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TMI Blog2017 (5) TMI 58X X X X Extracts X X X X X X X X Extracts X X X X ..... by Board of Directors of the assessee company and assumption of the said CA V R Jain & Company who issued valuation report dated 15-10-2012 in assuming and presuming that each non cumulative compulsory convertible preference shares shall be converted into one equity share of the assessee company needed enquiry by the AO vis-à-vis its implication in computing income as contemplated u/s 56(2)(viib) of 1961 Act and any discounting factor is to be used in this regard. Further, the shares issued by the assessee were preference shares and not equity shares albeit preference shares are compulsorily convertible into equity shares. The AO should have also looked into this aspect that Rule 11UA(1)(c)(c) of 1962 Rules stipulates that in case of issue of shares other than equity shares , the Rule mandate valuation as per following method : (c) the fair market value of unquoted shares and securities other than equity shares in a company which are not listed in any recognized stock exchange shall be estimated to be price it would fetch if sold in the open market on the valuation date and the assessee may obtain a report from a merchant banker or an accountant in respect of such valuation.] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the Act ) dated 23.03.2016 (hereinafter referred to as the assessment order ), as erroneous and prejudicial to the interest of the Revenue. The reasons given by him for doing so are wrong, contrary to the facts of the case and against the provisions of law; 2. The Pr. CIT failed to appreciate that, where two views are possible and the Assessing Officer, after conduct of due enquiry, has taken one view with which the Pr. CIT does not agree, the assessment order cannot be treated as erroneous and prejudicial to the interest of the revenue; 3. The Pr.CIT erred in invoking the provision of section 56(2)(viib) of Act for reasons which are wrong, contrary to the facts of the case and against the provisions of law; 4. The Pr.CIT erred in holding the issue price of noncumulative compulsorily convertible preference shares adopted basis a valuation report of an independent valuer as exorbitant on reasons purely in the realm of conjectures / surmises without appreciating that the same is in accordance with provisions of the Act; 5. The above grounds/sub-grounds are without prejudice to each other. 3. This appeal has arisen out of the order u/s 263 of the Act dated 08-12- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cash flow was used in valuing shares by DCF method. Therefore, it is clear that valuation made on the basis of unverified exorbitant FCF given by management has given inflated value of shares @ ₹ 250/-. This is not as per recognized DCF method but as per whims fancy of the management to arrive at higher value to issue shares at huge premium. Considering this the valuation of shares done by CA as per DCF method is not reliable and should have been questioned by the A.O, which was not done. If DCF method is rejected and book value method is taken then there can be addition of more than ₹ 9 crores u/s 56(2)(viib). In view of the above, the assessment order passed u/s.143(3} by the ACIT- 3(2)(1), Mumbai dated 23- 03-2016 appears to be erroneous and prejudicial to the interest of Revenue and it is evident that the Assessing Officer has committed the lapse of not applying his mind to the issues discussed above. I, therefore, propose to pass such order there on as the circumstance of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment under the provisions of Section 263. The assessee s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /s 263 of the Act. The finding of the commissioner should be on fresh tangible material and after due application of mind pursuant to which the Commissioner must come to a firm conclusion. AO has conducted detailed enquiry and specifically applied his mind to the issue at hand. Having perused all the relevant details in connection with issue at hand and having taken a view that preference shares are correctly issue at the fair market value, AO completed the scrutiny assessment making no addition on that count. Hence, the exercise of jurisdiction u/s 263 is not warranted. The preference shares have been issued at ₹ 250/ - per share after obtaining a valuation report from an independent valuer. The valuation has been done based on the DCF method suing reasonable assumptions. The use of such methodology is in line with Rule 11UA. The assessee, in support relied upon the decision of the Hon ble Apex Court in the case of Malabar Industrial Co. Ltd. v. CIT, (2000) 243 ITR 83(SC) to challenge the proceedings u/s 263 of the 1961 Act. The ld. Pr. CIT observed that the amendment made to section 263 of the 1961 Act w.e.f. 1st June, 2015 widens the scope of section 263 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. Crores Particulars % Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Free cash flow for equity 5.30 43.01 6.67 9.41 223.46 Discounting factor 15.01 0.93 0.81 0.70 0.61 0.53 Discounting cash flow 4.93 34.79 4.69 5.75 118.80 Aggregate DCF value 168.96 Terminal value 100.13 Total value of company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said CA issuing the said valuation report dated 15-10-2012. The ld. Pr. CIT observed that the future cash flows for next 5 years were estimated in the valuation report at ₹ 5.30 crores, ₹ 43.01 crores, ₹ 6.67 crores, ₹ 9.41 crores and ₹ 223.46 crores , whereas the free cash flow for financial year 2011-12 was not even ₹ 1 crore. It was observed by ld. Pr. CIT that valuation has been determined based on unverified exorbitant cash flow given by management which resulted in inflated value of shares @ ₹ 250/- per share. It was observed by ld. Pr. CIT that no scientific method had been employed for determining the valuation of shares which is being done by management as per its whims and fancies to arrive at higher value to issue shares at huge premium which is not reliable and the AO should have questioned the same which was not done by the AO while passing assessment order dated 23-03-2016 u/s 143(3) of the 1961 Act. It was observed that the assessee had tried to justify the DCF method employed by the C.A. in the said valuation report dated 15-10-2012. The assessee submitted that it had issued and allotted 6,00,000 noncumulative compulso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of application of DCF method with the perspective of ICAI guidelines on valuation of shares nor the assessee has submitted any kind of explanation in respect of the same. It was observed that the assessee has only commented on the superiority of DCF method in preference to net asset value method. The ld. Pr. CIT observed that the assessee has failed to justify the flaws and mistakes/errors pointed out in the said valuation report. The ld. Pr. CIT observed that the assessee has not addressed the issue of share at unjustified large premium in the instant case and the same is hit by provisions of Section 56(2)(viib) of the 1961 Act. Thus, the ld. Pr. CIT set aside the assessment order dated 23-03-2016 passed by the A.O. u/s 143(3) of the 1961 Act with a direction to the A.O. to make fresh assessment after conducting detailed enquiries and detailed verifications of the submissions made. The A.O. was also directed to examine the valuation report dated 15-10-2012 issued by CA M/s V R Jain Co submitted by the assessee in the light of observation and recommendation as mentioned in the Technical guide on share valuation issued by ICAI. The AO was also directed by learned Pr. CIT to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... drawn to paper book /page 39 whereby details of allotment money received against issuance of preference shares capital is placed. Our attention was also invited to paper book / page 40 to 43 whereby form 2 which is return of allotment of share filed with Ministry of Corporate Affairs(MCA-ROC) has been placed. Our attention was also invited to paper book/ page 44-45 whereby bank statement of Smt. Padmini Somani who was subscriber to the said preference shares is placed and our attention was drawn to cheque of ₹ 7,50,00,000/- dated 16-10-2012 which is debited to the said bank account in favour of the assessee is placed. Similarly, bank statement of other subscribers to the shares are placed on record at page 46-51/paper book and it was pointed out that payments for shares were made through banking channel. The learned counsel for the assessee brought our attention to paper book / page 52-54, wherein the Board Resolution for allotment of shares to the said shareholders is placed. Our attention was also drawn to paper book/ page No. 55-57 whereby the assessee s letter to the AO is placed wherein the assessee enclosed said valuation report dated 15-10-2012 issued by CA M/s V R Ja ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct was introduced to curb black money and only 2% cases are selected for scrutiny. The learned CIT DR submitted that there is no application of mind by the A.O. while accepting valuation adopted by the valuer in its valuation report dated 15-10-2012, and the said valuer merely relied upon the assumptions of management of the assessee company. It is submitted that it was a complex valuation of preference shares which was not done correctly by the valuer who merely relied upon the management projections without verifying the same. It is submitted that it was the duty of the A.O. to make proper enquiries which AO failed to make. The assessee had issued 6,00,000 preference shares of ₹ 10/- each issued at premium of ₹ 240/- per share which is very high. Section 263 of the 1961 Act was rightly invoked by the ld. Pr. CIT was the contention of ld. CIT DR. The A.O. cannot prejudice the interest of the Revenue. It is submitted that the ld. Pr. CIT was correctly applied the provisions of section 263 of the Act. It is also brought to notice that explanation 2 to Section 263 of the 1961 Act was inserted by Finance Act, 2015 w.e.f. 01-06-2015. The ld. CIT D.R. relied upon the decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch fully paid up issued at a premium of ₹ 240/- per share to existing shareholders and submitted copy of valuation report of the said CA, V R Jain Co. and details of shareholder along with their PAN, copy of bank statement from where the shareholders to whom shares were issued and allotted issued the cheque s in favour of the assessee, copies of income tax returns along with Balance sheet of the said shareholders . The assessee also furnished copy of form no 2 being return of allotment of shares filed with the office of Registrar of Companies, MCA intimating about issue and allotment of 6,00,000 non cumulative compulsory convertible preference shares of ₹ 10/- each fully paid up issued at a premium of ₹ 240/- per share to existing shareholders, copies of Board Resolution allotting the aforesaid shares, list of shareholders to whom shares were allotted at premium were also duly submitted by the assessee before the AO. The end use of the proceeds of the issue of the aforesaid preference shares were also submitted before the AO as being issued for subscribing to 1,48,70,000/- preference shares of ₹ 10 each of Entercoms Solutions Private Limited . The explanat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsidiary company namely M/s Madhurima Holdings Mauritius Limited for the financial year ended 31-03-2015 were also submitted by the assessee before the AO. The AO accepted these explanations and passed the assessment order dated 23-03-2016 u/s 143(3) of the 1961 Act , wherein no additions were made by the AO u/s 56(2)(viib) of the 1961 Act and also there is no discussion in the assessment order w.r.t. the issue of said non cumulative compulsory convertible preference shares of ₹ 10/- each fully paid up issued at a premium of ₹ 240/- per share to existing shareholders and its acceptability by the AO. It is profitable at this stage to reproduce relevant provisions of 1961 Act and 1962 Rules which are reproduced hereunder : F.-Income from other sources Income from other sources. 56. (1) 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 foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on, or assigned to, him under the orders or directions issued by the Board or by the 7[Principal Chief Commissioner or] Chief Commissioner or 7[Principal Director General or] Director General or [Principal Commissioner or] Commissioner authorised by the Board in this behalf under section 120; (b) record [shall include and shall be deemed always to have included] all records relating to any proceeding under this Act available at the time of examination by the [Principal Commissioner or] Commissioner; (c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal [filed on or before or after the 1st day of June, 1988], the powers of the [Principal Commissioner or] Commissioner under this sub-section shall extend [and shall be deemed always to have extended] to such matters as had not been considered and decided in such appeal.] [Explanation 2.-For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which has been audited by the auditor of the company appointed under section 224 of the Companies Act, 1956 (1 of 1956) and where the balance-sheet on the valuation date is not drawn up, the balance-sheet (including the notes annexed thereto and forming part of the accounts) drawn up as on a date immediately preceding the valuation date which has been approved and adopted in the annual general meeting of the shareholders of the company; and (ii) in any other case, the balance-sheet of such company (including the notes annexed thereto and forming part of the accounts) as drawn up on the valuation date which has been audited by the auditor appointed under section 224 of the Companies Act, 1956 (1 of 1956); ] (c) merchant banker means category I merchant banker registered with Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992); (d) quoted shares or securities in relation to share or securities means a share or security quoted on any recognized stock exchange with regularity from time to time, where the quotations of such shares or securities are based on current transaction made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce value of the artistic work shall be the fair market value; (iii) in case the artistic work is received by any other mode and the value of the artistic work exceeds rupees fifty thousand, then assessee may obtain the report of registered valuer in respect of the price it would fetch if sold in the open market on the valuation date; (c) valuation of shares and securities,- (a) the fair market value of quoted shares and securities shall be determined in the following manner, namely,- (i) if the quoted shares and securities are received by way of transaction carried out through any recognized stock exchange, the fair market value of such shares and securities shall be the transaction value as recorded in such stock exchange; (ii) if such quoted shares and securities are received by way of transaction carried out other than through any recognized stock exchange, the fair market value of such shares and securities shall be,- (a) the lowest price of such shares and securities quoted on any recognized stock exchange on the valuation date, and (b) the lowest price of such shares and securities on any recognized stock exchange on a date immediatel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hange shall be estimated to be price it would fetch if sold in the open market on the valuation date and the assessee may obtain a report from a merchant banker or an accountant in respect of such valuation.] [(2) Notwithstanding anything contained in sub-clause (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 to clause (viib) of sub-section (2) of section 56 shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner under clause (a) or clause (b), at the option of the assessee, namely:- (a) the fair market value of unquoted equity shares = (A L) (PV), (PE) where, A = book value of the assets in the balance-sheet as reduced by any amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act and any amount shown in the balance-sheet as asset including the unamortised amount of deferred expenditure which does not repr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r law after conducting detailed enquiries and verifications of the submissions of the assessee. The directions were also issued by ld. Pr. CIT to the AO to examine the valuer w.r.t. valuation report dated 15-10-2012 prepared by the said valuer. The ld Pr. CIT also invoked newly inserted Explanation 2 to Section 263 of the 1961 Act which was inserted by Finance Act, 2015 . It was observed by the learned Pr. CIT that the valuer M/s V R Jain Co has issued valuation report dated 15-10-2012 wherein he has used DCF method to arrive at valuation of shares but he has merely used projections and information provided by management and no independent enquiries/verifications as to management certified projections were made by the said CA , V R Jain Co. to arrive at valuation of the shares. The said CA in his valuation report has issued disclaimer that no independent verifications as to management certified projections were made by the said CA before issuing valuation report dated 15-10-2012 , valuing aforesaid preference share at ₹ 250 per share as against face value of the share at ₹ 10 per share. The AO also accepted the said valuation report without probing into the basis of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 43.01 crore for financial year 2013-14 and also further projected free cash flow increased to ₹ 223.46 crores in financial year 2016-17 from merely ₹ 9.41 crores in financial year 2015-16 , which were adopted by the said valuer M/s V R Jain Co in his report dated 15-10-2012. The AO has also not probed on the disclaimer issued by the said CA while issuing valuation report that he has not made any independent verification of the projections made by the management. The actual free cash flow of the assessee was less than ₹ 1 crore for the financial year 2011-12 , while for the first year of the projections i.e. financial year 2012-13, the free cash flow adopted was ₹ 5.30 crores i.e. more than five times. The said valuer has given a disclaimer in his valuation report dated 15-10-2012 that he has not made any independent investigations/verification as to the management certified projections which were merely adopted by the said valuer, which also should have triggered a further probe by the AO as to the reliability and authenticity of the said valuation report more-so newly inserted Section 56(2)(viib) of 1961 Act was applicable for the impugned assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 1961 Act. There are certain other flash points which should have triggered further probe by the AO as to the valuation report dated 15-10-2012 furnished by the assessee as the assessee did not issued equity shares during the relevant previous year but instead issued 10% non cumulative compulsory convertible preference shares of ₹ 10/- each fully paid up issued at a premium of ₹ 240/- per share which are convertible into 1 equity share for every preference share held by the allottee or at such higher ratio of conversion at the end of the tenure of 10 years as may be decided by Board of Directors of the assessee company. These shares are also convertible at the option of allottee after three years at the conversion ratio to be decided by Board of Directors of the assessee company and assumption of the said CA V R Jain Company who issued valuation report dated 15-10-2012 in assuming and presuming that each non cumulative compulsory convertible preference shares shall be converted into one equity share of the assessee company needed enquiry by the AO vis- -vis its implication in computing income as contemplated u/s 56(2)(viib) of 1961 Act and any discounting factor is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvoked the provisions of section 263 of the Act as the A.O. failed to make proper enquiry and verification as required for completion of the assessment u/s 143(3) of 1961 Act, which made the said assessment order dated 23-03- 2016 as erroneous in so far as prejudicial to the interest of Revenue. We have duly considered the case laws relied upon by both the parties before arriving at our above decision. The assessee has relied upon the decision of Hon ble High Court in the case of CIT v. Jagadhri Electric Supply Industrial Co.(1981) 7 taxman 56(P H HC), wherein it was held if the assessee satisfy tribunal that grounds for decision given in the order by the Commissioner are wrong on facts or not tenable in law, the tribunal can set aside the order of the Commissioner. But in the instant case, the AO has not looked into the law as well valuation report submitted by the assessee for valuing the fair price of the shares in proper perspective as detailed above in preceding para s of this order and hence the facts in the instant case are different from the ratio of decision of CIT v. Jagadhri Electric Supply Industrial Co.(supra) which is not applicable. In the case of CIT v. Ga ..... X X X X Extracts X X X X X X X X Extracts X X X X
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