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TMI Blog2024 (11) TMI 697X X X X Extracts X X X X X X X X Extracts X X X X ..... ancial Year 2014-15, the petitioner had issued 3,59,500 equity shares of Rs. 10/- each, at a premium of Rs. 143/- totaling to premium collected at Rs. 5,14,08,500/-. 4.3 Notices under section 133 (6) of the Income Tax Act,1961 [for short 'the Act'] were issued by the Income Tax Officer on 01.09.2017, 14.09.2017, 26.09.2017 and 20.05.2019 to conduct inquiry into the issuance of such share capital at such valuation. The petitioner filed replies to each of the notices issued under section 133 (6) of the Act. 4.4 It appears that the return filed by the petitioner was not taken for scrutiny and intimation under section 143 (1) of the Act was issued. 4.5 The respondent No. 1-Assessing Officer has issued impugned notice under section 148 of the Act on 29.03.2021 asking the petitioner to file a return of income for A.Y. 2015-16. The petitioner filed return in response to the notice under section 148 of the Act on 03.01.2022 and sought reasons recorded for reopening. 4.6 The respondent No. 1 provided reasons to the petitioner on 04.02.2022 which reads as under: "1. Brief details of the assessee: The assessee company is engaged in ceramic mess filed its return of income for the A.Y.201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sequel to information collected/ received: During the AY 2015-16, Since, assessee had sold 359500 shares, amount of Addition comes the to Rs. 2,87,60,000/-which is required to be added u/s. 56 (2) (vii} (b) of the IT Act." 4.7 On receipt of the reasons recorded, the petitioner filed objection with respondent No. 1 on 15.02.2022 challenging the validity of the notice issued under section 148 of the Act. Respondent No. 2 disposed of the objections of the petitioner by order dated 03.03.202. Being aggrieved, the petitioner has preferred this petition challenging the notice issued under section 148 of the Act. 5. Learned advocate Mr. B.S. Soparkar appearing for the petitioner submitted that the impugned notice for reopening is without jurisdiction as the reasons recorded for reopening do not reflect that any income has escaped assessment. It was further submitted that the reasons recorded are fundamentally erroneous because at the time of issue of shares, the petitioner obtained valuation report as per which, the valuation of shares as per the Discounted Cash Flow ['DCF' for short] based on projected financials was valued at Rs. 153/- per share. It was therefore submitted that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e substituted by a different method. 6. On the other hand, learned Senior Standing Counsel Mr. Varun K. Patel for the respondent Assessing officer submitted that in the facts of the present case, no scrutiny assessment under section 143 (3) of the Act was made and as per the information received in the insight portal uploaded by ITO (I & CI), the assessee-company had sold 359500 shares at a premium of Rs. 143/- as against that there was a difference between the two valuation methods as prescribed under Rule 11UA (2) of the Rules and the Assessing Officer was therefore, justified in recording the reasons for issuing notice for reopening by recording reasons that there was a difference of Rs. 80/- between the Net Asset Value of Rs. 73/- per share and as per DCF of Rs. 153/- per share which has resulted into escapement of the income to the tune of Rs. 2,87,60,000/-(80X 3,59,500). 6.1 It was therefore submitted that the Assessing Officer was justified in issuing the notice for reopening in the facts of the case. In respect of his submissions, reliance was placed on the decision of the Hon'ble Apex Court in case of Raymond Woolen Mills Ltd vs. ITO reported in (1999) 236 ITR 334 wherei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the Rules. Section 56 (2) (viib) of the Act reads as under: "56. Income from other sources. "(1) xxx xxx xxx (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:- xxxxxx [(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,- (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 as per the Discounted Free Cash Flow method;..." 10. Clause (a) and (b) of the Rule 11UA (2) of the Rule prescribes the method of Net Asset Value method and the discounted cash flow method for which, the assessee is entitled to exercise the option for computation of the fair market value for the applicability of section 56 (2) (viib) of the Act. 11. Hon'ble Delhi High Court in case of Agra Portfolio (P.) Ltd. (supra), in the facts of the said case, adopting right of the assessee to adopt either of the two methods for arriving at Fair Market Value, has observed as under: "20. A more detailed disc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cting the future cash flow certain assumptions are required to be made, there needs to be tested and then such exemptions becomes the base of estimation of such projected future cash flows. If there are no assumptions, there cannot be an estimate of future projected cash flows and then discounted cash flow method becomes redundant. For exercise of valuation, assumption made by the valuer and information available at the time of the valuation date are relevant. As the exercise of valuation must be viewed as on the date of the valuation looking forward and cannot be reviewed in retrospect. Further, the valuation is always made based on review of historical data and projected financial information provided by the management. Further report of expert will always include limitation and responsibilities but that does not make his report incorrect. Of course, if there are errors in the working of projected cash flow, estimating the projected revenue and projected expenditure as well as in adoption of cost of equity and discount factor, the learned Assessing Officer is within his right to correct it after questioning the same to the assessee. The learned Assessing Officer can also question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ethod or fair market value of the unquoted equity shares determined by a merchant banker. The choice of method is that of the Assessee. The Tribunal has followed the judgment of Hon'ble 2020 SCC OnLine ITAT 9482 Bombay High Court rendered in the case of Vodafone M-Pesa Ltd. v. Pr. CIT (supra) and has taken the view that the AO can scrutinize the valuation report and he can determine a fresh valuation either by himself or by calling a determination from an independent valuer to confront the Assessee but the basis has to be DCF method and he cannot change the method of valuation which has been opted by the Assessee. The decision of ITAT, Delhi in the case of Agro Portfolio Ltd. 171 ITD 74 has also been considered by the ITAT, Bangalore in the case of VBHC Value Homes Pvt. Ltd.(supra). 12. In view of the above legal position, we are of view that the issue with regard to valuation has to be decided afresh by the AO on the lines indicated in the decision of ITAT, Bangalore in the case of VBHC Value Homes Pvt. Ltd., Vs ITO (supra) i.e., (i) the AO can scrutinize the valuation report and he can determine a fresh valuation either by himself or by calling a determination from an indep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect in rejecting the DCF method and proceeding to value the shares by NAV method merely on the ground that there was a huge difference in projected figures and actual results available for some years. Xxxxx 18. We are of the opinion that the orders passed by the Income Tax Appellate Tribunal as well as the CIT(Appeals), are fairly comprehensive. Both of them have concurrently found that no consideration was received by the assessee-firm for allotment of the shares, therefore Section 56 (2) (viib) of the Act would not apply, and that it would have applied only if consideration was received for such a transaction. Xxxxx 19. Also, both the Tribunal and the CIT(Appeals) have held that the Assessing Officer had no jurisdiction to substitute the NAV method of assessing the valuation of shares, once the assessee had exercised option of a DCF valuation method as per Rule 11UA (2) of the Income Tax Rules." 13. Thus, so far as the applicability of the method prescribed in Rule 11UA (2) of the Rules is concerned, the same is as per the option to be exercised by the assessee and once the assessee has exercised the option, the Assessing Officer even during the regular course of assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X
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