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TMI Blog2023 (2) TMI 1186X X X X Extracts X X X X X X X X Extracts X X X X ..... er consideration, the assessee had sold shares to two entities, viz, NBM Investment Fund ALP., a non resident company and M/s. HT Digital Media Holdings Ltd. with very high premium and received an amount of Rs.24,37,500 from each of the investors. He, therefore, called upon the assessee to substantiate the fair market value of the shares. In response to the query raised, the assessee furnished a valuation report from an independent valuer in terms of Rule 11UA, wherein, the valuer determined the fair market value of the shares adopting Discounted Cash Flow (DCF) method. Assessing Officer, however, did not accept the valuation. He observed that, in the valuation report the future projection of cash flow estimated for subsequent years is not commensurate with the sales disclosed by the assessee. Further, he observed, the assessee is a new company and there was no basis for earning such large share premium. Accordingly, treating the share premium received does not represent the fair market value of shares, the Assessing Officer added back the amount of Rs.48,63,880 to the income of the assessee. Though, the assessee contested the aforesaid addition before learned Commissioner (Appeals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITAT Delhi Bench. 5. Learned Departmental Representative strongly relied upon the observations of the Assessing Officer and learned Commissioner (Appeals). 6. I have considered rival submissions in the light of decisions relied upon and perused the material available on record. 7. Undisputedly, in the year under consideration, the assessee has received an amount of Rs.24,31,940 each from two investors who have invested in the equity shares of the assessee sold at a premium of Rs.4,374 per share. As could be seen from the facts on record, the assessee, which is in the business of software and mobile application, wanted to develop a new application for sale in the open market. To fund his project, the assessee approached M/s. NBM Investment ALP Ltd. who invested in the shares, it is observed, NBM Investment Fund ALP is a non-resident Venture Capital fund. On a reading of section 56(2)(viib), it becomes very much clear that it is applicable to resident investors and not to non-residents. That being the statutory provision, the addition made in respect of investment made by M/s. NBM Investment Fund ALP by invoking the provisions of section 56(2)(viib) is unsustainable. 7. As regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 95,46,200/- made by the AO, by invoking the deeming provisions of Section 56(2)(viib) by adopting fair market value of the share premium received by the Assessee Company from the investors at Nil. What has been sought to be taxed is mainly the share premium issued on equity shares which according to the AO far exceeded the FMV of the shares. Though facts have been discussed in detail in the foregoing paragraphs, however in the succinct manner, the relevant facts and background are reiterated in order to appreciate the controversy and the issue for adjudication. The assessee company was incorporated on 19th September, 2013, i.e., in the Assessment Year 2014-15, with the objective of carrying of business of production and distribution of feature film, tele films, video films, documentary films etc. During the year under consideration assessee company was in the initial phase of the setting up of the business, therefore, there was no business of film production as such. The assessee company to start its venture of its film production approached accredited ace investors of India to join in as equity partners, namely, Shri Rakesh Jhunjhunwala, Shri Anand Gopal Mahindra & Shri Radhakisha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also drawn by the ld. counsel that the investment was to be made by these investors in various phases and transactions and it was only after they have gone by the projection and satisfied with the potentials and credentials of future growth, they were willing to make such huge investment in the 'start-up company' like assessee. Thus, neither the identity nor the creditworthiness of the investors nor the genuineness of the transaction can be doubted and in fact the same stands fully established to which Assessing Officer has also not raised any doubt or disputed this fact. Thus, under the deeming provisions of section 68, the test of proving the nature and source of the credit received stood accepted. 28. Now what we are required to examine whether under these facts and circumstances Assessing Officer after invoking the deeming provision of Section 56(2)(vii) could have determined the fair market value of the premium on shares issued at Nil after rejecting the valuation report given by the Chartered Accountant on one of the prescribed methods under the rules adopted by the Valuer. Before us, learned counsel, Mr. Dinodia, first of all had harped upon the spirit and intention of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 56 for the sake of ready reference is reproduced hereunder: "Income from other sources. 56. (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head "Income from other sources", if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. (2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head "Income from other sources", namely :- (i)....... (viib) "where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares: Provided that this clause shall not apply where the consideration for issue of shares is received- (i) by a venture capital undertaking from a venture capital company or a venture capital fund; or (ii) by a company from a class or classes of person ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ointed out that the basis of projection adopted by the valuer was based on very scientific analysis and method, like number of movies to be released in the upcoming years and such movies were further segregated into big, medium, small and micro films with reasonable number of movies in hand, like one big film, two medium films and one or two small or micro film a year. Further, the estimate of projected revenue was also kept on a conservative side keeping in mind of the following: - Engagement of successful directors like Rakesh Om Prakash¬ Mehra who has given block buster films like Bhaag Milkha Bhaag which made a box office collection of INR 164 Crores, and Rang De Basanti which made a box office collection of INR 97 Crores etc. In support Ld. Counsel had referred to Annexure-III, giving details of Track records v. Projections for movies signed with Rakesh Mehra. Engagement of veteran writers and music directors-Like¬ Gulzar and Shankar Ehsaan Roy. Interesting start cast, including the launch of Anil Kapoor's¬ son- Harshvardhan Kapoor and Shabana Azmi's niece Saiyami Kher; along with veteran actors like Om Puri, Anu Malik etc. Keeping in view of engagement of renow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manner in which the valuation of the shares has been adopted in the valuation report has been disputed by the Assessing Officer or by the ld. CIT(A) or any material facts have been brought on record to show that either the methodology or the contents of the report are not correct. 32. What is seen here is that, both the authorities have questioned the assessee's commercial wisdom for making the investment of funds raised in 0% compulsorily convertible debentures of group companies. They are trying to suggest that assessee should have made investment in some instrument which could have yielded return/ profit in the revenue projection made at the time of issuance of shares, without understanding that strategic investments and risks are undertaken for appreciation of capital and larger returns and not simply dividend and interest. Any businessman or entrepreneur, visualise the business based on certain future projection and undertakes all kind of risks. It is the risk factor alone which gives a higher return to a businessman and the income tax department or revenue official cannot guide a businessman in which manner risk has to be undertaken. Such an approach of the revenue has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... demand and supply, cost of capital and host of other factors. These factors are considered based on some reasonable approach and they cannot be evaluated purely based on arithmetical precision as value is always worked out based on approximation and catena of underline facts and assumptions. Nevertheless, at the time when valuation is made, it is based on reflections of the potential value of business at that particular time and also keeping in mind underline factors that may change over the period of time and thus, the value which is relevant today may not be relevant after certain period of time. Precisely, these factors have been judicially appreciated in various judgments some of which have been relied upon by the ld. Counsel, for instance: - i) Securities & Exchange Board of India &Ors [2015 ABR 291 - (Bombay HC)] "48.6 Thirdly, it is a well settled position of law with regard to the valuation. that valuation is not an exact science and can never be done with arithmetic precision. The attempt on the part of SEBI to challenge the valuation which is but its very nature based on projections by applying what is essentially a hindsight view that the performance did not match ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey have seen certain potential and accepted this valuation, then how AO or Ld. CIT(A) can question their wisdom. It is only when they have seen future potentials that they have invested around Rs.91 crore in the current year and also huge sums in the subsequent years as informed by the ld. counsel. The investors like these persons will not make any investment merely to give dole or carry out any charity to a startup company, albeit their decision is guided by business and commercial prudence to evaluate a start-up company like assessee, what they can achieve in future. It has been informed that these investors are now the major shareholder of the assessee company and they cannot become such a huge equity stock holder if they do not foresee any future in the assessee company. In a way Revenue is trying to question even the commercial prudence of such big investors like. According to the Assessing Officer either these investors should not have made investments because the fair market value of the share is Nil or assessee should have further invested in securities earning interest or dividend. Thus, under these facts and circumstances of the case, we do not approve the approach and th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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