AI Drafter - (New and Powerful) 
Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter. 
TaxTMI 
TaxTMI 
2020 (12) TMI 1062
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 247,499,862 made by Ld. AO to returned income of the Appellant 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 v....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Travel Holding Cyprus Limited and M/s. Asia Consolidated DMC PTE Ltd. both being foreign companies. For the 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ted vs. actual figures achieved by the company it is seen that accountant has taken projected revenue, future cash flow and other information as certified by the management. No verification whatsoever of projections 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 proje....
X X X X Extracts X X X X
X X X X Extracts X X X X
....market value of each equity share is: Rs.-7,95,21,228/-/ 18,33,060/- = Rs.-43.38/- per share Therefore, the fair market value of the equity share is determined at Rs.-43.38/- per equity share." 8. Applying same methodology, Ld. AO also estimated the Value of shares allotted by the appellant on 31st March 2014 in negative 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....a crucial aspect that such estimations need to be congruence with the actual figures, i.e., the estimation ought to be as closely accurate as possible. A huge difference arising out on account of some haywire computations is not at all acceptable. Further, an estimation is not something arising out of some calculation in thin air. This calculation needs to be supported and substantiated by some basis or some evidence, which the appellant has outrightly failed to provide. 4.8 It is noted that the AO 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e provisions of section 56(2)(viib) be interpreted applying of purposive construction. In support Ld. AR cited several judicial precedents. It was also submitted by Ld. AR that this objection was specifically raised before Ld. CIT (A) in ground no 4. Ld CIT (A) though records submission of appellant on this issue (briefly at internal page 11), however, thereafter he has failed to record any conclusions. 11. Ld. AR also challenged the impugned additions made on merits. In this regard Ld. AR narrated the facts of the case sequentially 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....700,000 % age variation compared to actual revenues 4.35% 6.14% 5.81% 4.95% 15.89% It is amply clear from the aforesaid table that the projected revenues of the Appellant closely approximate to the actual revenues with variance of just 4-6% (except for FY 2017-18 which was primarily on account of an extraordinary macro-industry factor i.e. - the announcement of merger of two biggest competitors of the Appellant namely Make My Trip and Goibibo, essentially creating 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 eng....
X X X X Extracts X X X X
X X X X Extracts X X X X
....once that option is exercised then the AO cannot change the method. At the most, the AO could refer the matter to a valuation an expert or to Valuation Officer. References: * Hon'ble Bombay High Court in the case of Vodafone M-pesa ltd. v. Principal Commissioner of Income Tax (2018) 92 taxmann.com 73 copy enclosed at pages 67 to 71 of case law PB-II relevant at page 70, para 9. * Rameshwaran Strong Glass Pvt. Ltd. reported in 172 ITD 571(Jai) copy enclosed at pages 13 to 33 of Case law PB-II relevant at page 29 * Ozoneland Agro Pvt. Limited ITA No. 4854/Mum/2016 order dated 02nd May 2018 copy enclosed at pages 34 to 46 of Case Law PB-II relevant at page 432nd para 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: "......
X X X X Extracts X X X X
X X X X Extracts X X X X
....sted in Appellant in November 2013 and March 2014 respectively. Accordingly, in the instant case, as share allotment money has been infused in the Appellant by a company registered outside India and source of funds invested is effectively FDI, provisions of section 56(2)(viib) should not be attracted." 12. On the other hand, Ld. CIT (DR) vehemently challenged the submissions made by appellant. It was submitted by the Ld CIT(DR) that both the lower authorities have for just reasons made/upheld the additions. Ld CIT (DR) also opposed the arguments advanced by the Ld AR objecting to application of provisions of section 56(2)(viib) to the facts of the case. It was submitted by him that the Ld AO was justified in rejecting DCF method 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 c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pendent and comparable inquiries, he has simply relied upon figures furnished by management of the assessee company. He has not been able to substantiate reason for taking growth rate of 25% (xii) Detailed analysis has been provided by AO in para 4.18 to 4.21. In para 4.24, AO has analysed how there is no correlation between projections and actual figures of the assessee. 13. In support Ld CIT (DR) also relied upon following judicial pronouncements: * Agro Portfolio (P) Ltd. reported in 171 ITD 74(Del) * Sunrise Academy of Medical Specialties reported in 257 Taxman 373(Ker) * Sunrise Academy of Medical Specialties reported in (2018) 94 taxmann.com 181(Ker) * Madhurima International Private Limited, ITA 421/Mum/2017 order dated 28th April 2017. 14. We have heard both the parties, gone through 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 referen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s, 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". 15. As per clause (i) of the Explanation (a), the FMV of shares issued is to be determined in accordance with such method as may be prescribed. Method to determine this FMV is further provided in Rule 11UA (2). The relevant extract of the applicable Rules is reproduced below: "11UA. [(1)] For the purposes of section 56 of the Act, the fair market value of a property, other than immovable property, shall be determined in the following manner, namely,-- (2) Notwithstanding anything contained in sub-clause (b) of clause (c) of sub-rule (1), the fair market value of unquoted equity shares for the purposes of sub-clause (i) of clause (a) of Explanation to clause (viib) of sub-section (2) of section 56 shall be the value, 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... unambiguous then recourse cannot be taken to principles of purposive interpretation, even if the literal interpretation results in hardship and inconvenience to the tax payer. The purposive construction can only be resorted to when there is ambiguity or the contradiction in two provisions for the same statute. Here, no such ambiguity or contradiction is there nor has been pointed out before us. A Court of law has nothing to do with reasonable or unreasonableness of a provision of a statute except as it may hold in interpreting what the legislature has clearly stated. If the language of the statute envisages only one meaning then it must be continued to mean and intended what it has been clearly expressed. Accordingly, the contention raised by the ld. counsel is rejected. 18. Coming to the method of valuation, from the plain reading of Rule 11UA it is clear that it provides an option to the assessee to estimate the FMV by applying either 'Net Assets Value' (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 consideratio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s have been judicially appreciated in various judgments some of which are as under: - 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 but 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 mind the DCF Method and is essentially based on the projections (estimates) only and hence thes....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ithin his rights to examine the methodology adopted by the assessee and/or underlying assumptions and if he is not satisfied, he can challenge the same and suggest necessary modifications/alterations provided ITA No. 2541/Bang/2019 ITA No. 37/Bang/2020 S.P. Nos. 29 and 59/Bang/2020 the same are based on sound reasoning and rationale basis. In the same tribunal order, a judgment of Hon'ble Bombay High Court is also taken note of having been rendered in the case of Vodafone M-Pesa Ltd. vs. PCIT as reported in 164 DTR 257. The tribunal has reproduced part of Para 9 of this judgment but we reproduce herein below full Para 9 of this judgment. "9. We note that, the Commissioner of Income-Tax in the impugned order dated 23rd February, 2018 does not deal with the primary grievance of the petitioner. This, even after he concedes with the method of valuation namely, NAV Method or the DCF Method to determine the fair market value of shares has to be done/adopted at the Assessee's option. Nevertheless, he does not deal with 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 valuat....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Cash Flow Projections. Hence, the assessee should be asked to establish that such projections by the assessee based on which, the valuation report is prepared by the Chartered accountant is estimated with reasonable certainty by showing that this is a reliable estimate achievable with reasonable certainty on the basis of facts available on the date of valuation and actual result of future cannot be a basis of saying that the estimates of the management are not reasonable and reliable. 13. Before parting, we want to observe that in the present case, past data are available and hence, the same can be used to make a reliable future estimate but in case of a start up where no past data is available, this view of us that the projection should be on the basis of reliable future estimate should not be insisted upon because in those cases, the projections may be on the basis of expectations and in such cases, it should be shown that such expectations are reasonable after considering various macro and micro economic factors affecting the business. 14. In nutshell, our conclusions are as under:- (1) The AO can scrutinize the valuation report and the if the AO is n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e assessee should be adopted and with regard to various Tribunal orders cited by learned DR of the Revenue which are against the assessee we hold that because we are following a judgment of Hon'ble Bombay High Court rendered in the case of Vodafone M-Pesa Ltd. Vs. Pr. CIT (supra), these tribunal orders are not relevant. In the case of Innoviti Payment Solutions Pvt. Ltd. Vs. ITO (supra), this judgment of Hon'ble Bombay High Court was followed and the matter was restored back to the file of AO for a fresh decision with a direction that AO should follow DCF method only and he cannot change the method opted by the assessee as has been held by the Hon'ble Bombay High Court. The relevant paras of this Tribunal order are already reproduced above which contain the directions given by the Tribunal to the AO in that case. In the present case also, we decide this issue on similar line and restore the matter back to the file of AO for a fresh decision with similar directions. Accordingly, ground No. 3 of the assessee's appeal is allowed for statistical purposes." 20. Respectfully following the above coordinate Bench decision we are of the opinion that the action of Ld. AO i....