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2022 (7) TMI 1490 - AT - Income TaxAddition u/s 56(2)(viib) - share premium in excess of Fair Market Value - FMV determination - Valuation of shares - issuance of equity shares to its non-resident angel investors was by way of conversion of CCDS into equity shares - valuation of equity shares which ultimately leads to the quantification of the addition to be made u/s 56(2)(viib) in the hands of the assessee in the form of excess of aggregate consideration over and above the fair market value of the equity shares - HELD THAT - Owing to the observations made by the ld. CIT(A) on the non-submission of MIS data and other details relevant to the valuation report placed on record the above conclusions drawn in the case of Innoviti Payment Solutions Pvt. Ltd. 2019 (1) TMI 688 - ITAT BANGALORE apply mutatis mutandis and we direct both the assessee and the ld. AO to comply with the same for which in the conspectus of factual matrix applicable law deliberated above we remit the issue of valuation of shares to the file of ld. AO for the limited purpose of verification in terms of conclusions noted above so as to arrive at satisfaction on the scientific basis of valuation and rationality of assumptions adopted to build hypothesis on the valuation of shares. The assessee is also directed to make available the MIS data and all the other details of various assumptions adopted to arrive at the given valuation of equity shares issued by it. Ld. AO is also directed to analyze the data and projections which have undergone in arriving at the FMV on the basis of DCF method opted by the assessee and to come to a conclusion accordingly in terms of the applicable law. Before parting on this issue we make it clear that we have not expressed any of our views on the correctness and completeness of the valuation report submitted by the assessee by adopting DCF method under Rule 11UA(2)(b) of the Rules so as not to impair or injure the verification process before the ld. AO. The observations made herein by us in remitting the matter back to the file of the ld. AO will also not impair or injure the case of the assessee and not cause any prejudice to the defence/explanations of the revenue. Accordingly these two grounds are allowed for statistical purposes.
Issues Involved:
1. Applicability of section 56(2)(viib) of the Act on the transaction of conversion of Compulsorily Convertible Debentures (CCDs) into Equity Shares. 2. Applicability of exclusion clauses of section 56(2)(viib) of the Act on transactions with Venture Capital Fund and Non-residents. 3. Applicability of Rule 11UA of the Income-tax Rules, 1962 for valuation method opted for valuation of equity shares. 4. Valuation arrived at by the assessee of the equity shares issued. Detailed Analysis: 1. Applicability of Section 56(2)(viib) on the Conversion of CCDs into Equity Shares: The Tribunal examined whether the conversion of CCDs into equity shares falls under the purview of section 56(2)(viib) of the Income-tax Act. The assessee argued that the entire consideration was received at the time of issuance of CCDs in AY 2011-12 and AY 2012-13, and the conversion did not involve further payment. However, the Tribunal noted that the term "consideration" encompasses more than just money and includes tangible or intangible benefits received upon conversion. The Tribunal concluded that the provisions of section 56(2)(viib) apply to the conversion of CCDs into equity shares in AY 2013-14, as the conversion entails the receipt of consideration by the assessee. The Tribunal dismissed the assessee's ground on this issue. 2. Applicability of Exclusion Clauses of Section 56(2)(viib) on Transactions with VCF and Non-residents: The assessee claimed that share premium received from Aavishkar India Micro Venture Capital Fund (VCF) and certain non-residents should be excluded under the first proviso to section 56(2)(viib). The Tribunal accepted the assessee's contention regarding Aavishkar being a VCF and the assessee being a Venture Capital Undertaking (VCU), thus falling within the exclusion clause. The Tribunal directed the deletion of the addition related to the share premium received from Aavishkar. For the non-resident investors, the Tribunal noted that the issuance of equity shares was by way of conversion of CCDs and accepted the assessee's submission that the provision of section 56(2)(viib) does not apply to non-residents. The Tribunal directed the deletion of the addition related to the share premium received from non-resident angel investors. 3. Applicability of Rule 11UA for Valuation Method: The Tribunal examined the valuation method adopted by the assessee under Rule 11UA(2) of the Income-tax Rules, 1962. The assessee opted for the Discounted Free Cash Flow (DCF) method, while the Assessing Officer (AO) adopted the Net Asset Value (NAV) method. The Tribunal held that the AO cannot change the method of valuation chosen by the assessee, as Rule 11UA(2) provides an option to the assessee to choose either the DCF or NAV method. The Tribunal emphasized that the AO can scrutinize the valuation report but cannot disregard the method opted by the assessee. 4. Valuation Arrived at by the Assessee: The Tribunal noted that the AO rejected the DCF valuation report submitted by the assessee without providing specific discrepancies. The Tribunal observed that the DCF method is based on projections and cannot be compared with actual results. The Tribunal directed the AO to verify the scientific basis of the valuation and the rationality of the assumptions adopted by the assessee. The Tribunal remitted the issue of valuation of shares to the AO for verification and directed the assessee to provide all relevant data and assumptions used in the valuation report. Conclusion: The Tribunal partly allowed the appeal of the assessee, holding that section 56(2)(viib) applies to the conversion of CCDs into equity shares, but the share premium received from VCF and non-residents falls within the exclusion clauses. The Tribunal upheld the assessee's right to choose the DCF method for valuation and remitted the issue of valuation back to the AO for verification.
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