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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 ..... g identity, creditworthiness of the investors and the genuineness of the transaction. 2. That the Ld. CIT (A) has erred in law as well as on facts in enhancing the income of appellant u/s 251(1) by a sum of Rs. 76,00,000/- under the head income from other sources by applying section 56(2)(viib) of the Act on protective basis and rejecting the valuation of shares as determined as per NAV method provided under Rule 11UA(2)(a) of Income 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nished in the PB M/s. Good luck Industries (P) Ltd. (PB Pg131 to 155) M/s. Metalcity Constructions Kovai (P) OLtd. (PB 143-165) M/s. Rishi Credit & Industries (P) Ltd. (PB 166-188) M/s.Pearl Multicon Pvt. Ltd. (PB 105-130) M/s. Good luck Industries Ltd. (PB 131-154) M/s. Rishi Credit & Industries (P) Ltd. (PB 155-179) 5. The Ld counsel for the assessee has submitted that the CIT(A) has committed error by sustaining the addition made u/s 68 of the Act. The assessees have given the names, addresses and PAN number of the investors 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 Mantr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eport along with balance sheet and profit and loss account for the relevant Financial Year 2016-17, ledger account of Axis Bank, bank statement. The assessees have also furnished the documents with respect to investor companies such as confirmation of accounts, share application, confirmation of accounts share certificate, certification of incorporation along with memorandum and article of association and article of association, and profit and loss account for the relevant F.Y. 2016-17. The particular of the investment made by the investors as per assessees as under;- 1- M/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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause (b) at the option of the assessee. In the instant case the assessees have got fair market value of the shares determined through an accountant and follow the Act. 12. 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:- 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 pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainment (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 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 invok ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ources. 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 sub-section (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 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ............................................ 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 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 In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, 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 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 adopt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 b 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 appreciate the controversy and the issue for adjudication. The assessee company was incorporated on 19t September, 2013, I.e., in the Assessment Year 2014-15, with the objective of carrying of business production and distribution of feature film, tele films, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rpreting 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 Rules provide for 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/m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 by the assessee is allowed and appeal filed by the 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t towards depreciation. (iv) any amount representing provision for taxation, other than amount of tax paid as deduction or collection at source or as advance 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 formatted by the IT (sixth amendment) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FMV on the basis of either the DCF or NAV Method. The Respondent- Assessee being a start-up company adopted DCF method to value its shares. This was carried out on the basis of information and material available on the date of valuation and projection of future revenue. There is no dispute that methodology adopted by the Respondent- Assessee has been done applying a recognized and accepted method. Since the performance did not match the projections, Revenue sought to challenge the valuation, on that footing. This approach lacks material foundation and is irrational since the valuation is intrinsically based on projections which can be affected by various factors. We cannot lose sight of the fact that the valuer makes forecast or approximation, based on potential value of business. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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