TaxTMI 
TaxTMI 
2020 (12) TMI 1062
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....ellant by invoking provisions of Section 56(2)(viib) of the Act on the premise that Appellant has received consideration in excess of fair market value of shares (issued to the extent of INR 247,499,862, is bad in law as it is not a speaking order and is therefore against principles of natural justice. 3. That the Ld. CIT(A) has erred gravely on facts as well as in law in confirming action of the Ld. AO of rejecting valuation reports dated 03.04.2013 and 31.03.2014 determining fair market value of shares of the appellant as per Discounted Cash Flow ('DCF') method as prescribed under Rule 11UA(2)(b) of the Income-tax Rules ('the Rules') at INR 192 per share and INR 274 per share respectively. 3.1 That the Ld. CIT(A) has gravely erred on facts and in law in confirming the action of Ld. AO of carrying out valuation of shares of the Appellant as per Net Assets Value ('NAV') method. 3.2 In doing so, the Ld. CIT(A) as well as Ld. AO have failed to appreciate provisions of Rule 11UA(2)(b) of the Rules which provide for an option to the Appellant to chose a method of his choice for valuation of its shares for the purposes of Section 56(2)(viib) of the Act. The....
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....year under consideration, appellant filed its return of income declaring loss of (-) Rs. 1,05,08,901/-. However, as against the returned loss, Ld Assessing Officer has passed the assessment vide order dated 29th December 2017, assessing the total income at Rs. 23,69,90,961/-. The assessment has been framed by making a cumulative addition of Rs. 24,74,99,862/- after invoking the deeming provisions of section 56(2)(vii)(b). 3. The genesis of the issue of addition Rs. 24,74,99,862/- by invoking the provisions of section 56(2)(vii)(b) arises from the fact that during the year under consideration appellant company had issued 1,059,153 equity shares to its holding company, that is, to M/s. YOPL. The shares were issued in two lots, details of which have been noted by Ld. AO also in his order which is as under:-- Date of issue No. of shares issued Face value per share (Rs.) Premium per share (Rs.) Issue price per share ( Rs.) Total face value (Rs.) Total premium (Rs.) Total amount Received (Rs.) 04.11.2013 5,20,830 10 182 192 52,08,300 9,47,91,060 9,99,99,360 31.03.2014 5,38,323 10 264 274 53,83,230 14,21,17,272 14,75,00,502 Total 1,059,153 &....
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....ections and assumptions adopted by management was done by CA, thereby making the report as per the convenience and requirement of the management. The above fact was accepted by Mr. Shiv Bansal Chartered Accountant while recording his statement on 17th December, 2017. 4.28 The Chartered Accountant considered 25% growth rate in the revenue, he didn't even considered the average growth rate of industry which is approximately 16% available on various sources on internet. Even while issuing the report on 31st March, 2014, growth rates of year ending 31st March 2013 was not considered. 4.29 Such exorbitant estimated of sales and free cash flow was used in valuing shares by DCF method. Therefore, it is clear that valuation made on the basis of unverified exorbitant DCF given by management has given inflated value of share Rs. 192/- on 31.3.2013 and Rs. 274/- on 31.3.2014 respectively. From the statement of Sh. Shiv Bansal it is apparent that he has used the projection figures and also the different discount rates for the purpose of valuation of the share solely on the input of the assessee company who is the beneficiary of the valuation report. He has nowhere applied his mind whet....
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....as under: "7. Valuation of 5,38,323 shares allotted on 31.03.2014 @ Rs. 274: 7.1 For this allotment the balance sheet of year ending 31.3.2014 as on the valuation date shall be taken for determination of Fair Market value of the Unquoted Equity Share of the assessee as per provisions of Rule 11U of the IT Rules. In this figure the assessee has also included the proceeds of the allotment of shares on 31.03.2014. Therefore, in commutation the Paid up Capital and General Reserves and Surplus are modified to the extent of reducing from it the amount of Paid up capital received and Share Premium received. A= Total Asset : Rs. 108,84,60,324/- Less Advance Tax : Rs. 5,88,91,631/- Less Deferred Tax : Rs. 21,13,490/- A= Rs. 102,74,55,203/- L= Total Liability: Rs. 108,84,60,324/- As reduced by: (a) Paid up capital: Rs. 2,35,38,900 (2,89,22,130 -53,83,230) (b) Reserve: Rs.-79,94,481 (13,41,21,691 - 14,21,17,272) = Rs. 107,29,17,005/- (b) the fair market value of unquoted equity shares = (A-L) x (PV) (PE) (102,74,55,203- 108,84,60,324)*23,53,890 23,53,890 = Rs. - 6,10,05,121/- Therefore, the fair market value of each equity share is: Rs. - 6,10,05,121/ 235389....
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....has clearly highlighted the discrepancies in the computation of the appellant and has more than evidently provided evidence as to the difference between the estimation and the actual figures. The appellant has not been able to throw light on the estimation of 25% that has been used by it, vis-a-vis, the actual figures. In fact, the report of the media and other experts, clearly indicate that the estimation used by the appellant is nowhere close to the reality from the very beginning. This in turn means that the appellant has simply overstated its values, with the intent of inflating the share value. However, such inflation has been rightly shown to be unsustainable. 4.9 Now, since the AO has rightly highlighted the infirmities in the calculation of the appellant, in as much as in his statement, Sh. Shiva Bansal of M/s. Shiv Bansal & Associates has clearly admitted to have failed to carry out any due diligence w.r. to projection for future growth and earnings provided by the appellant the AO is eligible to reject the method of computation, as used by the appellant and hence, apply another method, as has been prescribed by the provisions of Law. Under the circumstances, I do not fi....
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....lly and submitted that both the authorities have not properly appreciated the same. Written synopsis has also been filed where in it has been submitted as under: "ii) Submissions on merits of the case It is submitted that in the assessment order passed by the AO he has relied on several erroneous, extraneous and irrelevant facts in rejecting cash flow projections of the Appellant in the two valuation reports, details of which have been specified below: (a) At page 3, para 4.12 AO has erred in comparing the two valuation reports inter se. The first valuation report dated 03rd April 2013 was prepared at the very beginning of the relevant Financial Year as such even the financial data for the year under consideration i.e. 2014 was adopted on an estimate basis (refer page 39-40 of the PB). The second valuation report is dated 31st March 2014 which has been prepared on the last day of relevant financial year but before finalization of annual accounts. Actual revenue figures were by and large known by then and therefore the second valuation report adopted nearly actual revenue figures for the year under consideration i.e. 2014 (refer pages 43-44 of PB). The AO therefore has erred i....
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....ting the largest on-line travel portal in India with a comprehensive set of deep discounted travel offerings). Hence, growth projection percentage adopted by the Appellant cannot be said to be arbitrary and self-serving in nature by any stretch of imagination. (c) The Ld. AO erroneously alleged that growth projection in revenue from operation taken at 25% is arbitrary and self-serving - It is submitted that that Ld. AO has totally erred in alleging that Appellant has assumed growth projections in revenues at 25%. The Appellant is engaged in the business of travel and hotel reservations and earns revenues in the form of commission on these reservations. The Appellant had considered a growth rate of 25% in Total Transaction Value ('TTV') of reservations to be handled by it and not on revenues. The corresponding growth on revenues as per the first and second valuation reports was in the range of 16-25% and 14-25% respectively. The aforesaid growth projection in TTV was based on, amongst several other factors, a travel report issued in the year 2012 (copy at pages 236 to 257 of PB) by a travel industry research authority, according to which year-on-year growth for online air ....
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....ra top. * Innoviti Payment Solutions (P) Limited reported in (2019) 102 taxmann.com 59(Bang) copy enclosed at pages 47 to 66 of Case Law PB-II, relevant at page 65-66, paras 11 to 14 As submitted above, the financial data provided by management to the Valuer was accurate and the AO has erroneously doubted the same. Specific reference in this regard is invited to following observations of Hon'ble Jaipur ITAT in case of Rameshwaran Strong Glass (supra) as under: "..Further, though the AO can scrutinize the valuation report only if some arithmetical mistakes are found, he may make necessary adjustments. But if he finds the working of the C.A. or the assumptions made as erroneous or contradictory, he may suggest the necessary modification and alterations therein provided the same are based on sound reasoning and rational basis and for this purpose the AO may call for independent expert valuer's report or may also invite comment on the report furnished by the assessee's valuer as the AO is not an expert. It is not open for the AO to challenge or change the method of valuation, once opted by the assessee and to modify the figures as per his own whims and fancies. In any....
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....hod followed by the assessee in view of following facts: (i) (para 4.5) both valuation reports are based on projection provided by the management (ii) As per law, valuation reports are required to be based on Consolidated Financial Statements. The valuer could not have taken provisional figures. The assessee issued first lot of shares on 04.11.2013, when financial statement of the year ending was crystalized and audited but assessee still chose to use valuation certificate dated 03.04.2013 'that was based on provisional financial statements. (iii) In statement on oath of Shri Shiv Bansal recorded u/s. 131 on 17.12.2017, he was asked to furnish supporting evidences on the basis of which valuation reports were prepared. He submitted projection given by assessee and provisional financial statements on 31.03.2013 and 31.03.2014. A huge difference was found in the figures shown in provisional financial statements and actual financial statements (para 4.8 & 4.9) (iv) Vide order sheet entry dated 21.11.2017, assessee was asked to provide basis of projections for valuation of FMV of shares. However, assessee did not state anything regarding basis or documents on the basis of wh....
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....the orders and have also considered facts of the case and the material referred to before us. Sole issue in dispute relates to the addition of Rs. 24,74,99,862/- made by the Assessing Officer by invoking the deeming provisions of Section 56(2)(viib) of the Act. Relevant facts qua the issue have already been culled out above. For ease of reference, provisions of Section 56 are 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:-- (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....
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....e, on the valuation date. of such unquoted equity shares as determined in the following manner under clause (a) or clause (b), at the option of the assessee, namely:-- (a) (net asset method), 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." 16. One of the arguments of the ld. counsel before us while challenging the addition was that the authorities below have wrongly invoked the provision of Section 56(2)(vii)(b). It has been stated that the legislative intent behind the insertion of such provision was to tackle a menace of the black money and literal interpretation should not be applied and one has to see the purpose of introduction of this section that is, purposive construction should be given while interpreting the said section. It was submitted that the aforesaid deeming provision was brought in the statute as an anti-abuse provision where a company receives any consideration for issue of shares that exceeds the face value of shares, then excess value is deemed to be income of that company. 17. From a plain reading of the Section, it is seen that the language of the s....
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....ue' (NAV) Method or 'Discounted Cash Flow' (DCF) Method. In the present case appellant exercising this option has chosen DCF method. Under DCF the valuation of shares is basically estimated taking into consideration the future anticipated revenues and profits. These projections are then discounted to arrive at the present value of the business. Section 56(2)(viib) is a deeming provision and one cannot expand the meaning of scope of any word while interpreting such deeming provision. If the statute provides that the valuation has to be done as per the prescribed method and if one of the prescribed methods has been adopted by the assessee, then AO has to confine to the choice made by the assessee. The Method once adopted thus cannot be changed. In case, the AO is not satisfied with any of the parameters adopted in estimating the value, then subject to material being available on record, the Ld. AO can adopt his own valuation in DCF method or get it valued by some different Valuer. There has to be some enabling provision under the Rule or the Act where Assessing Officer has been given a power to tinker with the valuation report obtained by an independent valuer as per the ....
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....mining 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 determination of the fair market value, the past history may or may not be available in a given case and therefore, the other relevant factors may be considered. The projections are affected by various factors hence in the case of company where there is no commencement of production or of the business, does not mean that its share cannot command any premium. For such cases, the concept of start-up is a good example and as submitted the income-tax Act also recognized and encouraging the start-ups." iii) DQ (International) Ltd. vs. ACIT (ITA 151/Hyd/2015) "10 ...... In our considered view, for valuation of an intangible asset, only the future projections along can be adopted and such valuation cannot be reviewed with actual....
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....ith the change in the method of valuation by the Assessing Officer which has resulted in the demand. There is certainly no immunity from scrutiny of the valuation report submitted by the Assessee. Therefore, the Assessing Officer is undoubtedly entitled to scrutinise the valuation report and determine a fresh valuation either by himself or by calling for a final determination from an independent valuer to confront the petitioner. However, the basis has to be the DCF Method and it is not open to him to change the method of valuation which has been opted for by the Assessee. If Mr. Mohanty is correct in his submission that a part of demand arising out of the assessment order dated 21st December, 2017 would on adoption of DCF Method will be sustained in part, the same is without working out the figures. This was an exercise which ought to have been done by the Assessing Officer and that has not been done by him. In fact, he has completely disregarded the DCF Method for arriving at the fair market value. Therefore, the demand in the facts need to be stayed." 12. As per above Para of this judgment of Hon'ble Bombay High Court, it was held that the AO can scrutinize the valuation r....
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....business. 14. In nutshell, our conclusions are as under:- (1) The AO can scrutinize the valuation report and the if the AO is not satisfied with the explanation of the assessee, he has to record the reasons and basis for not accepting the valuation report submitted by the assessee and only thereafter, he can go for own valuation or to obtain the fresh valuation report from an independent valuer and confront the same to the assessee. But the basis has to be DCF method and he cannot change the method of valuation which has been opted by the assessee. (2) For scrutinizing the valuation report, the facts and data available on the date of valuation only has to be considered and actual result of future cannot be a basis to decide about reliability of the projections. (3) The primary onus to prove the correctness of the valuation Report is on the assessee as he has special knowledge and he is privy to the facts of the company and only he has opted for this method. Hence, he has to satisfy about the correctness of the projections, Discounting factor and Terminal value etc. with the help of Empirical data or industry norm if any and/or Scientific Data, Scientific Method, scientific ....
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....Respectfully following the above coordinate Bench decision we are of the opinion that the action of Ld. AO in rejecting use of DCF method is not proper. 21. We also find considerable merit in the argument advanced by Ld. AR that the under DCF, the information to be considered should be as on date of valuation. In the instant case, Ld. AO has erred in comparing estimated projections with the actual audited revenues. This issue has also been considered by Tribunal in case of Innoviti Payment Solutions (supra) and VBHC Value Homes (supra). 22. We further find merit in submissions of the Ld AR that the lower authorities have not properly adjudicated upon the contentions raised by the appellant. Before Ld CIT (A) appellant narrated the reasons for variation in estimated projections in valuations reports dated 03rd April 2013 and 31st March 2014. It was also submitted by the appellant that estimated projections as per valuation report dated 31st March 2014 are with a range of 4% to 6% of the actual audited revenues and therefore there is no material variance. Appellant further elaborated that it had considered a growth rate of 25% in Total Transaction Value ('TTV') of reservati....