TaxTMI 
TaxTMI 
2017 (5) TMI 58
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....ment order, under section 143(3) of the Income-tax Act, 1961 ("hereinafter referred to as "the Act") dated 23.03.2016 (hereinafter referred to as "the assessment order"), as erroneous and prejudicial to the interest of the Revenue. The reasons given by him for doing so are wrong, contrary to the facts of the case and against the provisions of law; 2. The Pr. CIT failed to appreciate that, where two views are possible and the Assessing Officer, after conduct of due enquiry, has taken one view with which the Pr. CIT does not agree, the assessment order cannot be treated as erroneous and prejudicial to the interest of the revenue; 3. The Pr.CIT erred in invoking the provision of section 56(2)(viib) of Act for reasons which are wrong, contrary to the facts of the case and against the provisions of law; 4. The Pr.CIT erred in holding the issue price of noncumulative compulsorily convertible preference shares adopted basis a valuation report of an independent valuer as exorbitant on reasons purely in the realm of conjectures / surmises without appreciating that the same is in accordance with provisions of the Act; 5. The above grounds/sub-grounds are without prejudice to each....
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....d 223.46 crores. Such exorbitant estimated free cash flow was used in valuing shares by DCF method. Therefore, it is clear that valuation made on the basis of unverified exorbitant FCF given by management has given inflated value of shares @ Rs. 250/-. This is not as per recognized DCF method but as per whims & fancy of the management to arrive at higher value to issue shares at huge premium. Considering this the valuation of shares done by CA as per DCF method is not reliable and should have been questioned by the A.O, which was not done. If DCF method is rejected and book value method is taken then there can be addition of more than Rs. 9 crores u/s 56(2)(viib). In view of the above, the assessment order passed u/s.143(3} by the ACIT- 3(2)(1), Mumbai dated 23- 03-2016 appears to be erroneous and prejudicial to the interest of Revenue and it is evident that the Assessing Officer has committed the lapse of not applying his mind to the issues discussed above. I, therefore, propose to pass such order there on as the circumstance of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment under the provis....
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.... jurisdiction u/s 263 of the Act. The finding of the commissioner should be on fresh tangible material and after due application of mind pursuant to which the Commissioner must come to a firm conclusion. AO has conducted detailed enquiry and specifically applied his mind to the issue at hand. Having perused all the relevant details in connection with issue at hand and having taken a view that preference shares are correctly issue at the fair market value, AO completed the scrutiny assessment making no addition on that count. Hence, the exercise of jurisdiction u/s 263 is not warranted. The preference shares have been issued at Rs. 250/ - per share after obtaining a valuation report from an independent valuer. The valuation has been done based on the DCF method suing reasonable assumptions. The use of such methodology is in line with Rule 11UA." The assessee, in support relied upon the decision of the Hon'ble Apex Court in the case of Malabar Industrial Co. Ltd. v. CIT, (2000) 243 ITR 83(SC) to challenge the proceedings u/s 263 of the 1961 Act. The ld. Pr. CIT observed that the amendment made to section 263 of the 1961 Act w.e.f. 1st June, 2015 widens the scope of sectio....
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.... Rs. Crores Particulars % Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Free cash flow for equity 5.30 43.01 6.67 9.41 223.46 Discounting factor 15.01 0.93 0.81 0.70 0.61 0.53 Discounting cash flow 4.93 34.79 4.69 5.75 118.80 Aggregate DCF value 168.96 Terminal value 100.13 Total value of company 269.09 No. of shares outstanding 1,07,60,003 Value per share(In Rs.) 250.08 Key assumptions: a. We have not independently verified the projections of the Company. b. We have been informed that there are 10,760,003 shares outstanding on a full diluted basis on the valuation date out of which 60,00,000 are equity shares and 47,60,003 are 10% Non cumulative compulsorily convertible preference shares of Rs. 10/ - each." It was observed by ld. Pr. CIT from the above repor....
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....um which is not reliable and the AO should have questioned the same which was not done by the AO while passing assessment order dated 23-03-2016 u/s 143(3) of the 1961 Act. It was observed that the assessee had tried to justify the DCF method employed by the C.A. in the said valuation report dated 15-10-2012. The assessee submitted that it had issued and allotted 6,00,000 noncumulative compulsory convertible preference shares of Rs. 10/- each fully paid up at a premium of Rs. 240/- per share after obtaining valuation report from an independent C.A. M/s V.R. Jain & Co . The funds were to be used for the purpose of investment in 1,48,70,000 preference shares of Rs. 10/- each of Entercom Solutions P. Ltd. amounting to Rs. 14,87,00,000/-. It was submitted that valuation of the said preference shares has been done based on DCF method using reasonable assumptions. The use of such methodology is in line with Rule 11UA of Income-tax Rules, 1962. It was submitted that Revenue cannot insist on the usage of the Net Value Method when Rule 11 UA of the 1962 Rules provides assessee an option to adopt DCF method. It was submitted that Net Asset Value method is considered unsuitable after consi....
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....cting detailed enquiries and detailed verifications of the submissions made. The A.O. was also directed to examine the valuation report dated 15-10-2012 issued by CA M/s V R Jain & Co submitted by the assessee in the light of observation and recommendation as mentioned in the "Technical guide on share valuation" issued by ICAI. The AO was also directed by learned Pr. CIT to examine the valuer w.r.t. valuation report prepared by the said valuer and the AO was directed by ld. Pr. CIT to make fresh assessment as per law, vide order dated 8th December, 2016 passed by learned Pr. CIT u/s 263 of the 1961 Act. 4. Aggrieved by the order dated 8th December, 2016 passed by ld. Pr. CIT u/s 263 of the 1961 Act, the assessee filed appeal before the tribunal. 5. The ld. counsel for the assessee drew our attention to the order dated 08-12-2016 passed by the ld. Pr. CIT u/s 263 of the 1961 Act and submitted that the complete details were submitted before the A.O. during the course of assessment proceedings u/s 143(3) r.w.s. 143(2) of the 1961 Act conducted by the AO, and the assessment order dated 23-03-2016 passed by the A.O. u/s. 143(3) of the 1961 Act cannot be considered as erroneous in ....
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....ssessee brought our attention to paper book / page 52-54, wherein the Board Resolution for allotment of shares to the said shareholders is placed. Our attention was also drawn to paper book/ page No. 55-57 whereby the assessee's letter to the AO is placed wherein the assessee enclosed said valuation report dated 15-10-2012 issued by CA M/s V R Jain & Co. and copies of income-tax returns of the subscribers of the shares are placed. The said letter also explained the basis of valuation of shares adopted by the assessee. It was submitted that DCF method is most appropriate method for valuation of shares based on facts and circumstances of the case. It was submitted that net asset value method is not appropriate in the case of the assessee. Our attention was also drawn to paper book/ pages 65 to 85 whereby the income tax returns of various shareholders who subscribed to preference shares are placed. Our attention was also drawn to paper book / page 86-89, wherein the assessee's explanation to the AO as to disinvestment of the shares held by Mauritius subsidiary of the assessee is placed along with cash flow for working valuation of shares. Our attention was also drawn to the copies of ....
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....ld. CIT DR. The A.O. cannot prejudice the interest of the Revenue. It is submitted that the ld. Pr. CIT was correctly applied the provisions of section 263 of the Act. It is also brought to notice that explanation 2 to Section 263 of the 1961 Act was inserted by Finance Act, 2015 w.e.f. 01-06-2015. The ld. CIT D.R. relied upon the decision of Hon'ble Delhi High Court in the case of CIT v. Ashok Logani (ITA No. 553 of 2010 dated May, 11, 2011). The ld. CIT D.R also relied on the decision of the Tribunal in the case of M/s Crompton Greaves Ltd. v. CIT in ITA No. 1994/Mum/2013 & ITA No. 2836/Mum/2014 for A.Y. 2007-08 order dated 1st February, 2016, which was authored by one of us (accountant member). 6. We have considered rival submissions and also perused the material available on record including case laws relied upon by both the parties. The assessee is engaged in the business of trading including commodities. The stock of commodities is periodically hedged by the assessee by entering into derivative contracts. We have observed that original assessment was framed by Revenue u/s 143(3) of the Act vide assessment orders 23rd March, 2016 wherein addition of Rs. 3,72,613/- was made ....
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....y submitted by the assessee before the AO. The end use of the proceeds of the issue of the aforesaid preference shares were also submitted before the AO as being issued for subscribing to 1,48,70,000/- preference shares of Rs. 10 each of Entercoms Solutions Private Limited . The explanations were also provided as to the use of DCF method as suitable method for arriving at valuation of non cumulative compulsory convertible preference shares of Rs. 10/- each at Rs. 250/- per share . Justification was also given that the said DCF method for valuing shares of assessee company which is an unlisted company is in due compliance with Rule 11UA of Income-tax Rules, 1962 , and also DCF method is a better method as compared to Net asset value method to arrive at fair market value of shares. It was submitted before the AO that Section 56(2)(viib) of the 1961 Act is applicable for impugned assessment year but it gets triggered when the FMV of shares of unlisted company is lower than issue price of shares. It was stated before the AO that the FMV of shares is Rs. 250.06 per share while the issue price is Rs. 250/- per share and hence Section 56(2)(viib) of the 1961 Act did not get triggered in t....
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...."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 :- *** *** *** (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: **** 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....
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.... it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner,- (a) the order is passed without making inquiries or verification which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.] [(2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.] (3) Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contain....
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....ecurities means a share or security quoted on any recognized stock exchange with regularity from time to time, where the quotations of such shares or securities are based on current transaction made in the ordinary course of business; (e) "recognized stock exchange" shall have the same meaning as assigned to it in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956); (f) "registered dealer" means a dealer who is registered under Central Sales Tax Act, 1956 or General Sales Tax Law for the time being in force in any State including value added tax laws; (g) "registered valuer" shall have the same meaning as assigned to it in section 34AB of the Wealth-tax Act, 1957 (27 of 1957) read with rule 8A of Wealthtax Rules, 1957; (h) "securities" shall have the same meaning as assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956); (i) "unquoted shares and securities", in relation to shares or securities, means shares and securities which is not a quoted shares or securities; [(j) "valuation date" means the date on which the property or consideration, as the case may be, is received by the....
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....and securities quoted on any recognized stock exchange on the valuation date, and (b) the lowest price of such shares and securities on any recognized stock exchange on a date immediately preceding the valuation date when such shares and securities were traded on such stock exchange, in cases where on the valuation date there is no trading in such shares and securities on any recognized stock exchange; [(b) the fair market value of unquoted equity shares shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner, namely:- the fair market value of unquoted equity shares = (A-L) x (PV), (PE) where, A = book value of the assets in the balance-sheet as reduced by any 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 and any amount shown in the balance-sheet as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset; L = book value of liabilities shown in the balance-sheet, but not including the following amounts, namely:- (....
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....d expenditure which does not represent the value of any asset; L = book value of liabilities shown in the balance-sheet, but not including the following amounts, namely:- (i) the paid-up capital in respect of equity shares; (ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company; (iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart 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 cumulat....
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.... the basis of arriving of the projected turnover and free cash flows as prepared by management and accepted by the said valuer. The ld. Pr. CIT observed that the book value as per balance sheet comes to less than Rs. 100/- per share whereas the value of shares as per DCF method was worked out at Rs. 250/- per share and a report of valuation dated 15-10-2012 contained the following details:- Particulars % Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Free cash flow for equity 5.30 43.01 6.67 9.41 223.46 Discounting factor 15.01 0.93 0.81 0.70 0.61 0.53 Discounting cash flow 4.93 34.79 4.69 5.75 118.80 Aggregate DCF value 168.96 Terminal value 100.13 Total value of company 269.09 No. of shares outstanding 1,07,60,003 Value per share 250.08 Key assumptions: a. We have not independently verified the projection....
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....28 crores while actual turnover achieved was merely Rs. 16.81 crores for the financial year 2013-14, which is merely 29% of the projected turnover applied for valuing the shares in the projections so made by the management and accepted by the valuer. The vast and wild deviation in actual turnover vis-à-vis was brushed aside by the assessee by blaming the non-achievement of projected turnover to turmoil in commodity market in post 2012 crisis. The projection as to proceeds of disinvestment in downstream subsidiaries by its subsidiary company in Mauritius taken into account and included for valuing the shares also did not materialize and could not be achieved which also needed deeper probe by the AO as to the reasons and justification for its inclusion in free cash flow projected by the said valuer, which required deeper probe as to whether the said investment was a strategic investment and can it at all be used to account for in the projected free cash flows as adopted by management/valuer for valuing the shares of the assessee company in the first instance itself and the basis and rationale for its valuation. The AO did not made any efforts to enquire, investigate or verify ....
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....espect of such valuation.] The AO should have enquired into this aspect that convertible preference shares were issued which were although convertible into equity shares after a certain period but did the law equate the same to be equity shares for the purposes of valuation of shares as mandated under the provisions of statute and rules made there-under. Further , the AO needed to look into an explanation to Section 56(2)(viib) of the 1961 Act which provided as under : 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; The AO did not look into this aspect that explanation refers to value of assets also as per clause (ii) as well method prescribed as per clause (i) of the said explanati....