TaxTMI 
TaxTMI 
2017 (5) TMI 58
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....-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 other." 3. This appeal has arisen out of the order u....
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....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 provisions of Section 263." The assessee submitted its reply to SCN....
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....d 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 section 263 of the 1961 Act to include non-conduct of proper enquiries, hence, the dec....
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.... 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 report that the free cash flow for equity was estimated arbitrarily wherein the CA who issued valuation report of shares has taken future cash flows as certified by Management and no verification of projections and assumptions adopted by the ....
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....hod 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 considering the facts and circumstances of the case. It was submitted that DCF method is far superior method as compared to Net asset value method as the said method represents true potential of the company. It was submitted by the assessee that ....
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....ecommendation 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 so far as it is prejudicial to the interest of the Revenue. The ld. counsel drew our attention to the paper book / page 62 and submitted that a working was given with respect to the valuation as per discounted cash flow method. He also drew our at....
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....s 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 balance sheet of Madhurima Holdings Mauritius Limited for financial year ended 31- 03-2015 submitted to the A.O. from pages 90 to 116/paper book. Further, the ld. counsel relied on the decision of Hon'ble Bombay High Court in the case of CIT vs. G....
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....s 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 to returned income on account of disallowance u/s 14A of the 1961 Act. During the year under consideration , the assessee had issued and allotted 6,00,000 non cumulative compulsory convertible preference shares of Rs. 10/- each fully paid up shares is....
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....utions 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 the instant case and hence cannot be applied in the instant case. Vide letter dated 26-02-2016 filed before the AO, the assessee made an attempt to justify that due to turmoil in global commodity market since 2012, the total revenue actually achieved i....
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.... 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 any other business or commercial rights of similar nature, whichever is higher; *** ***" E.-Revision by the [Principal Commissioner or] Commissioner Revision of orders prejudicial to revenue. 263. (1) The [Principal Commissioner or] Commissioner may call for and exami....
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.... (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 contained in an order of the Appellate Tribunal, [National Tax Tribunal,] the High Court or the Supreme Court. Explanation.-In computing the period of limitation for the purposes of sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this sec....
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....ation) 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 assessee. ] Determination of fair market value . 11UA . [ (1) ] For the purposes of section 56 of the Act, the fair market value of a property, other than immovable property, shall be determined in the following manner, namely,- (a) valuation of jewellery,- (i) the fair market value of jewellery shall be estimated to be the price which such jewellery would fetch if sold i....
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....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:- (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 ....
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....ure 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 cumulative preference shares; PE = total amount of paid up equity share capital as shown in the balancesheet; 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 as per the Discounted Free Cash Flow method. ] It is pertinent to mention here that case of the assessee was selected for scrutiny under CASS by the Revenue due to issue of shares of face value of Rs. 10 at a premium of Rs. 240 per share. It is also pertinent to mention that the assessee ....
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....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 projections of the Company. b. We have been informed that there are 1,760,003 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." The A.O. accepted the valuation report given by the CA but the A.O. has not gone in details to probe about the sudden huge spike in projected free cash flow from Rs. 5.30 crores in financial year 2012-13 to Rs. 43.01 crore for financial year 2013-14 and also further projected free cash flow increased to Rs. 223.46 crores in financial year 2016-17 from merely Rs. 9.41 crores in financial year 2015-16 , which we....
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....eper 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 the afore-said crucial aspects in the valuation report dated 15-10-2012 issued by M/s V R Jain and Co., CA and merely accepted the said valuation report, which in our considered view has made an assessment order dated 26-03-2016 passed by the AO u/s 143(3) of the 1961 Act , an order which is erroneous in so far as it is prejudicial to the interest of Revenue , keeping in view provisions of Section 56(2)(viib) of the 1961 Act read with explanation 2 to Section 263 of the 1961 Act. There are certain other flash points which should have triggered further probe by the AO as to the valuation report dated 15-10-2012 furnished by the assessee as the assessee did not issued equity shares duri....
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....ated 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 explanation, as is contained in explanation to Section 56(2)(viib) of the 1961 Act as to the fact that manner of computing fair value of shares for the purposes of Section 56(2)(viib) of 1961 Act is provided in above explanation of being higher of the two sub-clauses. The AO merely accepted the valuation report dated 15-10-2012 of the valuer submitted by the assessee without going into all these aspects. In our considered view, the ld. Pr. CIT has rightly invoked the provisions of section 263 of the Act as the A.O. failed to make proper enquiry and verification as required for completion of the assessment u/s 143(3) of 1961 Act, which made the said assessment order dated 23-03- 2016 as erroneous in so f....