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TMI Blog2019 (6) TMI 1367X X X X Extracts X X X X X X X X Extracts X X X X ..... not come within the ambit and scope of the expression undisclosed income as defined for the purposes of Section 271AAB. It has come on record that the Revenue seeks to rely upon the same very material as it was used in assessee s sister concern s case pertaining to the very search wherein its identical grievance stands declined vide above extracted detailed discussion. We adopt the said reasoning mutatis mutandis in the instant case as well as no distinction on facts and law has been pointed out at the Revenue s behest. The CIT(A) s order under challenge deleting the impugned penalty is confirmed accordingly. - This Revenue s appeal is dismissed. X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances of the case in not appreciating the fact that the valuation of the shares of the assessee is based on the prescribed method (DCF Method) under Rule 11UA (2)(b) by a prescribed expert, i.e., Chartered Accountant, and the same can neither be varied nor disregarded by the Ld.AO for determination of fair market value for the purposes of section 56(2)(viib). Questioning the commercial wisdom 5. That Ld. CIT(A) has grossly erred in law and on facts and circumstances of the case by upholding the action of Ld. AO of making the aforesaid addition by challenging the assessee's commercial wisdom and questioning the investment made by the assessee in compulsorily convertible debentures. Penalty & Interest 6. The Ld. AO has grossly erred in initiating penalty proceedings under section 271(1)(c) of the Act mechanically and without recording any satisfaction for its initiation. 7. That the Ld. A.O has erred in law in charging interest u/s 234B of the Act on wholly illegal and untenable grounds. 2. Ground no. 1 being general in nature does not require any specific adjudication. Main issue has been raised vide ground nos. 2 to 5, pertaining to addition of share premiu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . During the course of assessment, the assessing officer disregarded the valuation report of the assessee. The main reason for disregarding the valuation of equity shares carried out by the assessee is that projections of revenue as considered for the purpose of valuation do not match with the actual revenues of subsequent years. The AO has alleged that no efforts have been made by the assessee to achieve the projections as made out in the valuation report and hence in his view, the share premium received by the assessee is without any basis and contrary to the provisions of section 56(2)(viib) r.w.s. 2(24)(xvi) of the Act. The AO has further alleged that assessee has also failed to submit any basis of projections. He is also of the view that in order to achieve the said projections, assessee should have invested the share premium amount to earn some income/return, whereas the assessee has made investment in zero percent debentures of its associate company and hence basic substance of receiving high premium is not justified in the view of AO. 6. Aggrieved by the above assessment order, the assessee filed an appeal before CIT (A)-2. The CIT (A) vide its order dated 24.09.2018 conf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansactions. The genuineness and creditworthiness of the strategic investors is not even doubted either by AO or by CIT (A). The provisions of section 56(2)(viib) require that in case of closely held company, the shares should be issued at its fair market value to resident investors based on notified valuation formula by a notified expert. 8. It has been submitted that the provisions of section 56(2) and section 68 are in the nature of anti-abuse measures aimed at preventing the malafide transactions intended to avoid tax liability and to tackle the problem of black money and were never intended to be made applicable on genuine, bonafide and purely commercial transactions. To substantiate the same the counsel of the assessee relied on the following board circulars and judicial precedents: • Para 13.2 and 13.4 of CBDT Circular no. 1/2011 dated 6th April, 2011: stating that the provisions of 56(2)(vii) are antiabuse provisions which were applicable only if an individual or an HUF is the recipient. These provisions were introduced as a counter evasion mechanism to prevent laundering of unaccounted income. The provisions were intended to extend the tax net to such transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in section 56(2) of the Act, being anti-abuse in nature….". It was further submitted that although the said circular dated 31.12.2018 was withdrawn due to perhaps certain political reasons yet the board had affirmed its view which always stood since introduction of these provisions. • The AR further relied on various judicial precedents wherein the assessee highlighted that the bonafide business transactions cannot be taxed under 56(2)(vii) and that the provisions of section 56(2) were to strike at the generation and use of unaccounted money and was never intended the honest and bonafide transactions where consideration for transfer was correctly disclosed by the assessee. Reliance was placed on various case laws some of which are: i) ITO v.K.P. Varghese (131 ITR 597); "The object and purpose of sub-section (2), as explicated from the speech of the Finance Minister, was not to strike at honest and bona fide transactions where the consideration for the transfer was correctly disclosed by the assessee but to bring within the net of taxation those transactions where the consideration in respect of the transfer was shown at a lesser figure than that actually rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... identities, credit worthiness and genuineness of the investment transaction. Further the equity partners of the assessee company who made investment of the said sum with premium are seasoned investors of international repute and their investment wisdom, capacity and prudence cannot be challenged or put to question. It is prominent that investors of assessee who have subscribed the shares of assessee at premium are Sh. Anand Gopal Mahindra, Sh. Radha kishan Damani, Sh, Rakesh Jhunjunwala. The investment prowess of these renowned celebrity investors cannot even be doubted, was submitted by assessee's counsel. 9. The Ld. Counsel further submitted that there is no doubt that share premium receipt is always a capital receipt (CIT v Stellar 251 ITR 263 (SC); Lowry v. Consolidated African Selection Trust 8 ITR Suppl 88). However, it is only because of the deeming fiction provided in such sections i.e. section 68 or 56(2)(viib) that in certain circumstances the amount received as capital can be deemed to be income. However, section 68 and 56(2)(viib) being the deeming provisions were created to achieve a particular objective as per the legislature intent of introducing such provisions, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision) and in the matter of interpretation of exemption notification is too obvious to require any elaboration. Nonetheless, in a nutshell, we may mention that, as observed in Surendra Cotton Oil Mills Case (supra), in the matter of interpretation of charging section of a taxation statute, strict rule of interpretation is mandatory and if there are two views possible in the matter of interpretation of a charging section, the one favourable to the assessee need to be applied. There is, however, confusion in the matter of interpretation of exemption notification published under taxation statutes and in this area also, the decisions are galore." ii. Lakshadweep Development Corporation Ltd [(2019) 411 ITR 213 (Kerela HC)] iii. M/s Microfirm Capital Pvt. Ltd. v. DCIT (ITA no.513/Kol/2017) iv. Vaani Estates (P). Ltd v. ITO 172 ITD 629 v. CBDT circular no.10/2018 dated 31.12.2018 and CBDT Circular no.03/2019 dated 21.01.2019 The ld Counsel emphasizing the aforesaid rule of strict interpretation submitted that sub clause (ii) of explanation to section 56(2)(viib) is not applicable and assessee was not required to satisfy the ld. AO about the valuation done. In accordance wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated future projections. Therefore, the AO/CIT (A) action of comparing the actual with projections is in violation of DCF valuation principles. The AO/CIT(A) have thus, in a way attempted to test the future NAV with DCF, which is not allowable under law. In support of the arguments that revenue authorities cannot disregard or modify the valuation, ld counsel relied upon the following judgements: i. Securities & Exchange Board of India &Ors [2015 ABR 291 -(Bombay HC)] ii. Rameshwaram Strong Glass Pvt Ltd v. ITO [2018-TIOL- 1358-ITAT-Jaipur] iii. DQ (International) Ltd. vs. ACIT (ITA 151/Hyd/2015) Besides it was further contended that neither assessing officer nor assessee are expert in the subject of valuation which is why the law has provided that assessee is required to get the valuation done from an prescribed outside expert (Chartered Accountant or Merchant Banker). Therefore, once the assessee has obtained the valuation in accordance with the prescription of law, it is not open for revenue authorities to comment upon. In the support of his contention the assessee relied on the following judgements:- i. Miheer H. Mafatlal v. Mafatlal Industries Ltd (AIR 1997 SC 506 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jects the valuation report of the assessee on whimsical grounds and on the other hand failed to provide any alternate fair value of shares. What law requires is the determination of fair market value as per the prescribed methodology. The ld. AO cannot escape the statutory requirement of determination of FMV by simply rejecting the valuation report. In this case the ld. AO rejected the valuation report wherein DCF method was applied and then determined value of premium at Nil. The ld AO did not even see any need of following any prescribed method. In its support the counsel relied on the following judicial pronouncements: Bharat HariSinghania and Ors v. CWT [1994] 207 ITR 1 (SC);Vodafone M-Pesa Ltd [2018-TIOL-419-HC-Mum- IT]; Ozoneland Agro Pvt. Ltd. [2013-TIOL-117-ITAT-Mum]; Innoviti Payment Solutions Pvt. Ltd. [ITA no.1278/Bang/2018]; Chandra Kishore Jha v. Mahavir Prasad &Ors. (1999) 8 SCC 266 (SC); State of Uttar Pradesh v. Singhara Singh and Ors. [1963 AIR 358 (SC)]; Medplus Health Services P. Ltd. v. The Income Tax Officer [2016 (48) ITR (Trib)396(Hyderabad)]; Social Media India Ltd. v. ACIT 2013 (28) ITR (Trib) 212 (Hyderabad). 18. Mr. Pradeep Dinodia, highlighted that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these projections. The assessee has been resilient and has made its best efforts to achieve the aforesaid projections. The assessee had received hundreds of film scripts out of which it shortlisted its initial set of movies. It may be noted that assessee has hired best directors and star cast, entered into various agreements and incurred costs as estimated. The first big film 'Mirzya' while on the initial stage generated a huge amount of press inprint media, online media, social media and other platforms with over 100 stories. 19. Then the counsel pointed out to the cost projections made in the DCF method and cost actually incurred on production of above movies by highlighting the comparison of cost of movies actually released with their actual cost, submitted that the assessee has incurred costs as projected. However it is impossible to determine the exact cost or revenue of films at the time of signing them. Moreover, on revenue front, in some case (Satellite and digital revenue), the assessee has exceeded the projected estimates. Therefore, he submitted that projections were not mere paperwork as alleged by CIT(A). The assessee has actually made its best efforts and incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be taken as a valid input in the present case in judging the action of the TPO. In fact, the CIT (Appeals) has referred to and applied them and his decision has been affirmed by the Tribunal. These guidelines, in a different form, have been recognized in the tax jurisprudence of our country earlier. It has been held by our courts that it is not for the revenue authorities to dictate to the assessee as to how he should conduct his business and it is not for them to tell the assessee as to what expenditure the assessee can incur. We may refer to a few of these authorities to elucidate the point. In Eastern Investment Ltd. v. CIT [1951] 20 ITR 1 (SC), it was held by the Supreme Court that "there are usually many ways in which a given thing can be brought about in business circles but it is not for the Court to decide which of them should have been employed when the Court is deciding a question under Section 12(2) of the Income Tax Act". It was further held in this case that "it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned". In CIT v. Walchand& Co. (P.) Ltd. [1967] 65 ITR 381 (SC), it was held by the Supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of Equity Shares of assessee i.e. Cinestaan Entertainment Private Limited. He further distinguished the ruling of Agro Portfolio Private Limited from the present case of the assessee under various headings as presented in the table below: Sl. No. AGRO PORTFOLIO PVT. LTD. ( Sector - Financial Services) ASSESSEE (CINESTAAN ENTERTAINMENT PVT. LTD). ( Sector - Media/ Film) 1. AO has questioned Financial Parameters of Valuation Report From the ITAT Order, it appears that the assessee (Agro Portfolio) failed to justify any of the financial parameters questioned by the AO in relation to the valuation report (para 5); which include: (1) Beta (2) Market Rate of return (3) Risk free rate of return ITAT has observed that despite AO's questioning the above, no responses at all came from assessee. The AO therefore proceeded on best judgment assessment to determine FMV relying on NAV Method. In case of assessee (FY 2014-15), neither the Assessing Officer nor CIT (Appeal) has questioned any of the technical/financial parameters for valuation report (such as beta, risk free rate of return etc.). AO/ CIT (A) has disregarded the valuation report solely on account of comparison of fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to any notices issued by AO. AO has not resorted to best judgment assessment as all notices issued were duly complied with. 6. Reliance on Valuer's Disclaimer ITAT noted that while valuer has given a disclaimer ("that valuer did not verify the truth of the projections"), the assessee (Agro Portfolio) has also completely failed to justify the projections. There was no response whatsoever by assessee to justify the projections or respond to queries of AO on financial parameters. For assessee (FY 2014-15), the valuer has stated that the projections were examined for reasonableness and consistency. That apart, assessee has also explained the basis for projections in detail in its submissions before AO/ CIT (A) which have not been controverted by the tax authorities. DECISION 25. We have heard the rival contentions, perused the relevant findings given in the impugned orders as well as material referred to before us at the time of hearing. In various grounds of appeal, the sole issue raised by the appellant assessee relates to the addition of ₹ 90,95,46,200/- made by the AO, by invoking the deeming provisions of Section 56(2)(viib) by adopting fair market value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld that no efforts have been made by the assessee to substantiate the figures of projected revenue in the valuation report and has also failed to submit any basis for projection. Instead, AO held that assessee should have invested the share premium amount to earn some income, whereas assessee has made investment in debentures of its associate company and hence the basic substance of receiving the high premium was not justified. After invoking the provision of Section 56(2)(viib), AO took fair market value of premium at Nil and face value of ₹ 10/- per share. 27. From the perusal of the records and the impugned orders, it transpires that Assessing Officer had also issued notices u/s.133(6) to all the 3 investors to seek confirmation, information and documents pertaining to transaction of issuance of shares. In response to the said notices, Assessing Officer has received all the details and replies directly from these investors confirming the transaction. The venture agreement between the assessee and the investors were also filed before the Assessing Officer and in this regard, our attention was also drawn by the ld. counsel that the investment was to be made by these inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted independent parties, who are one of the leading industrialists and businessman of the country, after considering the valuation report and future prospect of the company, have chosen to make investment as an equity partners in a 'start-up company' like assessee, then can it be said that there is any kind of tax abuse tactics or laundering of any unaccounted money. It cannot be the unaccounted or black money of investors as it is their tax paid money invested, duly disclosed and confirmed by them; and nothing has been brought on record that it is unaccounted money of assessee company routed through circuitous channel or any other dubious manner through these accredited investors. If such a strict view is adopted on such investment as have been done by the Assessing Officer and by ld. CIT(A), then no investor in the country will invest in a 'start-up company', because investment can only be lured with the future prospects and projection of these companies. 29. Now, whether under the deeming provision such an investment received by the assessee company be brought to tax. The relevant provision of Section 56 for the sake of ready reference is reproduced hereunder: "Income from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ket 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:- (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." 30. Ergo, the assessee has an option to do the valuation and determine the fair market value either on DCF Method or NAV Method. The assessee being a 'start-up company' having lot of projects in hand had adopted DCF method to value its shares. Under the DCF Method, the fair market value of the share is required to be determined either by the Merchant Banker or by the Chartered Accountant. The valuation of shares based on DCF is basically to see the future year's revenue and profits projected and then discount the same to arrive at the present value of the business. Before us, the ld. counsel from the facts and material placed on record had pointed out that the basis of projection adopted by the valuer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the assessee was projected to make five movies which it had actually commenced and released and has also pointed out that assessee has worked upon with 25 movies inception. Not only that, assessee had also taken into account the cost incurred in production of various movies and also the comparison of projected revenue and cost of three movies which were actually released by the assessee with actual revenue and cost, for which separate annexure were filed before us. Nowhere the Assessing Officer and ld. CIT (A) has either disputed the details of projects, revenues, cost incurred and the manner in which it was substantiated by the actual revenue. In fact, the projected revenue really commensurate with the actual state of affairs based on subsequent year financials. It has been pointed out that assessee had incurred huge cost which were precisely as per the estimates as projected. However, the revenue could not be generated as much expected, because the film did not do well in the box office. Ld. Counsel has also highlighted various reasons as to why assessee could not achieve the projected revenue from various documentary evidences. None of these averments and the and the manner i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the valuation has to be done as per the prescribed method and if one of the prescribed methods has been adopted by the assessee, then Assessing Officer has to accept the same and in case he is not satisfied, then we do not we find any express provision under the Act or rules, where Assessing Officer can adopt his own valuation in DCF method or get it valued by some different Valuer. There has to be some enabling provision under the Rule or the Act where Assessing Officer has been given a power to tinker with the valuation report obtained by an independent valuer as per the qualification given in the Rule 11U. Here, in this case, Assessing Officer has tinkered with DCF methodology and rejected by comparing the projections with actual figures. The Rules provide for two valuation methodologies, one is assets based NAV method which is based on actual numbers as per latest audited financials of the assessee company. Whereas in a DCF method, the value is based on estimated future projection. These projections are based on various factors and projections made by the management and the Valuer, like growth of the company, economic/market conditions, business conditions, expected demand and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business, does not mean that its share cannot command any premium. For such cases, the concept of start-up is a good example and as submitted the income-tax Act also recognized and encouraging the start-ups." iii) DQ (International) Ltd. vs. ACIT (ITA 151/Hyd/2015) "10...... In our considered view, for valuation of an intangible asset, only the future projections along can be adopted and such valuation cannot be reviewed with actuals after 3 or 4 years down the line. Accordingly, the grounds raised by the assessee are allowed". The aforesaid ratios clearly endorsed our view as above. 34. In any case, if law provides the assessee to get the valuation done from a prescribed expert as per the prescribed method, then the same cannot be rejected because neither the Assessing Officer nor the assessee have been recognized as expert under the law. 35. There is another very important angle to view such cases, is that, here the shares have not been subscribed by any sister concern or closely related person, but by an outside investors like, Anand Mahindra, Rakesh Jhunjhunwala, and Radhakishan Damania, who are one of the top investors and businessman of the country and if they have ..... X X X X Extracts X X X X X X X X Extracts X X X X
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