient sources for making such investment in shares. As stated earlier, there is absolutely no dispute that payments for acquisition of shares at Rs.15.40 per share had been duly met out of disclosed sources of the assessee. Moreover, it is also pertinent to note that the said investment had been made by the assessee in A.Y.2012-13 i.e. the earlier year. We find that assessee had duly explained the rationale behind making investment in the shares of Pyxis Systems Pvt. Ltd., at a premium, based on the advice given by certain parties and after analysing the various reports that are made available to her by her advisors and had also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wished to divest its shareholding in Shriram Auto Components (Madras) Limited (name changed to Rambal Limited) and Shripet Cybertech Systems Limited. The shareholding of the assessee in the aforesaid two companies was valued at the figure of Rs. 1/- per share and the sale resulted in a capital loss of an amount of Rs. 3.98 crores (Rs. 2.88 + 1.10 crores). 5. During the course of assessment, the Assessing Authority raised a query on the allowance of capital loss on the sale of shares, specifically on the valuation adopted. The justification provided by the assessee in respect thereof reads thus:- The company is a manufacturer of Automobile components. We had acquired 10 lakhs shares in this company at a cost of Rs. 100 lakhs in the year ended 30.03.99. The company had been incurring losses every year and had not declared any dividend since its inception in 1996. The accumulated debit balance in Profit Loss Account as on 31.03.04 amounted to Rs. 594 lakhs against the share capital of Rs. 1288 lakhs. There was no return for us from the investment in the company. Further, due to the guidelines of Reserve Bank of India, we a Non Banking Financial Company had to concentrate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dopted by the assessee, he had not offered or arrived at any other alternative. The order of the CIT (A) was assailed before the Income Tax Appellate Tribunal, (in short, 'ITAT), which by order dated 26.03.2010 confirmed the same, reiterating the findings of the CIT (A) to the effect that the valuation was in order. The Tribunal particularly notes that though a suspicion had been raised by the Assessing Officer regarding the valuation of the shares, nothing was placed on record to substantiate such suspicion or provide a more acceptable alternative. It is, in this background, that the Revenue is now before this Court. 8. We are of the view that the Assessee had provided an acceptable justification for both transactions of sale of shares including the aspect of valuation of the shares. The Assessing Authority, while accepting the genuineness of the transactions, merely raises a vague suspicion relating to the valuation adopted by the assessee. This, by itself, is insufficient to reject the claim of capital loss. While the Assessing Officer is certainly entitled to question the valuation, he ought to have produced some materials to either disprove the justification offered b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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