TaxTMI 
TaxTMI 
2019 (6) TMI 1367
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....lly erroneous, illegal and untenable grounds: a. That Ld. CIT(A) has erred in law and on facts and circumstances of the case in upholding the aforesaid addition made by Ld. AO by treating the amount of share premium ought to be received by the assessee as NIL without affording any cogent reasons. b. That Ld. CIT(A) has erred in law and on facts and circumstances of the case in holding that value of entire share premium received of represents the income of the assessee. Rejection of valuation report 3. That Ld. CIT(A) has erred in law and on facts and circumstances of the case by upholding the aforesaid addition made by the Ld. AO by disregarding the valuation report submitted by assessee on completely whimsical and superficial grounds: a. That Ld. AO and subsequently Ld. CIT(A) have erred in law and on facts and circumstances of the case in taking a hindsight by comparing the projections made at the time of issuance of shares with the subsequent events and actual financial results despite the settled legal proposition that valuation cannot be judged in light of subsequent events or hindsight. b. That Ld. AO and subsequently Ld. CIT (A) have erred in not appreciati....
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....During the year the assessee was in the initial phase of setting-up of the above business, therefore, there was no business of film production. For assessment year 2015-16, the assessee filed return of income on 28.09.2015 declaring NIL income. The case was selected for scrutiny and order of assessment was passed u/s 143(3) of the Income-tax Act, 1961 ('the Act') vide order dated 31.12.2017 determining the income of the assessee at Rs. 90,95,46,200/-. The only addition / disallowance made by the assessing officer is the addition of entire share premium amounting to Rs. 90,95,46,201/- received during the year by the assesse u/s 56(2)(viib) of the Act r.w.r. 11UA of the Income-tax Rules, 1962 ('the Rules'). 4. The assessee has received share premium of Rs. 90,95,46,201/- from various subscribers/equity partners as stated before the authorities below:- Sl. No. Name of equity partner Date of Issue No. of Shares Premium (Rs.) per share Amount of premium (Rs.) 1. Shri Anand Mahindra 06.01.2015; 23.02.2015 4,15,385 1949* 80,95,85,365/- 2. Shri Rakesh Jhunjhunwala 24.03.2015 19,207 2602 4,99,80,793/- 3. Shri Radhakishan Damani 24.03.2015 19,207 2602 4,99,80,793/- ....
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....ays possible for the company to decide the proposed value of the share and then travelling back to tailor the figures with the reverse engineering process, to suit its convenience. 7. Before us, Ld. Counsel for the assessee Shri Pradeep Dinodia after narrating the entire facts and issues involved and giving the various chronology of events as to when the shares were issued, the number of shares issued and the amount of premium received from each equity partners, submitted that the entire share premium amounting to Rs. 90.95 Crores received by the assessee during the year in respect of issue of shares has been treated as income by the AO and CIT(A) u/s 56(2)(viib) of the Acton the reasons which are extraneous, arbitrary and unjustifiable. The Ld. Counsel further contended that it is the prerogative of assessee as to how much capital is to be raised based on its long term and short term funding requirements for the purpose of running its business. The capital has been raised by issuing certain number of shares at certain price, which is again within the domain of assessee to decide. The assessee in captioned case issued shares at premium based on the value arrived at by an independ....
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.... increasing the onus of proof on closely held companies for funds received from shareholders as well as taxing share premium in excess of fair market value. Continuing with the above argument the assessee's counsel stated that in order to find out the legislative intent or to ascertain the object or purpose behind the legislation, the speech made by the Minister or the mover of the Bill can be taken into consideration by quoting these judicial precedents: CIT v. Achaldas 217 ITR 799 (SC); Allied Motors (P.) Ltd. v. CIT [1997] 91 Taxman 205/224 ITR 677 (SC); Kerala SIDC v CIT 259 ITR 51 (SC); Soorjmull Nagarmull v CIT 190 ITR 418 (Cal HC); CIT v Vaidya 224 ITR 186 (SC); Loka Shikshana Trust v CIT 101 ITR 234 (SC). The counsel further highlighted the subsequent statement of Hon'ble Finance Minister made on 12.02.2019 wherein it was said that "no action of any kind was taken against honest companies that had brought genuine money at premium; we will protect honest people". Thus, emphasizing that said provisions were never meant to be applied on genuine transactions. * The ld counsel then referred CBDT circular no.10/2018 dated 31.12.2018 and CBDT Circular no.03/2019 dated 21.01.201....
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....pplies only where the actual consideration received by the assessee is not disclosed and the consideration declared in respect of the transfer is shown at a lesser figure than that actually received" ii) Subhodh Menon (ITA 676/Mum/2015); Hon'ble ITAT in this case has observed that a bonafide business transactions cannot be taxed u/s 56(2)(vii), especially when there is no whisper of money laundering by the Ld. AO and the consideration for shares have been received through banking channels. iii) Vaani Estates (P). Ltd v. ITO 172 ITD 629 "Para 7.2........In the absence of the provisions of Section 56(2)(viia) & Section 56(2)(viib) of the Act it was possible for any company either closely held or otherwise to introduce unaccounted money as investment in equity share of the company with inflated share premium through a deploy as investor. However in the case of the assessee company, the investors source of investment is genuine and not in dispute. The only other lone shareholder of the assessee company is the daughter of late Mr. B.G. Raghupathy and Mrs. Sasikala Raghupathy who is the new entrant in the business of her parents with no scope of possessing undisclosed cash. From....
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.... not applicable to the assessee's case and assessee was not required to satisfy the AO about the valuation done. In accordance with sub clause (i) of explanation, the assessee had an option to carry out a valuation and determine the FMV only on the discounted cash flow method (DCF), which was appropriately followed by the assessee. It was submitted that in any case the assessee has the option to issue shares at a price which is higher of clause (i) or clause (ii) of explanation reproduced above. The AR argued that law leaves no discretion, option or mandate with the AO under explanation (i) to section 56(2)(viib) to interfere or vary the option exercised by the assessee as well as the valuation done by the prescribed expert following the prescribed valuation methodology. 11. He further submitted that cardinal principle of interpretation of fiscal statute is that they should be construed strictly and so long as the provision is free from ambiguity, there should be no need to draw any analogy. In support of his submission he relied upon the judgments in the case of CIT v Kasturi237 ITR 24 (SC); Fed of APCCI v State of AP 247 ITR 36 (SC); CIT v Trivedi 183 ITR 420; Greatway v CIT 19....
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....nsel further submitted in support of his ground on rejection of valuation report that the main reason for rejecting the valuation report of the assessee as also observed by AO and subsequently by CIT(A) is that the projections of revenue as per the valuation do not match with the actual revenues of the assessee of subsequent years which is totally unwarranted and beyond the powers provided under statute. The provisions of section 56(2)(viib) read with Rule 11UA(2) nowhere give the right to assessing officer to examine the valuation report submitted by the assessee. The provisions only require the assessee to get the valuation of shares done by an expert (Chartered Accountant) using the prescribed methodology. In the present case, the assessee has obtained a valuation report from a Chartered Accountant which is based on DCF methodology. The very purpose of getting the valuation done by a Chartered Accountant is to ensure that the valuation is fair and reasonable. Such valuation is to be done by an expert of the subject matter only, which an assessing officer is not expected to be. The Rule nowhere permits the AO tinker with the valuation or methodology applied, assumptions used or t....
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....ion, his valuation cannot be assailed unless it is shown that the valuation was made on a fundamentally erroneous basis, or that a patent mistake had been committed, or the valuer adopted a demonstrably wrong approach or a fundamental error going to the root of the matter." iv. ITO v. SBS Properties &FinvestPvt. Ltd. (ITA 278 and 2164/Del/2008) v. Dr.RenukaDatla (Mrs.) v. Solvay Pharmaceuticals B.V. and Ors. [2004] 265 ITR 435 (SC) "If the valuer applied the standard methods of valuation, considered the matter from all appropriate angles without taking into account any irrelevant material or eschewing from consideration any relevant material, his valuation could not be challenged on the ground of its being vitiated by fundamental error." vi. Duncans Industries Ltd. v. State of U.P. and Ors. 2000 ECR 19 (SC) "The question of valuation is basically a question of fact and this court is normally reluctant to interfere with the finding on such a question of fact if it is based on relevant material on record." 16. The Ld. Counsel submitted that CIT(A) has made unwarranted and serious allegations on the assessee without pointing any fundamental fallacy in the projections ....
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....venue, operating expenses, balance sheet and profit & loss etc. of future 5 years till 2020 in accordance with the DCF valuation methodology. It was submitted that basis of projections were very scientific based on the number of movies to be released in upcoming years. Such movies were segregated in Big, Medium, Small and Micro Films, with reasonable number of movies each year viz., 1 Big Film, 2 Medium Film, and 1 or 2 small or micro film a year. Further, the estimates of projected revenue were also very reasonable and conservative keeping in view the engagement of highly successful directors like Rakesh Om Prakash Mehra (ROPM) who has given block bluster films like 'Bhaag Milkha Bhaag' which made a box office collection of INR 164 Crores, 'Rang De Basanti' which made a box office collection of INR 97 Crores etc and also super hit like 'Delhi-6'. The ld counsel took us through the comparative chart of Track records of above movies as also the projections for movies signed with ROPM to demonstrate that projections were quite reasonable and conservative. Engagement of veteran writers and music directors- Like Gulzar and Shankar Ehsaan Loy, interesting start cast, including the launc....
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....rsely affected due to actor Saif Ali Khan's earlier back to back flop films 'Rangoon' and 'Chef'. 20. The counsel then summarized his argument related to the above ground by stating that nature of film industry is such that nobody can predict the success or failure of the film and how much business a film would do. Sometimes big fat movies with super star casts flop, while budget movies with no budgets and not so popular casts do wonders. The nature of business of the assessee was stated to be highly risky, full of promises and pitfalls. The nature of the risk of film business is that of either feast or famine. Neither the AO nor CIT(A) were correct in questioning of commercial wisdom/ expediency wherein the assessee's commercial wisdom of making investment of funds raised in zero percent compulsorily convertible debentures (CCDs) of group companies was questioned by stating that that assessee should have investment in some instruments which would have yield the return/profits/revenue in accordance with the projections made at time of issue of shares. The counsel argued that the AO and consequently CIT (A) failed to appreciate that these are strategic investments which are made t....
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....In support of her arguments the DR strongly relied upon the judgement of Hon'ble Delhi ITAT in the case of Agro Portfolio Private Limited [(2018) 94 taxmann.com 112 (Delhi-Trib.)] wherein it was pointed out that the merchant banker who was appointed by the assessee to carry out the valuation, conducted no independent enquiry to verify the truth or otherwise the figures furnished by the assessee."The merchant bankers solely relied upon an assumed without independent verification the truthfulness accuracy and completeness of the information and the financial data provided by the company. A perusal of this long disclaimer clearly shows that the merchant banker did not do anything reflecting their expertise, except mere applying the formula to the data provided by the assessee." 22. The DR further highlighted the clause of the valuation report which contained a disclosure of limitation by the valuer wherein the valuer has stated that: "The Valuation report has been prepared on the basis of the Certified Projected Financials and information provided by the management of the company. Although we have reviewed such data for consistency and reasonableness, we have not....". She submitted....
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....sing Officer and therefore AO proceeded to apply NAV method under best judgement assessment. ITAT order notes (Para 14) that no evidence to justify projections was produced even before the CIT(A). Assessee only argued that a valuation report could not be disturbed by AO. Assessee has complied with each and every notice of the AO providing detailed explanation on each aspect. Detailed submission was filed with AO explaining the basis of projections with reference to track record of the crew, caste etc. Even reasons for deviation from actual projections were explained. All backups for projections were placed on record (both before AO and CIT(A)) While there has been no non-compliance by Assessee, it is the AO/ CIT(A) who have cursorily brushed aside the voluminous defence put forward by assessee. 3. Past Performance of Assessee From the limited description of the facts in ITAT Order it appears that the assessee already had history of poor performance or track record as AO has noted that it was carrying forward losses (para 5 of the ITAT Order). Therefore, on the facts of the case, this raises a question mark that how positive cash flow projections could have been taken. For asses....
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.... Assessment Year 2014-15, with the objective of carrying of business of production and distribution of feature film, tele films, video films, documentary films etc. During the year under consideration assessee company was in the initial phase of the setting up of the business, therefore, there was no business of film production as such. The assessee company to start its venture of its film production approached accredited ace investors of India to join in as equity partners, namely, Shri Rakesh Jhunjhunwala, Shri Anand Gopal Mahindra & Shri Radhakishan Damani. The funds were raised by way of issue of equity shares to the aforesaid equity partners and by raising premium on such shares over and above the face value of Rs. 10/- per share. The details and quantum of premium received from each of the equity partners are as under: S. No. Name of equity partner Date of Issue No. Of shares Premium (Rs.) per share Amount of premium (Rs.) 1. Shri Anand Mahindra 06.01.2015; 2302.2015 4,15,385 1949 80,95,85,365/- 2. Shri Rakesh Jhunjhunwala 24.03.2015 19,207 2602 4,99,80,793/- 3. Shri Radhakishan Damani 24.03.2015 19,207 2602 4,99,80,793/- Total 4,5....
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....the deeming provisions of section 68, the test of proving the nature and source of the credit received stood accepted. 28. Now what we are required to examine whether under these facts and circumstances Assessing Officer after invoking the deeming provision of Section 56(2)(vii) could have determined the fair market value of the premium on shares issued at Nil after rejecting the valuation report given by the Chartered Accountant on one of the prescribed methods under the rules adopted by the Valuer. Before us, learned counsel, Mr. Dinodia, first of all had harped upon the spirit and intention of the Legislature in introducing such a deeming provision and submitted that such a provision cannot be invoked on a normal business transaction of issuance of shares unless it has been demonstrated by the Revenue authorities that the entire motive for such issuance of shares on higher premium was for the tax abuse with the objective of tax evasion by laundering its own unaccounted money. His main contention was that, being a deeming fiction, it has to be strictly interpreted and there is no mandate to the Assessing Officer to arbitrarily reject the valuation done by the assessee on his ow....
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...... (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 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, whic....
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....e Bhaag Milkha Bhaag which made a box office collection of INR 164 Crores, and Rang De Basanti which made a box office collection of INR 97 Crores etc. In support Ld. Counsel had referred to Annexure-III, giving details of Track records v. Projections for movies signed with Rakesh Mehra. * Engagement of veteran writers and music directors-Like Gulzar and Shankar Ehsaan Roy. * Interesting start cast, including the launch of Anil Kapoor's son- Harshvardhan Kapoor and Shabana Azmi's niece Saiyami Kher; along with veteran actors like Om Puri, Anu Malik etc. * Keeping in view of engagement of renowned star cast and previous success of directors, the appellant has projected revenue for only Rs. 55 Crores for 1 Big Film in first year which went till Rs. 93.10 Crores in 5th Year. While for other movies, the projections ranged between 22 lacs to 50 Crores. Further the projected revenues were discounted in later years to account for fluctuations in economic cycles. * The number of movies and total revenue and average revenue for such movies are as projected under: Particulars Year 1 (2016) Year 2 (2017) Year 3 (2018) Year 4 (2019) Year 5 (2020) Number of movies 1 B....
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....nvestment in some instrument which could have yielded return/ profit in the revenue projection made at the time of issuance of shares, without understanding that strategic investments and risks are undertaken for appreciation of capital and larger returns and not simply dividend and interest. Any businessman or entrepreneur, visualise the business based on certain future projection and undertakes all kind of risks. It is the risk factor alone which gives a higher return to a businessman and the income tax department or revenue official cannot guide a businessman in which manner risk has to be undertaken. Such an approach of the revenue has been judicially frowned by the Hon'ble Apex Court on several occasions, for instance in the case of SA Builders, 288 ITR 1 (SC) and CIT vs. Panipat Woollen and General Mills Company Ltd., 103 ITR 66 (SC). The Courts have held that Income Tax Department cannot sit in the armchair of businessman to decide what is profitable and how the business should be carried out. Commercial expediency has to be seen from the point of view of businessman. Here in this case if the investment has made keeping assessee's own business objective of projection of ....
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....today may not be relevant after certain period of time. Precisely, these factors have been judicially appreciated in various judgments some of which have been relied upon by the ld. Counsel, for instance: - i) Securities & Exchange Board of India &Ors [2015 ABR 291 - (Bombay HC)] "48.6 Thirdly, it is a well settled position of law with regard to the valuation. that valuation is not an exact science and can never be done with arithmetic precision. The attempt on the part of SEBI to challenge the valuation which is bu its very nature based on projections by applying what is essentially a hindsight view that the performance did not match the projection is unknown to the law on valuations. Valuation being an exercise required to be conducted at a particular point of time has of necessity to be carried out on the basis of whatever information is available on the date of the valuation and a projection of future revenue that valuer may fairly make on the basis of such information." ii) Rameshwaram Strong Glass Pvt. Ltd. v. ITO [2018-TIOL- 1358-ITAT- Jaipur] "4.5.2. Before examining the fairness or reasonableness of valuation report submitted by the assessee we have to bear in ....