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TMI Blog2023 (11) TMI 863X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on the valuation report and on the basis of certain judicial pronouncements in an abstract manner. CIT(A) has not dealt with the factual objections of the Assessing Officer that the projections/cash flow assumed in the valuation report are without any demonstrable basis of reasonable nature. The CIT(A) has simply proceeded to return its findings on an abstract law. No doubt, the valuation is not an exact science and therefore cannot be done with arithmetic precision. However, in the same vain, the AO is entitled to scrutinise the basis of projections which resulted in such hefty valuations, more so, in the absence any significant earning capabilities in the past. CIT(A) is not expected to come to a conclusion based on abstract position of law. No inquiry has been shown to be made towards the basis for determination of projected figures assumed while applying DCF Method. The report of the valuer is also based on disclaimer. The valuer has determined the projected cash flow solely on the basis of estimations provided by the assessee. The basis for arriving at such estimations anticipated have not bee vouched by the expert valuer. CIT(A) has not examined such important fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otal income at Rs. 2,32,560/- for the Assessment Year 2016-17 in question. The return filed by the assessee was subjected to scrutiny assessment under Section 143(3) of the Act. 3.1 In the course of the assessment proceedings, the Assessing Officer inter alia observed that the assessee has issued 4,90,000 no. fresh equity shares of Rs. 10/- each totaling to Rs. 49 lakh at a premium of Rs. 4,50,80,000/- thereon @ Rs. 92 per share. The equity share of the company was thus issued and subscribed at Rs. 102/- per share. The Assessing Officer further observed that Fair Market Value (FMV) of the equity shares of the company stands at Rs. 17.18 per share and consequently the excess consideration received on issue of equity shares is susceptible to tax under Section 56(2)(viib) of the Act. 3.2 On being confronted, the assessee furnished a valuation report with effective date of valuation being 01.03.2016 wherein the FMV per share was assigned at Rs. 102 per share by following Discounted Cash Flow (DCF) Method. The Assessing Officer however cast shadow on the propriety of FMV determined as per the valuation arrived in the valuation report and held such valuation to be unsustainable. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business. The assessee-company was planning to expand its footprint in broadcasting and telecast of News and current affairs, TV channels which was visualized to carry massive potential to generate return for its stakeholders. The company had applied for the license in Ministry of Information and Broadcasting for expanding its business. The license was however denied vide communication dated 19.08.2020. The assessee thus contended that the genuineness of the premium charged at the time of subscription could not be disputed. 5. The CIT(A) found justification in the assertions made by the assessee in justification of the FMV. The CIT(A) thus reversed the action of the Assessing Officer and reversed the addition made under Section 56(2)(viib) of the Act. The relevant operative paragraph of the order of the CIT(A) is reproduced hereunder: 4. DECISION: The contention of the Appellant has been considered and the order of AO has also been perused. 4.1 Section 56(2)(viib) of the Act, reads as follows: (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 consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f such equity shares; or (b) the fair market value of the unquoted equity share determined by a merchant banker or an accountant as per the Discounted Free Cash Flow method.] 4.2 Reference is also drawn to the relevant extract of Technical guide o mare valuation (issued in 2009) by research committee of the Institute of Chartered Accountants of India (ICAI) which further clarifies the concept riving at valuations, which has been reproduced as under: 1.1 The valuation of the shares of a company involves use of judgement, experience and knowledge. The accountant undertaking this work should possess knowledge the analysis and interpretation of financial statements backed by a practice appreciation of business affairs and investments. A valuation based on quantitative information alone will not be adequate for a real valuation. It should also recognized that the method of valuation of shares would vary, depending on purpose for which it is to be used. 1.2 A clear understanding of the purpose of valuation is undoubtedly important, an equally important imperative is to have a full appreciation of the 'value emanating from common principles. This 'general pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital expenditure and incremental working capital. These cash flows are then discounted at a cost of capital that reflects the risks of the business and the capital structure of the entity. 2.7 Discounted Cash Flow is the most commonly used valuation technique, and is widely accepted by valuers because of its intrinsic merits, some of which are given below: (a) Theoretically, it is a very sound model because it is based upon expected future cash flows of a company that will determine an investor's actual return. (b) It is based on expectations of performance specific to the business, and is not influenced by short-term market conditions or noneconomic indicators. (c) It is not as vulnerable to accounting conventions like depreciation, inventory valuation in comparison with the other techniques/approaches since it is based on cash flows rather than accounting profits. (d) It is appropriate for valuing green-field or start-up projects, as these projects have little or no asset base or earnings which render the net asset or multiple approaches inappropriate. However, it is important that valuation must recognise the additional risks in such a case (e.g. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to uplink Popcorn TV Channel (Non-News Current Affairs Category) on 20th January 2016. The business sector in which the Company was planning to expand is a growing sector even in the present date and have a massive potential to generate returns for its stakeholders. As cited above, that the Company had applied for the license and based on the view that the license will be allotted, projections were estimated and valuation of shares were undertaken in the valuation report. 4.5 In course of appellate proceedings, various arguments were made by the learned AR of the appellant. She was asked to explain that as per the details available on page 2 of the paper book, during F.Y. 2016-17 F.Y. 2017-18, the projected revenue was Rs 350 Lakhs and Rs 650 Lakhs respectively whereas the actual revenue was observed as at Rs 1.9 Lakhs. and Rs 184 Lakhs and under this factual position, how the projections of 85% 30% increase in turnover can be accepted. In reply, learned AR of the assessee made various arguments that the projections assumed in the valuation report were based on the assumption that the Popcorn TV channel will be allotted. Unfortunately, the license was rejected and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ience and can never be done with arithmetic precision, hence the valuation by a Valuer has to be accepted unless, specific discrepancy in the figures and factors taken are found. Then AO or CIT (A) may refer to the Valuer to examine the same. 4.7 The Ld. AR of the appellant also represented that the most critical input DCF model is the Cash Flow Projections and if the valuation report is prepared with reasonable certainty by showing that the reliable estimates are achievable with reasonable certainty on the basis of facts available on the date of valuation and actual result of future cannot be a basis of saying that estimates of the management are not reasonable and reliable. The learned AR of the assessee also represented that the estimates are clearly within the industry norms and are practically achievable and therefore, the projection of growth of 85% and 30% is justified. The cash flow projections certified by the management were mere projections/estimations depending on various factors which nobody could have anticipated or foreseen on the when such valuations were made. Therefore, there was no justification to make a comparison of the estimations with the actuals. Such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are not relevant and a mere suspicion. It appears that the AO has ignored the 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 on the value, on the date of issue of shares, of its assets, including intangible asset being goodwill, know-how, patents, copyrights, trademarks, licenses franchises or any other business or commercial rights of similar nature whichever is higher. Moreover, it is only the Explanation (a)(ii) speaks o the satisfaction of the AO but there appears no such condition in the Explanation (a)(i) which therefore AO shouldn't interfere in the valuation once done in accordance with the method prescribed in the Rule 11UA(2). 4.10 For these reasons, I find no justifications behind the objection of the Assessing Officer that the valuation submitted by the assessee was absolutely baseless and exaggerated or without any basis. The valuer at the time of valuation in all aspects considered the eco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... valuation report corroborates the share premium and thus Assessing Officer was not justified in dislodging such valuations. The ld. counsel referred to the judgment delivered by the Hon ble Delhi High Court in the case of Pr.CIT vs. Cinestaan Entertainment Pvt. Ltd., (2021) 433 ITR 82 (Del) to contend that projections of revenue cash flow do involve estimations and cannot be compared with subsequent actual results unknown at the time of valuations. The actual results may often vary due to occurrence or non occurrence of events and expectations. The ld. counsel further contended that the onus is on revenue to demonstrate that the motive for issuance of share at high premium for any tax abuse. The Assessing Officer has failed in doing so. The ld. counsel also pointed out that the Assessing Officer cannot be permitted to arbitrarily change the valuation method from DCF method to NAV method as observed in the case of Vodafone M-Pesa Ltd. vs. Pr.CIT, (2018) 92 taxmann.com 73 (Bom). The ld. counsel thus submitted that no interference with the order of the CIT(A) is called for. 8. We have heard the parties in length and perused the assessment order as well as the first appellate order. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... improve the revenue manifold. The Revenue on the other contends that the projections made are imaginary and wholly unrealistic. The potential revenue and cash flow have been assumed without showing any realistic basis for arriving on such exaggerated projections which in turn has lead to lofty valuations. 9. At this juncture, it may be pertinent to note that the Hon ble Bombay High Court in the case of Vodafone M-Pesa (supra) has observed that the Assessing Officer is entitled to scrutinize a fresh valuation either by himself or by calling for a final determination from independent valuer and there is no immunity from scrutiny of valuation report per se. 10. The co-ordinate bench of Tribunal in Cinestaan Entertainment (P) Ltd. Vs. ITO 106 taxmann.com 300 observed that the assessing officer had not disputed details of projects, revenue, cost incurred and the manner in which it was substantiated by actual revenue. The assessee, from the facts and material placed on record, had pointed out that the basis of projection adopted by the valuer was based on very scientific analysis and method for arriving at projections. On these facts, in appeal by revenue, the Hon ble Delhi High C ..... X X X X Extracts X X X X X X X X Extracts X X X X
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