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TMI Blog2020 (8) TMI 90X X X X Extracts X X X X X X X X Extracts X X X X ..... jurisdiction of the AO to change the method of valuation. Bombay High court, in the case of Vodafone M-Pesa Ltd. [2018 (3) TMI 530 - BOMBAY HIGH COURT] has held that the Ld. AO cannot change the method adopted by the assessee for valuing the market value of the shares from discounted cash flow method to net asset value method, which was violation of Rule 11UA and accordingly, the impugned order was to be set aside. Similarly, the co-ordinate bench in the case of Vodafone M-Pesa Ltd vs PCIT (supra) has held that the Ld. AO cannot change the method of valuation adopted by the assessee by merely relying on the actual results in the subsequent years and arbitrarily coming to the conclusion that projections were not achieved. We, therefore respectfully following the decisions as discussed above, set aside the order the Ld.CIT(A) and direct the Ld. AO to delete the additions. - Decided in favour of assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... allotment 1 18.10.2013 8024 10/- @ 1987/- Preferential allotment 2 18.10.2013 340 10 1987/- Equity 3 25.02.2014 18 10 / - 1987/- Equity 4 28.02.2014 8806 10/- 26S9/- Equity and accordingly, the Ld. AO called upon the assessee to furnish the basis of valuation for issuing the shares at a premium, which was replied by the assessee by submitting that section 56 of the I.T Act r.w.s. Rule 11UA provides for the valuation of shares and according to the company has valued its shares as per discounted Free Cash Flow Method. The said method uses the future free cash flow projections and discounts them and thus filed the valuation report before the Ld. AO. On perusal of projection of the growth of the assessee, the Ld. AO observed that the projections did not reflect that the true and realistic figure, as the projections made were neither comparable with the growth of the company in the past nor in the subsequent year. The Ld. AO noted that AY 2015-16 & 2016-17 returns filed by the assessee reveal that the assessee has failed to achieve the revenue projections and so the EBITDA. Moreover, the assessee has also failed to bring on record, the basis wherein two d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r such shares as exceeds the fair market value of the shares". appellant has carried out the valuation of shares under the Discounted Free cash flow method which uses the future projections of financial growth to arrive at the FMV of shares. After perusing the return of income of the appellant for AY 2015-16 & 2016-17 it is evident that the projections estimated by the appellant are not achieved. Further, the appellant has valued the premium price of shares at R/1,987 oh 25.02.2014 and Rs^2,68S on 28.02.2014 while it has failed to provide any evidences to prove this hike in the projection of the share prices. The appellant, in its submissions has made a reference to the Supreme court's decision in the case of Swasthya Adhikar Manch, Indore & ANR. v/s Union of India & ORS. wherein the Supreme Court asked the government to provide more details on the mechanism adopted to approve the clinical / drug trials. In spite of this order having a negative impact on the companies in the business of clinical trial management, the appellant has projected higher growth. Further, when the second round of shares were issued by the assesse the Supreme court had already come up with its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these above decisions, it has been held that the Ld. AO is not at liberty to change the method adopted by the assessee at his whims and fancies and is bound by the valuation done by the assessee , as per by the method prescribed under Rule 11UA of the Rules and thus, the prayed before the bench that appeal of the assessee may be allowed. 6. The Ld. DR, on the other hand relied on the order of the authorities below by submitting that the valuation done by the assessee, as per the DCF method was too distant from reality as in the subsequent returns filed by the assessee, the projections were not achieved and thus, the valuation of the assessee was not correct and therefore, rightly rejected by the Ld. AO and therefore, prayed that the appeal of the assessee may be dismissed. 7. After hearing both the parties and perusing the material available on record, we note that the assessee has issued shares at a premium. In order to ascertain the market value of the shares, the assessee adopted DCF method, as prescribed under Rule 11UA r.w.s 56(2) of the Act and accordingly, the shares were issued at a premium. According to the Ld. AO, the valuation report furnished by the assessee is not re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ir majority of shareholdings at an attractive price to some local and international institutional investors. Out of these transactions, the A.O. observed that two persons i.e., Mr. C. Srinivasa Raju and Chintalapati Holdings P. Ltd., transferred their shares to the assessee on 04.03.2011 at ₹ 75.49 per share whereas, on the same day and also on 08.03.2011 all the other shareholders transferred their shareholdings to the assessee at Re.1 per share. He observed that when the market rate is ₹ 75.49 ps, the assessee has purchased the shares at less than the market price i.e., Re.1 per share and therefore, the transactions attract provisions of section 56(2)(viia) of the I.T. Act. Therefore, the A.O. issued a show cause notice dated 27.02.2014 requiring the assessee to explain as to why the difference amount of ₹ 74 per share should not be treated as a deemed gift/income and taxed in the hands of the company. The assessee, vide letter dated 07.03.2014, submitted a detailed note as to why the provisions of section 56(2)(viia) are not applicable to the assessee's case. It was submitted that as per Explanation to Section 56(2)(viia) of the Act, the 'fair market value' (FM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of which, the shares of ₹ 15,90,000 were partly paid i.e., only up to ₹ 0.50 ps and that these partly paid up shares were also acquired by the company from the shareholders. It was submitted that in the case of partly paid up shares, an amount of ₹ 9.50ps is still to be paid by the purchaser and hence, the value of deemed gift in the case of partly paid shares is to be calculated accordingly. After considering the assessee's contentions, the A.O. computed the value of the deemed gift of partly paid up shares at ₹ 10,33,34,100 and of fully paid up shares at ₹ 10,89,39,465 and brought it to tax. Aggrieved, assessee preferred an appeal before the Ld. CIT(A) who confirmed the order of the A.O. and against the order of the Ld. CIT(A), the assessee is in second appeal before us. 4. The Ld. Counsel for the assessee, Mr. Kanchan Kaushal, while reiterating the submissions made by the assessee before the authorities below, drew our attention to the provisions of section 56(2)(viia) of the I.T. Act, to demonstrate that the said provisions would apply to the assessee only if the price paid by the assessee was less than the fair market value computed under Rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether the provisions of section 56(2)(viia) of the I.T. Act are applicable to the facts of the case before us. For the sake of convenience and ready reference, the relevant provisions are reproduced hereunder : Explanation. For the purposes of this clause, "fair market value" of a property, being shares of a company not being a company in which the public are substantially interested, shall have the meaning assigned to it in the Explanation to clause (vii);]' 7.1 Further, the Explanation to clause (vii) to 56(2) of the Act reads as under : EXPLANATION: '(b) "fair market value" of a property other than an immovable property, means the value determined in accordance with the method as may be prescribed.' 7.2 The prescribed method for valuation of the fair market value is under Rules 11U and 11UA(c)(b) of I.T. Rules. Rule 11UA (c)(b) reads as under : 7.3 From the literal reading of the above provision, it is clear that to apply the above provision, the following conditions have to be satisfied: i. there is transfer of shares a company not being a company in which the public are substantially interested: ii. the purchaser of the shares is a company not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e before us. Therefore the question before us is whether the A.O. can adopt the value at which the assessee acquires the shares of the same company on the same day for a higher consideration as the fair market value of the shares or whether FMV is compulsorily to be valued under Rule 11UA of the Act before applying the provisions of Sec. 56(2)(viia) of the Act. 10. From a plain reading of the provisions which are reproduced above and also the precedents discussed above, it is seen that section 56(2)(viia) requires that before application of the said provision, the A.O. has to necessarily compute the fair market value and only then can compare the same with the consideration paid by the assessee and apply the said provision only if the conditions set therein are satisfied. In the case before us, undisputedly some of the shareholders have sold the shares at a much higher price than that at which the assessee has purchased the balance of the shares from other shareholders i.e., at Re.1. Though the A.O. has not computed the fair market value in accordance with Rule 11UA of the I.T. Rules, he had evidence before him to be satisfied that the market value of the shares was much higher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Optival share is at a negative figure) whereas the assessee has paid at Re.1 per share. He has also observed that no basis is given by the assessee for adopting the rate of ₹ 63.79 per share for purchase of shares by Sri Madhukar Reddy. He observed that there is no basis for transacting in the shares at different rates and that this arrangement has been done to defraud the revenue of its taxes by transacting at abnormally low prices. Having regard to the above observations of the AO, we are of the opinion that if the AO was not satisfied with the working given by the assessee, he ought to have computed the FMV himself in the method prescribed under the rules but ought not to have adopted higher of the prices paid by the assessee for purchase of some of the shares of M/s Optival as even when the transactions are between the related parties, the provisions of section 56(2)(viia) can be applied only in accordance with the prescribed method and the difference between the price at which the assessee has purchased the shares and aggregate of the fair market value of the shares as computed can be brought to tax as deemed income in the hands of the assessee.….." 5.2.Here, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iability to interest for the remaining life of the debentures because for the remaining period the assessee was not required to pay interest on the borrowed amount. By discharging the liability to interest in the first year of the issue itself, the assessee had benefited by making payment of a lesser amount of interest in comparison with the interest which was payable under the first mode over a period of five years. …..the moment the second option was exercised by the debenture holder to receive the payment upfront, the liability of the assessee to make the payment in that very year, on exercise of this option, had arisen and this liability was to pay ₹ 55 per debenture. Not only had the liability arisen in the assessment year in question, it was even quantified and discharged as well in that very accounting year. …..the assessee did not seek to spread this expenditure over a period of five years as in its return, it had claimed the entire interest paid upfront as deductible expenditure in the same year. When this course of action was permissible in law to the assessee as it was in consonance with the provisions of the Act which permit the assessee to claim the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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