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TMI Blog2022 (7) TMI 1490X X X X Extracts X X X X X X X X Extracts X X X X ..... valuation of shares to the file of ld. AO for the limited purpose of verification in terms of conclusions noted above so as to arrive at satisfaction on the scientific basis of valuation and rationality of assumptions adopted to build hypothesis on the valuation of shares. The assessee is also directed to make available the MIS data and all the other details of various assumptions adopted to arrive at the given valuation of equity shares issued by it. Ld. AO is also directed to analyze the data and projections which have undergone in arriving at the FMV on the basis of DCF method opted by the assessee and to come to a conclusion accordingly in terms of the applicable law. Before parting on this issue, we make it clear that we have not expressed any of our views on the correctness and completeness of the valuation report submitted by the assessee by adopting DCF method under Rule 11UA(2)(b) of the Rules so as not to impair or injure the verification process before the ld. AO. The observations made herein by us in remitting the matter back to the file of the ld. AO will also not impair or injure the case of the assessee and not cause any prejudice to the defence/explanations of the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... des such category of shareholders from the applicability of the section; 3. That on the facts and in the circumstances of the case, the learned CIT(Appeals) erred in disallowing an amount of Rs 2.9 crores without appreciating that the consideration was first received on account of CCDs in FY 2010-11 and FY 2011-12 prior to introduction of Section 56(2)(viib) from 1 April 2012 and CCDs were merely converted to equity shares during the year. 4. That without prejudice to the ground taken above, the learned CIT(Appeals) erred in confirming the disallowance made by the Assessing Officer to the extent of Rs 6.8 crores under section 56(2)(viib) of the Act without giving any cognizance to the sharp valuation report and without appreciating that the shares have been issued at a price not exceeding the Fair Market Value (FMV) of the shares. 5. That on the facts and in the circumstances of the case, the learned CIT(Appeals) erred in upholding the action of the Assessing Officer in rejecting the Assessee's Discounted Free Cash Flow Method and adopting book value method for valuation of shares without any legal basis. 3.1. From the perusal of grounds of appeal above, we note that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ggregate consideration of Rs. 17,45,07,000/-. Aggrieved, assessee went in appeal before the Ld. CIT(A). 6. In the course of first appellate proceedings, ld. CIT(A) gave partial relief to the assessee by deleting the addition of Rs. 9,24,03,061/- pertaining to share premium received from non-residents by holding that the provision of section 56(2)(vii)(b) of the Act is applicable only on proceeds received from residents. Ld. CIT(A) also gave relief by deleting the addition of Rs. 1,34,06,290/- pertaining to the receipt of face value of shares by holding that provision of section 56(2)(vii)(b) of the Act is applicable only on the "consideration for issue of shares that exceeds the face value of share" i.e. only share premium and not the face value of the shares. On the relief granted by the ld. CIT(A), it was submitted by the ld. Counsel that the department is not in appeal before the Tribunal which is not controverted by ld. CIT, DR. The balance addition of Rs. 6,86,97,649/- made by ld. AO was confirmed by the ld. CIT(A), details of which is tabulated as under: 7. Aggrieved, the assessee is in appeal before the Tribunal. 8. Ld. Counsel for the assessee has placed on record a syno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Company that is reclassified, re-organised, reconstituted or converted into Equity Shares and includes the Conversion Shares; 1.38 "Encumbrance" means (i) any mortgage, charge (whether fixed or floating), pledge, lien, hypothecation, assignment, deed of trust, security interest or other encumbrance of any kind securing, or conferring any priority of payment in respect of, any obligation of any Person, including any right granted by a transaction which, in legal terns, is not the granting of security but which has an economic or financial effect similar to the granting of security under applicable law; (ii) any voting agreement, interest, option, right of first offer, refusal or Transfer restriction in favour of any Person; and (iii) any adverse claim possession or use; ……………… ……………… 1.85 "Shareholders" mean the shareholders of the Company from time to time and shall include the Investors as and when Conversion of any of the Investor CCDs takes place; 1.86 "Shareholding" shall mean the respective percentage proportions in which the share capital of the Company is held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erms of the investment agreement and the relevant extract from para 1 and 2 of this Annexure which provides for the entitlement on conversion is reproduced as under:- 1. Right to Convert: The Debenture Holder shall be entitled to have the CCDs converted into Equity Shares in the manner as set out in this Annexure 5. 2. Entitlement on Conversion (a) Upon Conversion, each Debenture Holder shall be entitled to receive such number of Conversion Shares for the CCDs held by the Debenture Holder. (b) The Conversion Shares issued to the Debenture Holder pursuant to the Conversion shall be transferable to any Person, subject to the terms of the Agreement. (c) The Conversion Shares issued to the Debenture Holder pursuant to the Conversion shall be of the same face value and shall be pari passu in every respect with the comparable Equity Shares of the Company then outstanding, and shall be issued at the Conversion Price to the Debenture Holder. 11.4 Further, there is Annexure No. 6 to the same agreement which lists down the warranties wherefrom under Clause (1) titled as subscription, relevant clauses are extracted as under:- "1.1. The issue of Investor CCDs respectively sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of shares, then it is unfathomable to apply such method so as to reject the assessee's valuation and assessee cannot be expected to comply with the method when it was notified subsequent to the date of allotment of the shares." He also submitted that the provisions of Section 56(2)(viib) of the Act having introduced w.e.f. 01.04.2013 i.e. from AY 2013-14 and since the assessee has received the amount on issuance of CCDs in the preceding two years i.e. AY 2011-12 and AY 2012-13, section 56(2)(viib) of the Act will not be applicable and the sum so received will not be chargeable to tax under the aforesaid section. He further placed reliance on the decision of the Co-ordinate Bench of ITAT Kolkata in the case of ACIT vs. Diach Chemicals & Pigments Pvt. Ltd. in ITA No. 546/Kol/2017 for AY 2013-14 order dated 19.06.2019 wherein it was held that since the amount for allotment was received by the assessee in AY 2012-13 and the allotment of shares was done in AY 2013-14, the provisions of Section 56(2)(viib) of the Act cannot be applied in the year of allotment of shares. 11.7 Per contra, ld. CIT DR relied on the order of the ld. CIT(A) and the ld. AO and emphasized that the secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall be the value-- (i) as may be determined in accordance with such 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, on the date of issue of shares, 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, whichever is higher; (aa) "specified fund" means a fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which has been granted a certificate of registration as a Category I or a Category II Alternative Investment Fund and is regulated under the Securities and Exchange Board of India (Alternative Investment Fund) Regulations, 2012 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992) or regulated under the International Financial Services Centres Authority Act, 2019; (ab) "trust" means a trust established under the Indian Trusts Act, 1882 (2 of 1882) or under any other law for the time being in force; (b) "venture capital company", "venture capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the assessee making it more investor attractive/lucrative. (vi) The risk of getting into the claim of insolvency resolution from the debt creditors in case of default in servicing their debt obligation is mitigated, so on and so forth… 12.4 Further, from the extracts reproduced in para 11 above from the Investment Agreement placed on record, the terms and conditions, warranties and other covenants relating to issuance of CCDs and their subsequent conversion into equity shares evidently records and corroborates few of the considerations listed above relating to discharge of obligation, release of encumbrance, interest obligation, pari passu ranking of rights of equity shareholders, etc. Thus, when looked from these aspects, section 56(2)(viib) of the Act envisages a much wider outlook to the "receipt of any consideration" which cannot be limited to the receipt of money only. The conversion of CCDs into equity shares in AY 2013-14 entails receipt of consideration by the assessee which is translated into the total issue price of 17,45,07,000/- including share premium of Rs. 16,11,00,710/-, tabulated in para 11.5 above. 12.5 Contention canvassed by the assessee is in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aking' (VCU), both of which falls within exclusion clause (i) of the first proviso to section 56(2)(vii)(b) of the Act. 13.3 To understand the definition of 'Venture Capital Fund' and 'Venture Capital Undertaking', useful reference was made by the ld. Counsel to the explanation to section 10(23FB) of the Act. Relevant portion of the said section is reproduced for ease of reference. 13.4 To substantiate his claim, ld. Counsel referred to the certificate dated 28.05.2002, issue by Securities Exchange Board of India (SEBI) acknowledging the status of Aavishkar as VCF which is placed at page 62 of the paper book. Further, to demonstrate that the assessee falls within the definition of Venture Capital Undertaking (VCU), Ld. Counsel referred to the SEBI (VCF) Regulations, 1996 wherein u/s. 2(n) it is defined as under: 13.5 By referring to this definition of VCU, ld. Counsel emphasized that all the conditions are fulfilled by the assessee to hold it as a VCU, i.e. to say - (a) Shares of assessee are not listed on a recognized stock exchange. (b) Assessee is engaged in the production or manufacture of articles i.e. dairy products. (c) Assessee is not engaged in services provided i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n first proviso to section 56(2)(vii)(b) wherein it states that section 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. Accordingly, we direct to delete the addition so made in this respect. 13.9 Another part of ground no. 2 relates to addition of Rs. 64,52,066/- in respect of share premium received from certain other non-resident angel investors, list of which is tabulated as under: 13.10 In this respect, ld. Counsel for the assessee submitted that the issuance of equity shares to its non-resident angel investors was by way of conversion of CCDS into equity shares in the impugned year but since these are non-residents, provision of section 56(2)(viib) is not applicable. Ld. Counsel for the assessee further submitted that ld. CIT(A) already deleted the addition of Rs. 9,24,02,061/- as noted above in respect of amount received from non-resident company i.e. Aavishkar India (II) Company Ltd. (AICL) against which Department is not in appeal and therefore no addition can be made in respect of share premium on the equity shares issued to the other non-resident angel inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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:-- (a) the fair market value of unquoted equity shares = (A-L) (PE) × (PV), where, ………. ………..; or (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. [emphasis supplied by us by bold and underline] 14.2 From the above, the two methods prescribed in Rule 11UA(2)(a) and (b) are at the option of the assessee. We note that assessee has strongly agitated vide ground no. 4 and 5 on the issue of change of method for valuation of equity shares to NAV method by the ld. AO when the DCF method has been opted and adopted by the assessee as prescribed in the said rule. Ld. Counsel submitted that ld. AO cannot disregard the method used by the assessee and change it without scrutinizing the valuation report furnished by the assessee which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esults as projected are not matching with the actual results declared in the final accounts, the AO cannot substitute his own valuation in place of the value determined either on DCF method or NAV method." He also placed reliance on the decision of Cinestaan Entertainment Pvt. Ltd. v. ITO in ITA No. 8113/Del/2018 dated 27.05.2019 wherein it was held that the commercial wisdom of reputed investors should not be questioned by the AO without providing any tangible reasons. 14.5 On another aspect of date on which the valuation report was obtained as alleged by the ld. CIT(A), ld. Counsel submitted that even if the valuation report is obtained subsequent to the date of issue of shares, it does not alter the situation, rather what is relevant is whether valuation report supports the share price determined by the assessee or not. For this contention, he placed reliance on the decision of Co-ordinate Bench, ITAT, Chennai in the case of Sri Sakthi Textiles Ltd. v. DCIT in ITA No. 1228/Chn/2019 dated 01.02.2021. In view of this decision by the Co-ordinate Bench of ITAT, Chennai, ld. Counsel submitted that observation of Ld. CIT(A) that the valuation report obtained by the assessee is an aft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12.2016. 16.4 We note that ld. CIT(A) has made certain observation while rejecting the valuation done by the assessee under DCF method by holding it as an afterthought and with a malafide intention. In the course of appellate proceeding, ld. CIT(A) asked for certain documents from the assessee including board resolution for the appointment of valuer, scope of valuation given, data provided to the valuer, valuation report and the bill issued by the valuer for the valuation charges. Further, ld. CIT(A) observed that in the year 2016 when the valuer was conducting valuation exercise, the valuer ought to have been aware about the financial statements of the assessee for the preceding years i.e. 2013-14, 2014-15 and 2015-16 which could have given indications for taking the realistic approach by taking into account the actual results of these past years. He also noted that the assessee did not submit the MIS data which was given to the valuer for the purpose of valuation of shares and therefore, there is no possibility of verifying the correctness of the data supplied by the assessee to the valuer so as to ensure correctness and completeness of the valuation arrived at in the valuation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eafter, he can go for own valuation or to obtain the fresh valuation report from an independent valuer and confront 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. (ii) 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. (iii) 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, terminal value, etc. with the help of empirical data or industry norms, if any, and/or scientific data, scientific method, scientific study and applicable guidelines regarding DCF Method of Valuation. 16.8 In the present case before us relating to the addition made towards share premium of Rs. 2,47,18,166/- from 'Other Angel Investors' and of Rs. 6,51,417/- from Aavishkar Ventures Management Services Pvt. Ltd. (AVMSPL) ta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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