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TMI Blog2023 (7) TMI 728X X X X Extracts X X X X X X X X Extracts X X X X ..... ne of the method approved in the Rule 11UA of I.T. Rules and it is supposed to get report from merchant bankers but assessee has taken the report from Chartered Accountant Firm. Except the report obtained from the Chartered Accountant Firm assessee has followed the due process of law. Since the assessee has submitted report from merchant banker which is more or less similar to the valuation report submitted by the Chartered Accountant Firm and Ld. DR made a submission that it may remit back to the file of the AO so that it can be properly verified. Even valuation report obtained from the merchant bankers even they have issued a limitations and warrantees to the valuation report. Therefore, the disclaimer of a valuer cannot be a basis for disallowing the proper allotment of shares. It is not a bar on the assessee to issue shares with a premium as per companies Act. Thus we are inclined to delete the additions proposed by the Assessing Officer. Decided in favour of assessee. - ITA NO. 836/MUM/2022 - - - Dated:- 1-12-2022 - SHRI AMIT SHUKLA, HON'BLE JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, HON'BLE ACCOUNTANT MEMBER For the Appellant : Shri Jayesh Dadiya For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been issued at a price which have been determined based on the valuation report received from the professional organization. The copy of the valuation report was already submitted before the Assessing Officer dated 10.11.2017. It was submitted that the valuation of the shares was valued adopting one of the accepted method specified under Rule 11UA of I.T. Rules and assessee is a newly formed startup company with a unique platform for range of medical and healthcare services. This company is founded by three promotors namely Jagat Parikh, Ryan Albuquerque and Jaydev Sanghavi. All the promotors have a wide experience of working with multinational and consulting firm for around 15 to 20 years before starting up this venture. The method adopted for value the shares are one of the approved method that is Discounted Cash Flow analysis method, based on this method shares were valued at ₹. 1253/- per share. 6. After considering the submissions of the assessee, Assessing Officer rejected the submissions of the assessee by observing that the valuation report is prepared which is suitable to the objective of the assessee and the report issued by the professional has expressed the dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... themselves. (iv). The issue of shares at high premium should not attract the provision of Section 56(2)(viib) of the Act in the case of the appellant as the purpose of the appellant was not tax abuse but genuine business transaction. (v). Rule 11UA(2) of the I.T. Rules gives an option to choose the most appropriate method for determination of Fair Market Value. Accordingly, the appellant has chosen the Discounted Free Cash Flow method. As per the technical guidance of the ICAI, Cash Flow Projections should reflect the best estimates of the management. In the case of the appellant, the business model was unique and therefore, the best estimate of the management is reflecting in the Valuation Report of the appellant. (vi). The investors who are high networth individuals and company have made the investment after considering the projection of the management and their judgment cannot be questioned by the Revenue authorities. (vii). The case of the appellant company is that of a startup and therefore, the valuation ought not to be questioned by the Revenue authorities more particularly, when the genuineness of the investment and the identity and creditability of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to an another independent valuer before finalizing the assessment. The action is unjustified and against the spirit of the Law. (4) Your Petitioners craves leave to add, amend, alter and / or withdraw the aforesaid ground of appeal. 11. At the time of hearing, Ld. AR of the assessee brought to our notice basic facts on record and he submitted that assessee has issued 31248 equity shares at ₹. 1250/- with a premium ₹. 1240/-. He submitted that the promotors held only 3082 shares and balance 28246 shares were issued to the outsiders and before issuing the shares assessee has obtained the valuation report in which Discounted Cash Flow method was adopted to arrive of the value of the shares which is one of the approved method under Rule 11UA of the I.T. Rules. Ld. AR submitted that the Assessing Officer has reviewed the disclaimer made by the valuer in their report and merely relying on the disclaimer and the valuations done by the Chartered Accountant was rejected by the Assessing Officer. He submitted that subsequently assessee acquired the valuation report from the mercantile banker and even the mercantile banker has arrived at the similar valuation. Assessee f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inting out certain observation made in the disclaimer in the valuation report. 15. Since the assessee has submitted report from merchant banker which is more or less similar to the valuation report submitted by the Chartered Accountant Firm and Ld. DR made a submission that it may remit back to the file of the Assessing Officer so that it can be properly verified. We observe that even valuation report obtained from the merchant bankers even they have issued a limitations and warrantees to the valuation report. Therefore, the disclaimer of a valuer cannot be a basis for disallowing the proper allotment of shares. It is not a bar on the assessee to issue shares with a premium as per companies Act. As far as invoking provisions of section 56(2)(viib) of the Act various courts have held as under: - Securities Exchange Board of India Ors [2015 ABR 291-(Bombay HC)] 48.6 Thirdly, it is a well settled position of law with regard to the valuation that valuation is not an exact science and can never be done with arithmetic precision. The attempt on the part of SEBI to challenge the valuation which is by its very nature based on projections by applying what is essentially ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the top investors and businessman of the country and if they have seen certain potential and accepted this valuation, then how 40 or Ld. CIT(A) can question their wisdom. It is only when they have seen future potentials that they have invested around Rs. 91 crore in the current year and also huge sums in the subsequent years as informed by the ld counsel. The investors like these persons will not make any investment merely to give dole or carry out any charity to a startup company, albeit their decision is guided by business and commercial prudence to evaluate a start-up company like assessee, what they can achieve in future. It has been informed that these investors are now the major shareholder of the assessee company and they cannot become such a huge equity stock holder if they do not foresee any future in the assessee company. In a way Revenue is trying to question even the commercial prudence of such big investors like. According to the Assessing Officer either these investors should not have made investments because the fair market value of the share is Nil or assessee should have further invested in securities earning interest or dividend. Thus, under these facts and circ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied by assessee independently or verified the figures or projections independently. This is the main reason for rejecting the valuation report submitted by the assessee. Since AO has rejected the valuation report, he himself proceeded to value the fair market value of the shares based on net assets method. Since AO has rejected the valuation report even though it was done by valuer, which is independent entity. We observe that the reason for rejecting the valuation report by the AO was well answered by Ld. CIT(A) and also Ld. CIT(A) has appreciated the fact that assessee has option to choose one of the method i.e. net asset method or DCF method, whichever is favourable to them. 19. Since Ld. CIT(A) has already addressed the issue of method of valuation which has to be adopted, therefore we do not intend to go into which method has to be adopted and accordingly, we notice that the department is in appeal against Ld. CIT(A) and in our considered view, Ld. CIT(A) has properly rejected the method adopted by the AO and proceeded to accept the DCF method adopted by the assessee. Therefore, we are inclined to dismiss the ground raised by the department. 20. Coming to the finding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Private Limited @ 615 per share) and for which necessary copy of Resolution dated 20/12/2013 duly attested by Notary public of Italy were submitted to AO during assessment itself and it was categorically stated in reply that the said transaction has actually taken placed at agreed rate of Rs 380.53 per share of Clearview Healthcare Pvt Ltd (Rs 615 per share of Clearmedi Healthcare Private Limited) (refer assessee's paper book pages 143-144 letter dated 23.12.2016 addressed to AO in assessment proceedings, same reply in letter to AO Dated 19.12.2016 paper book pages 153) clearly justifies instant share premium of Rs 150 per share and AO wrongly added Rs 16 per share as alleged excessive premium (which amounted to Rs 919,632/- in aggregate) within the meaning of provisions of section 56(2)(viib) of the Act (explanation to section 56(2)(viib) clause (ii) thereof where judicious satisfaction of AO is talked about). This plea of assessee has considerable cogency. The second plea is that when ultimately shares are bought by foreign buyer on basis of detailed due diligence which is reflected from share purchase resolution and share purchase agreement already placed on records and mon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... head Income from other sources. However, this provision shall not apply where the consideration for issue of shares is received by a venture capital undertaking from a venture capital company or a venture capital fund. Further, it is also proposed to provide the company an opportunity to substantiate its claim regarding the fair market value. Accordingly, it is proposed that the fair market value of the shares shall be the higher of the value- (i) as may be determined in accordance with the method as may be prescribed; or (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value of its assets, including intangible assets, being goodwill, know- how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. This amendment will take effect from 1st April, 2013 and will, accordingly, apply in relation to the assessment year 2013-14 and subsequent assessment years... 5.1 I further find that the issue in dispute is squarely covered by the decision of the ITAT 'A' Chennai Bench decided in ITA Nos.663, 664 665/Chny/2019 in case of M/s Lalithaa Jewellery Mart Pvt. Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X
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