9911796707
TMI Blog2025 (5) TMI 1563X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Commissioner of Income Tax (Appeals) ('CIT(A)') is invalid and bad in law as being in violation of the principle of natural justice and without considering the written submissions filed by the appellant. 2. On the facts and circumstances of the case and in law, CIT(A) erred in upholding the action of the learned AO in making an addition of Rs. 8,10,00,000/- under section 56(2)(viib) of the Income-tax Act, 1961 ('the Act') alleging excess receipt of share premium on issue of Non- Cumulative Compulsory Convertible Preference Shares (NCCCPS) for reasons which are wrong, contrary to the facts of the case and against provisions of law. 3. On the facts and circumstance of the case and in law, the CIT(A) erred in upholding the action of the AO in rejecting the fair market value of NCCCPS computed by an independent chartered accountant using the Discounted Cash Flow Method. 4. On the facts and circumstance of the case and in law, the CIT(A) erred in upholding the action of the AO in applying the Net Asset Value (NAV)/ Book Value Method for determining the value of the NCCCPS without appreciating that the same could not have been applied when the assessee has app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... addition of INR. 8,10,00,000/- under Section 56(2)(viib) of the Act. The Assessing Officer rejected the value of INR. 250/- per Share determined by the independent valuer using Discounted Cash Flow (DCF) Method adopted by the Assessee and used Net Asset Value (NAV) Method to determine the Fair Market Value of the Shares at INR.115 per Share invoking the provisions contained in Rule 11UA of the Income Tax Rule, 1962 [for short 'IT Rules']. Thus, the Assessing Officer arrived at a difference of INR. 135/- per Share and brought to tax in the hands of the Assessing Officer brought tax INR. 8,10,00,000/- (INR. 6,00,000/- x INR. 135/-) being aggregate payment received by the Assessee in excess of the Fair Market Value determined by the Assessing Officer using NAV Method. 6. Being aggrieved the Assessee preferred appeal before the CIT(A) challenging the above addition made by the Assessing Officer under Section 56(2)(viib) of the Act. 7. Being aggrieved, the Assessee has preferred the present appeal before the Tribunal on the grounds reproduced at Paragraph 2 above. 8. The Assessee has challenged the addition of INR. INR. 8,10,00,000/- made by the Assessing Officer under Section 56(2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... report was prepared merely on the basis of management projection without any supporting documents was factually incorrect. 9. Per contra Learned Departmental Representative placed reliance upon the Paragraph 6 to 6.2.5 of the Assessment Order and submitted that the Assessing Officer had recorded the statement of independent valuer and asked her to explain the basis on which free cash flows were estimated. In her reply letter, dated 04/09/2017, the independent valuer had stated that free cash flows for the future years provided by the management were used for determining the value of the Shares using DCF Method. Thus, it is clear that no verification was not carried out by independent valuer. Further, no documents and details were furnished by her is support of the valuation report. 10. In rejoinder the Learned Authorized Representative for the Assessee submitted that the independent valuer had clearly stated that due diligence was undertaken and the management projection were not blindly relied upon. The observations made by the Assessing Officer in Paragraph 6.1.2 of the Assessment Order that no corroborating evidence in this regard brought on record were factually incorrect. Pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons. Thus, in absence of any valid and meaningful justification for the projections considered and adopted in determining FMV under the DCF method, the Hon'ble ITAT agreed with the decision of the ld. AO to deploy NAV method. In doing so, the Hon'ble ITAT thus upheld the authority of the ld. AO to override the choice of valuation method adopted under certain circumstances. 4.7. Again, Hon'ble Delhi ITAT in case of Agro Portfolio (P.) Ltd. v. ITO [2018] 94 taxmann.com 112/171 ITD 74, held that, in the facts of this case in the event the ld. AO had any inhibition or doubt about the valuation adopted by the taxpayer, he may make a reference to the Valuation Officer of the Department to verify the veracity of such valuation. However, in a situation where the taxpayer-company fails to substantiate the projections adopted to determine the FMV as per DCF method, it may not be possible even for the Departmental valuation officer to verify the correctness of such valuation adopted. Accordingly, the Hon'ble ITAT held that in such cases, the ld. AO may be forced to reject the DCF method, since the same cannot be verified and instead, could adopt the NAV method to determine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anagement. However, reasonable due diligence was undertaken, and the management projections were not relied upon blindly. The management had assumed that there would be a steady growth of revenues as also that the Assessee would earn income from divestments of equity stake in Entercoms Inc. and Onprocess Technology Inc. held by the Assessee Company through its wholly own subsidiary (i.e. Madhurima Holding Mauritius Ltd.). It was further clarified that the surge in the cash flows in Financial Year 2013-2014 and Financial Year 2016-2017 was on account of estimated gains to be earned by proposed disinvestment of Entercoms Inc. and Onprocess Technology Inc., respectively. We note that in paragraph 6.1.3., the Assessing Officer has recorded that along with reply dated 04/09/2017, filed by the independent valuer following documents were annexed (a) Projections, (b) Profit & Loss Account and Balance Sheet for the Financial Years 2012-2013 to 2017-2018 and (c) Sheet depicting the basis for valuation of proposed divestment of assessee's holding in Entercom Inc. and Onprocess Technology Inc. 15. We find that the Assessee had also explained the surge in projected cash flows and the deviation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly not sold these investments at present, as he expects to realize a better realization on divestments We are also enclosing working of projected cash flow used in valuation of shares along with copy, of financials of MHML for the year ended 31 March 2014 and fair value working in Indian Rupees." (Emphasis Supplied) 16. To support the enterprise value of its wholly owned subsidiary (i.e. Madhurima Holding Mauritius Ltd), the Assessee had furnished the financial statements for the Financial Year ended 31/03/2014. On perusal of the same we find that 'Available-For- Sale Investment' held by the wholly own subsidiary of the Assessee Company had a Fair Market Value of USD. 2,93,15,638/- (INR. 51.06 Crores approx) as on 31/03/2014. AVAILABLE-FOR-SALE INVESTMENT 2014 USD 2013 USD Cost At end of year 21,376,348 21,376,348 Fair Value Adjustment At start of year 7,939,290 6,918,090 Fair value adjustments - 1,021,200 At end of year 7,939,290 7,939,290 Fair values as at year end 29,315,638 29,315,638 Notes To The Financial Statements For The Year Ended 31 March 2014 AVAILABLE-FOR-SALE INVESTMENT (Cont'd) Details of investments: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (b) Profit & Loss Account and Balance Sheet of the Assessee for the Financial Years 2012-2013 to 2017-2018 (c) Sheet depicting the basis for valuation of proposed divestment of assessee's holding in Entercom Inc. and Onprocess Technology Inc. and (d) Financial Statements of wholly owned subsidiary as on 31/03/2014. During the assessment proceedings it was explained that for the purpose of preparing projections it was assumed that there would be a steady growth of revenues. The surge in the cash flows in Financial Year 2013-2014 and Financial Year 2016-2017 was on account of estimated gains from the proposed disinvestment of Entercoms Inc. and Onprocess Technology Inc., respectively. The fair market value of the investments as recorded in the Financial Statements of the wholly owned subsidiary as on 31/03/2014 supported the proposed estimated gains. Thus, we find that in the present case the Assessee had provided justification for the projections adopted while computing the value using DCF Method and no infirmity [other than surge in cash flows which was explained by the Assessee and the independent valuer] was highlighted by the Assessing Officer or the CIT(A). Therefore, the reli ..... X X X X Extracts X X X X X X X X Extracts X X X X
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