TMI Blog2024 (2) TMI 882X X X X Extracts X X X X X X X X Extracts X X X X ..... ted figures had been made by the Ld. AO, the order impugned passed by the Ld. CIT(A) deleting the addition made by the Ld. AO is found to be just and proper so as to warrant interference. Revenue s appeal is found to be devoid of any merit, therefore, dismissed. - SHRI WASEEM AHMED, ACCOUNTANT MEMBER Ms. MADHUMITA ROY, JUDICIAL MEMBER For the Appellant : Shri Ashok Kumar Suthar, Sr. DR For the Respondent : Shri Sanjay R Shah, A.R. ORDER PER Ms. MADHUMITA ROY JM : The instant appeal filed by the assessee is directed against the order dated 10.04.2019 passed by the Ld. Commissioner of Income Tax (Appeals)-9, Ahmedabad (in short CIT(A) ) arising out of the order dated 18.12.2017 passed by the DCIT, Circle3(1)(1), Ahmedabad, under Section 143(3) of the Income Tax Act, 1961, (hereinafter referred to as the Act ) for Assessment Year 2015-16 and whereby and whereunder the addition made on account of charging of share premium in excess to the valuation under Rule 11UA of the Income Tax Rules to the tune of Rs.2,04,10,016/- made by the Ld. AO has been deleted. 2. We have heard the rival submissions made by the respective parties and we have also perused ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use (b) of the Rule 11UA(2) of the Rules which is as follows: Rule 11UA(2) [(2) Notwithstanding anything contained in sub-clause (b) or sub-clause (c), as the case may be, of clause (c) of sub-rule (1): (A) the fair market value of unquoted equity shares for the purposes of sub-clause (i) of clause (a) of the Explanation to clause (viib) of sub-section (2) of section 56 shall be the value, on the valuation date, of such unquoted equity shares, as shall be determined under sub-clause (a), sub-clause (b), sub-clause (c) or sub-clause (e), at the option of the assessee, where the consideration received by the assessee is from a resident ; and under sub-clauses (a) to (e) at the option of the assessee, where the consideration received by the assessee is from a non-resident, in the following manner: (a) the fair market value of unquoted equity shares =(A-L) [PV/PE], where, A = book value of the assets in the balance-sheet as reduced by any amount of tax paid as 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 and any amount shown in the balance-sheet as asset including ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) specified fund shall have the same meaning as assigned to it in clause (aa) of Explanation to clause (viib) of sub-section (2) of section 56; (ii) venture capital company , venture capital fund and venture capital undertaking shall have the same meaning assigned to them in clause (b) of Explanation to clause (viib) of sub-section (2) of section 56. Illustration: If a venture capital undertaking receives a consideration of fifty thousand rupees from a venture capital company for issue of one hundred shares at the rate of five hundred rupees per share, then such an undertaking can issue one hundred shares at this rate to any other investor within a period of ninety days before or after the receipt of consideration from venture capital company. (d) the fair market value of the unquoted equity shares determined by a merchant banker in accordance with any of the following methods: (i) Comparable Company Multiple Method; (ii) Probability Weighted Expected Return Method; (iii) Option Pricing Method; (iv) Milestone Analysis Method; (v) Replacement Cost Methods; (e) where any consideration is received by a company for i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs.109/- having face value of Rs.10/-. Initially, the Ld. AO did not accept the valuation report and adopted the value of shares at Rs.9.80/- upon applying the formula as per Rule 11UA of IT Rules as against value adopted at Rs.119/- and proposed to tax the income of Rs.2,20,23,456/- by invoking the provision of Section 56(2)(vii)(b) of the Act but subsequently upon considering the re-working provided by the assessee by and under the letter dated 15.12.2017, the Ld. AO added the difference of Rs.101.20 by taking the fair market value of the shares at Rs.17.80 as against the valued shares at Rs.119/- by the assessee and ultimately made addition to the tune of Rs.2,04,10,016/-. The case of the Revenue is this that the projections had been made without any parameter and the actual figures of P L account as available on 04.03.2015 i.e. nearer to 31.03.2015 has not been considered. As there has been a steep difference in the estimated figure for A.Y. 2016-17 as on the date of making the assessment on 18.12.2017, the financial statements were available, the Ld. AO shifted the method of DCF to ALV as prescribed in Rule 11UA of the IT Rules. This particular aspect has been duly consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 14 lakhs. The assessee had determined Fair Market Value (FMV) on the basis of Discounted Cash Flow Method As per the Assessing Officer, the prerequisite for issue of share at premium was the substantial increase in the net worth of the income which was mainly due to the profitability, credibility. goodwill etc. of the concern, however, such requirements were not available in the present case. Therefore, these shares did not have intrinsic value to give price to premium in the business, thus, premium of Rs. 60 per share did not appear to be justifiable. The Assessing Officer found that calculation of share premium was not in accordance with rule IIUA and after referring to rule 11UA(2) (b), the Assessing Officer computed the FMV of share based on Book Value and finally held that the fair market value of unquoted equity shares of the assessee comes to Rs. 32.76 only and the assessee was entitled to charge premium to Rs 2.27 lakhs (32.76(-) Rs. 1022.76 X 10000 shares) against which the assessee charged premium of Rs. 84 lakhs. Thus, the excess premium of Rs. 81.72 lakhs received by the assessee was not justified and not in accordance with the amended provisions of section 56( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s conferred an option upon the assessee to choose a particular method, the valuation of the shares has to be in accordance with such method only i.e. DCF method in the present case under rule 11UA(2)(b) read with section 56(2) (viib). It is observed that in the instant case, the assessee-company had exercised an option to value the share by DCF method. However, the Assessing Officer had worked out the value based on NAV Method though in the body of assessment order he has referred to rule IIUA(2)(b) but in substance, he has valued the share based on the book value figures only by considering the value of the assets shown in the balance sheet as on 31-3-2013 being the land valuing Rs. 3.27 lakhs and the liabilities. The Commissioner (Appeals) also, though considered the case in context of rule 11UA (2) (b) yet however, his act of asking the assessee his CA to prepare and submit a valuation report only on actual figures, is nothing but a valuation done on the basis of NAV Method under rule 11UA(2)(a) only. From the facts it is clear that the authorities below wanted to impose upon the method of valuation of their own choice, completely disregarding the legislative intent whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al was left out by oversight, which has now been taken care and corrected in the revised report. This contention was supported by the earlier valuation report and the revised valuation report. There is nothing wrong if a bona fide mistake was corrected (Para 4.5.1] Before examining the fairness or reasonableness of valuation report submitted by the assessee, one has to bear in mind that the DCF Method, and is essentially based on the projections (estimations) only and hence these projection cannot be compared with the actuals to expect the same figures as were projected. The valuer has to make forecast on the basis of some material but to estimate the exact figures is beyond its control. At the time of making a valuation for the purpose of determination of the fair market value, the past history may or may not be available in a given case and therefore, the other relevant factors may be considered. The projections are affected by various factors hence in the case of company where, there a no commencement of production or of the business, does not mean that its share cannot command any premium For such cases, the concept of startup is a good example and as submitted, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioner (Appeals) that the projection made in the CA's report are in contradiction of the figures of the installed production capacity which being lesser yet the production was shown disproportionately higher. Also there is no whisper in the orders of the Commissioner (Appeals) as to which figure was found incorrect and what should be the correct figures. Except making comparison with the actuals there is nothing on record to doubt the veracity of the CA's report or to support the observations of the Commissioner (Appeals). He further doubts that the figures of the sale shown in the valuation report and those shown the in the balance sheet of financial year 2014-15 and financial year 2015-16. However such an objection cannot be given weightage for the reason that firstly no explanation was called for by the Commissioner (Appeals) on this aspect but he assumed on his own and there apart the assessee has already stated that due to the nonavailability of the power connection, it could not commence the production in the initial years therefore, there was no production, which fact is admitted by the Assessing Officer also and hence, comparison of the projected sales figure with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... served that the assessee raised loans from the above associate concerns and has converted them into shares application/premium money. However, it has not shown how it will affect the correctness of the valuation claimed. It is not the case of the Assessing Officer that the shares were allotted to the outsiders non-related persons but the existing amount of the loans from the related persons were converted into shares. Hence there cannot be any scope of introduction of assessee's unaccounted income through allotment of shares at unreasonably high priced shares. Therefore, such observations is not relevant and a mere suspicion. It appears that the authorities below have ignored Explanation (a) below section 56(2)(viib). The said Explanation provides that the fair market value of the shares shall be the value as may be determined in accordance with such method as may be prescribed ie under rule IIUA; or (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port dated 15.12.2014, the Respondent-Assessee issued shares to various equity partners at a premium as per the following table: S. No Name of equity partner Date of Issue No. of Shares Premium (Rs.) per share Amount of premium (Rs.) 1. Shri Anand Mahindra 06.01.2015 23.02.2015 4,15,385 1949 80,95,85,365 /- 2. Shri Rakesh Jhunjhunwala 24.03.2015 19,207 2602 4,99,80,793/- 3. Shri Radhakishan Damani 24.03.2015 19,207 2602 4,99,80,793/- Total 4,53,799 90,95,46,200/- 10. The AO has disregarded the valuation report of the Respondent Assessee primarily on the ground that the projections of revenue as considered for the purpose of valuation do not match ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares, 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 been judicially frowned by the Hon'ble Apex Court on several occasions, for instance in the case of SA Builders, 288 ITR 1 (SC)and CIT vs. Panipat Woollen and General Mills Company Ltd., 103 ITR 66 (SC). The Courts have held that Income Tax Department cannot sit in the armchair of businessman to decide what is profitable and how the business should be carried out. Commercial expediency has to be seen from the point of view of businessman. Here in this case if the investment has made keeping assessee's own business objective of projection of films and media entertainment, then such commercial wisdom cannot be questioned. Even the prescribed Rule 11UA(2) does not gi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us 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 and 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 the projection is unknown to the law on valuations. Valuation being an exercise required to be conducted at a particular point of time has of necessity to be carried out on the basis of whatever information is available on the date of the valuation and a projection of future revenue that valuer may fairly make on the basis of such information. ii) Rameshwaram Strong Glass Pvt. Ltd. v. ITO [2018-TIOL1358-ITAT- Jaipur) 4.5.2. Before examining the fairness or reasonableness of valuation report submitted by the assessee we have to bear in mind the DCF Method and is essentially based on the projections (estimates) only and hence these projections canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the finding of the ld. Assessing Officer or ld. CIT(A) so to take the fair market value of the share at 'Nil' under the provision of Section 56(2)(viib) and thereby making the addition of Rs.90.95 crores. The other points and various other arguments raised by the ld.counsel which kept open as same has been rendered purely academic in view of finding given above. 36. Other grounds are either consequential or have become academic, hence same are treated as infructuous. In the result appeal of the appellant assessee is allowed. 13. From the aforesaid extract of the impugned order, it becomes clear that the learned ITAT has follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Courts for interfering with the findings of a valuer is not satisfied in the present case, as the Respondent-Assessee adopted a recognized method of valuation and Appellant-Revenue is 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 it committed a mistake which goes to the root of the valuation process. 14. In view of the foregoing, we find that the question of law urged by the Appellant-Revenue is purely based on facts and does not call for our consideration as a question of law. 15. For the foregoing reasons, the appeal is dismissed along with pending application. 10. It appears from the order passed by the Hon ble Delhi High Court that when the assessee respondent has adopted a recognized method of valuation and further 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 it committed a mistake which goes to the root of the valuation process, interfering with the finding of the valuer by the Ld. AO, is found to be not permissible. Similarly, as we fi ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
