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TMI Blog2025 (4) TMI 541X X X X Extracts X X X X X X X X Extracts X X X X ..... 143(3) 5 17/PUN/2024 2018-19 14.11.2023 Rs.3,79,79,669/- 143(3) r.w.s.143(3A) & 143(3B) 2. Since identical grounds have been raised in these appeals we therefore proceed to dispose of these appeals by this consolidated order for the sake of convenience. 3. In ITA No.13/PUN/2024 for the A.Y.2014-15, assessee has raised following grounds of appeal : "1. On the facts and in the circumstances of the case, Ld. CIT-Appeal has erred in law and on facts, in sustaining the reassessment order passed by Ld. AO under section 147 of the Act which is without jurisdiction, illegal and thus, the said reassessment order deserves to be quashed and set aside. 2. On the facts and in the circumstances of the case, Ld. CIT-Appeal has erred in law and on facts, in sustaining the reassessment order passed by Ld. AO under section 147 of the Act which was reopened based on the change on opinion without bringing any fresh tangible material on record and thereby further erred in overlooking the fact that the issue of taxation of share premium was duly examined during the course of original assessment proceedings and thus, the said reassessment order deserves to be quashed and set aside. 3. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time; and thereby, working out extra share premium and holding the same as taxable u/s 56(2) (viib) of the ITA, 1961. 10. On the facts and in the circumstances of the case, Ld. CIT-Appeal has erred in law and on facts, in upholding the action of Ld. AO in not appreciating that choice of a valuation method, as per Rule 11UA(2) rests with the Appellant Company and not with the AO and hence, Ld. AO as well as Ld. CIT-Appeal has erred in computing the FMV by applying the NAV method. 11. On the facts and in the circumstances of the case, Ld. CIT-Appeal has erred in law and on facts, in not referring the matter of valuation of shares of the Appellant Company through the office of Departmental Valuation Officer u/s 55A of ITA, 1961 and has further erred in assigning cryptic and incorrect reasoning while dismissing this ground which incorrect and hence, bad-in-law. 12. On the facts and in the circumstances of the case, Ld. CIT-Appeal/ AO has erred in law and on facts, in rejecting the valuation report given by M/s Ray & Ray (Chartered Accountants) mainly on the ground of he being a statutory auditor. In that case, Ld. AO/CIT-Appeal ought to have considered the Appellant's case u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t adjudicating and considering the additional evidences submitted by the Appellant during the course of appellate proceedings and thereby has erred in sustaining the addition made by Ld. AO and hence, the said addition as well as orders deserve to be quashed. 7. On the facts and in the circumstances of the case, Ld. CIT-Appeal has erred in law and on facts, in upholding the illegal actions of Ld. AO in disregarding DCF method and thrusting NAV method, to compute the FMV of shares issued by the Appellant from time to time; and thereby, working out extra share premium and holding the same as taxable u/s 56(2) (viib) of the ITA, 1961. 8. On the facts and in the circumstances of the case, Ld. CIT-Appeal has erred in law and on facts, in upholding the action of Ld. AO in not appreciating that choice of a valuation method, as per Rule 11UA(2) rests with the Appellant Company and not with the AO and hence, Ld. AO as well as Ld. CIT-Appeal has erred in computing the FMV by applying the NAV method. 9. On the facts and in the circumstances of the case, Ld. CIT-Appeal has erred in law and on facts, in not referring the matter of valuation of shares on the basis of tangible / intangible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3) of the Act was passed on 21.06.2016. Since the assessee did not submit relevant details as called for during the regular assessment proceedings inspite of giving several opportunities and assessment proceedings getting time barred, ld. AO had reason to believe that income of the assessee has escaped assessment within the meaning of section 147 and initiated the reassessment proceedings after taking prior approval from the concerned authority. The main reason for reopening was that the assessee issued the shares at a share premium of Rs. 85.057 whereas the value of each share as per NAV method was Rs. 19/-. Ld. AO accordingly after issuing proper reasons to believe reopened the assessment and validly issued the notices required for carrying out the re-assessment proceedings. During the course of re-assessment proceedings, ld. AO only focussed to the issue of Fair Market Value (FMV) of the shares issued by the assessee company and the application of section 56(2)(viib) of the Act. Ld. AO observed that the assessee has opted for Discounted Cash Flow (DCF) method for calculating the share premium with regard to the construction of Hospital. In the DCF method certain projections were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as above, it was possible to complete and construct a 75 bed hospital or later 119 bed hospital (Which naturally requires considerable construction time and time for machinery and equipments installation) complete with all permission and approval by F.Y. 2013-14, so as to generate the revenue as per DCF valuation. Even the ITR filed by the assessee does not show any revenue till A.Y. 2018-19. While it is true that projection need not meet actual but projection should be logical and possibility should exits at the time of making them. The assessee has cursorily just stated that the construction work is in progress at the time of assessment proceedings ongoing u/s 143(3) of IT Act earlier. In this context, the landmark judgment of the Honorable Supreme Court in the case of Sumati Dayal Vs CIT (SC) 214 ITR 801 wherein it is observed that "the apparent must be considered as real until it is shown that there are reasons to believe that the apparent is not the real and that the taxing authorities are entitled to look into the surrounding circumstances to find out the reality and the matter has to be considered by applying the test of human probabilities" (vi) Corporate veil and intra g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of share and, for that matter such price per share was not even determined in the valuation report of the CA as per DCF method submitted during the course of the assessment proceedings: iii. It is further seen from the verification of the valuation report that huge projection of the revenue and profit were made to create free cash flow even though, as a matter of fact assessee did neither own any land and, it was taken on lease from group company only on 02-03-2015 vide registered agreement. Thus, the construction of Hospital did not commence at least till 02.03.2015 and thus, projections of revenue done were not correct. iv. In the valuation report dated 10.01.2014, the revenue for FY 15-16 has been projected at Rs. 6.98 Crs whereas, in another valuation report dated 21.01.2015 (filed during the course of assessment proceedings for AY 15-16). the revenue for FY 15-16 has been shown at Rs. 15.50 ers. The valuer kept on changing the valuation report and revenue projections at the behest of the management only to generate more free cash flow for justifying the premium on shares ranging from Rs. 93 to Rs. 378 in the previous year relevant to AY 2015-16 even though the valuer CA w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res should be issued as against the face value of Rs. 20184580/; (2018458 Rs. 10). Therefore the excess share premium over and above the NAV @Rs.19 per share at Rs. 89641183/- (Rs.107807305-(Rs.38350702-Rs.20184580)) is added u/s 56(2)(viib) of IT Act and taxed accordingly. Penalty proceedings u/s 271(1)(C) of the IT Act are also initiated for furnishing inaccurate particulars of income. 1 Total income as per computation of income 0 2 Add: As discussed in Para 3,4,5 above 189641183 3 Total Income assessed 189641183 Rounded off : 189641180 8. Aggrieved assessee preferred appeal before the ld.CIT(A) challenging the validity of the reopening proceedings and also challenged the addition made u/s. 56(2)(viib) of the Act but failed to succeed. Now the assessee is in appeal before this Tribunal. 9. Ld. Counsel for the assessee as regards the legal issue challenging the re-assessment proceedings stated that the assessee has also passed through assessment proceedings u/s. 143(3) of the Act and all relevant details have been examined. Therefore, again carrying out the re-assessment proceedings for the issues dealt by the AO in the regular assessment proceedings wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgued supporting the orders of the lower authorities. Ld. DR submitted that assessee failed to establish the credentials, financials have not been submitted and the projections made by the assessee company have no basis. Further, he submitted that the DCF method is not applicable to the assessee company as the project has gone off the track. Therefore, ld.CIT(A) has rightly sustained the addition made by the AO u/s. 56(2)(viib) of the Act. Ld. DR while arguing the case also referred to the following written submissions which read as follows : "1. Facts of the case: 1.1 The assessee is a private limited company Incorporated on 16/08/2013 in the business of the assessee had not started commercial operation and it had been stated that the work of the hospital was in the construction stage. This contention of the assessee was repeatedly submitted again and again. The assessee company had received premium on shares and the computation of the said premium was not accepted by the AO and the excess premium was added back to the total income. This issue of excess premium and its computation is under challenge before the Hon'ble ITAT. The said issue is present in all the AYs mentione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt and that the estimate of the value did not constitute a fairness opinion or solvency opinion and should not be relied as such. Among other things, the AO sought the following details: (i) the intrinsic value of the share as per NAV (ii) to furnish the DCF computation by incorporating actual figures for financial years 2014-15, 2015-16, 2016-17 and 2017-18 (as on date) for which the values were known. Reasons for divergences if any with projections were to be explained with supporting details. (iii) to clarify whether hospital was sold and the status of the construction/renovation of the proposed hospital as on date. (iv) that, there was a huge variation in the premium of shares though there was not much difference in the period of issue of shares and therefore the assessee was asked to furnish the basis of quantification of share premium in each case and supporting details as to how the premium was justifiable as per the DCF method. (v) As regards the valuation reports relied upon by the assessee, the AO asked with respect to the report from Ray and Ray as to why the same should be accepted as there was no conclusion in the report as to the value of each share as per t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o prohibit the AO from examining the claim of projections being made on which the valuation of shares depend as per the DCF method. Further, the assessee was appraised of the rationale behind rejecting the unsubstantiated projections and was given ample opportunity to substantiate the same and therefore it cannot be said that the AO had not followed the law of natural justice. The CIT (A) has also given a finding that the assessee was given ample opportunity to make necessary compliance to the satisfaction of the AO when a remand report was sought on the additional evidence filed by the assessee before the CIT (A). The failure was on the part of the assessee in substantiating the projections that were used in the valuation of shares as per the DCF method vis-à-vis the actual figures available on record. 3.3 The assessee submitted a valuation report by CA Arvind Yenemadi but the same cannot be relied upon as it not by an independent auditor as per the requirement of the law. The law at that point in time required that the report should be from a merchant banker or accountant but the accountant should not be the tax auditor of the company. Therefore, the assessee failed to f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under : "Appellant's Contentions and Submissions regarding ground for erroneous initiation of 147 proceedings: As per statement of facts and grounds of appeal as above. Decision: In course of appeal proceeding it was clearly stated by the appellant in his statement of facts that during scrutiny assessment the appellant voluntarily disclosed all materials before the then AO. Hence it is also placed by the A,R of the appellant nothing new had come to the knowledge of the Ld. AO. The same record what was available on record to him at the time of making the original assessment, the same record was used for recording the satisfaction by changing the opinion on the same evidence. I find from the case records (assessment order dated 24-12-2018) that scrutiny assessment in this case was first made by the A.O u/s 143(3) on 21-06-2016 accepting the returned income shown by the appellant. Thereafter scrutiny order u/s 143930 r.w.s 147 of the l.t act has been passed on 24-12-2018. It is also observed that before initiation of proceeding the AO has recorded a satisfaction note forming reason to believe for reopening the cases vide page 1 to page 9 of the assessment order dated 24-12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above finding of the ld.CIT(A) as well as the decisions referred therein and also taking into consideration the facts of the instant case, we find that since material information was not disclosed properly in the regular scrutiny proceedings as well as in the income-tax return, ld. AO was very well within his jurisdiction to issue notice u/s. 148 of the Act and carry out the re-assessment proceedings u/s. 147 of the Act. Therefore, the legal issue raised in grounds of appeal No. 1 and 2 for ITA No.13/PUN/2014 for A.Y. 2014-15 are hereby dismissed. 15. Now coming to the merits of the case where the only issue is regarding the addition made u/s. 56(2)(viib) of the Act for the excess share premium charged by the assessee. Admittedly the assessee was planning to construct a Multi Speciality Hospital and also to increase the capacity and for carrying out this project work it needed funds, therefore, issued share capital. But for issuing such Equity Shares on premium, assessee had to calculate the Fair Market Value of the Equity Shares. Calculation of FMV of the unquoted Equity Shares is referred in Rule 11UA of the Income Tax Rules, 1962 which read as follows: "*(2) Notwithstanding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is available with the assessee to either adopt the NAV or DCF method. In the instant case, the assessee adopted DCF method and the Valuation Report was to be procured from the Merchant Banker. The assessee has procured the Valuation Report from his Auditor namely Mr. Arvind Yenemadi. Auditor of the assessee company cannot issue the Valuation Report under DCF method. Only the Merchant Banker can issue the Valuation Report for calculating the FMV as per DCF method. It is also an admitted fact that projections made in the Valuation Report seems to be highly exaggerated if they are compared with the actual. Ld. AO has elaborately dealt with this aspect that the projections were made to calculate the share premium of Rs. 85.057 over and above its face value of the Equity Share of Rs. 10/-. The projections have not been achieved to the extent they have been mentioned in the DCF method prepared by the Auditor of the company on the basis of information provided by the management indicating that in order to charge excess share premium has given the information of high projection to the person preparing the Valuation Report under DCF method. 17. Before us, ld. Counsel for the assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction of OTS request Dt.25.09.19 07-11-2019 2nd OTS request from Accord Mediplus Pvt.Ltd. to Andhra bank, Mumbai 16-11-2019 Recovery Notice from Advocate Nitin R. Shaha on behalf of Andhra Bank 27-11-2019 Letter from Andhra Bank for rejection of 2nd OTS request Dt.07.11.2019 01-04-2020 Andhra Bank and Corporation Bank Merged into Union Bank April 2020 to Aug-2020 No communication due to lockdown as COVID-19 13-09-2022 OTS accepted by Union Bank asking to pay Rs. 73 CR as full and final settlement 20-02-2023 Union Bank cancelled OTS offer 24-02-2023 Auction notice given by Union Bank 10-03-2023 E-auction by Union Bank for Rs. 55 CR 02-05-2023 One Investor approached DRT objecting to Auction and seeking intervention 23-05-2023 WRIT petition filed by M/s. Genuine Seeds P Ltd. (one of the Investors in Appellant Company) before Honorable bombay High Court, challenging the AUCTION PB 819-848 28-06-2023 Actual Auction of project property for Rs. 55 CR 28-07-2023 Despite Auction, Union Bank asked Rs. 78 CR + Interest for settlement fresh OTS PB 849-852 21-08-2023 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll(UA) (2) of the Rules which gives an option to an Assessee to determine the fair market value of shares by either of the two methods ie. the NAV or the DCF Method. It is submitted that the Assessee having opted for the DCF Method, the Assessing Officer, if at all not satisfied with the valuation report could have called for fresh valuation or even independently determined the fair market value, but this could only be done by adopting the DCF Method. Therefore, it was submitted that, ex-facie the impugned order was in face of the statutory provisions and could not be upheld. Therefore, an unconditional stay was sought of a demand arising from Assessment order dated 21st December, 2017. 7. Mr. Mohanty, the Learned Counsel appearing for the Revenue in support of the impugned order states that the Assessing Officer is entitled to examine the correctness of the Valuation Report submitted by the Assessee. The DCF Method is worked out on the basis of the projected figures of sales. These figures of sales, atleast for three years i.e. Assessment Years 2015-16, 2016-17 and 2017-18 were found infact inflated at the time when he was passing the Assessment order. Although, he does concede ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al determination from an independent valuer to confront the petitioner. However, the basis has to be the DCF Method and it is not open to him to change the method of valuation which has been opted for by the Assessee. If Mr. Mohanty is correct in his submission that a part of demand arising out of the assessment order dated ed 21st December, 2017 would on adoption of DCF Method will be sustained in part, the same is without working out the figures. This was an exercise which ought to have been done by the Assessing Officer and that has not been done by him. Infact, he has completely disregarded the DCF Method for arriving at the fair market value. Therefore, the demand in the facts need to be stayed." 19. We find that Hon'ble Jurisdictional High Court in the above referred judgment in the case of Vodafone M-Pesa Ltd. Vs. PCIT (supra) has categorically held that for the purpose of calculating the Fair Market Value, the option is available with the assessee in terms of Rules under 11UA of the Income Tax Rules, 1962. Similar view has also been taken in plethora of other decisions referred (supra) namely, 1. Akash Ceramics P. Ltd 2. PCIT vs. Abhirvey Projects P Ltd., 3. Agra Portfolio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its on the issue. We therefore, considering the facts and circumstances of the case, deem it proper to give one more opportunity to the assessee and direct the assessee company to procure the Valuation Report from the merchant banker as contemplated in Rule 11UA of the Income Tax Rules, 1962 and provide such report to ld.CIT(A) before whom the issues raised on merit are being restored for necessary re-adjudication. Ld.CIT(A) shall sent a copy of the report under DCF method to the AO to get the remand report and thereafter shall carry out the proceedings as per law after allowing reasonable opportunity of hearing to the assessee. Effective grounds of appeal No. 3 to 13 raised on merits are allowed for statistical purposes. 22. The issue raised on merits in the remaining appeals for the A.Yrs. 2015-16 to 2018-19 and the finding of ld.CIT(A) is also similar in these appeals. Therefore, our decision given in ITA No.13/PUN/2024 for the A.Y. 2024-15 remitting the issues on merit to the file of ld.CIT(A) for afresh adjudication and directing the assessee company to procure the Valuation Report under DCF method from the Merchant Banker as per Rule 11UA of the Income Tax Rules, 1962 and pl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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