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TMI Blog2022 (2) TMI 383X X X X Extracts X X X X X X X X Extracts X X X X ..... sment year 2015-16 on 30.09.2015 declaring total loss to the tune of Rs. 4,79,20,437/-. The assessment order, under section 143(3) of the Income Tax Act, was framed by the Assessing Officer on 06.12.2017 by accepting loss declared in the return of income. 4.Later on, ld. PCIT has exercised his jurisdiction under section 263 of the Income Tax Act 1961. The ld PCIT observed that assessee company had allotted 9,96,000 equity shares at face value of Rs. 10 per share and at a premium of Rs. 40/- per share to various parties. The assessee company received a total premium of Rs. 3,98,40,000/- out of this allotment. The assessee had allotted shares based on the valuation done on DCF (Discounted Cash Flow) method. As per Rule 11UA, assessee can determine Fair Market Value of shares based on book value method or DCF (Discounted Cash Flow) method. For DCF method, certificate of a chartered accountant is required. In the instant case, assessee has determined fair market value (FMV) of shares, based on DCF method and accordingly relied on the valuation certificate issued by Chartered Accountant, (CA) dated 30.04.2013. However, the shares have been allotted on 04.07.2014, 30.07.2014 and 26.03.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alue (FMV) of the shares. 6. The ld PCIT observed that assessee-company had issued shares at a premium of Rs. 40 per share and face value of Rs. 10 per share, thus at a total consideration of Rs. 50 per share. As per latest audited balance sheet for the year under consideration, i.e. Balance Sheet as on 31.03.2014, the book value of shares comes to about Rs. 22 per share. Considering this as fair market value (FMV) of shares, the amount of Rs.28 (Rs. 50 minus Rs. 22) per share requires to be taxed under section 56(2)(viib) of the Act. Hence, ld PCIT was of the view that provision of section 56(2)(viib) of the Income Tax Act is applicable in the assessee`s case under consideration and difference amount Rs. 28 per share, as worked out above, is required to be taxed under the head "income from other sources". The same was neither verified by the assessing officer nor added to the total income hence rendering the assessment order passed to be erroneous and prejudicial to the interest of Revenue. Therefore, Ld. PCIT has issued a show cause notice under section 263 of the Act, to the assessee, to explain the difference of Rs. 28 per share in Fair Market Value (FMV) of shares. The show c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould not be erroneous and prejudicial to the interest of revenue. 8. However, ld PCIT rejected the contention of the assessee and observed that assessee company had allotted 9,96,000 shares at face value of Rs. 10 per share and at a premium of Rs. 40 per share to various parties. The assessee received a total premium of Rs. 3,98,40,000/- out of this allotment. Assessee had allotted shares based on the valuation done on DCF method. The assessee has relied on the valuation certificate of C.A, dated 30.04.2013. The ld PCIT noticed that shares have been allotted on 04.07.2014, 30.07.2014 and 26.03.2015, which is substantially later than the valuation date. As per valuation certificate, the valuation is based on audited balance sheet as on 31.03.2013 whereas latest audited balance sheet as on 31.03.2014 was already available at the time of issue of shares. However, the latest audited balance sheet has not been considered in determining valuation of shares. Valuation certificate pertains to assessment year 2014-15, whereas, the assessment year under consideration is, assessment year 2015-16. The ld PCIT also referred Rule 11UA of the Income Tax Rules in his revision order under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares capital / premium are to be introduced, as per the past projection, therefore there is no any mistake so far the fair market value (FMV) of shares are concerned. Considering these facts, the Assessing Officer did not examine the issue. However, the Assessing Officer has called the relevant documents/evidences by issue of notice under section 142(1) of the Act, dated 10.07.2017. In response to the said notice, the assessee submitted the required details and documents before the Assessing Officer which is placed at paper book page nos.1 to 3. Therefore, Assessing Officer taking into account the same set of circumstances and facts did not discuss the issue in the assessment order and hence the Assessing Officer after verifying all the information has chosen, not to make addition on account of share capital / share premium, therefore order passed by the Assessing Officer, under section 143(3) of the Income Tax Act, dated 06.12.2017, is neither erroneous nor prejudicial to the interest of Revenue. This way, Ld. Counsel prays the Bench that order passed by ld. PCIT under section 263 of the Act, may be quashed. 12. On the other hand, Shri Ritesh Mishra, Learned Departmental Repre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... phs, however in the succinct manner, the relevant facts and background are reiterated in order to appreciate the controversy and the issue for adjudication. During the year under consideration, assessee company had allotted total of 9,96,000 shares at face value of Rs. 10 per share and at a premium of Rs. 40 per share to various parties. The assessee received a total premium of Rs. 3,98,40,000/- out of this allotment. Assessee had allotted shares based on the valuation done on DCF (Discounted Cash Flow) method. As per rule 11UA assessee can determine FMV of shares based on book value method or DCF method. For DCF method certificate of a CA is required. The assessee has determined FMV of shares based on DCF method and accordingly relied on the valuation certificate issued by C.A, dated 30.04.2013. However, the shares have been allotted on 04.07.2014, 30.07.2014 and 26.03.2015, which is substantially later than the valuation date. As per valuation certificate, the valuation is based on audited balance sheet as on 31.03.2013 whereas latest audited balance sheet as on 31.03.2014 was already available at the time of issue of shares. However, the latest audited balance sheet has not been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 minus Rs. 22) per share requires to be taxed u/s 56(2)(viib) of the Act. Therefore, ld PCIT held that above irregularities make the assessment order passed u/s 143(3) of the I.T. Act, 1961 dated 06.12.2017 erroneous and prejudicial to the interest of Revenue. 14. The ld Counsel claimed that various issues raised by ld PCIT in assessment year 2015-16, is covered by the Tribunal order in ITA No.221/SRT/2019, for assessment year 2014-15, therefore, order passed by ld PCIT in assessment year 2015-16 may be quashed. Therefore, taking into account the above noted facts, we shall examine, whether issue raised by ld PCIT in his revision order under section 263 of the Act is covered by the order of Tribunal in ITA No.221/SRT/2019, for assessment year 2014-15, dated 13.12.2019,in assessee`s own case. We note that Tribunal has quashed the order of ld. PCIT under section 263 for assessment year 2014-15, observing as follows: "10. As far as second reason for invoking the provision section 263 by ld.Pr.CIT is concern, it was noticed by ld.Pr.CIT that shares of the company were issued at Rs. 50 per share. On the basis of valuation report obtained from the CA. However, in the valuation report ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inadequate enquiry, that would not by itself give occasion to the Commissioner amount to categorical to pass order u/s.263 of the Act, merely because he has different opinion in matter. It is only in cases of lack of enquiry that such a course of action would be open. Moreover, in the instant case the AO had called for explanation on both the ground by issuance of notice and subsequently, the assessee had also submitted all the details in order to satisfy the queries raised during the investigations done by the AO which clearly shows that the AO had undertaken the exercise of examining of both the above issues. It appears that since the AO was satisfied with the assessee's explanation, he accepted the same. Even the commissioner conceded the position that AO made the enquiries, but the grievances of the commissioner was that the AO should have made further enquiries rather accepting the assessee's explanation, therefore it could not be said that it was a case of lack of enquiry." 15. Having gone through the order of the Coordinate Bench in assessee`s own case in ITA No.221/SRT/2019, for assessment year 2014-15, dated 13.12.2019 (supra), we noticed that issue raised by the ld PCIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s without which the said payments would not have been possible, the source of the deposits may be explained if the investors are related persons. (iii) Details of relationship if any between the investors and the assessee company. (iv) Certified Statement showing calculation of the value per share in respect of shares for which premium has been received." 17. In response to above notice under section 142(1) of the Act, the assessee submitted its reply, vide letter dated 25.07.2017, which is placed at paper book page no. 1 to 3, which is reproduced below (to the extent relevant for our analysis): "6. (i) Share prices were determined at discount free cash flows method and on the basis of projection which is in accordance to the valuation as prescribed in Rule 11UA of the Income Tax Rules for the purpose of Section 56(2)(viib). (ii) The loan is squared up during the year out of sale receipts and loan taken during the year. Also the confirmation, bank statement and other documents of the squared up loan have been enclosed above. (iii) The audit report asks for details of those payments that are made to related parties whereas ITR form asks for those payments to related which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DCF valuation report with reference to assessment year 2015-16 and including the data of audited balance sheet of 2013- 14, is submitted by assessee before the assessing officer.The ld Counsel submits that valuation report of assessment year 2014-15 was more relevant because the assessee Company while obtaining Loan facility in the financial year 2012-13 and 2013-14 had committed for Equity Share Capital of Rs. 13.51 Crores,to be infused as part of sanctioned conditions of the Loan.The Sanction Letter issued by the Bankers is also submitted before the assessing officer. The Shareholders had infused Rs. 8.52 crores as Share Capital and Share premium during the financial year 2013-14 and Rs. 4.98 crore during financial year 2014-15, making the total of Rs.13.50 crores. Therefore, the funds, in fact, had been committed at the commencement of financial year2013-14 but received in staggered manner as and when required. The pricing was based on the value as determined at the time when commitment was made. The Shareholders are from the promoter group and none is stranger. The sources of the investment are well explained with proper sources. The list of the Shareholders was also submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was held as follows: "4.5.3 Coming to the basis of the projections, it is submitted that the plant capacity was taken as a basis to make projections of the production. It is further submitted that at the assessee is dealing in toughened glass which is related to real estate (construction) industry and at the relevant point of time, the real estate sector was in boom and there existed favourable conditions in the industry. The Directors of the assessee company were having experience and knowledge of the field. The other three companies to whom shares were allotted were also in the real estate sector, as their name suggest. The Board of Directors were expecting good results in the future. Except the initial years where the production could not be commenced because of the circumstances beyond the control but as per the actual figures available now for the previous year ended on 31.03.2017, the value per share comes to Rs. 84.67 based on the audited accounts which is almost in accordance with the value of Rs. 95.90 estimated by the C.A. Moreover, such report was also submitted to the bank as per a notes at Page 46 of the assessee's paperbook, for obtaining hypothecation limit of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s which formed a reasonable basis of projections. Moreover it is not denied that the valuation reports were prepared by the C.A. as per the guidelines given by the Institute of Chartered Accountants of India and the AO has not found any fault. We thus, find no rational or sound basis in the order of the authorities below to reject the valuation report submitted by the assessee based on DCF Method. 4.5.4 In any case, it is also noticed that even as per the valuation got done by the CIT (A) based on the actuals, the FMV came to Rs. 65.31 per share as against which, the assessee had charged a premium of Rs. 60 only per share. Therefore even assuming that the valuation reports submitted by the assessee are not reliable for any reason than too there was no justification to rely upon the valuation of the shares done by the AO based on book value at Rs. 32.76 per share or premium at Rs. 27.76 per share. Reducing the face value of Rs. 10 from the FMV of Rs. 65.31, the amount of premium comes to Rs. 55.31 per share as against the premium claimed by the assessee at Rs. 60. Thus there is a small difference of around Rs. 5 which was less even than 10% of the premium claimed by the assessee @ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be determined is in the context of the section 56(2)(viib) of the Act as invoked by the AO and therefore, both the assessee and the revenue are equally guided by the said provisions and there is no discretion with either of the parties in terms of non-applicability of Sub-rule 2 of Rule 11UA. Therefore, we are unable to accede to the contention so raised by the Id DR4 that sub-rule 1 of rule 11UA which provides for determination of fair market value4 of unquoted equity shares as per book value as per formula so specified is applicable in the instant case. Rather, Sub-Rule 2 of Rule 11UA is more specific for the purposes of determination of fair market value of unquoted equity shares under section 56(viib) and shall be applicable in the instant case. The latter provides an option to the assessee to determine the fair market value of the shares either as per the book Value or Discounted Free Cash Flow Method. The exercise of such an option by the assessee is not subject to fulfillment of any specified conditions and it is left to the sole discretion of the assessee as it deems fit to apply. In the instant case, the assessee company has exercised its option to value its shares as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndent valuer to confront the petitioner. 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." The AO though observed that the assessee raised loans from the above associate concerns and has converted them into shares application/premium money. However, it has not shown how it will affect the correctness of the valuation claimed. It is not the case of the AO that the shares were allotted to the outsiders non-related persons but the existing amount of the loans from the related persons were converted into shares. Hence there cannot be any scope of introduction of assessee's unaccounted income through allotment of shares at unreasonably high priced shares. Therefore, such observations is not relevant and a mere suspicion. It appears that the authorities below have ignored Explanation (a) below S. 56(2)(viib).The said Explanation provides that the fair market value of the shares shall be the value- (i) as may be determined in accordance with such method as may be prescribed i.e. u/r 11UA; or (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the ground that valuation of the equity shares carried out by the assessee was based on projection of revenue which did not match with the actual revenues of the subsequent years. He further held 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 Rs. 10/- per share. 26. 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le in the matter of interpretation, then the construction most beneficial to the assessee should be adopted. Viewed from such principle, here is a case where the shares have been subscribed by unrelated 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. 28. Now, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other than immovable property, shall be determined in the following manner, namely,- (2) Notwithstanding anything contained in sub-clause (b) of clause (c) of sub-rule (1), the fair market 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." 29. 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 disco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of which it had short listed its initial stage of movies. The ld. counsel has also drawn our attention on various agreements for production of these films. He also pointed out that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) (viib) is a deeming provision and one cannot expand the meaning of scope of any word 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 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffected 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 startups." (iii) DQ (International) Ltd. (supra) "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. 33. 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. 34. 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 Radhakis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od adopted by the assessee and if he does not find any error in the method so adopted then order passed by him should not be treated erroneous. We note that ld PCIT in his revision order observed that clause 11(U) Sub-clause (b) of Rules 11UA defines the word Balance Sheet. This clause again referred to the Balance Sheet as drawn on the valuation date and where such Balance Sheet is not drawn on the valuation date it will be of the date immediately preceding the valuation date. Therefore, if the share was allotted in financial year 2014-15, and the Balance Sheet were not drawn on the date of the allotment, the relevant Balance sheet on the basis of which the fair market value could have been determined would be the Balance sheet as on 31.03.2014. As per ld PCIT, there would be no relevance of the Balance Sheet drawn on 31.03.2013. We do not agree with ld PCIT that fair market value of the shares should be determined based on Balance sheet as on 31.03.2014. The assessee made long term projections based on Balance Sheet drawn on 31.03.2013, and loan was sanctioned by the bank based on said projection. As per said projection, the shares were partly issued in previous year and partly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court in the case of Malabar Industries (supra) held that this phrase i.e. "prejudicial to the interest of the revenue'' has to be read in conjunction with an erroneous order passed by the Assessing Officer. Their Lordship held that it has to be remembered that every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interest of the revenue. When the Assessing Officer adopted one of the courses permissible in law and it has resulted in loss to the revenue, or where two views are possible and the Assessing Officer has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue "unless the view taken by the Assessing Officer is unsustainable in law". 25. We note that order passed by the assessing officer is sustainable in law as the assessing officer, during the assessment stage examined the DCF valuation report including the latest audited balance sheet, as on, 31/03/2014 with reference to assessment year 2015-16,whichdoes not give a different valuation. The data used in the report of 2014 is supported by the techno-economic valuation done by in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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