TaxTMI 
TaxTMI 
2020 (1) TMI 684
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....ssessee filed relevant information as called for. The assessee company is wholly owned subsidiary of Vodafone India Ltd. and engaged in operation of the mobile wallet business. During the year under consideration, the assessee company has shown loss from business of Rs. 69,90,70,978/- and income from other sources of Rs. 68,12,459/-. During the year under consideration, the assessee company has issued 10,12,14,568 shares of face value of Rs. 10/- each at a premium of Rs. 14.70 per share, accordingly received share premium of Rs. 148,78,54,000/-. During assessment proceedings, assessee was asked to furnish the working of premium and valuation report in respect of the intrinsic value of shares issued during the year under consideration. Assessee vide letter dated 24.08.2017 furnished valuation report from Ernst & Young Merchant Banking Services Pvt. Ltd. dated 11.03.2015. AO observed that in the valuation report, the valuer has relied on company specific information with respect to various projections up to March 2024 and this information was provided to the Valuer by the Management of the assessee. When the AO asked assessee to furnish the information provided by the assesse to the ....
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....e concern raised by your office on account of the below mentioned statement: "In particular, it may be noted that we have relied upon the information provided by the management. We have been given to understand that the information provided is correct and accurate....." With respect to the aforesaid statement, we wish to highlight that the above clAOse is a standard clAOse used in all valuation reports and there is nothing unusual or atypical about it. Further, it may be appreciated that a valuer is required to rely on the information provided by the Company in terms of its historical data and projections and is not required to verify the AOthenticity of the data, unlike an AOditor who is required to examine and verity the details in an AOdit process. For determining the fair value of shares as per the Discounting Cash Flow ('DGF7 method, a valuer, basis the future projections of earnings provided by a company, is required to compare it to general industry/economy trends and associated risks and accordingly, arrive at a discounting factor that needs to be applied to future net cash flows. The valuer is not required to verify the AOthenticity of the historical and future pro....
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.... which may not have been perused by us in any detail, if not considered relevant for our defined scope. - Industry and economy information - The following sources were utilized for analyzing the industry and the competitors: - Discussion with the Management - Publicly available information - Proprietary data bases subscribed to by EY In addition to the above, we have also obtained such other information and explanations from the Management as were considered relevant for the purpose of the valuation. - It may be mentioned that the Management has been provided opportunity to review factual information in our report as part of our standard practice to make sure that factual inaccuracies/omissions/etc, are avoided in our final report In addition, we wish to draw your attention to page 11 of the valuation report, which contains the 'Statement of Limiting Conditions wherein it has been clearly stated that as part of valuation, no AOdit function has been undertaken. For your ease of reference relevant clAOses are reproduced below: "Provision of valuation opinions and consideration of the issues described herein are areas of our regular valuation practice. The services....
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.... Limited ('VIL7. VMPL has been AOthorized by the Reserve Bank of India to operate payment system for issuance and operation of prepaid instruments in India under the Payments and Settlement Systems Act, 2007. VMPL offers mobile-based payment instruments like mobile wallets, linked cards, etc. to customers for enabling payments through mobile phones in a convenient and secure manner. VMPL has built a Mobile Wallet, which is a virtual wallet residing on a customer's mobile phone containing virtual money under the brand name of M-Pesa. By using M-Pesa, the customers can make c-commerce or mobile commerce transactions ie, buy products/ avail services at defined outlets registered with VMPL, deposit and withdraw cash, transfer money to mobile phone or bank account, etc., thereby, reducing the need to carry cash. Thus, the operating revenues of VMPL principally comprise of wallet revenues on account of transactions carried out by M-Pesa subscribers (ie. online bill payments, money transfers etc) and commission receivable as a business correspondent. The above services were started in India couple of years back and VMPL with couple of other operators are the pioneer who started ....
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.... of tax claimed as refund under the Income-tax Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto; (v) any amount representing provisions made 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 balance-sheet, 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." From the perusal of the above rule, it is apparent that the valuation can be computed by the aforementioned two method i.e., either by the methodology prescribed under clAOse (a) or Discounted Free Cash Flow ('DCF9 Method [clAOse (b)] at the option of assesse. Thus, DCF method is accepted method of computing the fair value of unquoted shares as per the prescribed Rules. In the instant case, the valuation report has been obtained by VMPL for the purpose of filing with the Res....
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.... by the Management and the Management has not provided them detail assumption and back-up information. 6. From the above, AO observed that the valuer has not undertaken any independent enquiry with respect to the claim made by the assessee for the purpose of valuation. Further AO observed that M-pesa business was bought by the assessee company from Mobile Commerce Solutions Ltd. (another group company) w.e.f. 7.11.2014 and the projected & actual figures of sales for F.Y. 2015, 2016 & 2017 is as under: A. Y Net sales Projected (Amt in millions) Net sales Actual (Amt in millions) 2015-16 290.5 128.70 2016-17 801.8 520 2017-18 1661.40 837.80 7. From the above statistics, AO observed that the projections made by the assessee are nowhere near to the actual state of affairs and he came to the conclusion that the management has provided the valuer the figures in projections as are suitable to their own requirement of charging premium on shares and further observed that the predictions/forecast made by the assessee are not based on any scientific calculation based on the fAOlty predictions. AO also discussed in detail the shortcomings of DCF valuation carried on....
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....future projections is to be done by the valuation team, it will be very time consuming and will turn out to be costly. There will always be some element of subjectivity in the forecast data provided by the management and the actual results will always differ from the forecasts. This is more so in the cases like that of the appellant where the business is new and the results are unpredictable. It is the general experience that in the same line of business some companies do extraordinarily well and others fail because their marketing strategy was not good or their competitors were better. If we accept the reasons given by the AO, no new company or company with a new idea would ever be able to choose DCF method for determination of fair market value of its shares because there would be insufficient or no background data and projections would always be questionable. Clearly, this is not the intention of the legislature or else they would have prescribed that only companies with certain years of business behind them would be allowed to use DCF method for determination of fair market value of their shares. Similarly, negative cash flow in the initial years is very normal in the mod....
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....he working given by the EYMBSPL in the report) and value per equity share would work out to Rs. 11.17 per share. The appellant has received consideration at the rate of Rs. 24.7 per equity share. Accordingly, the excess amount charged per equity share is Rs. 13.53. Total number of equity shares issued at premium are 10, 12,14,568. Accordingly, the amount taxable tinder section 56(2)(viib,) works out to Rs. 136,94,33,1051-. The AO is directed to restrict the addition to this amount. This ground of appeal is, accordingly, partly allowed. 9. Aggrieved with the above order, assessee preferred the appeal before us with the following grounds:- GROUNDS OF APPEAL The Appellant respectfully submits that: On the facts and circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) -14 ['CIT(A)], Mumbai has erred in partly confirming the additions made by the Deputy Commissioner of Income Tax, Circle 8(3)(2), Mumbai ('A 09 in the assessment order passed under section 143(3) ('impugned assessment order) of the Income Tax Act, 1961 ('Act) for the captioned AY. Each of the ground is referred to separately, which may kindly be considered indepen....
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....ctly observed that "there will always be some element of subjectivity in the forecast data provided by the management and actual results will always differ from the forecasts ", he has erred in completely disregarding his own observation and computing an ad hoc enterprise value of the Appellant basis a random comparison of projected net sales and actual net sales. 2.4. On the facts and in circumstances of the case and in law, the learned CIT(A) has erred in disregarding the valuation report issued by Category -1 Merchant Banker without providing any rationale basis for the same. 2.5. Without prejudice to ground 3.4 above, on the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in recomputing the enterprise value of the Appellant at INR 463.2 million, by applying an ad hoc percentage (ie, 40%) to the enterprise value of INR 1,158 million computed by a Category -I Merchant banker without providing cogent reasons. 3. GROUND NO. 3 - LEVY AND COMPUTATION OF INTEREST UNDER SECTION 234B OF THE ACT 3.1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming levy of consequential interest under section ....
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....it, as per which, DCF valuation is one of the method prescribed in the above said rule. However, Ld. CIT(A) after accepting the valuation report proceeded to compare the projections adopted by the valuer with the actual results or actual performance of the company in the subsequent years and arbitrarily he holds that the business is growing at 40% and hence the enterprise value of the assessee should also be taken up what the merchant banker has determined. In the result, he determined the share value at Rs. 11.17 per share and the excess of the amount received by the assessee was treated as addition u/s 56(2)(viib) of the Act. 12. Ld. AR strongly objected to the findings of Ld. CIT(A) and submitted that actual results cannot be replaced for the valuation of shares when the shares were actually issued. In this regard, he brought to our notice grounds of appeal raised by the assessee. He further submitted that assessee is not pressing Gr. No. 1.1 and 1.2 and Gr. No. 3 and 4 are general in nature. 13. Further Ld. AR brought to our notice notes forming of the financial statement which is placed at page 23 of the paper book, in which assessee has declared the acquisition of the busin....
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....air market value of its shares, it would be open to the petitioners to file an application for stay of the order dated 21 December 2017 passed by the Assessing Officer to the CIT(A) in its pending Appeal. In the above circumstances, there would be a stay of the order dated 21't December 2017 to the extent of the demand raised for a period of 4 weeks from today. In case, the petitioner files a stay application to the GIT (A) within a period of 4 weeks from today, the demand of Rs. 62.38 crores arising consequent to the impugned order dated 21 December, 2017 is stayed till the stay application is disposed of and for a further period of 2 weeks thereafter. 11. It is made clear that, the above direction will not inhibit CIT(A) to dispose off the entire Appeal alongwith the stay application after notice to the parties. This is so as the controversy appears within a narrow compass. 14. He further brought to our notice valuation report which is placed at page no. 183 of the paper book and he submitted that the valuer has adopted weighted average cost of capital at 14.8% and he supported the valuation adopted by the valuer and the information was on projection of business activities....
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.... for unaccounted credit entries in books of account of assessee in terms of section 68, it is legitimately expected that exercise would be taken to logical end, in all fairness taking into account material submitted by assessee in support of his assertion that person making payment is real, and not non-existent, and that such other person was actually source of money forming subject matter of transaction and that transaction is real and genuine - Held, yes - Whether however as two appellate Authorities, viz., Commissioner (Appeals) and Tribunal, are also forums for fact-finding, in event of Assessing Officer failing to discharge his functions properly, obligation to conduct proper inquiry on facts would naturally shift to door of said appellate Authorities and they having noticed want of proper inquiry, cannot close chapter simply by allowing appeal and deleting additions made - Held, yes 17. In the rejoinder, Ld. AR relied upon the decision of ITAT Delhi in the case of Stryton Exim India Pvt. Ltd. vers. ITO in ITA No. 5982/Del/2018, which is placed at page no. 32 to 83 of the paper book. 18. Considered the rival submission and material placed on record, we notice from the record....
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....ngly, they have projected the figures and further the valuer has adopted the projection figures provided by the assessee and it is left to the wisdom of valuer to accept or reject or to carry out independent investigation raised with the valuer and legislature in more than one place depends on the skills of the professionals like merchant banker only to value the valuation of shares or other volatile securities. Since, Ld. CIT(A) has compared the factuals with projections and assessee has achieved 40% of the actual results is too harsh to the assessee and the valuation is done in order to carry out certain activities by the management. In this case, the valuation was used to issue of rights shares. The AO or Ld. CIT(A) is trying to evaluate the accuracy of the valuation at the time of assessment, this is not proper and also the factuals are based on so many factors subsequent to adoption of projection and valuation. Accordingly, we are not in a position to accept the method adopted by Ld. CIT(A). In the similar facts, the Coordinate Bench of ITAT has held as under: 25. We have heard the rival contentions, perused the relevant findings given in the impugned orders as well as mater....
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....sued the shares to the aforesaid equity partners on premium. The Ld. Assessing Officer has discarded the valuation report of the CA mainly on the ground that valuation of the equity shares carried out by the assessee was based on projection of revenue which did not match with the actual reyenues of the subsequent years. He further held that no efforts have been made by the assessee to substantiate the figures of projected revenue in the valuation report and has also failed to submit any basis for projection. Instead, AO held that assessee should have invested the share premium amount to earn some income, whereas assessee has made investment in debentures of its associate company and hence the basic substance of receiving the high premium was not justified. After invoking the provision of Section 56(2)(viib), AO took fair market value of premium at Nil and face value of Rs. 10/- per share. 27. From the perusal of the records and the impugned orders, it transpires that Assessing Officer had also issued notices u/s. 133(6) to all the 3 investors to seek confirmation, information and documents pertaining to transaction of issuance of shares. In response to the said notices, Assessing....
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....hat in the matter of charging section of a taxing statute, strict rule of interpretation is mandatory, and if there are two views possible in the matter of interpretation, then the construction most beneficial to the assessee should be adopted. Viewed from such principle, here is a case where the shares have been subscribed by unrelated independent parties, who are one of the leading industrialists and businessman of the country, after considering the valuation report and future prospect of the company, have chosen to make investment as an equity partners in a 'start-up company' like assessee, then can it be said that there is any kind of tax abuse tactics or laundering of any unaccounted money. It cannot be the unaccounted or black money of investors as it is their tax paid money invested, duly disclosed and confirmed by them; and nothing has been brought on record that it is unaccounted money of assessee company routed through circuitous channel or any other dubious manner through these accredited investors. If such a strict view is adopted on such investment as have been done by the Assessing Officer and by Id. CIT(A), then no investor in the country will invest in a ....
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....on, 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 Put. Ltd. v. ITO [2O18-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 mind the DCF Method and is essentially based on the projections (estimates) only and hence these projections cannot be compared with the actuals to expect the same figures as were projected. The valuer has to make forecast on the basis of some material but to estimate the exact figure is beyond its control. At the time of making a valuation for the purpose of determ....