TMI Blog2023 (3) TMI 769X X X X Extracts X X X X X X X X Extracts X X X X ..... quantification of FMV so determined by DCF method and observed that the FMV determined as per DCF method is without any sound factual basis and the projected figures of the ensuing years widely vary with the actual figures reported and presently available at the time of assessment for Financial Years 2016-17 and 2017-18. The assessee company in the instant case has proceeded to issue equity shares at a premium to none other than its wholly owned holding company and that too on the basis of independent valuer report where FMV was determined as per DCF method which is one of the prescribed method for determination of valuation under Rule 11UA r.w. Section 56(2)(viib) - AO has disputed the DCF method on account of variation in the projected figures used by the valuer with the actual figures available subsequently at the time of assessment. The Assessing Officer discarded the FMV method as per DCF method and replaced the same with the NAV method which action runs totally contrary to the ratio laid down in Cinestaan Entertainment [ 2021 (3) TMI 239 - DELHI HIGH COURT] wherein the additions made under the deeming provisions of Section 56(2)(viib) made by the Assessing Officer were r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer has rightly applied NAV methodology for determining the FMV of equity shares. 3. Briefly stated, the assessee-company is engaged in the business of financing including financing against warehouse receipts primarily for agricultural commodities and advancing of loans etc. The assessee company filed its return of income for Assessment Year 2016-17 declaring total income at Rs.6,42,34,840/-. The return filed by the assessee was subjected to scrutiny assessment. In the course of assessment, the Assessing Officer has inter alia observed that the assessee-company has issued Rs.3,37,68,573/- shares to its holding company, M/s. Sohan Lal Commodities Management Pvt. Ltd. of Rs.22.21 per shares against the face value of Rs.10/- per share. The assessee company submitted valuation report of Chartered Accountant for determining fair market value per share at Rs.22.21/- adopting discounted cash flow (DCF) Method. The Assessing Officer disputed the fair market value determined on the basis of DCF Method which methodology is predominantly based on projected growth in the ensuing financial years over certain period of time. The Assessing Officer compared the projected gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has also been submitted to substantiate its action regarding higher premium. However, the AO did not accept the DC method employed in the report of auditor and adopted the NAV method as per book value which comes to Rs. 11.54/- per share. Accordingly, the difference of two (22.21 - 11.54) i.e. Rs. 10.67/- per share has been added as income u/s 56(2)(viib) of the Act. 7.1 It has been vehemently argued, as reproduced earlier that the provisions of section 56(2)(vilb) are not applicable in the case of appellant. It is contended that the valuation report has been prepared by the expert valuer/auditor and in accordance with the provisions of section 56(2)(viib), where as per Rule 11UA(2), the appellant is entitled for the valuation of fare market value (FMV) as per the DC method. It is also stated that the total investment has been made by the existing holding company where the appellant is fully owned subsidiary company. It is also mentioned that these funds have been received from holding company through foreign investments and indirectly can be termed as FDI. It is argued that the intent of legislature is to curb the black money and there cannot be involvement of any such unacc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c as per discount free cash flow method. It is at the option of assessee to choose between two whichever is higher. In the present case, the appellant has opted for the second option for working out the fair market value of shares duly supported by report of a Chartered Accountant. 7.7 On the other hand, AO has not provided any sound reasoning or not brought on record any material to counter the argument or to negate the submissions of the appellant. He has rejected the projection with the contention that this projection has not been turned out to be reality or actual performance and hence not regarded the DCF method and applied NAV method. It is pertinent to note that projections of future profits are only the estimates and not the exact working of future profits. This has also been held by Hon'ble ITAT Delhi Bench in the case of India Today Online Pvt. Ltd. (Supra) that DCF method is a recognized method where future projections of various factors by applying hindsight view and it cannot be matched with the actual performance. Further, the appellant has provided elaborate reasons for such projections not coming to the reality due to various factors, which was not envisage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 we do not we find any express provision under the Act or rules, where Assessing Officer can adopt his own valuation in DCF method or get it valued by some different Valuer. There has to be some enabling provision under the Rule or the Act where Assessing Officer has been given a power to tinker with the valuation report obtained by an independent valuer as per the qualification given in the Rule 110. Here, in this case, Assessing Officer has tinkered with DC methodology and rejected by comparing the projections with actual figures. The Rules provide for two valuation methodologies, one is assets-based NAV method which is based on actual numbers as per latest audited financials of the assessee company. These projections are based on various factors and projections made by the management and the Valuer, like growth of the company, economic/market conditions, business conditions, expected demand and supply, cost of capital a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actual performance which is also confirmed by Hon'ble ITAT Delhi in the case of India Today Online Pvt. Ltd (Supra). 7.14 Therefore, looking to the facts and circumstances of this case, considering appellant's submissions and in law, which is further supported by the judgment of Hon'ble ITAT Delhi in the case of Cinestaan Entertainment Pvt. Ltd (Supra) and other case laws and as discussed in detail in foregoing paragraphs, it cannot be said that the value adopted by the appellant is liable to be rejected or subjected to tax u/s 56(2) (vilb) of the Act, enforcing the change of method of valuation of FMV of shares. Accordingly, the valuation done by appellant is found to be in accordance with law. Therefore in view of above discussions and considering the extant law, this addition is directed to be deleted. Thus the appellant gets a relief of Rs. 36,03,10,674/-. These grounds of appeal are allowed. 5. Aggrieved by the relief granted by the CIT(A), the Revenue is in appeal before the Tribunal. 6. The ld. DR for the Revenue reiterated the observations made by the Assessing Officer and contended that the Assessing Officer has found on facts that the FMV determi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... available at the time of assessment for Financial Years 2016-17 and 2017-18. 8.4 The Assessing Officer essentially alleged that the valuation derived by the valuer is unconnected to the ground realities and cannot be relied upon. The Assessing Officer thus rejected the valuation of Rs.22.21/- per share determined as per DCF method to be FMV of the equity shares in terms of Section 56(2)(viib) r.w. Rule 11UA. The Assessing Officer computed the FMV by applying NAV method for the purposes of Section 56(2)(viib) and found the FMV at Rs.11.54/- per share, i.e., face value of Rs.10/- per share at a premium of Rs.1.54/- per share. The difference between the FMV as per DCF method qua NAV method was thus considered a chargeable income of the assessee under Section 56(2)(viib) of the Act. The excess consideration received by way of premium was thus determined at Rs.36,03,10,674/- arisen on issue of equity shares on the touchstone of Section 56(2)(viib). 8.5 To contradict the action of the Assessing Officer, the assessee broadly submits that; (i) the provisions of Section 56(2)(viib) introduced by Finance Act, 2012 are anti-abuse provisions with a sacrosanct object to curb the pract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... note of the most significant fact existing in the present case that the assessee is a wholly owned subsidiary company of the holding company, namely, SLCMPL. The shares have been issued at premium to its holding company who owns the assessee. The holding company raised the requisite fund with intent to make further investment into its downstream entities by means of foreign direct investment after compliance of all formalities with Reserve Bank of India. The holding company submitted the group projections including projections related to the assessee-company to the foreign investors are based on the same, the investment was procured by the holding company from the foreign investors which were further invested into its subsidiaries including the assessee-company. (v) Since holding company invested funds raised through foreign direct investment in the assessee company, under such circumstances, the investment by holding company to the assessee-company and consequent issuance of shares by the assessee-company to holding company is similar to issuance of share to itself and therefore, in such a case, the anti-abuse provision of Section 56(2)(viib) cannot be visualized. 9. On cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares have been subscribed by the holding company, i.e., the existing shareholders only. Pertinent to say, section 56(2)(viib) creates a legal fiction whereby the scope and ambit of expression income has been enlarged to artificially tax a capital receipt earned by way of premium as taxable revenue receipt. Hence, such a deeming fiction ordinarily requires to be read to meet its purpose of taxing unaccounted money and thus needs to be seen in context of peculiar facts of present case. The legal fiction has been created for definite purpose and its application need not be extended beyond the purpose for which it has been created. Bringing the premium received from holding company to tax net under these deeming fictions would tantamount to stretching provision to an illogical length and will lead to some kind of absurdity in taxing own money of shareholders without any corresponding benefit. 13. In totality, governed by the view taken by the Hon ble Delhi High Court as well as the Co-ordinate Bench in similar fact situation coupled with the fact of the issue of shares to its holding company, we are unable to see any infirmity in the first appellate order on the point under det ..... X X X X Extracts X X X X X X X X Extracts X X X X
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