TMI Blog2022 (11) TMI 1465X X X X Extracts X X X X X X X X Extracts X X X X ..... ir market value of the shares determined by a merchant bank or an accountant. In the fact of the present case, admittedly, the assessee has got the fair market value of the shares determined through an accountant. Thus, the assessee has acted as per the mandate of section 56(2)(viib) read with rule 11UA. Whereas, the Assessing Officer has substituted fair market value determined by the assessee through his own valuation. As decided in M/s. Dayalu Iron Steel Pvt. Ltd [ 2022 (7) TMI 625 - ITAT DELHI] as 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 give any power to the Assessing Officer to examine or substitute his own value in place of the value determined or requires any satisfaction on the part of the Assessing Officer to tinker with such valuation. Here, in this case, Assessing Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evidences furnished by the assessee, hence, accepted the investments to be genuine. As could be seen, without making any further inquiry independently, simply based on the documents available on record, Commissioner (A) has held that the investments made are not genuine, as, the creditworthiness and genuineness is not established. When the assessee has discharged the initial onus by furnishing all documentary evidences to establish the identity and creditworthiness of the investors and also furnished all documentary evidences to establish the genuineness of the transaction done through banking channel, merely on presumption and surmises the investments made cannot be treated as unexplained cash credit. Decided in favour of assessee. Penalty u/s 271(1)(c) - HELD THAT:- While deciding the quantum appeal of the assessee in the earlier part of the order, couple of additions have been deleted and the addition relating to disallowance of expenses has been restored back to the Assessing Officer. Thus, presently there is no surviving addition which formed the basis for imposition of penalty u/s 271(1)(c) of the Act. Decided in favour of assessee. - Shri Saktijit Dey, Judicial Member For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that the fair market value of the share as on the date of sale has to be determined by adopting one of the methods prescribed under rule 11UA, as per the option of the assessee. He submitted, the assessee has opted to value the shares through an independent valuer by adopting DCF method, wherein, the independent valuer determined the value of each share at Rs.50/-. He submitted, since the value of share determined by the assessee is as per the statutory provisions, the Assessing Officer cannot substitute the value by adopting his own valuation. For such proposition, he relied upon the following decisions: 1. M/s. Dayalu Iron Steel Pvt. Ltd. Vs. ITO, ITA No.6173/Del/2019 for AY: 2015-16, dated 12.07.2022. 2. M/s. Dayalu Fashions Pvt. Ltd. Vs. ITO, ITA No.6174/Del/2019 for AY: 2015-16, dated 12.07.2022. 3. M/s. Devesh Cinema Pvt. Ltd. Vs. ITO, ITA No.6184/Del/2019 for AY: 2015-16, dated 12.07.2022. 2.3 Learned Departmental Representative strongly relied upon the observations of the Assessing Officer and learned Commissioner (Appeals). 2.4 I have considered rival submissions and perused the materials on record. As far as the factual aspect relating to the disputed issue are concer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Bank statement for the period from 1.4.2014 to 31.3.2015 83-84 Ledger account of the bank book in the books of the appellant company 85 Valuation Report under Rule 11UA(2)(b) of the Income Tax Rules, 1962 from ! the Chartered Account as per Discounted Cash Flow Method. 86-89 13. On going through the order of A.O and Ld.CIT(A) it is found that the authorities have just brush aside the documents produced by the assessee and without making any enquiry about authenticity of the documents furnished and without bringing any material or making enquiry came to conclusion that the assessee company is not worth enough to fetch the share premium of Rs. 76,00,000/-. The authorities below without verifying the veracity of the documents from the publically available data on the web site of MCA IT Department. Once the assessee provided the names, addresses and Pan, particulars and ROC details of the investors. The Ld. A.O ought to have made further enquiry. Once the assessee furnishes the documents to prove the identity, creditworthiness and genuineness of the transaction. The same cannot be denied in the absence of material contrary brought by the Assessing Officer. 14. The Hon'ble Supre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be invoked on a normal business transaction of issuance of shares unless it has been demonstrated by the Revenue authorities that the entire motive for such issuance of shares on higher premium was for the tax abuse with the objective of tax evasion by laundering its own unaccounted money. His main contention was that, being a deeming fiction, it has to be strictly interpreted and there is no mandate to the Assessing Officer to arbitrarily reject the valuation done by the assessee on his own surmises and whims. We are in tandem with such a reasoning of the ld. Counsel, because the deeming fiction not only has to be applied strictly but also have to be seen in the context in which such deeming provisions are triggered. It is a trite law well settled by the Constitutional Bench of Supreme Court, in the case of Dilip Kumar Sons (supra) that in the matter of charging section of a taxing statute, strict rule of interpretation is mandatory, and if there are two views possible in the matter of interpretation, then the construction most beneficial to the assessee should be adopted. Viewed from such principle, here is a case where the shares have been subscribed by unrelated independent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the shares shall be the value - (i) as may be determined in accordance with such method as may be prescribed: 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 business or commercial rights of similar nature, whichever is higher; Further, as per clause (i) of the Explanation as reproduced above, the FMV is to be determined in accordance with such method as may be prescribed. Clause (ii) admittedly is not applicable on the facts of the assessee s case. The method to determine the FMV is further provided in Rule 11UA(2). The relevant extract of the applicable rules is reproduced below: 11UA. [(1)] For the purposes of section 56 of the Act, the fair market value of a property, other than immovable property, shall be determined in the following manner, namely, (2) Notwithstanding anything contained in subclause (b) of clause (c) of sub-rule (1), the fair market value of unquoted equity shares for the purposes of sub-clause (i) of clause (a) of Explanation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s objective of projection of films and media entertainment, then such commercial wisdom cannot be questioned. Even the prescribed Rule 11UA (2) does not give any power to the Assessing Officer to examine or substitute his own value in place of the value determined or requires any satisfaction on the part of the Assessing Officer to tinker with such valuation. Here, in this case, 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 Assessing Officer has to accept the same and in case he is not satisfied, then we do not we find any 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 wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bear in mind the DCF Method and is essentially based on the projections (estimates) only and hence these projections cannot be compared with the actual 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 figure 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 start-up is a good example and as submitted the income-tax Act also recognized and encouraging the start-ups. iii) DQ (International) Ltd. vs. ACIT (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 actual after 3 or 4 years down the line. Accordingly, the grounds raised by the assessee are allowed . The a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Coming to the findings of Ld. CIT(A), we notice that Ld. CIT(A) has accepted the DCF methoc adopted by the assessee and he analyzed the factual performance of the assessee subsequent to issue o: shares. The valuation of shares are for that matter any valuation is itself is a projection of future events oi activities and no doubt it has to be done with some accuracy, however no person in the world at the time o: projecting events or result to project with 100% of accuracy and actual events are highly volatile ant highly dependent on so many factors. Assessee has projected based on the fact that software of wallet and association of ICICI bank will increase the market share and accordingly, they have projected the figure; and further the valuer has adopted the projection figures provided by the assessee and it is left to the wisdom of valuer to accept or reject or to carry out independent investigation raised with the valuer am legislature in more than one place depends on the skills of the professionals like merchant banker only t value the valuation of shares or other volatile securities. Since, Ld. CIT(A) has compared the factual with projections and assessee has achieved 40% of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of premium (Rs.) 1 Sh. Anand Mahindra 06.01.2015; 23.02.2015 4,15,385 1949 80,95,85,365/- 2 Sh. Rakesh Jhunjhunwala 19,207 2602 4,99,80,793/- 3 Sh. Radhakishan Damini 19,207 2602 90,95,46,200/- Total 4,53,799 26. The assessee before issuing the shares had got the share valued by Chartered Accountant, i.e., 'Accountant' as provided under Rule 11UA(2) by using the 'DCF Method' which is one of the prescribed method in Rule HUA(2)(b) r.w.s. 56(2)(viib). Based on the said valuation report dated 15.12.2014, the assessee company had issued the shares to the aforesaid equity partners on premium. The Ld. Assessing Officer has discarded the valuation report of the CA mainly on the ground that valuation of the equity shares carried out by the assessee was based on projection of revenue which did not match with the actual revenues of the subsequent years. He further held that no efforts have been made by the assessee to substantiate the figures of projected revenue in the valuation report and has also failed to submit any basis for projection. Instead, AO held that assessee should have invested the share premium amount to earn some income, whereas assessee has made investment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in contention was that, being a deeming fiction, it has to be strictly interpreted and there is no mandate to the Assessing Officer to arbitrarily reject the valuation done by the assessee on his own surmises and whims. We are in tandem with such a reasoning of the Id. Counsel, because the deeming fiction not only has to be applied strictly but also have to be seen in the context in which such deeming provisions are triggered. It is a trite law well settled by the Constitutional Bench of Supreme Court, in the case of Dilip Kumar Sons {supra) that in the matter of charging section of a taxing statute, strict rule of interpretation is mandatory, and if there are two views possible in the matter of interpretation, then the construction most beneficial to the assessee should be adopted. Viewed from such principle, here is a case where the shares have been subscribed by unrelated independent parties, who are one of the leading industrialists and businessman of the country, after considering the valuation report and future prospect of the company, have chosen to make investment as an equity partners in a 'start-up company' like assessee, then can it be said that there is any kind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 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 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e next issue arising for consideration is relating to disallowance of expenses of Rs.5,29,311/-. In course of assessment proceeding, the Assessing Officer, on verifying the return of income of the assessee, noticed that the only income offered by the assessee is interest income. No income from business was offered by the assessee. Being of the view that the assessee has not carried out any business during the year and the interest income is assessable under the head income from other sources , the Assessing Officer disallowed the expenses of Rs.5,29,311/-. Learned Commissioner (Appeals) sustained the disallowance. 3.1 I have considered rival submissions and perused the materials on record. From the details filed before me, it is observed that the assessee is in the process of setting up of its business of beauty parlor. However, the business was not fully functional. Irrespective of that, the assessee had to incur certain expenditure to maintain its corporate status. From the details of expenses furnished before me, it is observed that the expenses incurred by the assessee relate to salaries, staff welfare, bank expenses, accounting charges, office expense, rent, audit fee, conveni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before the Assessing Officer. Even, after thorough inquiry, the Assessing Officer did not find anything adverse or deficient in the documentary evidences furnished by the assessee, hence, accepted the investments to be genuine. As could be seen, without making any further inquiry independently, simply based on the documents available on record, learned Commissioner (Appeals) has held that the investments made are not genuine, as, the creditworthiness and genuineness is not established. When the assessee has discharged the initial onus by furnishing all documentary evidences to establish the identity and creditworthiness of the investors and also furnished all documentary evidences to establish the genuineness of the transaction done through banking channel, merely on presumption and surmises the investments made cannot be treated as unexplained cash credit. 4.3 In view of the aforesaid, I delete the addition made by learned Commissioner (Appeals). 5. In the result, the appeal is partly allowed. ITA No.246/Del/2022 (Penalty Appeal) 6. I have heard the parties and perused material on record. Based on the addition made in the quantum proceeding the Assessing Officer has initiated pro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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