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TMI Blog2022 (11) TMI 1465X X X X Extracts X X X X X X X X Extracts X X X X ..... ar under dispute, the assessee filed its return of income on 13.09.2015 declaring income of Rs.2,35,690/-. Assessee's case was selected for limited scrutiny to examine large share premium received during the year and applicability of section 56(2)(viib) of the Act. In course of assessment proceeding, the Assessing Officer noticed that in the year under consideration, the assessee had allotted 1,88,000 equity shares to 5 entities, wherein, shares having face value of Rs.10 per share were sold at a premium of Rs.40 per share. Therefore, he called upon the assessee to demonstrate that the share premium charged by the assessee is not in excess of the fair market value of the share. Referring to rule 11UA of the Rules, the Assessing Officer computed the fair market value of each share at Rs.34.10. In response to the query raised by the Assessing Officer, the assessee submitted, a valuation report of an independent valuer determining fair market value of share at Rs.50 per share by adopting Discounted Free Cash Flow (DCF) method. The Assessing Officer, however, did not accept the valuation of the assessee and proceeded to add an amount of Rs.29,89,200/- to the income of assessee, by invo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lause (b), at the option of the assessee. Rule 11UA (2)(b) applicable to the relevant assessment year provided an option to the assessee to get fair market value of the shares determined by a merchant bank or an accountant. In the fact of the present case, admittedly, the assessee has got the fair market value of the shares determined through an accountant. Thus, the assessee has acted as per the mandate of section 56(2)(viib) read with rule 11UA. Whereas, the Assessing Officer has substituted fair market value determined by the assessee through his own valuation. While dealing with an identical issue, the Coordinate Bench in case of M/s. Dayalu Iron & Steel Pvt. Ltd. (supra) has held as under: "12. The Ld. A.O while making an addition u/s 68 of the Act raised question over the ne of the transaction source of funds invested. Further held that, the investor companies do not have produced creditworthiness to fund the assessee company which has been confirmed by the CIT(A) and the CIT(A) has also rejected the valuation report. The assessee in response to notice u/s 142 has produced following documents which have been also in the paper book before us:- Certificate of Incorporation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rein premium charge of Rs. 40 on each share under Rule 11UA has been found to be without basis and while doing so the CIT(A) has relied on decision of the Coordinate Bench of this Tribunal in the case of Agro Portfolio Pvt. Ltd. vs. ITO 2018, 171/ITD/74 DEL. The decision made in Agro Portfolio Pvt. Ltd. (supra) has been considered by the Coordinate bench of this Tribunal in the case of Cinestan Entertainment (P). Ltd. Vs. ITO for AY 2015-16 dated 27/05/2019, wherein it is held that the Assessing Officer cannot examined or substituted its own value in place of valuation arrived by the assessee either DCF Method or NAV Method, the commercial expediency has to be seen from the point view of businessman. Further held that if law provides the assessee to get the valuation done from a prescribed expert as per the prescribed method, then the same cannot be rejected because neither the Assessing Officer nor the assessee have been recognized as expert under the law. The relevant portion are hereunder:- "28. Now what we are required to examine whether under these facts and circumstances Assessing Officer after invoking the deeming provision of Section 56(2)(vii) could have determined the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r in the country will invest in a 'start-up company', because investment can only be lured with the future prospects and projection of these companies. 29. Now, whether under the deeming provision such an investment received by the assessee company be brought to tax. The relevant provision of Section 56 for the sake of ready reference is reproduced hereunder : "Income from other sources. 56. (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head "Income from other sources", if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. (2) In particular, and without prejudice to the generality of the provisions of subsection (1), the following incomes, shall be chargeable to income-tax under the head "Income from other sources", namely :- (i)....... (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 consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... valuation of shares based on DCF is basically to see the future year's revenue and profits projected and then discount the same to arrive at the present value of the business....................................................................... ................................................................................... 31. .......................................................................... 32. What is seen here is that, both the authorities have questioned the assessee's commercial wisdom for making the investment of funds raised in 0% compulsorily convertible debentures of group companies. They are trying to suggest that 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 based on certain future projection and undertakes all kind of risks. It is the risk factor alone which gives a higher return to a businessman and the income tax department ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions made by the management and the Valuer, like growth of the company, economic/market conditions, business conditions, expected demand and supply, cost of capital and host of other factors. These factors are considered based on some reasonable approach and they cannot be evaluated purely based on arithmetical precision as value is always worked out based on approximation and catena of underline facts and assumptions. Nevertheless, at the time when valuation is made, it is based on reflections 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 ld. Counsel, for instance: - i) 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e inclined to follow the ratio laid down in the case of Cinestan Entertainment P. Ltd. Supra and hold that the Ld. A.O and CIT(A) have committed an error in rejected the valuation done by the assessee from prescribed expert as per the prescribed method. 17. Further, the Ld.CIT(A) while enhancing the income of the assessee u/s 56 (2)(viib) had observed that, such share premium received by the appellant for Rs. 76,00,000/- during the Financial Year 2014-15 relevant to Assessment Year 2015-16 is considered income of the appellant. The Ld. CIT(A) has not provided mandatory opportunity of hearing to the assessee u/s 251 (1) of the Act which ultimately resulted in enhancement of assessed income. The assessee has produced the valuation report before the CIT (A) but the same has not been considered by the CIT(A). The assessee has prepared valuation of the shares in accordance with Rule 11US of the Act for the purpose of Section 56(2) (viib) of the Act, adopting discounted cash flow method. The Ld. CIT(A) failed to understand the valuation of the shares made as per DCF Method and not considered the valuation provided by the assessee. In our opinion, the CIT(A) has committed an error on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Coordinate Bench of ITAT has held as under: "25. We have heard the rival contentions, perused the relevant findings given in the impugned order as well as material referred to before us at the time of hearing. In various grounds of appeal, the sol issue raised by the appellant assessee relates to the addition of Rs.90,95,46,200/- made by the AO, b; invoking the deeming provisions of sections 6 (2)(viib) by adopting fair market value of the shar premium received by the Assessee Company from the investors at NIL What has been sought to be taxed is mainly the share premium issued on equity shares which according to the AO far exceede the FMV of the shares. Though facts have been discussed in detail in the foregoing paragraphs however in the succinct manner, the relevant facts and background are reiterated in order to appreciat the controversy and the issue for adjudication. The assessee company was incorporated on 19th September, 2013, I.e., in the Assessment Year 2014-15, with the objective of carrying of business c production and distribution of feature film, tele films, video films, documentary films etc. During the year under consideration assessee company was in the initia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... seek confirmation, information and documents pertaining to transaction of issuance of shares. In response to the said notices, Assessing Officer has received all the details and replies directly from these investors confirming the transaction. The venture agreement between the assessee and the investors were also filed before the Assessing Officer and in this regard, our attention was also drawn by the Id. counsel that the investment was to be made by these investors in various phases and transactions and it was only after they have gone by the projection and satisfied with the potentials and credentials of future growth, they were willing to make such huge investment in the 'start-up company' like assessee. Thus, neither the identity nor the creditworthiness of the investors nor the genuineness of the transaction can be doubted and in fact the same stands fully established to which Assessing Officer has also not raised any doubt or disputed this fact. Thus, under the deeming provisions of section 68, the test of proving the nature and source of the credit received stood accepted. 28. Now what we are required to examine whether under these facts and circumstances Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adopted on such investment as have been done by the Assessing Officer and by Id. CIT(A), then no investor in the country will invest in a 'start-up company', because investment can only be lured with the future prospects and projection of these companies. 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 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 given in the Rule 11U. Here, in this case, Assessing Officer has tinkered with DCF methodology and rejected by comparing the projections with actual figures. The Rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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. v. ACIT (ITA 15 l/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 actual 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 above." Therefore, respectfully following the decision of Coordinate Bench of ITAT, we allow the grounds raised by the assessee; 21. In the net result, the appeal filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... verified to come to a definite conclusion, whether it has any proximate nexus with assessee's business. Since, these aspects have not been properly examined by the departmental authorities, I remit the issue back to the Assessing Officer for fresh adjudication after due opportunity of being heard to the assessee. This ground is allowed for statistical purposes. 4. The only other issue, which arises for consideration is addition of Rs. 22,50,000/- under section 68 of the Act by way of enhancement of income made by learned Commissioner (Appeals). 4.1 Admittedly, while completing the assessment, the Assessing Officer did not raise any doubt regarding the source of investment made by investors in the shares issued by the assessee. In course of appellate proceeding, learned Commissioner (Appeals) took it upon himself to examine the identity, genuineness and creditworthiness of the share investors. After examining the details relating to share applicants, learned Commissioner (Appeals) was of the view that the creditworthiness of the investors and genuineness of the transaction are doubtful. However, considering the fact that major part of investments were made in financial years 2012-1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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