TaxTMI 
TaxTMI 
2019 (6) TMI 925
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....w and on facts in failing to appreciate the fact that the queries raised by the assessing officer in respect of the valuation report were duly directed to the Chartered Accountant who in turn responded with complete clarifications. The appellant also furnished the report of another independent Chartered Accountant who valued the shares based on the observation of the AO by factoring interest costs on loans. Without taking cognizance of the second valuation report the AO/CIT(A) dismissed the valuation of an expert based on presumption, suppositions, generalities and assumptions. 4. That the AO/ CIT(A) has erred in law and on facts in stating that the projections in the valuation report are contrary to the existing state of affairs of the company. 5. The CIT(A) has erred in law in rejecting the valuation using DCF method of an expert and thereafter substituting his own valuation by adopting the net asset value of the shares whereas option of selecting method between NAV or DCF was with the appellant in accordance with rule 11UA(2) of Income Tax Rule, 1962. This is grossly illegal and the CIT(A) has exceeded his jurisdiction. 6. The CIT(A) has erred in law a....
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.... section 292B of the Income Tax Act, 1961. 10. The Appellant Company craves leave to add/alter/amend the grounds of Appeal at the time of hearing." 3. The assessee e-filed its return of income on 30.09.2014 for Assessment Year 2014-15 declaring loss of Rs. 4,09,87,384/-. The case was selected for scrutiny. During the year under consideration, the assessee declared receipt of share premium amounting to Rs. 40.60 crores. The assessee had issued 14 lakh shares of face value of Rs. 10 per share to its existing share holders, namely M/s Prime Land Real Estate (P) Ltd. & M/s Eureka Ventures Foundation, during the year at a premium of Rs. 290/- per share. During the course of assessment proceedings, the assessee was asked to justify the share premium charged on issue of shares issued during the year and to furnish a valuation certificate in support thereof. The assessee furnished replies vide letter dated 08.07.2016 and 30.11.2016 and enclosed copy of share valuation certificate dated 17.06.2013 issued by M/s Uberoi Sood Kapoor, CAs. The valuation was carried out based on Discounted Cash Flow method. The value stated in the aforesaid certificate that the share valuation of the....
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....er u/s 143(3) was passed on 31/12/2016 by the Assessing Officer, assessing the income at Rs. 16,20,12,620/- after addition of Rs. 20,30,00,000/- u/s 56(2)(viib) of the Act. 4. Being aggrieved by the assessment order, the assessee filed appeal before the CIT(A). The CIT(A) dismissed the appeal of the assessee. 5. The Ld. AR submitted that the basis of taking the projected figures were clarified to the Assessing Officer during the course of assessment proceedings through a letter of valuer dated 16.12.2016. The Assessing Officer did not consider such letter. The clarification letter was again furnished before the CIT (A) vide submissions dated 07.07.2017. Valuer accountant had not merely prepared the report based on the projected figures provided by the client, but also mentioned that he had carried out the analysis of the information. For that he had relied on the published and the secondary data. Published and secondary data was referred in the clarification letter dated 16/12/2016. The scope of work and the limitations mentioned in the report given by the valuer is the reporting requirements and for the compliance with the professional standards of the valuer. In the reporti....
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....o be reduced from the value of the enterprise to arrive at the value of equity shareholders. In the valuation report dated 17.06.2013, the valuer had determined the value of shares by taking into consideration free cash flows to the firm and then reduced the value of debt to arrive at the value of equity. Further it is very logical that if the entire loans have been reduced at Zero period, how the interest would arise in future. The Ld. AR submitted that the Revenue alleged that projected figures are not verifiable. During the course of assessment proceedings the assessee had provided the clarifications dated 16.12.2016 regarding from where the projected figures were taken. Projected cash flows were based on the various reports/data gathered by the analyst and management and analysed and verified by the valuer as clarified in the statement referred above. The Assessing Officer did not consider such clarification statement while completing the assessment. 6. The Ld. AR further submitted that free cash flows to the firm were calculated by the valuer for the calculation of NPV. Free cash flows to the firm are calculated after deducting the operating expenses but before the inter....
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....on of management and valuer the resulted rate of 15% is the correct representative of the company's discounting factor. Rate has been simply derived by applying the formulas. Further the cash flows generated would not received by the appellant only at the last day of the year. It would have been received over the period. For determination of correct NPV, valuers has taken the scientific and approved method i.e., average of the days in a year and arrive at the dates at which the rate was applied. The CIT(A) has taken the last day of the year for applying the discount rate to calculate the NPV. Loan reduced at the Zero period is only for the purpose of calculating the equity value as already discussed above and it did not mean that the loans have actually been paid off. This valuation report has been prepared by using Free Cash Flows to Equity, in which periodical interest and loan repayments have been considered and was obtained during the assessment proceedings to satisfy the Assessing Officer. Repayment of loans has been taken as per the repayment schedule provided by the management. The loan repayment chart of the management consists of the repayment of (a) Bank loan; (b) Red....
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....as appellate proceedings. If the AO or the CIT(A) had ever asked to furnished the data, the assessee definitely would provide the clarification in this regard. No further query by the CIT(A) led to the assumption that he understood the basis and did not need any further detail. Further, various other factors and data have also been considered by the valuer for determining the value of share, but it is not possible for the valuer to mention or to describe each and every report or data he analysed. Valuation is not mechanical process, which everyone can use. It requires so much of professional judgment. Even the valuation of different valuers can differ because of the estimations and the professional judgment involved. In Para 9.1.1 of the order referred by the CIT(A) that "if the valuation is not based on relevant material, the adjudicating authority can interfere with the same." while referring the Supreme Court judgment. In the present case, the material used for the purpose of calculation were never examined by the CIT(A). Then how the CIT (A) could reach at the conclusion that the valuation suffers from defects. Adjudicating authority can interfere with the valuations when....
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.... 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 Ld. AR further submitted that the prescribed method under clause (i) is Rule 11UA(2) of the Income Tax Rules. Sub rule (2) of rule 11UA specifically provides the method for determining the fair market value of shares. The assessee had adopted the option (b) of the rule 11UA(2) of the Income Tax Rules, which provides as under: "(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." The assessee company had engaged an accountant (Chartered Accountant) who determined the value of equity share as per the DCF method prescribed under the rule for the purpose of making the right issue. During the course of proceedings before the lower authorities, both the Assessing Officer as well as CIT(A) had found faults in the valuation report made by an expert and made his own valuation. The Assessing Officer and the CIT(A) has failed to appreciate that a....