TMI Blog2023 (7) TMI 336X X X X Extracts X X X X X X X X Extracts X X X X ..... that it committed a mistake which went to the root of the process AO erred in discarding the DCF method of valuation of shares adopted by the assessee. Thus, we reverse the order of the ld. CIT (A) and direct the AO to delete the addition made u/s 56(2)(viib) - Decided in favour of assessee. - Shri Narendra Kumar Billaiya, Accountant Member And Shri Challa Nagendra Prasad, Judicial Member For the Assessee : Shri Yogesh Jagia, Advocate; For the Department : Shri Jitender kale, Sr. D.R.; ORDER PER C. N. PRASAD, J. M. : 1. These two appeals are filed by the assessee against different orders of the ld. Commissioner of Income Tax (Appeals)-3 [hereinafter referred to CIT (Appeals)] New Delhi for assessment years 2015-16 and 2016-17 in sustaining the addition made by the Assessing Officer under section 56(2)(viib) of the Income Tax Act, 1961 (the Act) in respect of share premium received by the assessee. 2. First we take up the appeal of the assessee in ITA. No, 7345/Del/2019 for assessment year 2015-16. Brief facts are that the assessee, a Pvt. Ltd. company filed return of income on 1.01.2016 declaring loss of Rs. 1,07,38,216/-. Assessment was complet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or scrutiny and the case was taken up. 4.2 Ld. Assessing officer on 19/04/2016 issued notice under section 143(2) of the act along with notice under section 142(1). Subsequent notices were issues and appellant attended the hearings from time to time and submitted the replies 4.3 Ld. Assessing officer issued a final show cause notice purported to be dated 20/12/2017 sent by speed post and received by assessee on 25/12/2017 being fag end of the limitation period posted in relation to share capital and share premium received during the year. Having given such a short notice, the appellant with great difficulties, in response to the show cause notice, filed its reply vide letter dated 27/12/2017. 4.4 For share premium, the appellant during the subject Assessment Year has issued share capital and has received the Share premium. The amount of share capital allotted is 142856 equity share at face value of Rs. 10/- and premium at Rs. 130/- per share amounting to Rs. 1,85,71,280/-. Appellant has adopted the discounted cash flow method (DCF) by which the share premium of the shares was determined at Rs 130/- per share in addition to face value of Rs. 10/- by relying on the explanati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto; (v) any amount 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. 5.2 Referring to Rule 11UA (2) it is submitted that the appellant has exercised the option (b) as mentioned in rule 11UA by using Discounted Free Cash Flow method which has been rejected by learned AO by applying (a) The difference between option (b) and (a) has been considered as Income. 5.3 Ld. Counsel submits that the method of valuation of unlisted equity shares is primarily that of bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecognized method, the Assessing Officer cannot adopt a different method. The ld. Counsel submits that in this case the assessee had opted only prescribed method of fair market value as per DCF valuation of an accountant under clause (b) of Rule 11UA and, therefore, there is no justification in adopting alternate method as provided in clause (a) of Rule 11UA read with section 56(2)(viib) of the Act. The ld. Counsel also contended that the shares subscribed by the parties are not related to the assessee and the genuineness of the investment is not doubted. 9. We observe that the Hon ble Delhi High Court in the case of Pr. CIT Vs. Cinestaan Entertainment Pvt. Ltd. [433 ITR 82 (Del)] an identical issue came up before the Hon ble court and the Hon ble court held that the shares had not been subscribed to by any sister concern or closely related person but by outsider investors. It was further held that the methodology adopted was a recognized method of valuation and the Revenue was unable to show that the assessee adopted a demonstrably wrong approach or that the method of valuation was made on a wholly erroneous basis or that the method of valuation or that it committed a mistake wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re premium amount to earn certain income/return and whereas the Respondent-Assessee made investments in zero percent debentures of its associate company and therefore the basic substance of receiving a high premium is not justified. 11. We note that in the instant case, the AO had issued notice under Section 133 (6) to all the investors to seek confirmation, information and documents pertaining to the issuance of shares. Further, the venture agreement between the Respondent- Assessee and the investors was also filed before the AO. The learned ITAT thus, after due consideration of the record, concluded that neither the identity, nor the creditworthiness and genuineness of the investors and the pertinent transaction could be doubted. This fact stood fully established, before the Assessing Officer and has not been disputed or doubted. Therefore, the nature and source of the credit stood accepted. 12. In this factual background, the learned ITAT then proceeded to examine whether the AO after invoking the deeming provision under Section 56(2)(viib) could have determined the FMV of the premium on the shares issued at nil after rejecting the valuation report given by the Chartered A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 DCF 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. Whereas in a DCF method, the value is based on estimated future projection. 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 and host of other factors. These f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art-up is a good example and as submitted the income-tax Act also recognized and encouraging the start-ups. iii) DQ (International) Ltd. Vs. ACIT (ITA 151/Hyd/2015) 10. In our considered view, for valuation or an intangible asset only the future projections along can be adopted and such valuation cannot be reviewed with actuals after 3 or 4 years down the line. Accordingly, the grounds raised by the asses see are allowed . 34. The aforesaid ratios clearly endorsed our view as above. In any case, if law provides the assessee to get the valuation done from a prescribed expert as per the prescribed method, then the same cannot be rejected because neither the Assessing Officer nor the assessee have been recognized as expert under the law. 35. There is another very important angle to view such cases, is that, here the shares have not been subscribed by any sister concern or closely related person, but by an outside investors like, Anand Mahindra, Rakesh Jhunjhunwala, and Radhakishan Damania, who are one of the top investors and businessman of the country and if they have seen certain potential and accepted this valuation, then how AO or Ld. CIT (Appeals) can question their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thod. Since the performance did not match the projections, Revenue sought to challenge the valuation on that footing. This approach lacks material foundation and is irrational since the valuation is intrinsically based on projections which can be affected by various factors. We cannot lose sight of the fact that the valuer makes forecast or approximation based on potential value of business. However, the underline facts and assumptions can undergo change over a period of time. The Courts have repeatedly held that valuation is not an exact science, and therefore cannot be done with arithmetic precision. It is a technical and complex problem which can be appropriately left to the consideration and wisdom of experts in the field of accountancy, having regard to the imponderables which enter the process of valuation of shares. The Appellant-Revenue is unable to demonstrate that the methodology adopted by the Respondent-Assessee is not correct. The Assessing Officer has simply rejected the valuation of the Respondent- Assessee and failed to provide any alternate fair value of shares. Furthermore, as noted in the impugned order and as also pointed out by Mr. Vohra, the shares in the pres ..... X X X X Extracts X X X X X X X X Extracts X X X X
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