TMI Blog2022 (11) TMI 610X X X X Extracts X X X X X X X X Extracts X X X X ..... ly valued about Rs. 367.96 crores. The assessee has also justified cash flows with the help of MoU with M/s. Prestige Estates Projects Pvt. Ltd. Therefore, we are of the considered view that there is no error or lacuna in the method followed by the assessee for determination of value of shares. AO without appreciating above facts has simply made additions towards share premium on flimsy grounds by assigning grounds which are not relevant to consider share premium for the purpose of provisions of section 56(2)(viib) - CIT(A) after considering relevant facts has rightly deleted additions made by the AO and thus, we are inclined to uphold findings of the learned CIT(A) and dismiss appeal filed by the Revenue. - I.T.A. No. 1491/Chny/2019 - - - Dated:- 12-10-2022 - SHRI V. DURGA RAO, JUDICIAL MEMBER AND SHRI G. MANJUNATHA, ACCOUNTANT MEMBER Appellant by : Mr. AR V Sreenivasan, Addl.CIT for Mr. V.Vikekananthan, CIT Respondent by : Mr. G.Seetharaman, C.A. Mr.S.Sundararaman, C.A ORDER Per G. Manjunatha, AM This appeal filed by the Revenue is directed against the order of the learned Commissioner of Income Tax (Appeals)-8, Chennai dated 31.01.2019 and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... already been withdrawn by the 3 partners. 5.2 The Ld. CIT(A) failed to notice that the valuation adopted by the assessee is unrealistic and no weightage has been given to an reason assigned for non consideration of past or future performance of the company for the valuation. 6. For these and other grounds. that may be adduced at the time hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer restored. 3. Brief facts of the case are that the assessee company is engaged in the business of developing, leasing of service apartments, hotels, guest houses, health clubs and other hospitality services, filed its return of income for the assessment year 2015-16 on 23.09.2015 admitting Nil total income. The assessee company is subsidiary of M/s. Estra Enterprises P. Ltd. in which Mr. Gurubinder Pal Singh, Mr. Harinder Singh and Mr. Haribinder Singh are key management personnel. During the financial year relevant to the assessment year 2015-16, the assessee company has increased authorized share capital from Rs. 1 lakh to Rs. 1,01,00,000/-. Further, the assessee company has allotted 10 lakh equity shares of face value of R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e development and aggregation of land and has aggregated land bank of about more than 50 acres near Perumbakkam, Chennai, which is adjacent to IT Corridor of OMR, Chennai. The assessee had also entered into MoU with M/s. Prestige Estates Projects Ltd. for development of land out of land owned by the partnership firm and if you consider possible revenue generation from the project, cash flow projections considered by the assessee for valuation of shares under DCF method is much below intrinsic value of share capital held by the assessee in partnership firm. Therefore, submitted that allotment of equity shares with premium is in accordance with law and also justified with the help of valuation report issued by independent valuer. 5. The Assessing Officer however, was not convinced with the explanation furnished by the assessee and according to the Assessing Officer, method followed by the assessee for valuation of shares is not supported by financials of the company. The Assessing Officer further held that DCF method may be good method for determination of intrinsic value of shares in a case where enterprises is involved in business activity and generating day to day revenue fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... land held by the partnership firm is marsh land. But, fact remains that partnership firm has already entered into MoU with famous builder for development of land. If you consider possible revenue generation from the project, valuation arrived at by the assessee for allotment of shares is much below value of shares held by the assessee in partnership firm. 7. The learned CIT(A), after considering relevant submissions of the assessee and also taken note of various facts opined that the Assessing Officer has erred in making additions towards share premium received by the assessee u/s. 56(2)(viib) of the Income Tax Act, 1961, without appreciating fact that the assessee company has justified allotment of shares with premium at Rs. 1676/- per share along with independent valuer report, where the independent valuer has determined value of shares held by the assessee in partnership firm, which is much more than the amount of capital contributed by the assessee in the partnership firm. The learned CIT(A) has discussed the issue at length in light of financials of M/s. Grande LLP, a partnership firm and land bank held by the partnership firm. M/s. Grande LLP has acquired total land bank o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2014 as per net assets value. This has been submitted by the assessee company as under: 12. As above, it is seen that M/s. Grande LLP has a net asset value of Rs. 168.31 crores as on 31.03.2014 as per financials filed. The net asset value of M/s. Grande LLP would assume character of intrinsic value of shares of M/s. Kaino Infra Development P. Ltd To this extent, even as per net asset value method, the assessee company is able to establish value of Rs. 168 crores as on 31.3.2014 itself. The assessee company has further claimed appreciation in the value of land as well as enhancement in the value of land on account of aggregation and consolidation. The assessee company has further justified the revenues as per a discounted cash flow method basis claiming development of the land acquired into residential housing project. The assessee company has claimed to received 17,43,903/- sq.ft of saleable residential space. This saleable space is multiplied by a value of Rs. 5000/- per sq.ft to arrive at total consideration received at Rs. 872 crores. After allowing for cost of construction and other expenses, the assessee claims an enterprise value of Rs. 423.79 crores as per DCF met ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ree cash flows of partnership firm and land bank held by LLP, without appreciating fact that said land is marsh land which is not suitable for any kind of development activity. Further, the assessee could not justify free cash flows considered under DCF method to arrive at share price of Rs. 1676/- per share. The Assessing Officer has given various reasons to come to a conclusion that share premium received by the assessee is nothing but income of the assessee. However, the learned CIT(A) without appreciating facts has simply deleted additions made by the Assessing Officer. 9. The learned A.R. for the assessee, on the other hand, supporting order of the learned CIT(A) submitted that the assessee company has justified allotment of equity shares with premium of Rs. 1676/- per share with the help of DCF method of share valuation. Further, the assessee has also justified share premium received for allotment of shares with the help of asset value of shares held by the company in M/.s Grande LLP, which is evident from fact that LLP is already aggregated more than 36 acres of land in prime location of Chennai. Further, partnership firm is also in the process of buying additional 30 acr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of share premium has been diverted to sister concern, where the Director of the assessee company are common partners. The Assessing Officer further observed that DCF method followed by the assessee is having lacuna, because the assessee is dependent upon free cash flows of partnership firm, where it is having 99.97% capital contribution. Its free cash flow is solely depend upon cash flow of partnership firm. The assessee does not have any say in business activity of partnership firm and its cash flow. Therefore, valuation of shares on the basis of free cash flow of third party is not suitable to determine correct value of shares for the purpose of provisions of section 56(2)(viib) of the Income Tax Act, 1961. The Assessing Officer had given various reasons to doubt share premium collected by the assessee for allotment of equity shares, right from diversion of funds to sister concern, drawing of said funds from partnership firm by three partners for their personal purposes. According to the Assessing Officer, the assessee has devised a tool to take out money from company through multiple layers of transactions and ultimately amount has been transferred to Director's account. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hod as prescribed under Rule 11UA for valuation of shares and such valuation has been arrived at on the basis of future earning capacity of the company as per which, value of shares has been worked out at Rs. 1,676/- per share. The assessee justifies value of shares arrived at by DCF method on the basis of assets owned by the company including stock in trade being immovable property and value of such asset as on the date of valuation. Accordingly, the assessee has worked out Rs. 1676/- per share which is almost equal to value arrived at under DCF method. The Assessing Officer has rejected DFC method selected by the assessee and adopted net asset value method and for this purpose, the Assessing Officer has taken book value of asset as on the date of value of shares and worked out difference of Rs. 1676/- per equity shares. According to the Assessing Officer, the method selected by the assessee is not a correct method in the given facts and circumstances of the case, because DCF method is suitable only if companies which are in total control of the business being in a position to project income on the basis of asset and intangibles. Since, the assessee is not carrying any intangibles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the decision of Hon'ble Bombay High Court in the case of Vodafone Mpesa Ltd., vs. PCIT, (2018) (256 Taxman 240), where the Hon'ble Court held that Assessing Officer cannot change the method adopted by the assessee for valuing market value of shares from DCF to net asset value method. The ITAT., Mumbai Benches in the case of Karmic Labs Pvt. Ltd. vs. ITO in ITA No. 3955/Mum/2018 has taken similar view and held that Assessing Officer has no power to change the method adopted by the assessee from one method to another method provided under Rule 11UA. In our considered view fair market value of shares considered by the assessee under DCF method is one of the accepted method of valuation of shares under Rule 11UA and such value of shares is supported by necessary supporting evidences including valuation report as on the date of issue of shares. The value adopted by the Assessing Officer under net asset value method, even though a prescribed method does not give correct value of shares in the given facts and circumstances of the case, because amended provisions of Rule 11UA by the Finance Act, 2017 w.e.f 01.04.2018 has permitted valuation of immovable property as per guidance ..... X X X X Extracts X X X X X X X X Extracts X X X X
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