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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 ..... m income was without considering our CA certificates based on projection as per project report submitted with bank to take loans and advances. 2. That the CIT (Appeals) has not even considered our written submissions submitted before him at length. He has not at all considered the jurisdiction point even. There was no notice u/s 143(2) in time by competent authority having correct jurisdiction and as such the notice issued u/s 143(2) by correct authority having jurisdiction over the assessee was time barred. 3. That as the project delayed by more than one year due to non-receipt of electricity connection the factory started in FY 15-16 instead of 14-15 as per project report. However as desired by CIT (Appeals), Ajmer we have submitted the share valuation on the basis of actual figure Of FY 15-16 even and according to that also the value ascertained Rs. 65 as admitted by him even in his order but due to non-production in FY 13-14 and 14-15, he was not satisfied with valuation report given by CA as per Rules 11UA(2)(b). That the copy of submissions in report of share valuation on the basis of clause (b) of Rule 11UA(2) i.e., Discounted cash flow as per technical guide on share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he business. In his view, the premium of Rs. 60 per share did not appear to be justifiable. He also referred to the Section of 56(2)(viib) of the Income Tax Act, 1961 (hereinafter referred as the "Act"). The assessee filed a detailed reply in response on 30.11.2015, wherein he mainly contended that receipt of share premium was a capital receipt and was a commercial decision which does not require justification under the law. It was prerogative of the Board of Directors of the company to decide the premium amount and it is the wisdom of the shareholder whether they want to subscribe to share at a premium amount or not. Such receipts are not having the character of an income being capital assets. The AO observed that the assessee raised loans from the above associate concerns and has converted them to shares application/premium money. The appellant vide letter dated 15.12.2015 provided the calculation of the book value of each share, which comes to Rs. 108/-. However, the assessee issued the shares at Rs. 70 per share i.e Rs. Face value of Rs. 10 per share + Share premium of Rs. 60 per share. The AO found such calculation not in accordance with Rule 11UA and after referring to rule 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned by them that the figures adopted for computing the fair market value of share at Rs. 119.93 and Rs. 95.90 are purely on estimate basis. Therefore, they were asked to provide the actual figures for the FY 2013-14,2014-15 and 2015-16 which are available with the appellant. When on 29.08.2016, the valuation statement prepared on the basis of actual figures for the F.Y 2013-14,2014-15and 2015-16 was furnished, it was noticed that the Discounted Cash Flow during the F.Y 2013-14, 2014-15 and 2015-16 was Nil, Rs- 46.4 lac and Rs.-2.25 lac for the F.Y 2013-14,2014-15 and 2015-16, whereas in the original valuation statement, the Discounted cash flow these financial years was shown at Rs. 27.13 lac, Rs. 30.41 lac and Rs. 37.61lacs. In the revised valuation statement filed on 25.08.2016, the discounted cash flow for these financial year was shown at Rs. 27.13lacs, Rs. 10.65 lac and Rs. 21.42 lac. Thus, it is clear that the valuation statement furnished by the appellant showing Discounted Cash flow is based absolutely on imaginary and incorrect figures, because when the actual figures for the F.Y 2013-14, 2014-15 and 2015-16 are compared with the imaginary figures adopted in the valuation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Income Tax Rules, 1962 (herein after referred as "Rules"). The relevant extract are as under: (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) .......... or (b)The fair market value of the unquoted equity shares determined by a merchant banker or an accountant as per the Discounted Free Cash Flow method Hence the law has specifically conferred an option upon the assessee that for the purpose of S. 56(2)(viib) of the Act an assessee can adopt any of the methods mentioned u/r 11UA(2) of the Rules. From Rule 11UA, it is clear that either the Break Up Value Method (Clause 'a') or DCF Method (Clause 'b') can be applied for the purpose of S. 56(2)(viib) Expl. a(i) of the Act, at the option of the assessee. 3. In the present case, it is not denied that the assessee adopted clause (b) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.2 Further, there are several factors which effect the profitability of a project/industries which, broadly may be of 2 types i.e. general factors and the specific factors. Where the general factors are like economic and political environment of the country, however, demand supply of the product and the government policies regarding that particular industry, are such specific factor. 3.3 Therefore, the very requirement made by the ld. CIT(A) during the course of the appellate proceedings directing the assessee to give the valuation report based on the actual figures and then to compare such valuation report with these earlier reports based on the DCF Method (As approved by Rule 11UA(2)(b) of the Rules), is absolutely contrary to the provisions of the law and misconception of law. Otherwise also, the fact is not denied that the assessee couldn't commence its production for want of power availability in the next two years i.e up to AY 2016-17 and there was no justification for making a comparison. Pertinently, in AY 2017-18 when the company became operational the valuation can be seen almost in accordance with the actuals (as submitted in para 9 herein below). 3.4 The earning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by an accountant, which was as per the Discounted Cash Flow Method, the FMV determined in such a manner is binding upon the revenue as if directed by the law. There is no denial by the lower authorities from these facts and the fulfillment of the conditions as prescribed. 5. Comparison with Actual Unwarranted: The only objection of the ld. CIT(A), keeping in mind the actual figures, was that the valuation report (though undisputedly based upon DCF Method), "is based absolutely on the imaginary or on incorrect figures" and "is absolutely unreliable and without any basis" . Such allegations are completely without any basis and merely on surmises and conjecture, in the light of the following submissions: 5.1 Firstly, its comparison of the projections/ estimated figures used in report (derived) with the actual figures, was contrary to the very concept of valuation under the DCF. 5.2 Secondly, the ld. CIT(A) completely failed to point out which particular figure was found to be incorrect or imaginary. On the contrary it was the AO who considered the incorrect figure of Rs. 32.76 per share as against the correct amount of Rs. 95.90 5.3 Thirdly, he has not demonstrated how the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eral law. Kindly refer Reliance - (1) AIR 1978 (SC) 851 - Mohindersingh Gill vs. Chief Election Comm. (2) (1981) 131 ITR 429 (Ker) Ramraj (M.S. vs. Comm of Agr. IT)); (3) (1980) 126 ITR 270 (Mad) - Asa John Devinathan vs. Addl. CIT and (4) (1988) 174 ITR 714 (Cal) - Equitable Investment Co. (P) Ltd.vs. ITO. 7. Supporting Case Laws: 7.1 On this aspect kindly refer a direct decision of Hon'ble ITAT Jaipur in the case of ITO vs. Universal Polysack (India) Pvt. Ltd. ITA No. 609/JP/2017 (DPB 38-55). wherein, in para 16 page 14 it is held that: "Therefore, we are unable to accede to the contention so raised by the ld. DT that Sub-Rule 1 of Rule 11UA which provides for determination of fair market value of unquoted equity shares as per book value as per formula so specified is applicable in the instant case. Rather, sub- Rule 2 of Rule 11UA is more specific for the purposes of determination of fair market value of unquoted equity shares under section 56(viib) and shall be applicable in the instant case". Such option cannot be taken back merely because the AO is of the different opinion. Further, apart from the requirement of obtaining a certificate from the CA, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Rules. 8. Projections now Reconciled with the Actuals: As submitted earlier, the valuer had merely made projections which may or may not reconcile with the actuals. But the projections have to be made on some basis. In this case, the ld. CA did her best to estimate the FMV at Rs. 95.90 per Share based on DCF Method which fact, now is evident if the actual figures for the year ending on 31.03.2017 (AY 2017-18) are seen and compared with the projections. The assessee prepared Valuation report as per DCF Method and considered projected figures up to 31.03.2019. The Audited Balance Sheet of the assessee as on 31.03.2017 depicts the following picture. Particulars Amount (Rs.) Fixed Assets 2,21,20,988 Current Assets 85,10,652 Loans and Advances(Assets) 17,05,531 Long Term Borrowings (47,11,887) Current Liabilities and Provisions (1,49,24,429) Net Assets 1,27,00,855 No. of Shares 1,50,000 Value Per Share 84.67 (Note: However, these figures were not before the lower authorities as have come into the existence later on) Thus evidently the actual value of the share @ Rs. 84.67 is quite near to the projected FMV of Rs. 95.90 per share by the ld. CA-Valuer. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 06.02.2018 (DPB-84) wherein, the CBDT has taken note that in the cases of the startup where the assessee has applied for DCF Method by opting u/r 11UA(2)(b) r/w sec 56(2)(viib), "....in the assessment, such reports are not being accepted and rejected/modified by the Assessing Officer by treating them as based upon abnormal valuation resulting in additions being made u/s 56(2)(viib) of the Act in cases of "Start Up" companies" It appears that as per CBDT this is not in accordance with the correct interpretation of the law, therefore, the CBDT has indirectly hinted the field officers of its contrary view, by observing as under: "3. In view of the above, it has been decided that in case of 'start up' companies which fall within the definition given in notification of DIPP, Min. of commerce & industry, in G.S.R. 501(E) dated 23.05.2017, if additions have been made by the Assessing Officer under section 56(2)(viib) of the Act after modifying/rejecting the valuation so furnished under Rule 11UA(2), no coercive measure to recover the outstanding demand would be taken. Further, in all such case which are pending with the commissioner (Appeals), necessary administrative steps shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (SC), it was held that unless the machinery section is found workable, the substantive provision of the law even can't be applied. (Please see AO Pg. to top). Hence the impugned additions deserves to be deleted in full''. 4.4 On the other hand the ld. DR relied upon the orders of the authorities below. 4.5 We have heard the rival contentions and perused the materials available on record including the written submissions and case laws relied upon during the course of hearing. From the order of the ld. CIT(A) it emerges that the ld.AR and Smt. Dhanwanti Gupta, CA appeared and the matter was discussed with them and they were asked to furnish the actual figures in respect of F.Y. 2013-14, 2014-15 & 2015-16. In compliance of such direction, the ld. AR and the ld. CA attended before the CIT(A) on 29.08.2016 and filed another valuation report wherein the value of the share was worked out @ 65.31 per share. A copy of the said report is placed on Pages 47-50 of the assessee's paper book. It is clear from the order of the ld. CIT(A) that he made a comparison of the last report submitted to him on 29.08.2016 based on the actual figures with the earlier reports submitted and prepared by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration for issue of shares is received- (i) by a venture capital undertaking from a venture capital company or a venture capital fund; or (ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf. Explanation.-For the purposes of this clause,- (a) the fair market value of the shares shall be the value- (i) as may be determined in accordance with such method as may be prescribed9; 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; (b) "venture capital company", "venture capital fund" and "venture capital undertaking" shall have the meanings respectively assigned to them in clause (a), clause (b) and clause (c) of Explanation to clause (23FB) of section 10; "[Rule 11UA(2) Notwithstanding anything contained in sub-clause (b) of clause (c) of sub-rule (1), the fair market value of unquoted equity shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure whereas Rule 11UA(2) is a specific provision providing for the valuation of the unquoted equity shares. After going through the relevant Section and the Rules, in our opinion, the matter of valuation of unquoted equity shares, has been completely left to the discretion of the assessee. It is his option whether to choose NAV Method (Book Value) under clause (a) or to choose DCF Method under clause (b) and the AO cannot adopt a method of his own choice. The authorities below cannot compel the assessee to choose NAV Method only as against DCF Method. When the legislation has conferred an option upon the assessee to choose a particular method, the valuation of the shares has to be in accordance with such method only i.e. DCF method in the present case u/r 11UA(2)(b) r/w S. 56(2)(viib). In the case of Medplus Health Services (P) Ltd vs ITO (supra), the ITAT, Hyderabad Coordinate Bench, after taking into consideration various decisions, has observed as under: "11. On a careful reading of the judgments discussed above, it is seen that the Courts have held that where a method has been prescribed by the legislature, that method alone shall be followed for computation of the fair marke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the working of the C.A. or the assumptions made as erroneous or contradictory, he may suggest the necessary modification and alterations therein provided the same are based on sound reasoning and rational basis and for this purpose the AO may call for independent expert valuer's report or may also invite comment on the report furnished by the assessee's valuer as the AO is not an expert. It is not open for the AO to challenge or change the method of valuation, once opted by the assessee and to modify the figures as per his own whims and fancies. In any case, the revenue could not ask to prepare the valuation report based on actuals which is not contemplated in Rule 11UA(2)(b). 4.5.1 Now coming to the aspect where the assessee has complied with the conditions laid down under Rule 11UA(2)(b), it is clear that to comply with this rule the assessee is required to obtain a certificate of a Merchant Banker or Chartered Accountant and such a valuation must be based on Discounted Free Cash Flow (DCF) Method only. To exercise the option under this clause, the assessee is not subjected to the fulfillment of any other condition except these two. It is not denied that the assessee did file th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been directed to dispose such appeals expeditiously. 4.5.3 Coming to the basis of the projections, it is submitted that the plant capacity was taken as a basis to make projections of the production. It is further submitted that at the assessee is dealing in toughened glass which is related to real estate (construction) industry and at the relevant point of time, the real estate sector was in boom and there existed favorable conditions in the industry. The Directors of the assessee company were having experience and knowledge of the field. The other three companies to whom shares were allotted were also in the real estate sector, as their name suggest. The Board of Directors were expecting good results in the future. Except the initial years where the production could not be commenced because of the circumstances beyond the control but as per the actual figures available now for the previous year ended on 31.03.2017, the value per share comes to Rs. 84.67 based on the audited accounts which is almost in accordance with the value of Rs. 95.90 estimated by the C.A. Moreover, such report was also submitted to the bank as per a notes at Page 46 of the assessee's paperbook, for obtaini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the factors which formed a reasonable basis of projections. Moreover it is not denied that the valuation reports were prepared by the C.A. as per the guidelines given by the Institute of Chartered Accountants of India and the AO has not found any fault. We thus, find no rational or sound basis in the order of the authorities below to reject the valuation report submitted by the assessee based on DCF Method. 4.5.4 In any case, it is also noticed that even as per the valuation got done by the CIT(A) based on the actuals, the FMV came to Rs. 65.31 per share as against which, the assessee had charged a premium of Rs. 60 only per share. Therefore even assuming that the valuation reports submitted by the assessee are not reliable for any reason than too there was no justification to rely upon the valuation of the shares done by the AO based on book value at Rs. 32.76 per share or premium at Rs. 27.76 per share. Reducing the face value of Rs. 10 from the FMV of Rs. 65.31, the amount of premium comes to Rs. 55.31 per share as against the premium claimed by the assessee at Rs. 60. Thus there is a small difference of around Rs. 5 which was less even than 10% of the premium claimed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in the context of the section 56(2)(viib) of the Act as invoked by the AO and therefore, both the assessee and the revenue are equally guided by the said provisions and there is no discretion with either of the parties in terms of non-applicability of Sub-rule 2 of Rule 11UA. Therefore, we are unable to accede to the contention so raised by the Id DR4 that sub-rule 1 of rule 11UA which provides for determination of fair market value4 of unquoted equity shares as per book value as per formula so specified is applicable in the instant case. Rather, Sub-Rule 2 of Rule 11UA is more specific for the purposes of determination of fair market value of unquoted equity shares under section 56(viib) and shall be applicable in the instant case. The latter provides an option to the assessee to determine the fair market value of the shares either as per the book Value or Discounted Free Cash Flow Method. The exercise of such an option by the assessee is not subject to fulfillment of any specified conditions and it is left to the sole 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petitioner. However, the basis has to be the DCF Method and it is not open to him to change the method of valuation which has been opted for by the Assessee.-------- " The AO though observed that the assessee raised loans from the above associate concerns and has converted them into shares application/premium money. However, it has not shown how it will affect the correctness of the valuation claimed. It is not the case of the AO that the shares were allotted to the outsiders non-related persons but the existing amount of the loans from the related persons were converted into shares. Hence there cannot be any scope of introduction of assessee's unaccounted income through allotment of shares at unreasonably high priced shares. Therefore, such observations is not relevant and a mere suspicion. It appears that the authorities below have ignored Explanation (a) below S. 56(2)(viib).The said Explanation provides that the fair market value of the shares shall be the value- (i) as may be determined in accordance with such method as may be prescribed i.e. u/r 11UA; or (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date ..... X X X X Extracts X X X X X X X X Extracts X X X X
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