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TMI Blog2022 (12) TMI 1508X X X X Extracts X X X X X X X X Extracts X X X X ..... ciate the fact that the valuation report cannot be disturbed by the Assessing Authority. 3. That the Ld. Assessing Officer as well as Ld. CIT(Appeal) has failed to appreciate that the valuation computed by the Ld. Assessing Authority is wrong against the facts as well as against the law." 3. As per its grounds of appeal, the assessee has challenged the addition made by the Assessing Officer with reference to the provisions of Section 56(2)(viib) of the Act. 4. Briefly stated, the assessee filed its return of income for Assessment Year 2015-16 in question which was subjected to scrutiny assessment. In the course of the assessment, the Assessing Officer inter alia noticed that assessee had issued 24,32,000 equity shares at face value of Rs.10/- per share at a premium of Rs.40 per share. A total amount of Rs.9,72,80,000/- was thus received in the form of share premium. The Assessing Officer alleged that premium received on issue of equity share exceeds its 'Fair Market Value' (FMV) and consequently the excess premium received on issue of equity share is susceptible to tax in view of provisions of Section 56(2)(viib) of the Act as deemed income of the assessee. The Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t a premium of Rs. 40/- per share consisting total amount of Rs. 1,26,00,000/-. The said allotment was done by the assessee company in pursuance to provision of section 56(2)(viib) read with Rule 11UA whose fair market value of the share i.e. Rs. 50/- was done on the basis of Discounted Cash Flow Method which was work out by one of the know Merchant Banker i.e. M/s SPA Capital Advisors Ltd. 3. For the assessment year 2014-15, the assessee filed Its return of income u/s 139(1) of the Income Tax Act, 1961 (for short referred as the 'Act') on 29-09-2014 declaring a loss of Rs. 53,083/-. Assessment was concluded by order dated 19-12- 2016 on a total income at Rs. 1,26,72,917/- and in that process Ld. AO made addition of Rs. 1,27,26,000/- u/s 56(2)(viib) of the Income Tax Act, rejecting the valuation report of the said Merchant Banker i.e. M/s SPA Capital Advisors Ltd. and independently determining the value of Share at Rs. 9.60 and calculating over and above the value of share allotted over Rs. 9.60 i.e. Rs. 40.40 i.e., for deriving the aforesaid amount of Rs. 1,27,26,000/- multiply no. of shares i.e. 3,15,000 X Rs. 40.40 (diff. of Rs. 50 and Rs. 9.60). The disallowance u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nearer to the reality. 7. Basing on the above argument, Ld. DR had taken our attention to the disclaimer clause appended by M/s SPA Capital Advisors Ltd. to their report, and submits that a perusal of the above makes it clear that the valuation of shares is not a realistic one keeping in view the growth and stature of the company and the figures in the valuation report have been cooked up without providing any reliable basis as to how the assumptions took place. 8. Lastly, he submits that in so far as DCF method is concerned it is always possible for the company to decide the proposed value of the shares first and then travelling back to tailor the figures with the reverse engineering process, to suite their convenience. 9. Ld. DR, therefore, submits that unless and until the assessee provides the evidence justifying the facts and figures provided to the merchant banker with their justification it would not be possible for the authorities below either to consider the merits of the DCF method adopted by the assessee or to make suitable adjustments to the same for correct determination of the share price. However, Ld. CIT(A) recorded in his order at page no. 16 thereof that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Risk free rate (Zero Coupon Yield as on 30-09-13) 9.04% Beta (to be on conservative side) 1 Risk Premium 6.75% Perpetuity Growth rate 2% 11. In so far as the figures relating to cash flow to equity, risk free return, expected return from market and Beta taken by the assessee, the observations of the Ld. Assessing Officer are as follows: "Cash flow to Equity : The cash flow to the firm is the cash left over after taxes and after all reinvestment needs have been met, but before interest and principle payments on debt. To get to cash flow to the firm, you start with operating earnings, instead of net income, and subtract out taxes paid and reinvestment. The assessee has taken free cash flow to equity value for the year 2013-14 is in negative at 0.98. Same was the case is earlier years. The data available for the future years also reflects negative figures of cash flows. This clearly indicates that the discount rate calculated by the company is nowhere close to the reality. Risk Free Return: The Risk Free Return (Zero Coupon Yield as on 30-09-13) @ 9.04% taken by a company which has come into existence two years back and since inception is unprofitable is illogical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit margin, income tax rate, fixed investment requirement, and incremental working capital requirement. The revenue growth rate as well as the net profit margin of your Company, since inception, is negative and you have been carrying forward business losses. Even in the subsequent years, for which data is available, you have incurred losses (loss of Rs. 53083/- (AY 2014-15) and Rs. 1,00,384/- (AY 2015-16). However, as per the computation of valuation, the free cash flow to equity figures are -0.98 (2013-14), 32.61 (2014-15), 34.89 (2015-16), 37.00 (2016-17), 39.22 (2017-18) which are unrealistic. You are also requested to submit actual free cash flow (FCF) for the AY 2014-15, 2015-16 & 2016-17 till date) (iii) Similarly with regard to calculation of Cost of Capital, it is requested to clarify whether weighted average has been taken or otherwise. Further use of BSE 500 return data in your case is uncalled for. All your investments are in the associates company only and you must have the data of their year on year growth rate to calculate the actual return in your case. Also BSE 500 return data since inception is very unusal. Practically for assumption purpose this is a very ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO. At no point of time tried to explain where did the Ld. AO went wrong in his comments on the figures reflected in the above valuation report of the expert. 15. In these circumstances, we are unable to accept the contentions of the assessee that in view of the provisions under section 56(2)(viib) of the Act read with Rule 11UA(2) of the Rules the Ld. AO had no jurisdiction to adopt a different method than the one adopted by the assessee, and if for any reason the AO has any doubt recording such valuation report and does not agree with the same is bound to make a reference to the Income tax Department Valuation Officer to determine the fair market value of such capital asset. This is so because unless and until the assessee produces the evidences to substantiate the basis of projections in cash flow and provides reasonable connectivity between those projections in cash flow with the reality evidences by the material, it is not possible even for the Departmental Valuation Officer to conduct any exercise of verification of the acceptability of the value determine by the merchant banker. This is more particularly in view of the long disclaimer appended by the merchant banker at pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if any. 2. Please furnish the copies of acknowledged allotment letters issued to the new shareholders alongwith copy of form submitted to ROC in this regard. 3. Copies of all the bank statements with bank-ledger to verify the movement of funds in the course of claimed receipts of share application money/premium. " The counsel of the assessee attended the proceedings before the AO on and submitted as under: "......... The share premium is not offered for tax as the same was allotted at fair market value. Also, Section 56(2) lists incomes chargeable to income tax under the head 'Income from Other Sources Finance Act, 2012 inserts clause (viib) with effect from 1-4-2011 (assessment year 2013- 14) to include 'share premium ' received by a company in excess of its fair market value, as its income Chargeable under the head 'Income from other sources. ' Finance Act, 2012 simultaneously amends the definition of income in section 2(24) by inserting clause (xvi) lo include the above on side ratio exceeding fair-market value as 'income'. The amendment of the Rules is also to allow DCF valuation for valuing the equity shares. The company has allotted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and other information made available to us". The Chartered Accountant (Valuer) has stated that the valuation process has been carried out on the basis of the projected data provided to the Valuer. The appellant has not provided any basis/documentary evidences in support of the projected data provided to the Valuer. The AO has concluded that it is crystal clear that the reliability and correctness of the projected data are not based on any material. The appellant does not have any hidden assets in the form of patents, copy rights, intellectual property rights or even such investments etc belonging to the company based on which the appellant would substantially enhances profits. The AO has also noted that the accountant has taken future cash flow as certified by the management. No verification of projections and assumptions adopted by the management was made by the Valuer, thereby making the report as per the requirement of the management. In DCF method future free cash flow is the most relevant variable which can change the value to any extent. The AO further noted that the loans/capital added to the "Profit after Tax" contains a figure of Rs. 5,00,00,000/- for the F.Y. 2013-14, whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 28,95,750 -93,84,025 Discount rate (10%) 0.10 0.10 0.10 0.10 0.10 0.10 Discount factor PV of Future 1.00 0.91 0 83 0.75 0.68 0.62 cash inflow -19,00,000 3,60,79,976 -7,96,656 -25,446 19,69,110 -58,18,096 Total PV of Future Cash inflows Add: cash & bank Balance 31.03.2014 Estimated value of Business Total no. of shares Value per share -4,26,51,063 1,96,73,404 -2,29- 77,659 10,000 -2,297.77 Clause (viib) of sub section (2) of section 56 was inserted vide finance act, 2013 w.e.f 01.04.2013 i.e. for A. Y. 2013-14 to provide that where a closely held company issues its shares at a price which is more than its fair market value then the amount received in excess of fair market value of shares would be charged to tax in the hand of the company as income from other sources. According to the provisions of Rule 11UA(2)(b), the appellant exercised the option of valuation of shares by DCF method. However, the actual fair market value of the shares as per DCF Method has been worked out by the AO as above. 7.6 The AO has observed that it is clear that valuation made on the basis of unverified exorbitant forecasts given b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifying the correctness or otherwise of the data supplied by the assessee to the merchant banker, in the absence of which the correctness of the result of DCF method cannot be verified. This left no option to the AO but to reject the DCF method and to go by NA V method to determine the FMV of the shares. Without such evidence, it serves no purpose even if the matter is referred to the Department's Valuation Officer. We, therefore, do not find any illegality or irregularity in the approach of conclusions are by the authorities below. While confirming the same, we dismissed the appeal as devoid of merits.'' The decision of Hon'ble ITAT, Delhi in the case of Agro Portfolio (P.) Ltd (supra) is squarely applicable to the facts of the case. In view of the above, it is held that the AO has correctly made the addition of Rs.9,72,80,000/- u/s 56(2)(viib) in the present case. Accordingly, the addition of Rs.9,72,80,000/- u/s 56(2)(viib) is upheld in the instant case. Ground No. 1 is decided against the appellant. 7.7 Ground No. 2: In this ground of appeal the appellant has objected to initiation of penalty u/s 271(1 )(c). This ground of appeal is premature and not adjudicated. 7.8 G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermination of Fair Market Value as per valuation report dated 25.03.2015, of the independent valuer filed to support and vindicate the share premium on issue of equity share. The Assessing Officer however found fallacy in the 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 do not correspondingly match with the actual figures reported and presently available at the time of assessment. 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 embarked to adjust the projected figures of the subsequent years, i.e., F.Ys. 2015-16 and 2016-17 in sync with actual figures reported and available at the time of assessment. The Assessing Officer thus redetermined the value as per DCF method to be Rs.10 per share. The difference computed between the adjusted DCF value determined by the Assessing Officer and the amount received by the assessee in the form of premium was thus considered as chargeable income of the assessee under Section 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue and cash flow of the subsequent years as the projected figures cannot be gauged with any arithmetical precision. The valuation of the cash flow in future years cannot be visualized at the time of projections having regard to the many imponderables which may enter with the passage of time. The valuation determined under DCF is only an estimate of potential of establishment and any comparison of such projections with actual figures at a later stage to reject the valuation would totally frustrate the intended outcome from DCF method of valuation recognized by the statute. 9. On conspectus of the plea raised on behalf of the assessee, we find plausibility therein. The assessee in the instant case has proceeded to issue equity share at a premium on the basis of independent valuer report wherein DCF method was adopted for the purposes of determination of fair market value. The Assessing Officer has not disputed the DCF method adopted for valuation per se. The Assessing Officer however, has compared the projected figures used by the valuer with the actual figures available at the time of assessment. The AO displaced the FMV determined as per DCF method based on projected figures ..... X X X X Extracts X X X X X X X X Extracts X X X X
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