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TMI Blog2019 (3) TMI 158X X X X Extracts X X X X X X X X Extracts X X X X ..... hort 'the Act') vide order dated 28.12.2017; wherein the assessee's income was determined at Rs. 18,68,31,128/- in view of the following additions / disallowances: (i) Share premium taxed u/s 56(2)(viib) - Rs. 19,74,00,000/- (ii) Disallowance of bad debts - Rs. 40,70,166/- 2.2 Aggrieved by the order of assessment dated 28.12.2017 for Assessment Year 2015-16, the assessee preferred an appeal before the CIT(A) - 7, Bangalore, which was dismissed vide the impugned order dated 17.09.2018. 3. The assessee, being aggrieved by the order of CIT(A)-7, Bangalore dated 17.09.2018 for Assessment Year 2015-16, has preferred this appeal before the Tribunal, wherein it has raised the following grounds: 1. That in any case and in view of the matter, the action of the Learned ITO in framing the impugned Assessment Order is bad in law and is opposed to the facts and circumstances of the case and thus liable to be set aside. 2. That the Learned CIT(A) and the Learned ITO erred by adding to the income, an amount of Rs. 19,74,00,000/- u/s 56(2) (viib) of the Act and also disallowing the bad debts claimed of Rs. 46,70,166/- without appreciating the facts and circumstances of the case and the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he valuation, and the Appellant by exercising its option has chosen the DCF method. The Act of Learned ITO of choosing the NAV method over DCF method for valuation is ultra vires its jurisdiction. The provisions of the Act provide the Appellant to choose the method and not the Revenue authorities to decide the appropriate method. 11. That the Learned CIT(A) and the Learned ITO lost sight of the fact that the FMV to be considered for the purpose of 56(2) (viib) of the Act is higher of : a_ as may be determined in accordance with such method as may be prescribed; or b. 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, knowhow, patents, copyrights, trademarks, licenses, franchises, or any other business or commercial rights of similar nature. As against the above provision, the Learned ITO adopted a value of Rs. 84.20/-, being the lower of the value determined under any of the methods and the same has been erroneously upheld by the Learned CIT(A). 12. That the revenue authorities did not take into consideration the reliance placed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... share. Thereby, the total amount of consideration received was Rs. 28,95,00,000/-; out of which an amount of Rs. 23,95,00,000/- was towards share premium. On being queried in this regard, it was submitted by the assessee that the share premium amount was worked out as per the Discounted Cash Flow Method (DCF); based on the Valuation Report of an independent Chartered Accountant. The AO examined the Valuation Report and found that the said Valuation Report had relied only on values certified by the Management of the assessee company, which had been prepared to justify the high premium and therefore rejected the valuation given in the said valuation report. Having so held, the AO computed the value of the shares under NAV Method as per the provisions of Rule 114A(2)(a) of the Income Tax Rules, 1962 (in short 'the Rules') and determined the fair market value (FMV) of the shares at Rs. 84.20 per share as against Rs. 479/- per share determined by the assessee. Therefore, the difference in the two amounts aggregating to Rs. 19.74 Crores was added to the income of the assessee towards "excess share premium" exigible to tax u/s 56(2)(viib) of the Act. Aggrieved with the aforesaid additio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on projections given by the Management of the assessee company; that cannot be a valid ground for disregarding on experts' report. DCF Method is based on expected future cash flows which no one can predict accurately. (v) The Revenue authorities do not have the power to evaluate the Method of valuation once the option is exercised by the assessee and Revenue can only verify the arithmetical accuracy and not go beyond that. (vi) The assessee has the option to choose the method for valuation and the assessee has exercised the option of choosing DCF Method, the AO cannot choose the net asset valuation method (NAV) over the DCF Method. (vii) The FMV to be considered is to be the higher of the value determined under any of the methods; whereas the AO has adopted the lower of the value determined under any of the methods. (viii) Section 56 of the Act intends to tax only income and not capital receipts and share premium is a capital receipt. (ix) Reliance was placed, inter alia, on the decisions in the cases of (i) CIT Vs. Poddar Cements Pvt. Ltd., (1997) 226 ITR 625 (SC) (ii) Vaani Estates Pvt. Ltd., Vs. ITO in ITA No.1352/Chny/2018 dated 27.08.2018; (iii) Rameshwaram Strong ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by issuing shares at high premium; which is normally over and above the book value of the shares of the company. Further, promoters are also issued shares at premium with the purpose of keeping share capital low, yet with a stronger capital base so that the breakup value and market value is high. This leads to the advantage of low cost of servicing share capital and also improved prospects to issue shares at a premium in future by way of initial issue of offering by promoters. When shares are issued at a premium, the number of shares and authorized share capital increase lesser in comparison to capital raised by way of issue of fresh shares to the public by way of IPOs, etc. While there are judicial decisions to the effect that share premium is a capital receipt, these pertain to the period prior to the above amendments brought about by Finance Act, 2013 and in view of these deeming provisions w.e.f. Assessment Year 2013-14, for closely held companies, share premium in excess of the FMV of shares is deemed to be income in the hands of the recipient company / person. 5.4.4 The assessee's contentions to the effect that any price between the willing buyer and willing seller is the F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd before us, it is seen that neither has the AO questioned the right of the assessee to select the Method of Valuation nor has the AO dismissed the choice of DCF Method as a Method of Valuation. The AO has examined the parameters adopted by the assessee for valuation by the DCF Method and has rendered a finding that the valuation is not realistic as the actual figures were a long long way away from the projections made. These facts are available from details filed by the assessee before the CIT(A) and find mention in the following table extracted from para 5.4 on page 15 of the impugned order of the CIT(A): Therefore, the contention of the assessee that the AO had disregarded the valuation made under the DCF Method is not correct. 5.4.6.3 The assessee's contention that the 'Valuation Report' under the DCF Method adopted by the assessee has been disregarded by the authorities below only because it was based on valuations and projections certified by the Management of the assessee company is also not correct. A finding has been rendered that the basis of the estimates adopted in the valuation under DCF Method was not produced and the assessee was not able to substantiate the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same is bound to make a reference to the Income tax Department Valuation Officer to determine the fair market value of such capital asset. This is so because unless and until the assessee produces the evidences to substantiate the basis of projections in cash flow and provides reasonable connectivity between those projections in cash flow with the reality evidences by the material, it is not possible even for the Departmental Valuation Officer to conduct any exercise of verification of the acceptability of the value determine by the merchant banker. This is more particularly in view of the long disclaimer appended by the merchant banker at page no. 16 & 17 of the paper book which clearly establishes that no independent enquiry is caused by merchant banker to verify the truth or otherwise the figures furnished by the assessee at least on test basis. The merchant bankers solely relied upon an assumed without independent verification, the truthfulness accuracy and completeness of the information and the financial data provided by the company. A perusal of this long disclaimer clearly shows that the merchant banker did not do anything reflecting their expertise, except mere applying t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee and franchisee and therefore the assessee could have recovered the same at any time, if it so desired. Further, the AO was also of the view that the assessee did not produce any evidence to show that efforts were made to recover the reimbursable expenditure incurred by it from the franchisees. In that factual view of the matter, the AO disallowed the assessee's claim for write off of bad debts amounting to Rs. 46,70,166/- in respect of its franchisees. 6.2.2 On appeal, the CIT(A) examined the nature of the expenses in the light of the assessee's claim that its case was covered by the decision of Hon'ble Supreme Court in TRF Ltd., 323 ITR 397 and upheld the disallowance by holding that the writing off of the dues of the franchisees can be considered as portion of revenue forgone and cannot be termed as bad debts to be written off. While holding so, the CIT(A) has rendered the following findings / observations: (i) The expenditure incurred was in the nature of payment for advertisement for and on behalf of the franchisees; which was to be reimbursed by them. (ii) As the franchisees asked for writing off these amounts, as they were having insufficient cash flow, the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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