TaxTMI 
TaxTMI 
2019 (6) TMI 1367
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....n respect of share premium received on issue of equity shares during the year on wholly 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 li....
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....ion film, video films, magazine tapes and video cassettes and documentary films etc., production and distribution of contents for TV and Internet and other activities thereto. 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....
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....g that projections were mere paper plans. He also observed that figures in the valuation report have been cooked up without providing any reliable basis as to how the assumptions took place. Further, he observed that under DCF method, it is always 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 bus....
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....5 of Finance Minister's Budget 2012-13 Speech clarifying scope of provisions of section 56(2)(viib). The finance minister clarified in his speech above provisions were introduced as a series of measures to deter the generation and use of unaccounted money by 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 a....
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....(2) and the interpretation of this sub-section must fall in line with the advancement of that object and purpose. We must, therefore, accept as the underlying assumption of subsection (2) that there is understatement of consideration in respect of the transfer and sub-section (2) applies 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,....
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....ules and submitted that it is important to refer such provisions in order grasp the real intention of such provisions and scope and power of assessing authorities and drew our attention to the relevant provisions. 10. The ld. Counsel submitted that sub clause (ii) of explanation to section 56(2)(viib) is 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....
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....ted cash flow method, which was appropriately done by the assessee and as such AO had not discretion, option or mandate 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. 13. The Learned Counsel 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 ....
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....problem which can be appropriately left to the consideration of experts in the field of accountancy." ii. Rameshwaram Strong Glass Pvt Ltd v. ITO [2018-TIOL- 1358-ITAT-Jaipur] iii. G.L. Sultania and Anr. Vs. SEBI (AIR 2007 SC 2172) "If the valuer adopts the method of valuation prescribed, or in the absence of any prescribed method, adopts any recognized method of valuation, 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 Indus....
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....hat the assessee has failed to submit and substantiate the basis for projections are erroneous. The counsel in response submitted that the said allegation is factually incorrect since the assessee has furnished the detailed basis of projections before ld AO vide its submission dated 22.12.2017 and again before ld CIT (A) vide its submission dated 04.06.2018. The detailed working included the year wise and movie wise projected revenue, 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'....
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....ng the costs. He further pointed out the reasons why assessee could not achieve the projected revenues. The reason explained was that first big movie 'Mirzya' flopped on box office and consequently the assessee's relation with renowned director also soured and agreement got terminated for the other two major movies ' Fannney Khan', 'Guitar Guru' which resulted in substantial losses. In addition another movie 'Kaalakaandi' got adversely 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 invest....
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....ing whether the expenditure was wholly and exclusively laid out for the purpose of business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the Revenue." 21. On the other hand, Ld. DR submitted that the assessee has not provided the basis and parameters of valuation while applying DCF method of valuation and has not produced any evidence to substantiate the basis of projections. 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....
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....not a criteria to reject valuation as held by numerous Court Rulings].Moreso, when reasons for deviation of actual performance from projected revenues have been submitted in detail before both AO and CIT (A) none of them have controverted or even discussed the same in their orders. 2. Procedural non-compliance and best judgement order. ITAT order (para 13) notes that assessee (Agro Portfolio) did not respond to multiple notices issued by the Assessing 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 cursor....
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....essee Company from the investors at Nil. What has been sought to be taxed is mainly the share premium issued on equity shares which according to the AO far exceeded the FMV of the shares. Though facts have been discussed in detail in the foregoing paragraphs, however in the succinct manner, the relevant facts and background are reiterated in order to appreciate the controversy and the issue for adjudication. The assessee company was incorporated on 19th September, 2013, i.e., in the 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 f....
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....estment was to be made by these investors in various phases and transactions and it was only after they have gone by the projection and satisfied with the potentials and credentials of future growth, they were willing to make such huge investment in the 'start-up company' like assessee. Thus, neither the identity nor the creditworthiness of the investors nor the genuineness of the transaction can be doubted and in fact the same stands fully established to which Assessing Officer has also not raised any doubt or disputed this fact. Thus, under 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 deemin....
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.... reproduced hereunder: "Income from other sources. 56. (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head "Income from other sources", if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. (2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head "Income from other sources", namely :- (i)....... (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 ....
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....unsel from the facts and material placed on record had pointed out that the basis of projection adopted by the valuer was based on very scientific analysis and method, like number of movies to be released in the upcoming years and such movies were further segregated into big, medium, small and micro films with reasonable number of movies in hand, like one big film, two medium films and one or two small or micro film a year. Further, the estimate of projected revenue was also kept on a conservative side keeping in mind of the following: - * Engagement of successful directors like Rakesh Om Prakash Mehra who has given block buster films like 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 act....
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....ighted various reasons as to why assessee could not achieve the projected revenue from various documentary evidences. None of these averments and the and the manner in which the valuation of the shares has been adopted in the valuation report has been disputed by the Assessing Officer or by the ld. CIT(A) or any material facts have been brought on record to show that either the methodology or the contents of the report are not correct. 32. What is seen here is that, both the authorities have questioned the assessee's commercial wisdom for making the investment of funds raised in 0% compulsorily convertible debentures of group companies. They are trying to suggest that assessee should have made investment 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 a....
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.... various factors and projections made by the management and the Valuer, like growth of the company, economic/market conditions, business conditions, expected demand and supply, cost of capital and host of other factors. These factors are considered based on some reasonable approach and they cannot be evaluated purely based on arithmetical precision as value is always worked out based on approximation and catena of underline facts and assumptions. Nevertheless, at the time when valuation is made, it is based on reflections of the potential value of business at that particular time and also keeping in mind underline factors that may change over the period of time and thus, the value which is relevant 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....