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TMI Blog2024 (12) TMI 1051X X X X Extracts X X X X X X X X Extracts X X X X ..... annot tinker with the method adopted by the assessee and simply applied his own NAV method. In one hand ld. AO adopting DCF method showing that the valuation report is prior to introduction of Rule 11UA but still he proceeds to make his own valuation under one of the method prescribed under Rule 11UA. When the law provides two valuation methods, i.e., NAV and DCF, then AO cannot say one method should be applied for another and reject the valuation adopted by the assessee. DCF is always based projections based on current data and future market and economic condition for a particular industry and can t be equated with actual. Thus, respectfully following the judgment of Cinestaan Entertainment P. Ltd [ 2021 (3) TMI 239 - DELHI HIGH COURT] we hold that ld. AO cannot reject the DCF method and the valuation report as per DCF method cannot be tinkered with ld. AO without giving substantial reasons and not based on his own premise. Accordingly, the valuation done by the assessee is accepted and no addition u/s. 56(1)(viib) can be upheld. Additions u/s. 68 alternatively - From the perusal of the balance sheets it is seen that these companies had huge reserves and surplus and Revenue from o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ences available on record to discharge onus u/s. 68 with regards to identity, capacity and genuineness of transactions. 6. Ld. CIT(A) erred in law as well as on fact in upholding additions made by ld. AO without issuing show cause notice and in violation of principle of natural justice. 3. The brief facts qua the issue raised are that Assessee Company is a Non-Banking Finance Company (NBFC) duly carrying out business which is regulated by RBI. The main source of income by the assessee is recovery from portfolio clients and interest on loans given. During the year under consideration assessee had shown net profit of Rs. 1,67,89,063/- on total receipts of Rs. 11,91,35,222/-. The ld. AO noted that assessee had collected premium on 14,50,000 shares @40/- per on face value of shares of Rs. 10 per share totaling to Rs. 5,80,00,000 and in September 2012 it has collected share capital of Rs. 7,25,00,000/-. The ld. AO noted that looking to the activities of the assessee which is mainly involved in purchase of assets from the banks and then recovering them, the share premium receipts appeared to be highly abnormal looking to worth of the Company. Accordingly, he issued a show-cause notice as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany was negative prior to the issue of shares. Further, the assessee is into the business of recovering money out of stressed assets which is one of the riskiest businesses in financial industry. Even the market risk premium for such a company which is not having any goodwill or brand name in the Industry would be far higher than the 8% considered by the assessee. Also, no person would give debt to such a company (loss-making company) @ 8% i.e., the rate of interest considered for valuation of shares. This is especially important in view of the fact that the company was having negative net worth with accumulated losses of Rs. 6,14,15,907/- at the beginning of the year. Hence, no prudent man would pay such a huge premium for a loss making company. Therefore, the valuation report submitted by the assessee Is squarely rejected. 6. Having made the addition u/s 56(2)(viib). Ld. AO thereafter, on without prejudice basis, proceeded to make the addition u/s. 68 holding that the Director Shri Shyam Awasthi was not having surplus money which can be invested, in the assessee company. He rejected the assessee s plea that Director had borrowed funds from friends and vendors after perusing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reduced then there will be corresponding increase in the addition u/s 68 of the Act. 9. The ld. CIT (A) too has confirmed both the additions on the same reasoning given by the ld. AO. 10. We have heard both the parties at length and also perused the relevant finding given in the impugned order. The main contention of the assessee before us has been that, at the time of issuance/allotment of shares assessee has taken valuation report from an independent CA/ merchant banker who after adopting DCF method have valued the shares at Rs. 54/- per share. This report has been summarily rejected by the ld. AO on two grounds; firstly, in the valuation report DCF method has been applied and such method has been recognized in the Rules w.e.f. 29/11/2012, therefore, such report cannot be accepted; and secondly, the assessee has relied upon various variables which cannot be accepted for the reasoning given by him as noted above. Though, he has made the primary addition under the deeming provision of Section 56(1)(viib), however, he has made same addition u/s. 68 also. The valuation of shares even when Rule 11UA was not there in the statute at the time when report was prepared by the Valuer, howe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty of the Respondent-Assessee only to the extent that such profitability was not commensurate with the actual financials provided by the Respondent- Assessee during the course of assessment proceedings. Therefore, the financials of the Respondent-Assessee did not support the business module of the company. 6. Mr. Sharma further submitted that while there cannot be any dispute on the fact that it is for the entrepreneur to visualize the business based on certain projections and to undertake all kind of risks, but in the case of the Respondent-Assessee, the valuation report projected profits, and whereas the financials represented losses, thereby demonstrating that the actual financials and the valuation report were completely contradictory to each other 7. 8. We have heard and duly considered the arguments and contentions advanced by the learned counsel for both the parties. 9. 10. The AO has disregarded the valuation report of the Respondent- Assessee primarily on the ground that the projections of revenue as considered for the purpose of valuation do not match the actual revenues of subsequent years. The AO has made additions based on the assumption that the Respondent-Assessee ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn 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 substituted any of his own method or valuation albeit has simply rejected the valuation of the assessee. 33. Section 56(2) (viib) is a deeming provision and one cannot expand the meaning of scope of any word while interpreting 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 we 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rakesh Jhunjhunwala, and Radhakishan Damania, who are one of the top investors and businessman ofthe country and if they have seen certain potential and accepted this valuation, then how AO or Ld. CIT(A) can question their wisdom. It is only when they have seen future potentials that they have invested around Rs. 91 crore in the current year and also huge sums in the subsequent years as informed by the ld. counsel. The investors like these persons will not make any investment merely to give dole or carry out any charity to a startup company like, albeit their decision is guided by business and commercial prudence to evaluate a startup company like assessee, what they can achieve in future. It has been informed that these investors are now the major shareholder of the assessee company and they cannot become such a huge equity stock holder if they do not foresee any future in the assessee company. In a way Revenue is trying to question even the commercial prudence of such big investors like. According to the Assessing Officer either these investors should not have made investments because the fair market value of the share is Nil or assessee should have further invested in securitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssumptions. Investor who invested in the company sees 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 but they see the growth in future. The merchant banker of the valuer carries on the valuation based on various factors and data available. 12. Thus, the ld. AO cannot tinker with the method adopted by the assessee and simply applied his own NAV method. In one hand ld. AO adopting DCF method showing that the valuation report is prior to introduction of Rule 11UA but still he proceeds to make his own valuation under one of the method prescribed under Rule 11UA. 13. The ld. AO is also not an expert to carryout valuation and cannot reject the valuation report given by the valuer or merchant banker imposing his own methodology or valuation simply by pointing out that there are some variables which according to him is not justified. 14. When the law provides two valuation methods, i.e., NAV and DCF, then AO cannot say one method should be applied for another and reject the valuation adopted by the assessee. DCF is always based projecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ancials and balance sheet of these persons / entities. From the perusal of the same, it is seen that these persons had sufficient funds in the balance sheet. Ld. AO has only seen the return of income instead of looking to the availability of funds in the balance sheet which far exceeded the loans given by the entities of Shri Shyam Awasthi. For the sake of ready reference, the details of these persons who had given loans and advances details of which has been filed are as under:- Sr No Name, Address and PAN Opening Balance Loan Taken during the Year Loan Repaid During the Year Closing Balance Evidences 1 Shyam Alcohol Chemicals Ltd, A/10 Kavita Apts, Natakwala Lane, Borivali West, Mumbai - 400092 PAN: AAGCS6595M 1,75,00,000 1,75,00,000 1. Income Tax Return 2. Annual Audit Report 3. Confirmation 4. Bank Statement 5. PAN Card 2 Mishka Finance and Trading Ltd, A 403, Express Zone, Malad East, Mumbai - 400063 PAN: AAACP2548R 1,00,00,000 1,00,00,000 1. Confirmation 2. Income Tax Return 3. Bank Statement 4. Annual Audit Report 3 Shipra Fabrics Pvt Ltd, 44, 3rd Floor, Jariwala Bldg, Arthur road, Tardeo, Mumbai PAN: AAACS5527M 1,00,00,000 1,00,00,000 1. Confirmation 2. Bank Statement 3. In ..... X X X X Extracts X X X X X X X X Extracts X X X X
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