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TMI Blog2024 (4) TMI 447X X X X Extracts X X X X X X X X Extracts X X X X ..... e amount received in excess of fair market value of shares will be charged to tax in the hand of the company as income from other sources. Tax effect: Rs. 1,23,69,326/- 2. The assessee has raised following grounds of appeal in the CO: 1. That the order passed by the Assessing Officer ("AO") and Commissioner of Income-tax (Appeals) ("CIT(A)) to the extent questioned herein are contrary to the facts and circumstances of the case, the provisions of the Income-tax Act, 1961 ("the Act") and thus liable to be quashed. 2. That the AO erred in invoking Section 56(a)(viib) of the Act and the CIT(A) erred in affirming the same, without appreciating that the price at which the shares were issued by the Respondent to United Lex BPO Pvt. Ltd. was the same price at which United Lex BPO Pvt. Ltd. acquired the shares of the Respondent from erstwhile shareholders of the Respondent and in view of the above two transactions being independent third party transactions and therefore comparable, the price at which the Respondent issued its share ought to be accepted. 3. That the AO erred in invoking Section 56(2)(viib) of the Act and the CIT(A) erred in affirming the same, without appreciating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecords of this charge. Hene, the ld. D.R. requested to kindly condone the delay in filing the appeal. 4. The ld. A.R. strongly opposed the admission of appeal stating that there is no reasonable cause in filing the appeal belatedly before this Tribunal. 5. We have heard the rival submissions and perused the materials available on record. In this case, it is explained before us that after Covid period, there was a huge work pending before the Income Tax Officer Ward-3(1)(3) and he was very busy in various administrative and assessment works, as such, there was a delay of 302 days in filing the appeal before this Tribunal. The reason explained by the ld. AO is very reasonable as he was suffering from huge work pressure during this period. Accordingly, in our opinion, it is a fit case to condone the delay and the appeal is admitted for adjudication. 6. Facts of the case are that during the course of assessment proceedings, it was noted by the AO that the appellant had received large share premium during the concerned year in question. Various notices were issued from time to time and were complied by the appellant. On perusal of the balance sheet of the appellant company, it reveal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t before as per first valuation and profit before tax as per return for AY 2014-15, 2015-16 and 2016-17 as under:- AY Profit before tax as per first valuation Profit before tax as per return Achievement (5) of projections 2014-15 263.69 84.42 32 2015-16 320.4 56.42 17.6 2016-17 315.7 46.01 14.5 6.2 Thus, the AO observed that the projected and actual figures were nowhere close and had huge difference. Appellant was unable to explain the discrepancy which would directly affect the profit. Thus, the AO rejected the contention of the appellant to be based on projections which were misleading. Hence, the AO concluded that the discrepancy between the projected figures and the actual figures as per the return of income no way was near the projected figures, since these projections were provided by the management without any justification and with an ulterior motive only to justify the share premium received by hiking the fair market value by DCF method. 6.3 Before the NFAC the appellant vehemently argued that it was the AO who has disregarded the provisions of law that allows a taxpayer an option to choose BV or DCF as a method of valuation of its equity shares. In the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per section 56(2)(viib) r.w.R 11UA, the assessee has the option to do valuation of shares and determine FMV either on DCF Method or NAV method and AO cannot substitute his own value in place so determined. For coming to the above observations, NFAC relied on the following judgements and allowed the appeal of the assessee: a) Decision of ITAT Mumbai Bench 'F' in the case of Vodafone M- Pesa Ltd. Vs. DCIT, Circle-8(2), Mumbai reported in (2020) 114 taxmann.com 323 (Mumbai) b) Decision of ITAT Cuttack Bench in the case of ITO, Ward-1(1), Bhubaneswar Vs. Ashoka Industries Ltd. reported in (2020) 120 taxmann.com 214 (Cuttack Trib.) c) Decision of ITAT Delhi 'B' Bench in the case of Cinestaan Entertainment P. Ltd. Vs. ITO Ward 6(2), New Delhi reported in (2019) 106 taxmann.com 300 (Delhi Trib.) d) Decision of ITAT Bangalore 'C' Bench in the case of I-Exceed Technology Solutions P. Ltd. Vs. ITO Ward-3(1) Bengaluru reported in (2020) 119 taxmann.com 378 (Bangalore Trib). Against this revenue is in appeal before us. 7. We have heard the rival submissions and perused the materials available on record. In our opinion, similar issue came for consideration before the Coordinate Bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39; as provided under Rule 11UA(2) by using the TCF Method' which is one of the prescribed method in Rule HUA(2)(b) r.w.s. 56(2)(viib). Based on the said valuation report dated 15.12.2014, the assessee company had issued the shares to the aforesaid equity partners on premium. The Id. Assessing Officer has discarded the valuation report of the CA mainly on the ground that valuation of the equity shares carried out by the assessee was based on projection of revenue which did not match with the actual revenues of the subsequent years. He further held that no efforts have been made by the assessee to substantiate the figures of projected revenue in the valuation report and has also failed to submit any basis for projection. Instead, AO held that assessee should have invested the share premium amount to earn some income, whereas assessee has made investment in debentures of its associate company and hence the basic substance of receiving the high premium was not justified. After invoking the provision of Section 56(2)(viib), AO took fair market value of premium at Nil and face value of Rs. 10/- per share. 27. From the perusal of the records and the impugned orders, it transpires ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplied strictly but also have to be seen in the context in which such deeming provisions are triggered. It is a trite law well settled by the Constitutional Bench of Supreme Court, in the case of Dilip Kumar 85 Sons (supra) that in the matter of charging section of a taxing statute, strict rule of interpretation is mandatory, and if there are two views possible in the matter of interpretation, then the construction most beneficial to the assessee should be adopted. Viewed from such principle, here is a case where the shares have been subscribed by unrelated independent parties, who are one of fhe leading industrialists and businessman of the country, after considering the valuation report and future prospect of the company, have chosen to make investment as an equitypartners in a 'start-up company1 like assessee, then can it be said that there is any kind of tax abuse tactics or laundering of any unaccounted money. It cannot be the unaccounted or black money of investors as it is their tax paid money invested, duly disclosed and confirmed by them; and nothing has been brought on record that it is unaccounted money of assessee company routed through circuitous channel or any oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmined in accordance with such method as may be prescribed. Clause (ii) admittedly is not applicable on the facts of the assessee's case. The method to determine the FMV is further provided in Rule 11UA(2). The relevant extract of the applicable rules is reproduced below: "11UA, {{1}] For the purposes of section 56 of the Act, the fair market value of a property, other than immovable property, shall be determined in-the following manner, namely,- (2) Notwithstanding anything contained in sub-clause (b) of clause (c) of sub- rule (1), the fair market value of unquoted equity shares 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:- (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." 30. Ergo, the assessee has an option to do the valuation and determine the fair market value either on DCF Method or NAV Method. The assessee b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edium, 2 small, 1 Micro 1 Big, 2 Medium, 3 small, 1 Micro 1 Big, 2 Medium, 3 small, 2 Micro Total revenue projected (Rs. Crores) 121,62 «,** 142.50 197.68 238.16 274.76 Average revenue per movie (Rs. crores) 24.32 28.5 32.95 34.02 34.35 31. It has been submitted that the assessee had made all the efforts to achieve these projects and in fact had received 100 films scripts out of which it had short listed its initial stage of movies. The Id. counsel has also drawn our attention on various agreements for production of these films. He also pointed out that the assessee was projected to make five movies which it had actually commenced and released and has also pointed out that assessee has worked upon with 25 movies inception. Not only that, assessee had also taken into account the cost incurred in production of various movies and also the comparison of projected revenue and cost of three movies which were actually released by the assessee with actual revenue and cost, for which separate annexure were filed before us. Nowhere^ the Assessing Officer and Id. CIT (A) has either disputed the details of projects, revenues, cost incurred and the manner in which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dom cannot be questioned. Even the prescribed Rule 11UA (2) does not give any power to the Assessing Officer to examine or substitute his own value in place of the value determined or requires any satisfaction on the part of the Assessing Officer to tinker with such valuation. Here, in this case, Assessing Officer has not substituted any of his own method or valuation albeit has simply rejected the valuation of the assessee. 33. Section 56(2) (viib) is a deeming provision and one cannot expand the meaning of scope of any word while interpreting such deeming provision. If the statute provides that the valuation has to be done as per the prescribed method and if one of the prescribed methods has been adopted by the assessee, then Assessing Officer has to accept the same and in case he is not satisfied, then we do not we find any express provision under the Act or rules, where Assessing Officer can adopt his own valuation in DCF method or get it valued by some different Valuer. There has to be some enabling provision under the Rule or the Act where Assessing Officer has been given a power to tinker with the valuation report obtained by an independent valuer as per the qualification ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the projections (estimates) only and hence these projections cannot be compared with the actuals to expect the same figures as were projected. The valuer has to make forecast on the basis of some material but to estimate the exact figure is beyond its control. At the time of making a valuation for the purpose of determination of the fair market value, the past history may or may not be available in a given case and therefore, the other relevant factors may be considered. The projections are affected by various factors hence in the case of company where there is no commencement of production or of the business, does not mean that its share cannot command any premium. For such cases, the concept of start-up is a good example and as submitted the income-tax Act also recognized and encouraging the start-ups." iii) DQ (International) Ltd. vs. ACIT (ITA 151/Hyd/2015) "10...... In our considered view, for valuation of an intangible asset, only the future projections along can be adopted and such valuation cannot be reviewed with actuals after 3 or 4 years down the line. Accordingly, the grounds raised by the assessee are allowed". The aforesaid ratios clearly endorsed our view as ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... both the parties. 9. In the present case, the respondent-assessee has received share premium from various subscribers/equity partners. These funds were required by the respondent-assessee for film production. The shares were issued based on the valuation received from the prescribed expert i. e., a chartered accountant who used the discounted cash flow method which is one of the methods stipulated under section 56(2)(viib) read with rule llUA(2)(b). Based on the valuation report dated December 15, 2014, the respondent- assessee issued shares to various equity partners at a premium as per the following table: SI. No. Name of equity partner Date of issue No. Of shares Premium (Rs.) per share Amount of "" premium (Rs.) 1. Shri Anand Mahindra 6-1-2015; 23 -2-2015 4,15,385 1949 80,95,85,365 2. Shri Rakesh Jhunjhunwala 24-3-2015 19,207 2602 4,99,80,793 3. Shri Radhakishan Damani 24-3-2015 19,207 2602 4,99,80,793 Total 4,53,799 90,95,46,200 10. The Assessing Officer has disregarded the valuation report of the respondent- assessee primarily on the ground that the projections of revenue as considered for the purpose of valuation do not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies. They are trying to suggest that the assessee should have made investment in some instrument which could have yielded return/profit in the revenue projection made at the time of issuance of shares, without understanding that strategic investments and risks are undertaken for appreciation of capital and larger returns and not simply dividend and interest. Any businessman or entrepreneur, visualise the business baaed on certain future projection and undertakes all kinds of risks. It is the risk factor alone which gives a higher return to a businessman and the Income-tax department or Revenue official cannot guide a businessman in which manner risk has to be undertaken. Such an approach of the Revenue has been judicially frowned by the hon'ble apex court on several occasions, for instance in the case of S. A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 (SC) and CIT v. Panipat Woollen and General Mills Co. Ltd. [1976] 103 ITR 66 (SC). The courts have held that the Income- tax Department cannot sit in the armchair of businessman to decide what is profitable and how the business should be carried out. Commercial expediency has to be seen from the point of view of busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the potential value of business at that particular time and also keeping in mind underline factors that may change over the period of time and thus, the value which is relevant today may not be relevant after certain period of time. Precisely, these factors have been judicially appreciated in various judgments some of which have been relied upon by the learned counsel, for instance: (i) Kakinada Fertilizer Ltd, In re, (SEBI) (2016) 195 C-C 325, 328 (Bom) ; [2015] ABR 291 (Bom) '48.6 Thirdly, it is a well-settled position of law with regard to the valuation that valuations 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 a hindsight view that the performance did not match the projection is unknown to the law on valuations. Valuation being an exercise required to be conducted at a particular point of time has of necessity to be carried out on the basis of whatever information is available on the date of the valuation and a projection of future revenue that the valuer may fairly make on the basis of such inform ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge sums in the subsequent years as informed by the learned counsel. The investors like these persons will not make any investment merely to give dole or carry out any charity to a startup company like, albeit their decision is guided by business and commercial prudence to evaluate a startup company like the 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 the Revenue is trying to question even the commercial prudence of such big investors. According to the Assessing Officer either these investors should not have made investments because the fair market value of the share is nil or the assessee should have further invested in securities earning interest or dividend, Thus, under these facts and circumstances of the case, we do not approve the approach and the finding of the learned Assessing Officer or the learned Commissioner of Income-tax (Appeals) so to take the fair market value of the share at "nil" under the provision of section 56(2)(viib) and thereby making the addi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... noted in the impugned order and as also pointed out by Mr. Vohra, the shares in the present scenario have not been subscribed to by any sister concern or closely related person, but by outside investors. Indeed, if they have seen certain potential and accepted this valuation, then the appellant- Revenue cannot question their wisdom. The valuation is a question of fact which would depend upon appreciation of material or evidence. The methodology adopted by the respondent-assessee, accepted by the learned Income-tax Appellate Tribunal, is a conclusion of fact drawn on the basis of material and facts available. The test laid down by the courts for interfering with the findings of a valuer is not satisfied in the present case, as the respondent-assessee adopted a recognized method of valuation and the appellant-Revenue is unable to show that the assessee adopted a demonstrably wrong approach, or that the method of valuation was made on a wholly erroneous basis, or that it committed a mistake which goac to the root of the valuation process. 14. In view of the foregoing, we find that the question of law urged by the appellant-Revenue is purely based on the facts and does not call for ..... 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