TaxTMI 
TaxTMI 
2018 (5) TMI 1088
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....s, shares and securities of all kind of description. During the previous year relevant for the assessment year 2014-15, the assessee had allotted 3,15,000 Equity shares of face value of Rs. 10/- each at a premium of Rs. 40/- per share consisting total amount of Rs. 1,26,00,000/-. The said allotment was done by the assessee company in pursuance to provision of section 56(2)(viib) read with Rule 11UA whose fair market value of the share i.e. Rs. 50/- was done on the basis of Discounted Cash Flow Method which was work out by one of the know Merchant Banker i.e. M/s SPA Capital Advisors Ltd. 3. For the assessment year 2014-15, the assessee filed its return of income u/s 139(1) of the Income Tax Act, 1961 (for short referred as the 'Act') on 29.09.2014 declaring a loss of Rs. 53,083/-. Assessment was concluded by order dated 19.12.2016 on a total income at Rs. 1,26,72,917/- and in that process Ld. AO made addition of Rs. 1,27,26,000/- u/s 56(2)(viib) of the Income Tax Act, rejecting the valuation report of the said Merchant Banker i.e. M/s SPA Capital Advisors Ltd. and independently determining the value of Share at Rs. 9.60 and calculating over and above the value of share allotted ov....
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....fits. In then circumstances, the figures taken by the assessee on account of risk free return, risk free premium, expected returns from the market, risk free rate and Beta are nowhere nearer to the reality. 7. Basing on the above argument, Ld. DR had taken our attention to the disclaimer clause appended by M/s SPA Capital Advisors Ltd. to their report, and submits that a perusal of the above makes it clear that the valuation of shares is not a realistic one keeping in view the growth and stature of the company and the figures in the valuation report have been cooked up without providing any reliable basis as to how the assumptions took place. 8. Lastly, he submits that in so far as DCF method is concerned it is always possible for the company to decide the proposed value of the shares first and then travelling back to tailor the figures with the reverse engineering process, to suite their convenience. 9. Ld. DR, therefore, submits that unless and until the assessee provides the evidence justifying the facts and figures provided to the merchant banker with their justification it would not be possible for the authorities below either to consider the merits of the DCF method adopte....
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....20.80% Calculation of Risk Premium Expected return from market (BSE 500 return since inception) 15.80% Risk free rate (Zero Coupon Yield as on 30.09.13) 9.04% Beta (to be on conservative side) 1 Risk Premium 6.75% Perpetuity Growth rate 2% 11. In so far as the figures relating to cash flow to equity, risk free return, expected return from market and Beta taken by the assessee, the observations of the Ld. AO are as follows: "Cash flow to Equity : The cash flow to the firm is the cash left over after taxes and after all reinvestment needs have been met, but before interest and principle payments on debt. To get to cash flow to the firm, you start with operating earnings, instead of net income, and subtract out taxes paid and reinvestment. The assessee has taken free cash flow to equity value for the year 2013-14 is in negative at 0.98. Same was the case is earlier years. The data available for the future years also reflects negative figures of cash flows. This clearly indicates that the discount rate calculated by the company is nowhere close to the reality. Risk Free Return: The Risk Free Return (Zero Coupon Yield as on 30.09.13) @ 9.04% taken by a company w....
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....ssumptions regarding the company's revenue growth rate, net operating profit margin, income tax rate, fixed investment requirement, and incremental working capital requirement. The revenue growth rate as well as the net profit margin of your Company, since inception, is negative and you have been carrying forward business losses. Even in the subsequent years, for which data is available, you have incurred losses (loss ofRs. 53083/- (AY 2014-15) and Rs. 1,00,384/- (AY 2015-16). However, as per the computation of valuation, the free cash flow to equity figures are -0.98 (2013-14), 32.61 (2014-15), 34.89 (2015-16), 37.00 (2016-17), 39.22 (2017-18) which are unrealistic. You are also requested to submit actual free cash flow (FCF) for the AY 2014-15, 2015-16 & 2016-17 till date) iii) Similarly with regard to calculation of Cost of Capital, it is requested to clarify whether weighted average has been taken or otherwise. Further use of BSE 500 return data in your case is uncalled for. All your investments are in the associates company only and you must have the data of their year on year growth rate to calculate the actual return in your case. Also BSE 500 return data since inception ....
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....at such a report cannot be disturbed by the Ld. AO. At no point of time tried to explain where did the Ld. AO went wrong in his comments on the figures reflected in the above valuation report of the expert. 15. In these circumstances, we are unable to accept the contentions of the assessee that in view of the provisions under section 56(2)(viib) of the Act read with Rule 11UA(2) of the Rules the Ld. AO had no jurisdiction to adopt a different method than the one adopted by the assessee, and if for any reason the AO has any doubt recording such valuation report and does not agree with the same is bound to make a reference to the Income tax Department Valuation Officer to determine the fair market value of such capital asset. This is so because unless and until the assessee produces the evidences to substantiate the basis of projections in cash flow and provides reasonable connectivity between those projections in cash flow with the reality evidences by the material, it is not possible even for the Departmental Valuation Officer to conduct any exercise of verification of the acceptability of the value determine by the merchant banker. This is more particularly in view of the long di....