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TMI Blog2022 (3) TMI 208X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Cinestaan Entertainment Pvt. Ltd. [ 2019 (6) TMI 1367 - ITAT DELHI] wherein it has been held that the Assessing Officer cannot substitute his own value in place of the value determined either on DCF method or NAV method, the appeal of the assessee is hereby allowed. - ITA No. 9042/Del/2019 (Asstt. Year : 2015-16) - - - Dated:- 28-1-2022 - Sh. A. D. Jain, Vice-President And Dr. B. R. R. Kumar, Accountant Member Assessee by : Sh. Sanjiv Sapra, FCA Revenue by : Sh. Umesh Takyar, Sr. DR ORDER Per Dr. B. R. R. Kumar, Accountant Member: The present appeal has been filed by the assessee against the order of ld. CIT(A)-44, New Delhi dated 30.08.2019. 2. Following grounds have been raised by the assessee: 1. That the Ld. CIT(A) has erred on facts and in law in co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f shares to the tune of ₹ 2,32,84,843/-. Therefore, during the course of assessment proceedings, the AR was asked to justify the premium received over and above the fair market value of the shares with documentary evidence in terms of section 56(viib) of I.T. Act. 6. Before the AO, the ld. AR has filed valuation report dated 11.12.2014 of M/s Intelligrape Software Pvt. Ltd. prepared by M/s Puneet Puri Company wherein value of one share has been valued at ₹ 8,328/- per share. 7. Upon examination of the valuation report dated 11.12.2014 as given by the ld. AR of the assessee company during the course of assessment proceedings, it was noticed that the valuation report was prepared by the valuer on 11.12.2014 while shares were issued on 01.05.2014, 23.02.2015 and 30.03.2015. As per Rule 11UA fair market value of the equity share on the valuation date should be valued on which the shares issued but in this case more than six month difference in between the valuation date and date on which shares were actual issued. In addition to above, the assessee itself vide letter dated 19.12.2017 admitted that its PAT has been declined. The relevant portion of the said letter re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the assessee has failed to prove the basis of discounted rate used. In a discounted cash flow analysis, the sum of all future cash flows (C) over some holding period (N), is discounted back to the present using a rate of return (r) and the assessee has failed to prove the basis of future cash flows over some holding period and discounted back to the present using a rate of return. In result the valuation is not acceptable based on cash flow method. 9. Accordingly, the fair market value of Assessee Company i.e. M/s Intelligrape Software Pvt. Ltd. is calculated as per the provision of rule 11UA of I.T. Rules 1961. Calculation of value per share under NAV method on the basis of audited figure of financial statement of FY 2014-15: As at 31/03/2015 a) Total Asset excluding Misc Expenditure P L Dr Balance 1163,23,538 b) Less -Total Liability excluding contingent liability 488,54,805 c) Net assets value (a-b) 694,68,733 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the assumptions underlying the same have also not been explained in the report. The value and has mentioned that on the financial statement and other data pertaining to the company had been provided by the management of the company and had been accepted and relied upon by the valuer without further verification including nonconformity or conformity with the generally accepted accounting principles and/or other guidelines established by the regulatory bodies. The valuer has also stated that reported facts, comments, estimates, opinions and statistical information in the valuation exercise had been obtained from sources believed to be accurate and reliable and no liability was assumed for the content or accuracy of the data furnished by others including information and representations provided by the management. 12. We have perused the entire material on record. The similar issue in the case of the same assessee has been adjudicated by this Tribunal wherein one of the Member s is the author of the judgment for the A.Y. 2014-15 in ITA No. 3925/Del/2018 wherein the objections raised by the ld. CIT(A) have been duly deliberated. For the sake of ready reference, the relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the ratio of 70:30. Accordingly, WACC = (70 percent X 14.4 percent) + (30 percent X 14 percent X (1- 30 percent) = 13 percent Terminal Value: The Terminal Value of the Company is calculated based on the perpetuity growth model assuming a growth factor of 3 percent which is considere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding 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 15-16 16-17 17-18 Actual Profit/Loss a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce 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 requi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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