TaxTMI 
TaxTMI 
2019 (3) TMI 158
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....ded u/s 143(3) of the Income Tax Act, 1961 (in short 'the Act') vide order dated 28.12.2017; wherein the assessee's income was determined at Rs. 18,68,31,128/- in view of the following additions / disallowances: (i) Share premium taxed u/s 56(2)(viib) - Rs. 19,74,00,000/- (ii) Disallowance of bad debts - Rs. 40,70,166/- 2.2 Aggrieved by the order of assessment dated 28.12.2017 for Assessment Year 2015-16, the assessee preferred an appeal before the CIT(A) - 7, Bangalore, which was dismissed vide the impugned order dated 17.09.2018. 3. The assessee, being aggrieved by the order of CIT(A)-7, Bangalore dated 17.09.2018 for Assessment Year 2015-16, has preferred this appeal before the Tribunal, wherein it has raised the following grounds: 1. That in any case and in view of the matter, the action of the Learned ITO in framing the impugned Assessment Order is bad in law and is opposed to the facts and circumstances of the case and thus liable to be set aside. 2. That the Learned CIT(A) and the Learned ITO erred by adding to the income, an amount of Rs. 19,74,00,000/- u/s 56(2) (viib) of the Act and also disallowing the bad debts claimed of Rs. 46....
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.... 10. That the Learned CIT(A) and the Learned ITO failed to appreciate that the Appellant has the option to choose the appropriate method for the valuation, and the Appellant by exercising its option has chosen the DCF method. The Act of Learned ITO of choosing the NAV method over DCF method for valuation is ultra vires its jurisdiction. The provisions of the Act provide the Appellant to choose the method and not the Revenue authorities to decide the appropriate method. 11. That the Learned CIT(A) and the Learned ITO lost sight of the fact that the FMV to be considered for the purpose of 56(2) (viib) of the Act is higher of : a_ as may be determined in accordance with such method as may be prescribed; or b. 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, knowhow, patents, copyrights, trademarks, licenses, franchises, or any other business or commercial rights of similar nature. As against the above provision, the Learned ITO adopted a value of Rs. 84.20/-, being the lower of the value determined under....
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....at in the course of assessment proceedings, the Assessing Officer (AO) observed that the assessee had allotted 5,00,000 shares of the face value of Rs. 100/- to its parent company M/s. TUV Rheinland (India) Pvt. Ltd., at a premium of Rs. 479/- per share. Thereby, the total amount of consideration received was Rs. 28,95,00,000/-; out of which an amount of Rs. 23,95,00,000/- was towards share premium. On being queried in this regard, it was submitted by the assessee that the share premium amount was worked out as per the Discounted Cash Flow Method (DCF); based on the Valuation Report of an independent Chartered Accountant. The AO examined the Valuation Report and found that the said Valuation Report had relied only on values certified by the Management of the assessee company, which had been prepared to justify the high premium and therefore rejected the valuation given in the said valuation report. Having so held, the AO computed the value of the shares under NAV Method as per the provisions of Rule 114A(2)(a) of the Income Tax Rules, 1962 (in short 'the Rules') and determined the fair market value (FMV) of the shares at Rs. 84.20 per share as against Rs. 479/- per share determi....
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....ow. (iii) All the shares are issued to the parent company as it is the sole shareholder and therefore the price at which the shares are issued is not relevant. (iv) No material has been brought on record to show that the FMV adopted by the DCF Method adopted is based on projections given by the Management of the assessee company; that cannot be a valid ground for disregarding on experts' report. DCF Method is based on expected future cash flows which no one can predict accurately. (v) The Revenue authorities do not have the power to evaluate the Method of valuation once the option is exercised by the assessee and Revenue can only verify the arithmetical accuracy and not go beyond that. (vi) The assessee has the option to choose the method for valuation and the assessee has exercised the option of choosing DCF Method, the AO cannot choose the net asset valuation method (NAV) over the DCF Method. (vii) The FMV to be considered is to be the higher of the value determined under any of the methods; whereas the AO has adopted the lower of the value determined under any of the methods. (viii) Section 56 of the Act intends to tax only i....
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....upra) provides that where a closely held company issues its shares at a price which is more than its FMV, then the amount in excess of the FMV of the shares will be charged to tax in the hands of the recipient company as income from other sources. This amendment was made, keeping in view of the practice of closely held companies bringing in undisclosed money of Promoters / Directors by issuing shares at high premium; which is normally over and above the book value of the shares of the company. Further, promoters are also issued shares at premium with the purpose of keeping share capital low, yet with a stronger capital base so that the breakup value and market value is high. This leads to the advantage of low cost of servicing share capital and also improved prospects to issue shares at a premium in future by way of initial issue of offering by promoters. When shares are issued at a premium, the number of shares and authorized share capital increase lesser in comparison to capital raised by way of issue of fresh shares to the public by way of IPOs, etc. While there are judicial decisions to the effect that share premium is a capital receipt, these pertain to the period prior to the....
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....that the Valuation Report for valuation of share premium has been taken on the basis of values certified by the Management of the assessee company; is not a valid ground for disregarding the Valuation Report. It was also contended that DCF Method is based on future expected cash flows which cannot be predicted accurately. 5.4.6.2 From an appraisal of the facts of the case on hand on record before us, it is seen that neither has the AO questioned the right of the assessee to select the Method of Valuation nor has the AO dismissed the choice of DCF Method as a Method of Valuation. The AO has examined the parameters adopted by the assessee for valuation by the DCF Method and has rendered a finding that the valuation is not realistic as the actual figures were a long long way away from the projections made. These facts are available from details filed by the assessee before the CIT(A) and find mention in the following table extracted from para 5.4 on page 15 of the impugned order of the CIT(A): Therefore, the contention of the assessee that the AO had disregarded the valuation made under the DCF Method is not correct. 5.4.6.3 The assessee's contention that the 'Valuation Re....
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.... 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 disclaimer appended by the merchant banker at page no. 16 & 17 of the paper book which clearly establishes that no independent enquiry is caused by merchant banker to verify the ....
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....he record before us, is that in the course of assessment proceedings, the AO observed that the assessee had debited an amount of Rs. 2,66,18,490/-; out of which, an amount of Rs. 46,70,166/- was outstanding from three of its franchisees, which was written off as bad debts. According to the AO's observations, the assessee had a fee sharing model with the franchisees whereby the fees received was deposited in the joint bank account of the assessee and franchisee and therefore the assessee could have recovered the same at any time, if it so desired. Further, the AO was also of the view that the assessee did not produce any evidence to show that efforts were made to recover the reimbursable expenditure incurred by it from the franchisees. In that factual view of the matter, the AO disallowed the assessee's claim for write off of bad debts amounting to Rs. 46,70,166/- in respect of its franchisees. 6.2.2 On appeal, the CIT(A) examined the nature of the expenses in the light of the assessee's claim that its case was covered by the decision of Hon'ble Supreme Court in TRF Ltd., 323 ITR 397 and upheld the disallowance by holding that the writing off of the dues of the franchisees can be....