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TMI Blog2020 (10) TMI 403X X X X Extracts X X X X X X X X Extracts X X X X ..... CF valuation report of the Chartered Accountant/Valuer other than stating that year- wise results as projected are not matching with the actual results declared in the final accounts. Before the ld. CIT(A), reasons for variation between projected and actuals were duly explained. CIT(A) has accepted such explanation but rejected the DCF valuation report as submitted by the assessee. Accordingly, in the absence of any defect in the valuation of shares arrived by the assessee on the basis of DCF method, impugned addition as made on the basis of net asset value method is liable to be deleted. The rejection is unjustified as the valuation report is required under Rule 11UA of The Income Tax rules is based on the future aspects of the company at the time of issuing the shares, it may vary from the actual figures depending on the market condition at the present point of the time. Thus, keeping in view the entire facts of the case, the reports of the valuer, the comparison of the actual and projected revenues, provisions of Section 56(2)(viib) and keeping in view the order of Co-ordinate Bench of ITAT in the case of Cinestaan Entertainment Pvt. Ltd.[ 2019 (6) TMI 1367 - ITAT DELHI] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke IIT- Delhi and Amity University etc. 4. In the Assessment order, the AO has rejected the valuation report given by Chartered Accountant as per compliance procedure of Section 56 (2)(viib) of Income Tax Act of by comparing EBITDA of future years with actual profit. 5. The AO has made the addition amounting to ₹ 1 ,59,39 ,863/- in terms of the provisions of Section 56(2)(viib) of the Act in view that the company has issued the equity shares at a price more than the fair market value of the shares. Before the AO, the assessee company did submit a valuation report as per discounted cash flow method substantiating its fair market value of equity share being ₹ 6175/- per share. However, the AO rejected the valuation report furnished by the assessee on the ground that year- wise results projected are far from the actual results declared in the final accounts. The same has been dealt in para 5 6 of the assessment order. The AO, therefore, recomputed the value of the shares of assessee company by net worth method which came to be at ₹ 23.21. The AO thus made the addition of premium amount of ₹ 1,59 ,39,863/- received in excess of net worth of shares determ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... industries. Which similar industries and how this estimate is prudent and reasonable has not been explained. A slight difference in BETA can have drastic impact on Cost of Equity which can effect the valuation completely. The cost of Equity has been increased by 1.7 % because of lack of marketability. Again, the valuer has undertook an estimation without any basis. Having said so, to my understanding, as per the valuation principles, any adjustment for lack of marketability or liquidity is made in the final valued price and not in the cost of equity. As per the Balance Sheet submitted by the appellant company, there is no debt taken by the appellant company. However, while computing the weighted average cost of capital in the valuation report, Cost of Debt is also considered and a debt equity ration of 30 :70 is taken. There is no basis for the same. Weighted Average Cost of Capital (WACC) is computed on the basis of the actual debt equity ratio in the balance sheets which is applied to the cost of equity and cost of debt. However, in such a scenario, where there is no debts, the ratio of 70 : 30 taken in the balance sheet is against the principles of valuation. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Domain in which they are working and needed capital to fund and meet the business objects. Investor showed interest to fund the start up so as to preventing dilution of control among shareholders by reducing no of shares issued, the assessee company needed more capital for investments and meet its plan for future business expansion and to reduce finance charges by using less external funds 9. The company has issued 2591 shares at a premium of ₹ 6165.22 per share to Tangerine Digital Entertainment Private Limited which is the group company of the assessee company. Copy of valuation certificate obtained from the chartered accountant was also submitted in the paper book. 10. He also filed the details of CCDs issued to its existing non- resident debenture holder namely, Four Cross Holdings Cypress Ltd. and the corresponding investment made by such company in the equity shares of the assessee company. Thus, not only the source but the source of such source of shares subscription money has received by the assessee company have been proved. 11. Regarding the fair market value, the ld. AR explains that the prescribed method of 11UA(2) of IT Rules or DCF method as per Clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time value of money. The cost of equity is calculated on the basis of Capital Asset Pricing Model (CAPM). Cost of Equity = Risk free rate + [Beta *(Market risk premium)] Risk free rate is considered as 4 percent and market risk, premium is considered to be 7.1 percent. Beta has been estimated at 1.23 based on our understanding of the business risk in the similar industries. On the above basis the cost of equity is arrived as follows: Cost of Equity=4 Percent +(1.23 * 7.1 percent) = 12.73 percent Further, as the privately held shares are not traded in public, the shares of these companies are not generally as liquid as those of public companies. The last of marketability increases the cost of equity also by another 1.7 percent accordingly the Cost of Equity-becomes 14.4 percent. Weighted Average cost of Capital - The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. The WACC is calculated taking into account the relative weights of each components of the capital structure of the Company. In the instant case of the cost of equity and cost of debt is weighted in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany have been provided by the management of the company and we have accepted and relied on without further verification, including conformity or non- conformity with generally accepted accounting principles and/or other guidelines established by regulatory bodies. 2. All reported facts, comments, estimates, opinions and statistical information set forth in the valuation exercise have been obtained from sources believed to be accurate and reliable. No liability is assumed for the content or accuracy of the data furnished by others, including all information and representations provided by the management. 3. No attempt has been made to verify and audit the estimates and assumptions made by the management of the company. 4. The valuation of the company is been done solely at the request of the management and in our opinion may be considered as fair value for the purpose of fair valuation under section 56 of the Income Tax Act,1961. 15. In this background, the rationale of the Assessing Officer and the figures adopted by the AO while making the disallowance is examined. The same are as under: EBITDA 13 - 14 14 - 15 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordance with such method as may be prescribed . It is not in dispute that such method is prescribed in specific Rule 11UA(2) of I.T. Rules as applicable for issue of unquoted equity shares, which states that fair market value of unquoted equity shares is to be determined as per clause (a) or clause (b) of Rule 11 UA(2) at the option of the Assessee. Clause (a) refers to book value method whereas clause (b) refers to DCF method as supported by valuation report of a merchant banker or a chartered accountant. In the instant case, the assessee had opted for clause (b) of Rule 11UA(2) of I.T. Rules by applying DCF method and obtained valuation report form a chartered accountant thereby fulfilling both the requirements of such specific Rule. 20. When the assessee Company had opted for valuation of unquoted equity shares in accordance with DCF method as prescribed under clause (b) of specific Rule 11UA(2) as applicable, the AO/CIT(A) had no power/authority to change such valuation methodology and adopt a different book value method as prescribed under clause (a) of such Rule and hence such action of the authorities below was arbitrary. 21. It is trite law that when a statute re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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