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TMI Blog2023 (7) TMI 1452X X X X Extracts X X X X X X X X Extracts X X X X ..... unless by bringing cogent material on record, the AO established perversity in the method adopted by the assessee. A perusal of the record shows that the basis of valuation report is free cash flow projections weighted average cost of material, terminal value total company value, fair market value of the company. Method adopted by the assessee is in line with the relevant provisions and relevant rules. In our considered opinion, once the value of shares has been determined by adopting any of the two methods, i.e. NAV or DCF, then such value shall be deemed to be FMV of the assessee company and the AO cannot question the valuation per se. AO has not even considered equity and preference share capital. Further, number of convertible preference shares have been computed by the AO @ Rs. 10/- whereas the actual face value is of Rs. 100/- per share. Because of these gross mathematical errors, the AO computed the NAV as per the share as on 31.03.2014 at Rs. 2.70 as against Rs. 92.67 by the assessee. If the mathematical corrections are considered, it can be seen from the above chart that there is hardly any variation between the FMV adopted by the assessee and that of the AO, be it DCF or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed into Management Agreements for Novotel and Pullman Hotels respectively with an Indian operator who has the necessary skill and expertise to manage and operate such brand hotels in India. 7. Keeping in view the funds requirement, the assessee company received the following amounts from share holders and consequently, on 05.09.2013 had issued and allotted shares to the share holders as under: Name of shareholders Name of shareholders Name of shareholders PAN Received on Amount received Toward share Premium InterGlobal Enterprises Ltd. Office Space No 106, 1st Floor, Jaipur Towers Ml Road Jaipur -302001 19,54,271 Resident AAACI1393M 20-May-2013 19,48,80,000 (share capital: 1,95,42,710 plus sharepremium: 17,53,37,194) 17,53,37,194 AAPC Singapore Pte. Ltd. 1 Wallich Street, #17-01, Guoco Tower Singapore-078881 19,54,271 Non-Resident AAICA4319D 23-May-2013 19,48,80,000 (share capital: 1,95,42,710 plus sharepremium: 17,53,37,194) 17,53,37,194 APHV India Investco Pte.Ltd. 50 Raffles Place, #06-00 Singapore Land Tower, Singapore 048623 21,98,555 Non-Resident AAJCA7905Q 23-May-2013 21,92,40,000 (sharecapital: 2,19,85,550 plus sharepremium: 19,72,54,355 19,72,54,355 Total 61,07,097 60,90,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e chosen by the assessee. iv. Once one of the prescribed method has been adopted by the assessee, then Assessing Officer has to accept the same. V. Even if he is not satisfied, there is no enabling provision in the Act or rules. where Assessing Officer can adopt his own valuation method or get it valued by some different Valuer or replace the DCF method by NAV method. vi. DCF method is based on projections which are based on various factors 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. vi. In view of the above, DCF method cannot be challenged on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, 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 fair market value of the shares Provided that this clause shall not apply where the consideration for issue of shares is received- (1) by a venture capital undertaking from a venture capital company or a venture capital fund, or (ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf. Explanation-For the purposes of this clause- (a) the fair market value of the shares 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 ar any other business or commercial rights of similar nature, whichever is higher (b) venture capital company. venture capital fund and venture capital undertaking shall have the meanings respectivel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto; (v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities, (vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares; PE= total amount of paid-up equity share capital as shown in the balance-sheet; PV= the paid-up value of such equity shares; 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 Thus, on the perusal of the above, it is very much evident that FMV for the purpose of section 56(2)(viib) of the Act, shall be the value as on valuation date, which has been defined in Rule 11UG) of the Rules to mean the date on which the property or consideration, as the case may be, is received by the appellant . Thus, it is the FMV on the date of allotment which has to be determined. Further, the FMV of unquoted shares is determined by reducing the bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion the valuation per se. 23. At this stage, it would be pertinent to refer to the valuation adopted by the Assessing Officer which is full of mathematical error: Particulars As per the appellant As per Assessing Officer Remarks As on 31.03.2013 As on 31.03.2014 As on 31.03.2013 As on 31.03.2014 Share Capital (as per Note 3 of balance sheet) Equity Share Capital 66,892,220 127,963,190 Not considered Not considered Equity and preference share capital not considered by AO i.e. only Reserve Surplus considered as net assets Preference Share Capital 2,983,344,000 2,983,344,000 Not considered Not considered Total Share Capital (INR)-(A) 3,050,236,220 3,111,307,190 Reserve Surplus (as per Note 4 of balance sheet) Securities Premium 599,207,148 1,147,135,891 599,207,148 1,147,135,891 Accumulated Profit Loss (82,959,988) (307,892,717) (82,959,988) (307,892,717) Total Reserve Surplus 516,247,160 839,243,174 516,247,160 839,243,174 Reserve Surplus (as per Note 4 of balance sheet) Securities Premium 599,207,148 1,147,135,891 599,207,148 1,147,135,891 Accumulated Profit Loss (82,959,988) (307,892,717) (82,959,988 (307,892,717) Total Reserve Surplus (INR)-(B) 516,247,160 839,243,174 516,247,160 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. However, the underline facts and assumptions can undergo change over a period of time. The Courts have repeatedly held that valuation is not an exact science, and therefore cannot be done with arithmetic precision. It is a technical and complex problem which can be appropriately left to the consideration and wisdom of experts in the field of accountancy, having regard to the imponderables which enter the process of valuation of shares. The Appellant-Revenue is unable to demonstrate that the methodology adopted by the Respondent-Assessee is not correct. The AO has simply rejected the valuation of the Respondent-Assessee and failed to provide any alternate fair value of shares. Furthermore, as 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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