TaxTMI 
TaxTMI 
2018 (9) TMI 403
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.... shareholder. As such the addition maintained for Rs. 52,13,600/- against share premium income was without considering our CA certificates based on projection as per project report submitted with bank to take loans and advances. 2. That the CIT (Appeals) has not even considered our written submissions submitted before him at length. He has not at all considered the jurisdiction point even. There was no notice u/s 143(2) in time by competent authority having correct jurisdiction and as such the notice issued u/s 143(2) by correct authority having jurisdiction over the assessee was time barred. 3. That as the project delayed by more than one year due to non-receipt of electricity connection the factory started in FY 15-16 instead of 14-15 as per project report. However as desired by CIT (Appeals), Ajmer we have submitted the share valuation on the basis of actual figure Of FY 15-16 even and according to that also the value ascertained Rs. 65 as admitted by him even in his order but due to non-production in FY 13-14 and 14-15, he was not satisfied with valuation report given by CA as per Rules 11UA(2)(b). That the copy of submissions in report of share valuation on t....
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....oncern. However, such requirements were not available in the present case. Therefore, these shares do not have intrinsic value to give price to premium in the business. In his view, the premium of Rs. 60 per share did not appear to be justifiable. He also referred to the Section of 56(2)(viib) of the Income Tax Act, 1961 (hereinafter referred as the "Act"). The assessee filed a detailed reply in response on 30.11.2015, wherein he mainly contended that receipt of share premium was a capital receipt and was a commercial decision which does not require justification under the law. It was prerogative of the Board of Directors of the company to decide the premium amount and it is the wisdom of the shareholder whether they want to subscribe to share at a premium amount or not. Such receipts are not having the character of an income being capital assets. The AO observed that the assessee raised loans from the above associate concerns and has converted them to shares application/premium money. The appellant vide letter dated 15.12.2015 provided the calculation of the book value of each share, which comes to Rs. 108/-. However, the assessee issued the shares at Rs. 70 per share i.e Rs. Face....
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....aluation statement wherein the valuation of shares was shown at Rs. 65.31 per share. I have discussed the issue with the A\R and Smt. Dhanwanti Gupta, CA. It has been explained by them that the figures adopted for computing the fair market value of share at Rs. 119.93 and Rs. 95.90 are purely on estimate basis. Therefore, they were asked to provide the actual figures for the FY 2013-14,2014-15 and 2015-16 which are available with the appellant. When on 29.08.2016, the valuation statement prepared on the basis of actual figures for the F.Y 2013-14,2014-15and 2015-16 was furnished, it was noticed that the Discounted Cash Flow during the F.Y 2013-14, 2014-15 and 2015-16 was Nil, Rs- 46.4 lac and Rs.-2.25 lac for the F.Y 2013-14,2014-15 and 2015-16, whereas in the original valuation statement, the Discounted cash flow these financial years was shown at Rs. 27.13 lac, Rs. 30.41 lac and Rs. 37.61lacs. In the revised valuation statement filed on 25.08.2016, the discounted cash flow for these financial year was shown at Rs. 27.13lacs, Rs. 10.65 lac and Rs. 21.42 lac. Thus, it is clear that the valuation statement furnished by the appellant showing Discounted Cash flow is based absolutely o....
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....r the purpose of S. 56(2)(viib) of the Act shall be the value as determined in accordance with such method as may be prescribed. The prescribed methods of valuations are given under Rule 11 UA of Income Tax Rules, 1962 (herein after referred as "Rules"). The relevant extract are as under: (2) Notwithstanding anything contained in sub-clause (b) of clause (c) of sub-rule (1), the fair market value of unquoted equity shares for the purposes of sub-clause (i) of clause (a) of Explanation to clause (viib) of sub-section (2) of section 56 shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner under clause (a) or clause (b), at the option of the assessee, namely:- (a) .......... 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 Hence the law has specifically conferred an option upon the assessee that for the purpose of S. 56(2)(viib) of the Act an assessee can adopt any of the methods mentioned u/r 11UA(2) of the Rules. From Rule 11UA, it is clear that either the Break Up Value Method (Cl....
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....y introduction of the project. The concept of startup has been recognize even by the Income tax act where under, certain deductions u/s 80-IAC of the Act have been provided which provides for the period 7 years as gestation period. 3.2 Further, there are several factors which effect the profitability of a project/industries which, broadly may be of 2 types i.e. general factors and the specific factors. Where the general factors are like economic and political environment of the country, however, demand supply of the product and the government policies regarding that particular industry, are such specific factor. 3.3 Therefore, the very requirement made by the ld. CIT(A) during the course of the appellate proceedings directing the assessee to give the valuation report based on the actual figures and then to compare such valuation report with these earlier reports based on the DCF Method (As approved by Rule 11UA(2)(b) of the Rules), is absolutely contrary to the provisions of the law and misconception of law. Otherwise also, the fact is not denied that the assessee couldn't commence its production for want of power availability in the next two years i.e up to AY 20....
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....erchant banker or an accountant by using DCF Method, who have expertise in the valuation of shares and securities. The Fair Market Value has to be determined by an Accountant and that too as per DCF Method alone. Once the facts are admitted that there was a report by an accountant, which was as per the Discounted Cash Flow Method, the FMV determined in such a manner is binding upon the revenue as if directed by the law. There is no denial by the lower authorities from these facts and the fulfillment of the conditions as prescribed. 5. Comparison with Actual Unwarranted: The only objection of the ld. CIT(A), keeping in mind the actual figures, was that the valuation report (though undisputedly based upon DCF Method), "is based absolutely on the imaginary or on incorrect figures" and "is absolutely unreliable and without any basis" . Such allegations are completely without any basis and merely on surmises and conjecture, in the light of the following submissions: 5.1 Firstly, its comparison of the projections/ estimated figures used in report (derived) with the actual figures, was contrary to the very concept of valuation under the DCF. 5.2 Secondly, the ld....
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....of the unquoted equity shares specifically for the purpose of S. 56(2)(viib) r/w Explanation (a)(i) with which, the present appeal relates to, is a special law and therefore, shall prevail over the general law contained u/r 11UA(1) of the Rules. It is a trite law that special law will always prevail over the general law. Kindly refer Reliance - (1) AIR 1978 (SC) 851 - Mohindersingh Gill vs. Chief Election Comm. (2) (1981) 131 ITR 429 (Ker) Ramraj (M.S. vs. Comm of Agr. IT)); (3) (1980) 126 ITR 270 (Mad) - Asa John Devinathan vs. Addl. CIT and (4) (1988) 174 ITR 714 (Cal) - Equitable Investment Co. (P) Ltd.vs. ITO. 7. Supporting Case Laws: 7.1 On this aspect kindly refer a direct decision of Hon'ble ITAT Jaipur in the case of ITO vs. Universal Polysack (India) Pvt. Ltd. ITA No. 609/JP/2017 (DPB 38-55). wherein, in para 16 page 14 it is held that: "Therefore, we are unable to accede to the contention so raised by the ld. DT that Sub-Rule 1 of Rule 11UA which provides for determination of fair market value of unquoted equity shares as per book value as per formula so specified is applicable in the instant case. Rather, sub- Rule 2 of Rule 11UA is mo....
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.... in the subjected year itself or in the present case and the universal Polysack (supra), no production was commenced and that is the reason the AO considered the valuation based on the projections as imaginary so also did the ld. CIT (A) and i.e. perhaps the reason the lower authorities proceeded on a misconception, while ignoring the very purpose of introduction of Rule 11UA(2)(b) of the Rules. 8. Projections now Reconciled with the Actuals: As submitted earlier, the valuer had merely made projections which may or may not reconcile with the actuals. But the projections have to be made on some basis. In this case, the ld. CA did her best to estimate the FMV at Rs. 95.90 per Share based on DCF Method which fact, now is evident if the actual figures for the year ending on 31.03.2017 (AY 2017-18) are seen and compared with the projections. The assessee prepared Valuation report as per DCF Method and considered projected figures up to 31.03.2019. The Audited Balance Sheet of the assessee as on 31.03.2017 depicts the following picture. Particulars Amount (Rs.) Fixed Assets 2,21,20,988 Current Assets 85,10,652 Loans and Advances(Assets) 17,05,531 Long ....
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....tual figures. The DCF Method or the projections made cannot be rejected straight away just because there were some difference between actual and projected. The reconciliation or equilibrium between the actual and projected takes some time i.e around 5 to 8 Years depending upon economic conditions. 11. CBDT's Letter strongly supports Assessee's case: Very pertinently, the CBDT has recently come up with a letter (Instruction) (File No. 173/14/2018-ITA.I) dated 06.02.2018 (DPB-84) wherein, the CBDT has taken note that in the cases of the startup where the assessee has applied for DCF Method by opting u/r 11UA(2)(b) r/w sec 56(2)(viib), "....in the assessment, such reports are not being accepted and rejected/modified by the Assessing Officer by treating them as based upon abnormal valuation resulting in additions being made u/s 56(2)(viib) of the Act in cases of "Start Up" companies" It appears that as per CBDT this is not in accordance with the correct interpretation of the law, therefore, the CBDT has indirectly hinted the field officers of its contrary view, by observing as under: "3. In view of the above, it has been decided that in case of 'start up' com....
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....re different. In this case, there was only a receipt of the consideration but there was no allotment in this year (which was allotted in AY 2014-15 only). There may be situation where the consideration is received in one year and the allotement is made in fifth year then how the AO can apply the provisions in the year of receipt. For these reasons the said provision is evidently not found workable on the peculiar facts of the case. In the case of CIT vs. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC), it was held that unless the machinery section is found workable, the substantive provision of the law even can't be applied. (Please see AO Pg. to top). Hence the impugned additions deserves to be deleted in full''. 4.4 On the other hand the ld. DR relied upon the orders of the authorities below. 4.5 We have heard the rival contentions and perused the materials available on record including the written submissions and case laws relied upon during the course of hearing. From the order of the ld. CIT(A) it emerges that the ld.AR and Smt. Dhanwanti Gupta, CA appeared and the matter was discussed with them and they were asked to furnish the actual figures in respect of F.Y. 2....
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.... a company in which the public are substantially interested, shall have the meaning assigned to it in the Explanation to clause (vii); (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: Provided that this clause shall not apply where the consideration for issue of shares is received- (i) by a venture capital undertaking from a venture capital company or a venture capital fund; or (ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf. 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 prescribed9; 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, in....
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.... 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.]" However, there is no dispute between the parties that Rule 11UA(1) is not applicable on the facts and circumstances of the present case which is a provision of general nature whereas Rule 11UA(2) is a specific provision providing for the valuation of the unquoted equity shares. After going through the relevant Section and the Rules, in our opinion, the matter of valuation of unquoted equity shares, has been completely left to the discretion of the assessee. It is his option whether to choose NAV Method (Book Value) under clause (a) or to choose DCF Method under clause (b) and the AO cannot adopt a method of his own choice. The authorities below cannot compel the assessee to....
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....ce. When the law has specifically provided a method of valuation and the assessee exercised an option by choosing a particular method (DCF here), changing the method or adopting a different method would be beyond the powers of the revenue authorities. Permitting the revenue to do so will render the clause (b) of Rule. 11UA(2) as nugatory and purposeless. Thus, to this extent the action of the authorities below is not justified and it is held that the assessee has got all the right to choose a method which, cannot be changed by the AO. Further, though the AO can scrutinize the valuation report only if some arithmetical mistakes are found, he may make necessary adjustments. But if he finds the working of the C.A. or the assumptions made as erroneous or contradictory, he may suggest the necessary modification and alterations therein provided the same are based on sound reasoning and rational basis and for this purpose the AO may call for independent expert valuer's report or may also invite comment on the report furnished by the assessee's valuer as the AO is not an expert. It is not open for the AO to challenge or change the method of valuation, once opted by the assessee and to modi....
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....CBDT Instruction (File No. 173/14/2018-ITA.I) on dated 06.02.2018 (copy placed at paper book-84) given in the case of startup companies useful in the context of determination of fair market value of the unquoted equity shares u/s 56(2)(viib) of the Act r/w Rule 11 UA(2), which states that tough startup companies invariably submits valuation report in accordance with Rule 11UA(2)(b) but in the assessments such reports are not being accepted and rejected/modified by the AOs considering the same as based on abnormal valuations which results in additions. The CBDT has accordingly directed not to take coercive measures in such cases for recovery of demand resulting in additions and the CIT(A) have been directed to dispose such appeals expeditiously. 4.5.3 Coming to the basis of the projections, it is submitted that the plant capacity was taken as a basis to make projections of the production. It is further submitted that at the assessee is dealing in toughened glass which is related to real estate (construction) industry and at the relevant point of time, the real estate sector was in boom and there existed favorable conditions in the industry. The Directors of the assessee company w....
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....on were made. Therefore, there was no justification yet to make a comparison of the estimations with the actuals. Such a comparison is otherwise principally against the contemplation of Rule 11 UA(2)(b) which required the C.A. to prepare a report on DCF Method only i.e. based on mere projections and not actuals as against the NAV Method prescribed u/r 11UA(2)(a). For these reason we find no justifications behind the objection of the ld. CIT(A) that the valuation done by the C.A. was based absolutely imaginary and incorrect figures or without any basis. The C.A. has considered the plant capacity, industry and market conditions as prevailed in the state, the sanctioning of the loan by the bank are the factors which formed a reasonable basis of projections. Moreover it is not denied that the valuation reports were prepared by the C.A. as per the guidelines given by the Institute of Chartered Accountants of India and the AO has not found any fault. We thus, find no rational or sound basis in the order of the authorities below to reject the valuation report submitted by the assessee based on DCF Method. 4.5.4 In any case, it is also noticed that even as per the valuation got done by ....
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....tion received for such shares exceeds the fair market value of the shares.'' 15. The explanation to section 56(2)(viib) provides that the fair market value of such shares means the value determined in accordance with the method as may be prescribed. The method of valuation has been prescribed in rule 11UA which reads as under: xxx....... 16 As it is clear from the above, sub-rule 2 of rule 11UA talks about method of valuation of unquoted equity shares of the assessee company specifically for the purposes of section 56(2)(viib) of the act and the same overrides the general provisions of sub-rule 1 of rule 11UA. In the instant case, the context in which the valuation of the shares have to be determined is in the context of the section 56(2)(viib) of the Act as invoked by the AO and therefore, both the assessee and the revenue are equally guided by the said provisions and there is no discretion with either of the parties in terms of non-applicability of Sub-rule 2 of Rule 11UA. Therefore, we are unable to accede to the contention so raised by the Id DR4 that sub-rule 1 of rule 11UA which provides for determination of fair market value4 of unquoted equity sha....
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.... purely hypothetical and not based on sound financial understanding and market dynamics of the industry in which the assessee operates. 18...... 19. In light of above discussions and in the entirety of facts and circumstances of the case, the order of the Id CIT(A) is confirmed and the ground taken by the Revenue is dismissed." 4.5.6 We also find that in the case of Vodafone M-Pesa Ltd. vs. PCIT (2018) 92 Taxmann 73 (Bomabay) (DPB 79-83), the Hon'ble Mumbai High Court in para 9 has observed that "9. ....Therefore, the Assessing Officer is undoubtedly entitled to scrutinise the valuation report and determine a fresh valuation either by himself or by calling for a final 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.-------- " The AO though observed that the assessee raised loans from the above associate concerns and has converted them into shares application/premium money. However, it has not shown how it will affect the correctness of the valuation claimed. It is not the case of the AO....