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TMI Blog2020 (12) TMI 1062X X X X Extracts X X X X X X X X Extracts X X X X ..... there was no compliance by the assessee and therefore left with no other alternative AO completed assessment u/s. 144 applying NAV method. In the present case, as noted by us above, the appellant has not only participated during assessment but also categorically highlighted the errors in factual findings of the Ld AO. In this case the assessee filed a writ before Hon'ble High Court challenging jurisdiction of AO. Decision of Hon'ble Kerala High Court has also been considered in case of VBHC Value (supra). We set aside the matter back to the records of Ld AO for a de novo examination of DCF Valuation adopted by the appellant as per law. The Ld. AO is directed to re-examine the matter afresh. - I.T.A. No. 1068/DEL/2019 - - - Dated:- 14-12-2020 - Amit Shukla, Member (J) And Dr. B.R.R. Kumar, Member (A) For the Appellant : Tarandeep Singh, Adv. For the Respondents : S.S. Rana, Sr. D.R. ORDER Amit Shukla, Member (J) The aforesaid appeal has been filed by the assessee aggrieved against impugned order, dated 21st December 2018, passed by Ld. CIT (Appeals)- IX, New Delhi for the quantum of assessment passed u/s. 143(3) for the assessment year 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T(A) erred in confirming the action of Ld. AO of carrying out comparative analysis of projected revenue from operations and actual revenue from operations and is against the rule of Hon'ble Delhi Tribunal in case of M/s. Stryton Exim India Pvt. Ltd. (ITA No. 5982/2018) wherein the Hon'ble Tribunal had held that it was incorrect to assume that the projected cash flows should have equaled the actual cash flows for the purpose of valuation of shares using a DCF method. 4.1 Without prejudice, that the Ld. CIT (A) and Ld. AO gravely erred in holding that year-on-year growth rate estimated by Appellant is arbitrary and self-serving without appreciating close proximity between projected cash flows considered as per valuation reports and actual cash flows from operations and the fact that variation between the two cash flows were sometimes as low as 4%-6%. 5. The Ld. AO erred on facts and in law in levying the interest under section 234A and 234B of the Act. 6. The Ld. AO erred on facts and in law in initiating penalty proceedings under section 271(1)(c) of the act, without appreciating the fact that the appellant has neither concealed particulars of income nor furni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,69,08,332 24,74,99,862 4. In response to the show cause notice by the Ld AO, it was stated by appellant that the Fair Market Value (FMV) of issuance of shares as above was in accordance with provisions of Rule 11UA and that FMV was certified by valuation reports dated 03rd April 2013 and 31st March 2014 issued by a prescribed expert, i.e. M/s. Shiv Shatish Associates, Chartered Accountants. It was stated that the valuer has estimated the FMV using the Discounted Cash Flow Method (DCF) which is one of the prescribed method under section 56(2)(viib) read with Rule 11UA(2)(b). 5. Ld. Assessing Officer however, was unimpressed by the valuation technique adopted by the valuer and held that the valuer has prepared the valuation report based on projections provided by the management. To investigate the matter further Ld AO has: (a) Recorded statement under oath of the Valuer on 17th December 2017. (b) Doubted the basis of projected revenues estimated by the appellant by comparing projected revenue figures (as stated in valuation reports) with the actual revenue recorded in audited books of account and by comparing pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... valuation report. He has nowhere applied his mind whether these projections can be correct/reasonable or not. This is more so when there is huge amount of data in respect of every sector is available in public domain. 4.30 The Technical guide on shares valuation' published by the Institute of Chartered Accountants of India (ICAI) wherein three key factors viz., cash flow projections, discount rate and terminal value for computing DCF were discussed, it is observed that none of the above factors as mandated by ICAI has been considered by the said CA issuing valuation report while computing fair value of the unquoted equity shares of the assessee company. As per technical guide on shares valuation issued by ICAI wherein it is stated that the DCF method is as good as input assumptions used for computing Future Cash Flows. It was observed that the CA issuing valuation report dated 04th April, 2013 31st March, 2014 has merely adopted the values provided by the management clearly ignoring past performance which is self serving as several factors such as performance, growth prospects, earnings capacity, expansion and average growth rate of industry etc. were not considered by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f unquoted equity shares = (A-L) x (PV) (PE) (102,74,55,203- 108,84,60,324)*23,53,890 23,53,890 = Rs. 6,10,05,121/- Therefore, the fair market value of each equity share is: Rs. 6,10,05,121/ 2353890 = Rs.-25.92/- per share. Therefore, the fair market value of 5,38,323 equity share allotted on 31.03.2014 is determined at Rs.-25.92/- per equity share. 9. Being aggrieved, appellant filed an appeal before the Ld. First Appellate Authority. Ld CIT (A) in his impugned order dated 21st December 2018 has upheld the additions made by the Ld. AO and dismissed the appeal summarily after concluding as under: 4.4 I have gone through the facts of the case, the grounds of appeal, the order of the AO and the submissions of the appellant. The issue in this appeal, is with respect to the valuation of shares and the addition under Sec 56(2)(viib) of the Act. 4.5 The appellant has contended that the AO erred in applying the FMV method and that he also ought to have used the DCF method, as the option of using the methods rested with the appellant. It is also contended that the provisions of Sec 56(2)(viib) cannot be applied, since the shares are issued t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h and earnings provided by the appellant the AO is eligible to reject the method of computation, as used by the appellant and hence, apply another method, as has been prescribed by the provisions of Law. Under the circumstances, I do not find any infirmity in the application of FMV method by the AO. Extending above deliberation, the AO has rightly used and calculated the FMV and hence, I do not find any miscalculation therein. Therefore, in result of the above, the addition is sustained and the ground of appeal is dismissed. 4.10 In view of my detailed discussion, I am inclined to uphold the impugned addition made by the AO in the assessment order. Appellant fails in these grounds of appeal. As far as alternative plea of the appellant that no disallowance of face value amounting to ₹ 1,05,91,530/- is concerned, it is noted that the provision of S. 56(2)(viib) clearly stipulates that consideration received over and above, the FMV is deemed to be income as there is no exception for face value is mentioned therein. In the case of appellant FMV being computed by the AO to be in negative at Rs. (-) 43.38/- share on 04.11.2013 and Rs. -25.52/- shares, computation and addi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alization of annual accounts. Actual revenue figures were by and large known by then and therefore the second valuation report adopted nearly actual revenue figures for the year under consideration i.e. 2014 (refer pages 43-44 of PB). The AO therefore has erred in not considering the second valuation report which provided a more accurate result of the share valuation. (b) The basic thrust of AO's case is that he has ventured to compare projected revenue figures with actual revenue figures. In this regard at page 2-3, para 4.8 AO has alleged that if revenues as per Provisional Balance Sheets are compared actual audited revenues for year ending 31st March 2013 and 31st March 2014 then there is a difference of 7.3% and 13.8% respectively. In this regard it is submitted that entire approach to compare projected revenue with actual revenue is not in accordance with law {Reference: Rameshwaran Strong Glass Pvt. Ltd. reported in 172 ITD 571(Jai) copy enclosed at pages 13 to 33 of Case law PB-II relevant at pages 30-31, para 4.5.2 and 4.5.3} Without prejudice, it is submitted that the AO has erroneously concluded that Appellant's revenue projections are without any ration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these reservations. The Appellant had considered a growth rate of 25% in Total Transaction Value ('TTV') of reservations to be handled by it and not on revenues. The corresponding growth on revenues as per the first and second valuation reports was in the range of 16-25% and 14-25% respectively. The aforesaid growth projection in TTV was based on, amongst several other factors, a travel report issued in the year 2012 (copy at pages 236 to 257 of PB) by a travel industry research authority, according to which year-on-year growth for online air segment was 23%-38% in the year 2009-2013. Similarly, the year-on-year growth for online hotel segment in the same period was 14%-37%. The overall online market grew year-on-year at 22-35%. Accordingly, it is evident that the Appellant had rational basis in the form of past trends to project its growth projections. Without prejudice, to the above, it is submitted that during assessment the AO himself conducted an independent search and in the order of assessment he has taken into consideration a report of the Sunday Guardian Live by Sh. Anubhav Parseera dated 25.09.2016. Even as per AO's search the estimated average growth ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. But if he finds 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). (f) Appellant had dully narrated the above submissions in detail before CIT(A) refer pages 27 to 37 of CIT(A) order wherein submissions made by appellant have been reproduced. It was specifically pleaded by appellant before CIT(A) as to why that business carried on by appellant is very lucrative (refer page 16 of CIT(A) order). It is submitted that there is no consideration by CIT(A) to the above legal and factual submissions. (g) Moreover, it is submitted that provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th of Shri Shiv Bansal recorded u/s. 131 on 17.12.2017, he was asked to furnish supporting evidences on the basis of which valuation reports were prepared. He submitted projection given by assessee and provisional financial statements on 31.03.2013 and 31.03.2014. A huge difference was found in the figures shown in provisional financial statements and actual financial statements (para 4.8 4.9) (iv) Vide order sheet entry dated 21.11.2017, assessee was asked to provide basis of projections for valuation of FMV of shares. However, assessee did not state anything regarding basis or documents on the basis of which projections were made. (v) From perusal of two valuation reports, it is seen that there is huge variation in figures of projected revenue taken for different financial years. (para 4.12) (vi) Assessee has taken projection summarily a growth percentage at 25% year on year which is very high. Vide letter dated 27.12.2017 some data was submitted but it showed growth rate of only 9. 70% against projected 25% (vii) The fact that valuation of shares as per Rule 11UA comes to a negative figure itself indicates that valuation as per Discounted cash flow method w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income under this Act shall be chargeable to income-tax under the head Income from other sources , if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. (2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head Income from other sources , namely:-- (viib) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares: Provided that this clause shall not apply where the consideration for issue of shares is received-- (i) by a venture capital undertaking from a venture capital company or a venture capital fund 9 [or a specified fund]; or (ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf: [Provided further that where the provisions of this clause have not been applied t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es below have wrongly invoked the provision of Section 56(2)(vii)(b). It has been stated that the legislative intent behind the insertion of such provision was to tackle a menace of the black money and literal interpretation should not be applied and one has to see the purpose of introduction of this section that is, purposive construction should be given while interpreting the said section. It was submitted that the aforesaid deeming provision was brought in the statute as an anti-abuse provision where a company receives any consideration for issue of shares that exceeds the face value of shares, then excess value is deemed to be income of that company. 17. From a plain reading of the Section, it is seen that the language of the statute is absolutely clear and there is no ambiguity in such provision. No exception has been carved out that it shall not be applicable on certain kind of transaction looking to the hardships or there was no intention of any evasion of taxes in such kind of transfers or receiving of shares. It is trite and well settled law that the construction of the statute must be taken from the bare words of the Act. One should not look what could have been the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd while interpreting such deeming provision. If the statute provides that 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 AO has to confine to the choice made by the assessee. The Method once adopted thus cannot be changed. In case, the AO is not satisfied with any of the parameters adopted in estimating the value, then subject to material being available on record, the Ld. AO 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 va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on for the purpose of determination of the fair market value, the past history may or may not be available in a given case and therefore, the other relevant factors may be considered. The projections are affected by various factors hence in the case of company where there is no commencement of production or of the 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. 19. We further find further from the decision of Coordinate Bench decision of Tribunal as relied upon by the Ld. counsel in case of VBHC Value Homes Pvt. Limited in ITA No. 2541 37/Bang/2019, wherein vide order dated 12th June 2020 it was held as under: 9. We have con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titioner. 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. If Mr. Mohanty is correct in his submission that a part of demand arising out of the assessment order dated 21st December, 2017 would on adoption of DCF Method will be sustained in part, the same is without working out the figures. This was an exercise which ought to have been done by the Assessing Officer and that has not been done by him. In fact, he has completely disregarded the DCF Method for arriving at the fair market value. Therefore, the demand in the facts need to be stayed. 12. As per above Para of this judgment of Hon'ble Bombay High Court, it was held that the AO can scrutinize the valuation report and he can determine a fresh valuation either by himself or by calling a final determination from an independent valuer to confront the assessee. But the basis has to be DCF method and he cannot change the method of valuation which has been opted by the assessee. Hence, in our considered opinion, in the present case, when the guidance of Hon'ble Bombay high Court is available, we should follow this judgment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt the same to the assessee. But the basis has to be DCF method and he cannot change the method of valuation which has been opted by the assessee. (2) For scrutinizing the valuation report, the facts and data available on the date of valuation only has to be considered and actual result of future cannot be a basis to decide about reliability of the projections. (3) The primary onus to prove the correctness of the valuation Report is on the assessee as he has special knowledge and he is privy to the facts of the company and only he has opted for this method. Hence, he has to satisfy about the correctness of the projections, Discounting factor and Terminal value etc. with the help of Empirical data or industry norm if any and/or Scientific Data, Scientific Method, scientific study and applicable Guidelines regarding DCF Method of Valuation. 10. From the paras reproduced above, it is seen that in this case, the Tribunal has followed the judgment of Hon'ble Bombay High Court rendered in the case of Vodafone M-Pesa Ltd. Vs. Pr. CIT (supra). The Tribunal has noted that as per the judgment of Hon'ble Bombay High Court, it was held that AO can scrutinize the valuati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual audited revenues. This issue has also been considered by Tribunal in case of Innoviti Payment Solutions (supra) and VBHC Value Homes (supra). 22. We further find merit in submissions of the Ld AR that the lower authorities have not properly adjudicated upon the contentions raised by the appellant. Before Ld CIT (A) appellant narrated the reasons for variation in estimated projections in valuations reports dated 03rd April 2013 and 31st March 2014. It was also submitted by the appellant that estimated projections as per valuation report dated 31st March 2014 are with a range of 4% to 6% of the actual audited revenues and therefore there is no material variance. Appellant further elaborated that it had considered a growth rate of 25% in Total Transaction Value ('TTV') of reservations to be handled by it and not on revenues and that corresponding growth on revenues as per the first and second valuation reports was in the range of 16-25% and 14-25% respectively which is reasonable even as per the independent search conducted by the Ld AO himself, wherein after taken into consideration a report of the Sunday Guardian Live by Sh. Anubhav Parseera dated 25.09.2016, Ld AO ..... X X X X Extracts X X X X X X X X Extracts X X X X
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