TMI Blog2024 (4) TMI 447X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. From time to time various courts/Tribunals have held that as per section 56(2)(viib) r.w.R 11UA, the assessee has the option to do valuation of shares and determine FMV either on DCF Method or NAV method and AO cannot substitute his own value in place so determined. Similar issue came for consideration before case of Cinestaan Entertain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred in affirming the same, without appreciating that the price at which the shares were issued by the Respondent to United Lex BPO Pvt. Ltd. was the same price at which the Respondent paid bonus to its employees after receipt of funds from United Lex BPO Pvt. Ltd. and in view of the above two transactions being independent uncontrolled transaction and therefore comparable, the price at which the Respondent issued its shares out to be accepted. 4. That the AO and the CIT(A) failed to appreciate that Section 56(2)(viib) of the act has no application to the shares issued by the Respondent to Mr, Jaikesh Dani, inasmuch the same was issued by the Respondent under its employee stock option plan, the price under which was agreed way back in the year 2008. 5. That without prejudice and in any event, while computing the fair market value of the equity shares of the Respondent, the AO erred in taking into consideration the value of assets and liabilities as per the balance sheet as at 31.03.2014 instead of the values as at 31.03.2013, The Respondent craves leave to add to or alter, by deletion, substitution or otherwise, the above grounds, at any time before or during the hearing of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the appellant company, it revealed that the appellant company had collected premium of Rs. 4,29,79,874/- as securities premium. The details of the shares issued by the appellant on premium to the different shareholders during the year as incorporated by the AO in his impugned assessment order are as under:- S. No Name of the shareholder No. of shares Value per share Amount of share premium 1. Jaikesh Dani 72 53.5 3132 2. Deepesh Hiran 74 19.8 717 3. United Lex BPO Pvt. Ltd. 244293 185.92 42976025 6.1 The AO observed that since the appellant had issued shares at huge premium which was way above the face value of shares at base price of Rs. 10/- per share, the provisions of section 56(2)(viib) came into the question. The AO has reproduced the provisions of section 56(2)(viib) and rule 11UA of the Act. The appellant was requested to furnish the basis and to substantiate the share premium so collected. The appellant vide its letter dated nil furnished the copy of the valuation certificate issued by a chartered account dated 22.07.2014 in support of its claim. The AO observed that the certificate furnished by the CA by opting for DCF Method was based on the data furnished by the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tant case, the appellant has determined the FMV of the share by applying Discounted cash flow method as per Rule 11UA(2)(b) whereas the AO has computed the FMV of shares at Rs. 36.76 by applying Rule 11UA(2)(a) and rejected the methodology adopted by the appellant. Moreover, the valuation report furnished by the appellant has also been rejected by the AO. 6.4 The NFAC observed that Section 56(2)(viib) is a deeming provision and one cannot expand the meaning of scope of any word while interpreting such deeming provision. If the statute provides that the valuation has to be done as per the prescribed method and 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 there is no 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 11U. Here, in this case, Assessing Officer has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Cinestaan Entertainment P. Ltd. in ITA No.8113/Del/2018 dated 27.5.2019, wherein held as under: 25. We have heard the rival contentions, perused the relevant findings given in the impugned orders as well as material referred to before us at the time of hearing. In various grounds of appeal, the sole issue raised by the appellant assessee relates to the addition of Rs. 90,95,46,200/- 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. Dur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to seek confirmation, information and documents pertaining to transaction of issuance of shares. In response to the said notices, Assessing Officer has received all the details and replies directly from these investors confirming the transaction. The venture agreement between the assessee and the investors were also filed before the Assessing Officer and in this regard, our attention was 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on such investment as have been done by the Assessing Officer and by Id. CIT(A), then no investor in the country will invest in a 'start-up company3, because investment can only be lured with the future prospects and projection of these companies. 29. Now, whether under the deeming provision such an investment received by the assessee company be brought to tax. The relevant provision of Section 56 for the sake of ready reference is reproduced hereunder: Income from other sources. 56. (I) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equired to be determined either by the Merchant Banker or by the Chartered Accountant. The valuation of shares based on DCF i basically to see the future year's revenue and profits projected and then discount the same to arrive at the present value of the business. Before us, the Id. counsel from the facts and material placed on record had pointed 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 si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per the estimates as projected. However, the revenue could not be generated as much expected, because the film did not do well in the box office. Ld. Counsel has also highlighted various reasons as to why assessee could not achieve the projected revenue from various documentary evidences. None of these averments and the and the 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 Id. 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 entrep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 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 Id. Counsel, for instance: - i) Securities Exchange Board of India Ors [2O15 ABR 291 - (Bombay HC)J 48.6 Thirdly, it is a well settled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry 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(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 Id. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ib) read with section 2(24)(xvi) of the Act. Further, the Assessing Officer held that the respondent-assessee has failed to submit any basis for the projection. He also held the view that in order to achieve the said projection, the respondent-assessee should have invested the share premium amount to earn certain income/return and whereas the respondent-assessee made investments in zero per cent, 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 Assessing Officer 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 Assessing Officer. The learned Income-tax Appellate Tribunal 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 nat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sfaction on the part of the Assessing Officer to tinker with such valuation. Here, in this case, the Assessing Officer has not substituted any of his own method or valuation albeit has simply rejected the valuation of the assessee. 33. Section 56(2)(viib) is a deeming provision and one cannot expand the meaning of scope of any word while interpreting such deeming 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 the Assessing Officer has to accept the same and in case he is not satisfied, then we do not find any express provision under the Act or rules, where Assessing Officer can adopt his own valuation in discounted cash flow method or get it valued by some different valuer. There has to be some enabling provision under the Rule or the A ct where the 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 11U. Here, in this case, Assessing Officer has tinkered with discounted cash flow methodology and rejected by comparing the projections with actual figures. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect 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 is 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 Income-tax Act has also recognized and is encouraging the startups.' (iii) DQ (International) Ltd. v. Asst. CIT (ITA 151/Hyd/2015) '10. In our considered view, for valuation of 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 assessee 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 prescri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... impugned order, it becomes clear that the learned Income-tax Appellate Tribunal has followed the dicta of the hon'ble Supreme Court in matters relating to the commercial prudence of an assessee relating to valuation of an asset. The law requires determination of the fair market value as per prescribed methodology. The appellant- Revenue had the option to conduct its own valuation and determine the fair market value on the basis of either the discounted cash flow or net asset value method. The respondent-assessee being a start-up company adopted discounted * cash flow method to value its shares. This was carried out on the basis of information and material available on the date of valuation and projection of future revenue. There is no dispute that the methodology adopted by the respondent-assessee has been done applying a recognized and accepted method. Since the performance did not match the projections, the Revenue sought to challenge the valuation, on that footing. This approach lacks material foundation and is irrational since the valuation is intrinsically based on the projections which can be affected by various factors. We cannot lose sight of the fact that the valuer ma ..... X X X X Extracts X X X X X X X X Extracts X X X X
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