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TMI Blog2024 (9) TMI 1192X X X X Extracts X X X X X X X X Extracts X X X X ..... se the valuation of the shares lies with the assessee and the same is binding on the Income Tax Authorities. Assessees having the choice to opt for one of the methods enumerated in the above provision and the appellant has chosen to opt for clause (b) in most of the abovementioned cases for valuation of unquoted equity shares and based on the same, the value of the share had been computed. Accordingly, the new shares were issued and allotted to the investors during the captioned assessment year. During the assessment proceedings, computation of Fair Market Value of shares as per Rule 11UA(2) was submitted before the Ld.AO to justify that the shares issued by the appellants were at Fair Market Value (FMV) which was computed in accordance with Rule 11UA(2) of the Income Tax Rules, 1962. But the AO has not given any reasoning for rejecting the valuation of shares nor have they furnished any material to the contrary which justified the rejection of the valuation of shares. When the statute provides for a particular procedure, the authority has to follow the same and cannot be permitted to act in contravention of the same. It has been hitherto an uncontroverted legal position that where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tax Rules, 1962. 3. That the Ld. CIT(A) has erred in law as well as on facts in initiating the penalty proceedings u/s 271(1)(c) of the Act. 2. The brief facts of the cases are that the returns of income were e-filed by the assessees and the same were processed u/s. 143 (1). The cases were selected for limited scrutiny under CASS to verify whether the funds received in the form of share premium are from disclosed sources or not. Notice u/s 143(2) of the Act and notice u/s 142(1) with questionnaire were issued to the assessee company. The AO issued the notice u/s 131of the Act to the assessee for personal deposition of the Directors/Pr officers. The AO made the addition of the entire share premium and share capital to the income of the assessee company treated as unexplained income u/s 68 of the Act. 3. Aggrieved by the assessment orders made by AO against the assessee companies the assessee have preferred appeal before the CIT(A). The Ld CIT(A ) upheld the additions made by AO and enhanced income of the assessee u/s 251(1) read with 56(2)(viib) of the Act. The assessees have filed the above captioned appeals before us. 4. The Ld. Counsel for the assessees summarizing the issues i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tors and also entries in ROC Website. The assessees have proved that identity of investors, creditworthiness of the investors and genuineness of the transaction as required u/s of 68 of the Act by filing the documents. In support their contention they have filed the paper books in the appeals. He has submitted that assessees have discharged their onus as required u/s 68 of the Act, therefore sought for deletion of the addition. The Ld counsel has also relied on the following decisions;- Order of Tribunal in the matter of Mantram Commodities pvt. Ltd. Vs. ITO in ITA No. 6170/Del/2019 for Assessment Year 2015-16. Order of Tribunal in the matter of Mantram Commodities pvt. Ltd. Vs. ITO in ITA No. 105/Del/2021 for Assessment Year 2016-17. Order of Tribunal in the matter of Dayalu Iron Steel Pvt. Ltd. Vs. ITO in ITA No. 6173/Del/2019, Dayalu Fashion Pvt. Ltd. Vs. ITO in IETA o. 6174/Del/2019 and Devesh Cinemas Pvt. Ltd. Vs. ITO in ITA No. 6184/Del/2019 for Assessment Year 2015-16 Order of Tribunal in the matter of Sparsh Beauty Care Pvt. Ltd. Vs. ITO in ITA No. 170 and 246/Del/2022 for Assessment Year 2015-16. Judgment of Hon'ble High Court of Delhi in the matter of Pr. Commissioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Punyah Building Materials Pvt Ltd. ITA NO 81/Del/2021 A.Y.2016-17 Sl no particulars 1 Details of the investors who made the investment during the year M/S Metalcity Constructions Kovai (P) Ltd Rs 45,00,000/- on 26-06-2015 M/SGood Luck Industries (P) Ltd Rs 2500000/- on 21-10- 2015 M/s Rishi Credit Industries (P) ltd Rs 2500000/-on 21-10-2015 2 Evidence furnished in PB M/S Metalcity Constructions Kovai (P) Ltd (PB-119-142) M/S Good Luck Industries (P) Ltd (PB-143-165) M/s Rishi Credit Industries (P) ltd (PB_166-188) 2-M/s Speedy Courier services Pvt. Ltd. ITANo 80/Del/2021 A.Y 2016-17 Sl no particulars 1 Details of the investors who made the investment during the year M/s Good Luck Industries (P) Ltd RS 500000/-on 09-09-2015 2 Evidence furnished in PB M/S Good Luck Industries (P) Ltd (PB-131-155) 3-M/s Sparsh Beauty care Pvt. Ltd. ITANo 86/Del/2021 A.Y 2016-17 Sl no particulars 1 Details of the investors who made the investment during the year M/S Pearl Durobuild (P) Ltd Rs 10,00,000/- on 26-06-2015 and Rs 1500000/-on 31-07-2015 M/S Pearl Multicon (P) Ltd Rs 2000000/- on 22-07-2015 M/s Good luck Industries (P) Ltd Rs 1000000/-on 26-10-2015 M/s Rishi Credit Industries (P) ltd Rs 40 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee in response to notice u/s 142 has produced following documents which have been also in the paper book before us:- Particulars Page no of paper book Certificate of Incorporation and MOA AOA 1-34 Independent Auditors Report, Balance Sheet as at 31.03.2015, Profit and Loss Account for the year ended March 31, 2015 along with notes to financial statement for the year ended March 31, 2015 35-47 Copy of acknowledgement of Income Tax Return along with ITR 6 and Computation of Income 48-82 Bank book and Bank statement for the period from 1.4.2014 to 31.3.2015 83-84 Ledger account of the bank book in the books of the appellant company 85 Valuation Reprot under Rule 11UA92)(b) of the Income Tax Rules, 1962 from the Chartered Accountant as per Discounted Cash Flow Method. 86-89 13. On going through the order of A.O and Ld.CIT(A) it is found that the authorities have just brush aside the documents produced by the assessee and without making any enquiry about authenticity of the documents furnished and without bringing any material or making enquiry came to conclusion that the assessee company is not worth enough to fetch the share premium of Rs. 76,00,000/-. The authorities below w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircumstances Assessing Officer after invoking the deeming provision of Section 56(2)(vii) could have determined the fair market value of the premium on shares issued at Nil after rejecting the valuation report given by the Chartered Accountant on one of the prescribed methods under the rules adopted by the Valuer. Before us, learned counsel, Mr. Dinodia, first of all had harped upon the spirit and intention of the Legislature in introducing such a deeming provision and submitted that such a provision cannot be invoked on a normal business transaction of issuance of shares unless it has been demonstrated by the Revenue authorities that the entire motive for such issuance of shares on higher premium was for the tax abuse with the objective of tax evasion by laundering its own unaccounted money. His main contention was that, being a deeming fiction, it has to be strictly interpreted and there is no mandate to the Assessing Officer to arbitrarily reject the valuation done by the assessee on his own surmises and whims. We are in tandem with such a reasoning of the ld. Counsel, because the deeming fiction not only has to be applied strictly but also have to be seen in the context in whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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-- (i) 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 or any other business or commercial rights of similar nature, whichever is higher; Further, as per clause (i) of the Explanation as reproduced above, the FMV is to be determined in accordance with such method as may be prescribed. Clause (ii) admittedly is not applicable on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 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 SA Builders, 288 ITR 1 (SC) and CIT vs. Panipat Woollen and General Mills Company Ltd., 103 ITR 66 (SC). The Courts have held that 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 businessman. Here in this case if the investment has made keeping assessee's own business objective of projection of films and media entertainment, then such commercial wisdom 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an exact science and can never be done with arithmetic precision. The attempt on the part of SEBI to challenge the valuation which is but 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 valuer may fairly make on the basis of such information. ii) Rameshwaram Strong Glass Pvt. Ltd. v. ITO [2018- TIOL1358-ITAT- Jaipur] 4.5.2. Before examining the fairness or reasonableness of valuation report submitted by the assessee we have to bear in mind the DCF Method and is essentially based on the projections (estimates) only and hence these projections cannot be compared with the actual 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CF Method and not considered the valuation provided by the assessee. In our opinion, the CIT(A) has committed an error on this count. Further, similar issue has been considered by the Mumbai Bench in the case of Vodafone M Star Ltd. Vs. DCIT (2020) 114 Taxman.com 323 (Mumbai Trib.) wherein it is held as under:- 19. Since Ld. CIT(A) has already addressed the issue of method of valuation which has to be adopted therefore we do not intend to go into which method has to be adopted and accordingly, we notice that the department is in appeal against Ld. CIT(A) and in our considered view, Ld. CIT(A) has properly rejectee the method adopted by the AO and proceeded to accept the DCF method adopted by the assessee Therefore, we are inclined to dismiss the ground raised by the department. 20. Coming to the findings of Ld. CIT(A), we notice that Ld. CIT(A) has accepted the DCF methoc adopted by the assessee and he analyzed the factual performance of the assessee subsequent to issue o: shares. The valuation of shares are for that matter any valuation is itself is a projection of future events oi activities and no doubt it has to be done with some accuracy, however no person in the world at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... video films, documentary films etc. During th year under consideration assessee company was in the initial phase of the setting up of the business therefore, there was no business of film production as such. The assessee company to start its ventur of its film production approached accredited ace investors of India to join in as equity partner; namely, Shri Rakesh Jhunjhunwala, Shri Anand Gopal Mahindra Shri Radhakishan Damani. Th funds were raised by way of issue of equity shares to the aforesaid equity partners and by raisin premium on such shares over and above the face value of Rs. 10/-per share. The details and quantum of premium received from each of the equity partners are as under: Sl No. Name of equity partner Date of issue Name of shares Premium (Rs.) Per shear Amount of premium (Rs.) 1 Sh. Anand Mahindra 06.01.2015 23.02.2015 4,15,385 1949 80,95,85,365 2 Sh. Rakesh Jhunjhunwala 19,027 2602 4,99,80,793 3 Sh. Radhakishan Damini 19,027 2602 90,95,46,200/- total 4,53,799 26. The assessee before issuing the shares had got the share valued by Chartered Accountant, i.e., 'Accountant' as provided under Rule 11UA(2) by using the 'DCF Method' which is one of the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer after invoking the deeming provision of section 56(2)(vii) could have determined the fair market value of the premium on shares issued at Nil after rejecting the valuation report given by the Chartered Accountant on one of the prescribed methods under the rules adopted by the Valuer. Before us, learned counsel, Mr. Dinodia, first of all had harped upon the spirit and intention of the Legislature in introducing such a deeming provision and submitted that such a provision cannot be invoked on a normal business transaction of issuance of shares unless it has been demonstrated by the Revenue authorities that the entire motive for such issuance of shares on higher premium was for the tax abuse with the objective of tax evasion by laundering its own unaccounted money. His main contention was that, being a deeming fiction, it has to be strictly interpreted and there is no mandate to the Assessing Officer to arbitrarily reject the valuation done by the assessee on his own surmises and whims. We are in tandem with such a reasoning of the Id. Counsel, because the deeming fiction not only has to be applied strictly but also have to be seen in the context in which such deeming provisions a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two valuation methodologies, one is assets based NAV method which is based on actual numbers as per latest audited financials of the assessee company. Whereas in a DCF method, the value is based on estimated future projection. These projections are based on various factors and projections 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 Boar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he revenue stands dismissed. 18. In view of the above judicial pronouncements and for the reasons discussed above we are inclined to delete the addition made u/s 68 of the Act and also set aside the order of the CIT(A) in enhancing the income of the appellant u/s 251(1) of the Act by invoking Section 56(2) (viib) of the Act. Accordingly, we allow the Assessee's Grounds of Appeal No. 2 to 5. 19. In the result, I.T.A. No. 6173/DEL/2019 is allowed. 13. The ratio laid down in the aforesaid decision of the Tribunal squarely applies to the facts of the present captioned appeals. 14. In so far as enhancement made by the Ld. CIT(A) u/s 251(1) r.w.s. 56(2) (viib) of the Act, the Ld. CIT(A) has not accepted the Valuation Report submitted by the Assessee as per Rule 11UA of the Rules. During the assessment proceedings the assessees have submitted the Valuation Report duly signed by the auditor by following NAV/DCF Method as required under Rule 11UA(2) of the Rules. The Valuation Reports are produced before us along with the paper book. Both the lower authorities have failed to follow the Rule 11UA of the Act, as per which the option to choose the valuation of the shares lies with the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent) Rules, 2018 w.e.f. 24.3.2018) as per Discounted Free Cash Flow Method . 15. As per the aforesaid Rule, 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 determined under clause (a) or clause (b), at the option of the assessee. The Assessees having the choice to opt for one of the methods enumerated in the above provision and the appellant has chosen to opt for clause (b) in most of the abovementioned cases for valuation of unquoted equity shares and based on the same, the value of the share had been computed. Accordingly, the new shares were issued and allotted to the investors during the captioned assessment year. During the assessment proceedings, computation of Fair Market Value of shares as per Rule 11UA(2) was submitted before the Ld.AO to justify that the shares issued by the appellants were at Fair Market Value (FMV) which was computed in accordance with Rule 11UA(2) of the Income Tax Rules, 1962. But the AO has not given any reasoning for rejecting the valuation of shares nor have they furnished any material to the contrary which justified the reject ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dly 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-Axesser 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 learned ITAT, is a conclusion of fact dronen on the basis of material and facts available. The test laid down by th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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