TaxTMI 
TaxTMI 
2021 (3) TMI 239
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....ntertainment. During the concerned AY, the Respondent-Assessee allotted shares at a premium to various persons, as encapsulated in the assessment order. The Respondent-Assessee filed return of income for the relevant AY i.e., 2015-16 on 28.09.2015, declaring nil income. The return was processed under Section 143(1) of the Act. Thereafter, the case was selected for "Limited Scrutiny" and the reasons for scrutiny selection were (a) Large share premium received during the year [verify applicability of Section 56(2)(vii)(b)]; (b) Low income in comparison to very high investment; and (c) Low income in comparison to very high loans/advances/investments in shares. 3. Notice under Section 143(2) of the Act was issued on 07.04.2016 and was followed by a detailed questionnaire along with the notice under Section 142(1) on 12.10.2017. In response thereto, the Respondent-Assessee filed a valuation report dated 15.12.2014. Thereafter, vide order dated 31.12.2017, assessment was framed under Section 143(3) of the Act and the total income of the Respondent-Assessee was assessed as Rs. 90,95,46,200/-. The findings of the Assessing Officer ('AO') summarized by the Appellant are as follows: ....
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.... Media P. Ltd. has been reduced to NIL as compared to Rs. 71,99,74,000/- in the preceding year. Further, it is seen that as per P&L account for the period ending 31st March201 7, assessee company has shown an amount of Rs. 71,99,40,002/- below the line in P&L A/c on account of loss on sale of investment in unsecured compulsorily convertible debenture of Rs. 1000 each in M/s Script Stories Media P. Ltd. v. Since the investment was in zero percent debentures there was no scope of any income rather the transactions resulted in the loss of Rs. 71,99,40,002/-, it is clear that the assessee has made an investment with M/s Script Stories Media P. Ltd. without any interest to earn the income in future. Hence there was no effort on the part of the assessee to justify the projection made in the report under Rule 11 UA and premium as per Section56(2)(viib). vi. Ratio of share capital to share premium is 1:2602 by investors in assessee company, on the other hand during FY 2015-16 assessee is making investment in Cinestaan Film Company P. Ltd. of Re 1 share at a premium of Rs. 4 approx. Ratio of share capital to share premium is 1:4, it is quite obvious that the investments ma....
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....e valuation was based on assumption without independent verification of the truth/accuracy and completeness of the information and data provided by the company. He further argued that the AO had conducted a detailed analysis of allotment of shares at premium and further investment by the Respondent-Assessee and noted that the ratio of allotment of shares at premium is 1:2602, whereas further investment made by Respondent-Assessee is in the ratio of 1:4. Further, the Respondent-Assessee failed to submit the basis of projection/estimated figures as represented in the valuation report, thus, justifying the additions made. In this situation, the AO analysed the business profitability of the Respondent-Assessee only to the extent that such profitability was not commensurate with the actual financials provided by the Respondent-Assessee during the course of assessment proceedings. Therefore, the financials of the Respondent-Assessee did not support the business module of the company. 6. Mr. Sharma further submitted that while there cannot be any dispute on the fact that it is for the entrepreneur to visualize the business based on certain projections and to undertake all kind of risks....
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...., the Respondent-Assessee had an option to carry out a valuation and determine the fair market value (FMV) only on the discounted cash flow method (DCF), which was appropriately followed by the Respondent-Assessee. 8. We have heard and duly considered the arguments and contentions advanced by the learned counsel for both the parties. 9. In the present case, the Respondent-Assessee has received share premium from various subscribers/equity partners. These funds were required by the Respondent-Assessee for film production. The shares were issued based on the valuation received from the prescribed expert i.e., a Chartered Accountant who used the DCF method which is one of the methods stipulated under Section 56(2)(viib) read with Rule 11UA(2)(b).Based on the valuation report dated 15.12.2014, the Respondent-Assessee issued shares to various equity partners at a premium as per the following table: 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; 23.02.2015 4,15,385 1949 80,95,85,365/- 2. Shri Rakesh Jhunjhunwala 24.03.2015 19,207 260....
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....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 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 prof....
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.... 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 and 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 fa....
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....formed by the ld. counsel. The investors like these persons will not make any investment merely to give dole or carry out any charity to a startup company like, albeit their decision is guided by business and commercial prudence to evaluate a startup company like assessee, what they can achieve in future. It has been informed that these investors are now the major shareholder of the assessee company and they cannot become such a huge equity stock holder if they do not foresee any future in the assessee company. In a way Revenue is trying to question even the commercial prudence of such big investors like. According to the Assessing Officer either these investors should not have made investments because the fair market value of the share is Nil or assessee should have further invested in securities earning interest or dividend. Thus, under these facts and circumstances of the case, we do not approve the approach and the finding of the ld. Assessing Officer or ld. CIT(A) so to take the fair market value of the share at 'Nil' under the provision of Section 56(2)(viib) and thereby making the addition of Rs. 90.95 crores. The other points and various other arguments raised by th....