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TMI Blog2022 (12) TMI 1508X X X X Extracts X X X X X X X X Extracts X X X X ..... ble at the time of assessment. AO displaced the FMV determined as per DCF method based on projected figures by replacing the same by actual figures to discard the justification of share premium. We find that such action of the AO substitute the figures estimated at the time of valuation towards ensuing years by actual figures made available to AO at the later point of time is squarely in contrast to the judgment of Cinestaan Entertainment [ 2021 (3) TMI 239 - DELHI HIGH COURT] and decision of Intelligrape Software Pvt. Ltd [ 2020 (10) TMI 403 - ITAT DELHI] In Cinestaan [ 2021 (3) TMI 239 - DELHI HIGH COURT] took cognizance of the identical situation, i.e., the AO had disregarded the valuation report of the assessee primarily on the ground that the projections of revenue considered for the purpose of valuation do not match with the actual revenue arose in the subsequent years - in the fact situation observed that the assessee company has adopted a recognized method of valuation and the revenue could not show that assessee has adopted demonstrably wrong approach. It was observed that valuation is not an exact science and therefore cannot be done with arithmetic precision. It is a tec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,32,000 equity shares at face value of Rs.10/- per share at a premium of Rs.40 per share. A total amount of Rs.9,72,80,000/- was thus received in the form of share premium. The Assessing Officer alleged that premium received on issue of equity share exceeds its Fair Market Value (FMV) and consequently the excess premium received on issue of equity share is susceptible to tax in view of provisions of Section 56(2)(viib) of the Act as deemed income of the assessee. The Assessing Officer discarded the valuer s report and proceeded to determine value based on actual figures of profits for next two years, i.e., F.Ys. 2015-16 and 2016-17 in substitution of the projected profits before tax adopted in the valuation report. In essence, the Assessing Officer displaced the project figures and substituted actual figures for ensuing years to work out the valuation as per DCF method. In essence, the Assessing Officer alleged that valuation of equity shares has been made on the basis of unverified exorbitant forecast given by the management of the assessee-company which has resulted in inflated value of Fair Market Value at 50.29. The Assessing Officer reworked the valuations as per DCF methods b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e addition of Rs. 1,27,26,000/- u/s 56(2)(viib) of the Income Tax Act, rejecting the valuation report of the said Merchant Banker i.e. M/s SPA Capital Advisors Ltd. and independently determining the value of Share at Rs. 9.60 and calculating over and above the value of share allotted over Rs. 9.60 i.e. Rs. 40.40 i.e., for deriving the aforesaid amount of Rs. 1,27,26,000/- multiply no. of shares i.e. 3,15,000 X Rs. 40.40 (diff. of Rs. 50 and Rs. 9.60). The disallowance u/s 56(2)(viib) of the Income Tax Act of Rs. 1,27,26,000/-. 4. Appeal preferred to the Ld. CIT(A) was dismissed by way of impugned order. Hence, the assessee is before in this appeal stating that the AO is not justified in rejecting the valuation reports submitted before the assessee in support of the issue price of the shares to the Ld. AR and Rule 11UA(2) the Ld. AO is not supposed to ignore the option exercised by the assessee and to impose any other method than that adopted by the assessee. In this case, the assessee adopted the DCF Method and determined the FMV of the shares, as such, if it is not agreeable to the AO on the price determined by the Merchant Banker, Ld. AO could have referred the matter to the Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Ld. DR, therefore, submits that unless and until the assessee provides the evidence justifying the facts and figures provided to the merchant banker with their justification it would not be possible for the authorities below either to consider the merits of the DCF method adopted by the assessee or to make suitable adjustments to the same for correct determination of the share price. However, Ld. CIT(A) recorded in his order at page no. 16 thereof that at appellate stage also the assessee was asked to substantiate the basis of projections in cash flow but the Ld. AR relied on the valuers's report and vehemently argued that the valuer report cannot be disturbed by the AO. By not producing the evidences supporting the figures furnished by the assessee to the valuer for obtaining the report, the assessee did not leave any option to the authorities below to consider the merits of DCF method adopted by the assessee, as such, the authorities are constrained to reject the DCF method which could not be verified in the absence of material. Fie, therefore, submits that in the facts involved in this case there is no other go for the authorities than to adopt the NAV method. 10. We have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ree years to overturn its fortune and start earning profit. In view of the above this figure is also not acceptable. Expected Return from Market: The assessee has taken this figure @ 15.80% which is BSE 500 return since inception. The assessee company was asked to state as why a company newly incorporated and negative earnings since inception has taken BSE 500 figures that too since inception. Beta: Beta is the measurement of return versus risk. Beta measures the risk of the company relative to the risk of the stock market in general. With greater risk, as measured by a larger variability of returns (Business of operating risk), the company's should have a larger beta. And with greater leverage (higher debt to value ratio) increasing financial risk, the company's stock should also have a larger beta. In the case of the assessee the assessee being in financial sector only invest in its group companies having negligible risk and, therefore, should have taken a negative beta instead of average beta of I. 12. A notice u/s 142(1) of the Act was issued to the assessee calling for their remarks on these aspects, which reads as follows: '1. Please refer to your submission dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c figure as deduced from your associate company investments. Further, you are having investments in your associates so the risk factor should be at a very low side. Therefore, you are requested to clarify the basis relying upon the company specific risk has been calculated at 5%. Similarly Beta figure of I and Risk premium of 6.75 may also be justified. (iv) Also you have taken a discounting factor @ 20.80% for a company whose returns are continuously in negative which is an unrealistic approach to calculate the value of shares. In view of the above you are also requested to give details of values which have been taken to arrive at a discounting figure @ 20.8% and also the basis behind such assumption for a company whose return have consistently been negative. Also, whether sector specific study has been carried out to reach the rate of return of growth. If, yes give a copy of the same. (v) Further, you are requested to submit Financial statement of six months ended on September 30, 2013. In view of the above, you are requested to submit the details and explanations called for above and to explains as to why the DCF method of valuation employed by you for valuation of shares under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or otherwise the figures furnished by the assessee at least on test basis. The merchant bankers solely relied upon an assumed without independent verification, the truthfulness accuracy and completeness of the information and the financial data provided by the company. A perusal of this long disclaimer clearly shows that the merchant banker did not do anything reflecting their expertise, except mere applying the formula to the data provided by the assessee. We, therefore, are unable to brush aside the contention of the Revenue that the possibility of tailoring the data by applying the reverse engineering to the pre determined conclusions. 16. For all these reasons, we are of the considered opinion that there has not been any possibility of verifying the correctness or otherwise of the data supplied by the assessee to the merchant banker, in the absence of which the correctness of the result of DCF method cannot be verified. This left no option to the /\0 but to reject the DCF method and to go by NA V method to determine the FMV of the shares. Without such evidence, it serves no purpose even if the matter is referred to the Department's Valuation Officer. We, therefore, do not f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duly certified Valuation Certificate as per DCF method is enclosed herewith. 7.3 In the assessment order the AO has noted that the appellant has issued 24,32,000 equity shares of Rs.10/- each (face value) issued at premium of Rs.40/- per share for which the appellant company was asked to explain the reasonableness of the share premium charged during the year in view of provision of section 56(2)(viib) of the Income Tax Act, 1961. In response to it the appellant has filed a certificate issued by the Chartered Accountant as per provisions of Rule 11UA(2)(b) of the Income Tax Rules wherein valuation of the share of the appellant company has been given at Rs.50.29 per share by following discounted cash flow method. In this regard the AO has referred to 'Technical guide on shares valuation published by the Institute of Chartered Accountants of India(ICAI) wherein three key factors viz. cash flow projections, discount rate and terminal value for computing DCF are given. The AO has noted that none of these factors as mandated by ICAI has been considered by the CA issuing valuation report while computing fair market value. In this technical guideline on shares valuation issued by ICAI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d funds of Rs. 2.70 Crores and the capital of Rs. 1 Lakh. The AO has observed that wrong figure of Rs. 5 Crores has been put in the respective column of the DCF calculation chart. The AO has further observed that in the present case, the revenue projections provided by the management were merely self-serving figures which is evident from the final figures available in the return of income for the next two years i.e. for A.Y. 2016-17 and 2017-18. Financial Year Project profit before tax Profit before interest, tax depreciation. 2014-15 (A.Y. 2015-16 7,00,000 5,08,936 2015-16(A.Y. 2016-17) 25,00,000 (-6,65,450) 2016-17(A.Y. 2017-18) 31,25,000 (-49,100) 7.5 After correcting the mistakes as discussed above and replacing the projected figures with the actual figures of Profit before Tax as given above for F.Y. 2014-15 to 2016-17, the AO has worked out the Total PV of future cash inflow and share value as under: Particulars Audited Unaudited Budget based on discounting rate (Provisional) F.Y. 2013-14 F.Y. 2014-15 F.Y. 2015-16 F.Y. 2016-17 F.Y. 2017-18 F.Y. 2018-19 Profit before interest, Tax Depreciation 7,00,000 25,00,000 31,25,000 39,00,000 48,70,000 Less: Adjustments for abnormal inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 56(2)(viib) are satisfied : (i) the appellant company is not a company in which the public are substantially interested, (ii) the appellant company has received, in any previous year, from the person who are resident, (iii) the appellant company has received the consideration for issue of shares, (iv) the consideration so received exceeds the face value which is Rs. 10 for each of its 24,32,000 shares (v) the aggregate consideration received for such shares is Rs. 12,16,00,000/- and this amount exceeds the fair market value of the shares; which is determined at a negative amount. The AO has held that the aggregate consideration received by the appellant in lieu of shares, exceeds the fair market value. It got clearly established that the appellant company's shares commanded merely its face value as FMV for the purpose of Section 56(2)(viib) and; chargeable on the issue of the shares of the appellant company. Accordingly, the AO has added back the share premium of Rs.9,72,80,000/- charged by the appellant to the income of the appellant company as its income from other sources as envisaged in the provisions of Section 56(2)(viib) of the Income Tax Act, 1961. In the prese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The ld. Sr.DR, on the other hand, placed reliance on the order of the lower authorities and submitted that in the light of the facts noted by the Assessing Officer no interference with the order of the Revenue Authorities are called for. It was pointed out on behalf of the Revenue that while adopting the DCF method, the projected figures on profits in the subsequent years do not match with the actual figures available for next two Assessment Years 2016-17 and 2017-18. It was thus submitted that valuation was carried out on unrealistic data which has been rightly disregarded by the Assessing Officer. 8. We have heard the parties in length and perused the assessment order as well as the first appellate order. The documents referred and relied upon has been taken cognizance in terms of Rule 18(6) of the Income Tax (Appellate Tribunal) Rules, 1963. 8.1 In the case in hand, the solitary question presented for determination is whether the consideration received by the assessee towards premium on issue of equity share represents the fair market value or exceeds the fair market value, and whether deeming provisions of Section 56(2)(viib) of the Act are attracted in the facts of the case. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be applied mechanically to a genuine transaction which also has the backing of the report of independent valuer in accordance with Rules 11U and 11UA of the Income Tax Rules. (ii) the Assessing Officer has not disputed the application of DCF method in the instant case but however has unauthorizedly altered the projected figures used for the purposes of determination of Fair Market Value (FMV) at the time of issuance of shares. The Assessing Officer committed gross error in taking a hindsight by comparing the projections made at the time of issuance of shares with the subsequent events and actual financial results despite the legal proposition that valuation cannot be judged in the light of the subsequent events or hindsight. A reference was made to the decision of Hon ble Delhi High Court in the case of Pr.CIT vs. Cinestaan Entertainment Pvt. Ltd. (ITA No.1007/2019) CM Application No.54134/2019 judgment dated 01.03.2021. (iii) the assessee further contends that the DCF method adopted by independent valuer seeks to value the equity shares of a company by discounting its free cash flows for explicit forecast period and the perpetuating value thereafter. The free cash flow repr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), the Hon ble Delhi High Court took cognizance of the identical situation, i.e., the Assessing Officer had disregarded the valuation report of the assessee primarily on the ground that the projections of revenue considered for the purpose of valuation do not match with the actual revenue arose in the subsequent years. The Hon ble Delhi High Court in the fact situation observed that the assessee company has adopted a recognized method of valuation and the revenue could not show that assessee has adopted demonstrably wrong approach. It was observed that valuation is not an exact science and therefore cannot be done with arithmetic precision. It is a technical and complex issue which should best be appropriately left to the consideration and wisdom of experts in the field, having regard to the imponderables which enter the process of valuation of shares. The Hon ble High Court thus upheld the action of the ITAT and consequently the additions made under the deeming provisions of Section 56(2)(viib) made by the Assessing Officer were reversed. 11. Similar view has been taken by the Hon ble Co-ordinate Bench in Intelligrape Pvt. Ltd. (supra) wherein it was observed that the valuation ba ..... X X X X Extracts X X X X X X X X Extracts X X X X
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