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TMI Blog2018 (9) TMI 403X X X X Extracts X X X X X X X X Extracts X X X X ..... , know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher. Accordingly, the value computed under the Rule at 95.90 per share is higher than 65.31 or 32.76 per share and therefore, the higher valuation has to be adopted. Moreover, it is only the Explanation (a)(ii) speaks of the satisfaction of the AO but there appears no such condition in the Explanation (a)(i) which therefore AO is not permitted to interfere in the valuation, once done in accordance with the method prescribed in the Rule 11UA(2). No justification behind rejecting the declared valuation of the shares and in the impugned addition made by the AO but partly sustained by the CIT(A), which is hereby deleted.- Appeal of the assessee is partly allowed X X X X Extracts X X X X X X X X Extracts X X X X ..... d no. 2, Hence the same is dismissed being not pressed. 3.1 The Ground No. 4 of the assessee is general in nature which does not require any adjudication. 4.1 Apropos Ground No. 1 and 3 of the assessee, the facts as observed by the AO are that the assessee is a private limited company incorporated on 31.1.2011 which is registered under the Companies Act, 1956. There was no business activity during the starting A.Y.'s, from A.Y. 2011 to 12 to 2013-14, except purchase of a land worth ₹ 3,27,690/-. During the year under consideration, the assessee-company had issued 1,40,000 shares having the face value of ₹ 10 each, at the premium of ₹ 60 per share, receiving a total premium of ₹ 84,00,000/-, over and above the share application money of ₹ 14,00,000/-, as per the following chart:- Name of the parties to whom share were allotted No. of shares Share Application money @ ₹ 10/- per share Share premium @ ₹ 60/- per share Total amount received Rameshwaram Buildmat Pvt. Ltd. 50,000 5,00,000/- 30,00,000/- 35,00,000/- Rameshwaram Architecture Pvt. Ltd. 40,000 4,00,000/- 24,00,000/- 28,00,000/- Shri Oswal Granites Pvt. Ltd. 5000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in accordance with the amended provisions of section 56(2)(viib) of the I.T. Act." Consequently, the excess premium of ₹ 81,72,400 received by the assessee was held unjustified and considered as income from other sources and was added to the total income of the assessee by the AO. 4.2 In first appeal, the ld. CIT(A) partly confirmed the addition by rejecting the valuation done as per Discounted Cash Flow Method by observing as under: "4.3 I have gone through the assessment order, statement of facts grounds of appeal and written submission carefully. It is seen that w.e.f 01.04.2013 the provisions of section 56(2)(vii) are applicable to the any consideration received for issue of shares which exceeds the fair market value of the shares issued by the appellant company. During the course of appellate proceedings, the appellant has furnished the statement showing fair market value of the shares, claimed to have been computed as per the Discounted Free cash Flow Method,as provided under Clause b of Sub-rule 2of Rule 11UA. The valuation of the share as par this statement was ₹ 119.93 par share. When the appellant was requested to explain the basis of the figures adopte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant for these three years is absurd and are not even approximately close to the actual figures. The sales for the F.Y. 2013-14, 1014-15 and 2015- 16 shown in the valuation statement furnished by the appellant is ₹ 1152.71 lacs, ₹ 1297.25lacs and ₹ 1405.65lacs whereas the actual figure of sale of these three financial years were Nil, ₹ 328.74 lac and ₹ 790.81 lac. In view of these facts,I am of the considered view that the valuation of shares made in the valuation statement claimed to have been prepared on the basis of discounted free Cash Flow Method as provided under Clause 'b' of Sub-rule 2 of Rule 11UA is absolutely unreliable and without any basis .Therefore, the valuation of shares made in any of the three valuation report submitted by the appellant can be the held to be in accordance with the method provided under Clause 'b' of Sub-rule 2of Rule 11UA. Hence, the valuation submitted by the appellant is hereby rejected. However, the contention of the appellant that there is arithmetical mistake in computation of the fair market value by the AO by applying the fair market value by applying @32.76% is found to be correct. The AO is directed to c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per Rule 11UA (2) of the Rules). The very purpose of certification of DCF valuation by a merchant banker or chartered accountant is to ensure that the valuation is fair and reasonable. Such valuation is to be done by an expert of the subject only, which an assessing officer is not expected to be. The said rule provides that such valuation shall be the fair market value for the purpose of this section based on DCF Method. The Rule nowhere permits the AO to make any adjustment therein. 3.1 The Discounted Cash Flow Method derives the value from the present value of future cash flows therefore, this method entails the assessee to make the projections (i.e. Estimations) about revenue, expenses, investments, repayments etc. The projection is made on certain reasonable assumptions w.r.t reasonableness of future cash flows, industry and economic scenario, discount rate etc. The value is derived from the future profitability or cash flows of the company. The investors expect a certain minimum return on his investment. (ROI) Such returns can be generated only by future profits. Thus valuation of shares is primarily based on future expectations which necessarily involves estimations. Such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertain, so there may be some post reporting events, which may affect the valuation done by the Valuer at the time of valuation, but the Valuer is not required to update the report for these subsequent events. It is further submitted that the determination of the fair market value of the unquoted equity share, can't be done with a mathematical precision in as much as it all depends upon the projections being made which may or may not accurately match with the facts and circumstances which are in the womb of the future. One cannot foresee the future. It is for this reason only, the Rules itself has provided for such the fair market value to be determined based on a certificate of a Chartered accountant (as per discounted free cash flow method). It is not denied that in this case such fair market value has been determined based on a certificate of a Chartered Accountant Smt. Dhanvanti Gupta (PB 18-21) @ of ₹ 119.93 per equity share. However, because of some calculation mistake, it was correctly revised showing value of ₹ 95.90/- Per equity share. The focus of the ld. CIT (A) is only on the issue that what the actual figures were in the immediately later year. 3.5 The DC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e DCF was done by the valuer in accordance with the Technical Guidance Note of the ICAI on DCF which is of recommendatory in nature yet however, the lower authorities completely failed to point out any defect/deficiency. 5.5 A newly started company or a start-up can be valued only by this method, as these type of organizations have very little or no capital base. In this case, the assessee was a newly incorporated company with a very little assets base. The Board of Directors of the company decided to issue the shares at the premium because of the great prospects of earning and growth in the future. It is the wisdom of the shareholders whether they want to subscribe to share at such premium or not. 5.6 This way, the ld. CIT(A), in fact, has indirectly applied the provisions of Rule 11UA(1)(a) which speaks of the such valuation to be based on the actual i.e. as per NAV Method. That is the reason he started making a comparison between the estimation made by the CA u/r 11UA(2)(b) @ 119/95.90 with the actuals which was not warranted had the ld. CIT(A) correctly appreciated and applied clause (b) only of Rule 11UA. Hence the CIT(A) clearly proceeded on a misconception. Interesting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le discretion of the assessee as it deems fit to apply. In the instant case, the assessee company has exercised its option to value its shares as per DCF method and we find that the objection of the AO is primarily directed at not adopting the book value of determination of value of shares as against DCF adopted by the assessee company. The exercise of such an option cannot therefore be challenged by the Revenue once the same has been exercised at first place by the assessee." 17. "Further, where the Assessing officer is of the opinion that the methodology so adopted by the assessee and/or the underlying assumption while determining the share valuation as per DCF is not acceptable to him, there is no discretion with the assessing officer to discard the DCF method of valuation and adopt book value method." 7.2 On this aspect kindly refer DCIT vs. M/s. Ozoneland Agro Pvt.Ltd. in ITA No. 4854/Mum/2016 vide order dated 02.05.2018 Para 5 (DPB 66-78) and Green Infra Ltd. v/s ITO in ITA No. 7762/Mum/2012 vide order dated 23.08.2013 Para 10. 7.3 Also refer Medplus Health Services P. Ltd. Vs. ITO (2016) 158 ITD 0105 (Trib. Hyd) (DPB 56-65) 7.4 Also refer Vodafone M-Pesa Ltd. vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction to be done accordingly vis-à-vis the capital and revenue expenditure likely to be incurred. There apart, notably the Dena bank, Bangalore have also sanctioned Term Loan and CC Limit of ₹ 4 crore also taking into consideration these projections made by the assessee (although such loan were granted mainly taking into account the personal properties of the director hypothecated with the Bank). One important aspect and a later development is that there has been a change in the management and ownership in as much as the earlier Goyal Group, Beawar sold the 100% Shares to the present Jain Group, Banglore, who purchased the 1,50,000 Shares @ ₹ 98.67 Per Equity Share in the month of January, 2015. Moreover, the buyers are completely unrelated parties and as on day are managing the entire show and the assessee company is in full swing of production. These facts strongly support the case that looking to the purchase price of ₹ 98.67/- and purchase being in the January, 2015, the estimated Fair Market Value (FMV) by ld. CA around ₹ 95.90 was fully justified. Needless to say that why a stranger should have purchased the shares at such a high price i.e. a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares @ ₹ 70 per share including premium of ₹ 60 per share in respect of 1,40,000 share out of total 1,50,000 shares. The value per share derived as per DCF Method was ₹ 95.90 Per Share. 13. The confusion of the AO is also evident from Page 7 Para 3(b) top wherein, he continued with the share premium amount as per the Companies Act, i.e. based on NAV method and ignoring DCF and he speaks of substantial increase in the net worth, profitability, credibility and goodwill etc. which are not available in the assessee's case and alleged that the shares were not having intrinsic value to give price to premium in the business. In fact, all these are not possible in the case of newly startup/set up company being in existence of 8-10 years. 14. AY 2013-14 is not the rightful year: Alternatively and without prejudice to the above contention, even assuming it is held that the revenue is justified in their action, a careful reading of sec 56(2)(viib) shows that the happening of the two events (viz. the receipt of the consideration and the allotment of the shares) both must happen in the same year or at least, it can be later year where the shares have already been allot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/r 11UA(2)(a) or whether the assessee has got a right to opt for the method of valuation given u/r 11UA(2)(b) and secondly, if the assessee is entitled to the adopt the DCF method to estimate the fair market value, the valuation submitted by the assessee was fair and reasonable in accordance with Rule 11UA(2). Before proceeding further, we would like to reproduce the relevant Provisions contained u/s 56(2)(vii)(b) of the Act and the relevant Rules, which reads as under: - "S. 56(2) (viia) where a firm or a company not being a company in which the public are substantially interested, receives, in any previous year, from any person or persons, on or after the 1st day of June, 2010, any property, being shares of a company not being a company in which the public are substantially interested,- (i) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property; (ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration : Provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y:- (a) the fair market value of unquoted equity shares (A-L) x (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 represent the value of any asset; L = book value of liabilities shown in the balance-sheet, but not including the following amounts, namely:- (i) the paid-up capital in respect of equity shares; (ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company; (iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation; (iv) any amount representing provision for taxation, other than 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 un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.O. has to compute the fair market value in accordance with the prescribed method but cannot adopt the market value as fair market value under Section 56(2)(viia) of the Act. The legislature in its wisdom has also given a formulae for computation of the fair market value which cannot be ignored by the authorities below." It is observed that in the instant case, the assessee company had exercised an option to value the share by DCF Method however, we find that the AO has worked out the value based on NAV Method though in the body of assessment order he has referred to Rule 11UA(2)(b) but in substance, he has valued the share based on the book value figures only by considering the value of the assets shown in the Balance Sheet as on 31.03.2013 being the land valuing ₹ 3,27,690/- and the liabilities. The ld. CIT(A) also, though considered the case in context of Rule 11UA(2)(b) yet however, his act of asking the assessee & his CA to prepare and submit a valuation report only on actual figures, is nothing but a valuation done on the basis of NAV Method u/r 11UA(2)(a) only. From the facts thus, it is clear that the authorities below wanted to impose upon the method of valuation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut by oversight, which has now been taken care and corrected in the revised report. This contention was supported by Paper Book Page No.21 of the earlier valuation report and the revised valuation report Paper Book Page No.46.We find nothing wrong if a bonafide mistake was corrected. 4.5.2 Before examining the fairness or reasonableness of valuation report submitted by the assessee, we have to bear in mind that the DCF Method, and is essentially based on the projections (estimations) only and hence these projection cannot be compared with the actuals 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 figures 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 startup is a good example and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the contentions. It is not the case of the ld. CIT(A) that the projection made in the C.A.'s report are in contradiction of the figures of the installed production capacity which being lesser yet the production was shown disproportionately higher. Also there is no whisper in the orders of the CIT(A) as to which figure was found incorrect and what should be the correct figures. Except making comparison with the actuals there is nothing on record to doubt the veracity of the C.A.'s report or to support the observations of the ld. CIT(A).He further doubts that the figures of the sale shown in the valuation report and those shown the in the Balance Sheet of F.Y.2014-15 and F.Y.2015-16. However such an objection cannot be given weightage for the reason that firstly no explanation was called for by the ld. CIT(A) on this aspect but he assumed on his own and there apart the assessee has already stated that due to the non-availability of the power connection, it could not commence the production in the initial years therefore, there was no production, which fact is admitted by the AO also and hence, comparison of the projected sales figure with the actuals was not justified. As already ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 01.2018 (Assessee's PB Pages 38-55). The facts noted by the Hon'ble Coordinate Bench in that case are identical with the facts of the present case wherein the Hon'ble Bench held as under: "14 We have heard the rival contentions and pursued the material available on record. In the instant case, it is not in dispute that the assessee company is a company in which the public are not substantially interested and the shares of the assessee company are not listed or traded on any recognized stock exchange. It is also not in dispute that during the previous year. the assessee company has issued 11,500 shares of face value of ₹ 100 at a premium of ₹ 900 per share to M/s Terry Towel Industries Ltd and has thus received total consideration of ₹ 1,03,50,000. The limited issue under consideration is whether the consideration so received for such shares exceeds the fair market value of the shares. Where the answer to the same is in affirmative, the excess so determined over the fair market will be brought to tax as income from other sources as per the provisions of section 56(2)(viib) of the act which reads as under: ''Where a company, not being a company in w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce the same has been exercised at first place by the assessee. 17. Further, where the assessing officer is of the opinion that the methodology so adopted by the assessee and/or the underlying assumption while determining the share valuation as per DCF is not acceptable to him, there is no discretion with the AO to discard the DCF method of valuation and adopt book value method. At the same time, in our view the AO is well within his rights to examine the methodology so adopted by the assessee and/or the underlying assumption and where he is not satisfied with the same, he can challenge the same and suggest necessary modification/alterations provided the same are based on sound reasoning and rational basis. In the instant case, we find that certain basis objections have been raised by the Assessing Officer in terms of applying the estimated turnover numbers instead of actual numbers and discounting factor, etc which, in our view, has been satisfactorily explained by the assessee company during the appellate proceedings and nothing has been brought on record which can substantially challenge the methodology or the underlying assumption while determining the value of the shares. Fu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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