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TMI Blog2024 (2) TMI 604X X X X Extracts X X X X X X X X Extracts X X X X ..... ny activities of its own and all the education and training activities are carried in the subsidiary company. For the purpose of argument if we agree the valuation method suggested by the AO to value the shares of the assessee company, the valuation of investments made by the holding company in its subsidiary will remain at the historical cost. It will not change even after ten years and the valuation of the holding company will remain same even after ten years. Proper method of valuation of shares of any holding company depends upon valuation of the subsidiary company. Therefore, in order to determine the valuation of shares of the holding company the valuation of subsidiary company has to be determined on the basis of proper method as per Rule 11UA of I.T.Rules. The method to be selected based on the purpose for which the valuation is necessity. If it is running business, the valuation has to be on the basis of futuristic. Therefore, in order to determine the valuation of the subsidiary company one has to adopt the Discounted cash flow Method considering the fact that the futuristic value of shares has to be determined based on Discounted cash flow Method only. Net Asset Value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ground raised by the assessee. - Shri Aby T Varkey, Hon'ble Judicial Member And Shri S. Rifaur Rahman, Hon'ble Accountant Member For the Assessee : Shri Kapil Sanghvi For the Department : Shri P.D. Chougule ORDER PER S. RIFAUR RAHMAN (AM) 1. This appeal is filed by the assessee against the order of Learned Commissioner of Income-Tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter in short Ld. CIT(A) ] dated 14.03.2023 for the A.Y.2017-18. 2. Brief facts of the case are, assessee filed its return of income on 31.10.2017 declaring loss of ₹.5,73,140/-. The return was processed under section 143(1) of Income-tax Act, 1961 (in short Act ) accepting the return. Subsequently, the case was selected for scrutiny under CASS for one of the reason large share premium received during the year (verify applicability of section 56(2)(viib) of the Act) . Accordingly, notices under section 143(2) and 142(1) of the Act were issued and served on the assessee, in response assessee filed the details through e-proceedings. 3. The assessee is engaged in providing technology enhancement in respect of legal courses for training and skilling. During the course of assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer is of the view that, the Rule clearly states that fair market value of unquoted equity shares for the purpose of section 56(2)(viib) of the Act shall be the value on the valuation date as determined by prescribed rule at the option of the assessee i.e., either Net Asset Value Method or Discounted cash flow Method. He is of the view that the method taken for value of unquoted equity shares is not in accordance with the prescribed under Rule 11UA of I.T.Rules. 7. In view of the above observation a separate show cause notice dated 13.12.2019 was issued to the assessee by which assessee was asked to explain the approach of adopting revaluation of investments while applying Net Asset Value Method in light of section 56(2)(viib) of the Act. In response assessee has submitted as under: - 1. The company Cloudseed Education Private Limited (also known as 'Keep Learning Resources Private Limited) is a holding company and owns 100% Shares of its step-down subsidiary i.e. Mylaw Learning Resources Private Limited (also known as 'rainmaker Learning Resources Private Limited ). 2. As per the Share subscription agreement dated 19th September 2016 entered between the inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 92 taxmann.com 310 (Delhi - Trib.) Analjit Singh V. Deputy Commissioner of Income Tax, Circle-16(2), Delhi, Where in Hon'ble ITAT has calculated value of Shares of Holding Company including the Fair market Value of Subsidiary. Para 59 60 (Relevant pages of case law is enclosed herewith) On the same line, the Valuation of shares of Cloudseed education Private Limited is linked with the FMV of its Subsidiary Company Rainmaker Leaming Resources Private Limited. 06 You may please refer to the Valuation Report Page No. 3, Proecedures, on second point it has referred to the Projected Financials of Mylaw Resources Private Limited for arriving at fair Market Value of investment made by CEPL 07. The Valuer has considered that as The Cloudseed Education Private Limited does not have any business as such however as the actual business operation is with the Subsidiary Company and the Cash Flow Projection of the Subsidiary Company has been considered and the Valuer has clearly mentioned that he has followed Cash Flow procedure for the purpose of arriving at the FMV of Investment. Hence to arrive at the conclusion that the value of equity shares is not in accordance with prescribed Income T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of accounts of the assessee company except the value of investments made in M/s Mylaw Learning Resources Private Limited which was arrived after the revaluation of investments by adopting the DCF method. As per the provision of the Act, the assessee is having discretion of adopting any method i.e. either Net Asset Value or DCF method. If the assessee is adopting NAV method which is apparent in the case of the assessee company, the assessee can take the value of assets and liabilities as appearing in its books. The assessee is not having any discretion to take out any one of the assets or liabilities as per its convenience for arriving any premediated value thereon and incorporate the said value of assets while adopting the NAV of the equity share of the company. 9. The Assessing Officer proceeded to revalue the shares of the assessee company by adopting the Net Asset Value Method and arrived at the fair market value per share at ₹.284.36/-. Accordingly, he came to the conclusion assessee has charged excessive premium of ₹.222.22/- per share. Accordingly, he disallowed ₹.65,79,934/- and added to the income of the assessee. 10. Aggrieved assessee preferred appeal be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he also observed that this is not proper method. Further, he brought to our notice Page No. 7 of the Paper Book which is the valuation summary submitted by the valuer and the reasons for adopting the method. Further, he submitted that Assessing Officer has not challenged the method of valuation and he also brought to our notice Page No. 26 of the Ld. CIT(A) order. Ld. CIT(A) has merely sustained the additions made by the Assessing Officer. He prayed that the method adopted by the assessee is within the I.T. Rules. 13. On the other hand, Ld. DR relied on the findings of the lower authorities. Further, Ld. DR relied on the decision in the case of Narang Access Pvt., Ltd., v. DCIT in ITA No. 3521/Mum/2018 dated 22.08.2019. 14. Considered the rival submissions and material placed on record, we observe from the record that assessee is a holding company of wholly owned step down subsidiary (MLRPL) and we observe from the record that all the education and training activities are carried through wholly owned subsidiary company and assessee is merely a holding company not carrying on any activities. The assessee decided to issue shares to the new investors for that purpose assessee has rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he basis of proper method as per Rule 11UA of I.T.Rules. The method to be selected based on the purpose for which the valuation is necessity. If it is running business, the valuation has to be on the basis of futuristic. 18. Therefore, in order to determine the valuation of the subsidiary company one has to adopt the Discounted cash flow Method considering the fact that the futuristic value of shares has to be determined based on Discounted cash flow Method only. Net Asset Value of the subsidiary company will give present value, but will not give futuristic value. Since the assessee is bringing new investors the valuation has to be done on the basis of futuristic based valuation. Therefore, the valuation of wholly owned subsidiary company was carried out on the basis of Discounted cash flow Method which is one of the approved method under Rule 11UA of I.T. Rules. 19. Coming to the valuation of assessee s company since the assessee does not carrying out any activity except investments in subsidiary company most of the assets and liabilities are at historical cost except there may be changes in the investments made by the assessee in its subsidiary companies. The value of investments ..... 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