TaxTMI 
TaxTMI 
2023 (6) TMI 335
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....e Limited. The assessee company is doing its operational and business activities of operating a bakery restaurant and operating quick service restaurants (QSR) in India and Sri Lanka through its wholly owned subsidiaries (WOS). 4. The assessee had filed its return of income for AY 2016-17 on 08.10 .2016 declaring a loss of Rs. 10 ,24,33 ,542/-. The AO passed order u/s 143(3) of the Act assessing the income at Rs. 14,56,05 ,630/- after making an addition of Rs. 24,80,39 ,169/- under section 56 (2)(viib) of the Act. 5. During the year, the assessee company had issued 54,33,548 equity shares to Sapphire Foods India Pvt. Ltd. at a premium of Rs.55.65 for the share of Face Value of Rs.10 /- and received a total of Rs.30,23 ,74,146/-. Sapphire Foods Pvt. Ltd. is an entity of large venture capitalists [Goldman Sachs Investments Holding (Asia) Limited] and the investment in the assessee company was part of overall transaction of acquisition of Pizza Hut and KFC outlets in India and Sri Lanka. The overall transaction has been cleared by the Competition Commission of India (CCI) vide its order dated 13.08.2015 under section 31(1) of Competition Act, 2002. Invocation of Section 56 (2....
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....ons made in DCF report, why did it not pay advance tax as per projections. To sum up since valuation report as per DCF prepared by Mr. Ashok Kumar Verma has lost its sanctity & company has not performed accordingly. Therefore assessee through its authorized representative is hereby show caused as to why valuation report submitted by assessee should not be rejected & value per share should be taken as per method provided in rule as per I.T. Rules, 1962. After taking value of shares as per Rule 11UA, necessary addition to be made in assessee' s income as per S. 56(2)(viib) of the I. T. Act." 10. In response to the said show cause, the assessee filed its reply on 03 .12 .2018 highlighting the following points: a) As per the requirement under the Act, the company had obtained a report from the accountant who has determined FMV of the share under DCF method and that DCF method was the most appropriate method for valuation of share of a going concern. b) For larger businesses entities, DCF value is commonly a sum-of-the-parts analysis, where different business units are modeled individually and added together. c) Even though DCF is based essentially on p....
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....ted 06.12. 2018 on 7.12.2018 on 19. 56 hrs which is not acknowledged by AO * Confirmation as available on e- filing portal of appellant w.r.t. to fact that reply dated 06. 12.2018 was uploaded on 10.12.2018 as e- proceedings were not closed though Order is of date as 09. 12.2018. * Sworn Affidavits of Ashok Kumar Verma, Chartered Accountant Valuer of FMV of Equity Shares issued during the financial year ending 31.03.2016 relevant for assessment year 2016-17. * Document and Papers relied by the Valuer for preparing the Valuation report. * Audited financial statements of the company as provided by the management for the year ended March 31, 2014. * Provisional financial statements of the company as provided by the management for the year ended March 31, 2015. * Financial projections of the company for years ended on March 31, 2016 (part period); March 31 ,2017; March 31,2018; March 31,2019 and March 31,2020. * Management certificate of fair value of share of its subsidiaries In Sri Lanka viz. French Restaurants (Private) Limited and Gamma Pizzakraft Lanka (Private) Limited from respective management of its subsidiaries. ....
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....d on 09. 12. 2018 itself as is evident from the system date on the order and that system does not allow backdating of the order. 13. The Appellant has also submitted the documents, which were required to be filed by the Valuer to the AO, as additional evidence. They have also filed an affidavit from the Valuer who has claimed that he had visited the office of the AO on the appointed date i.e. 26. 11 .2018 but had to return without filing the details as the AO was busy with some other matter and he could not wait longer as he had some other appointment. In the Remand Report, the AO has stated that this fact is not emerging from the Assessment Order and that the AO has clearly stated that the Valuer did not submit the details till the date of order. 14 Finally the AO, in her Remand Report, requested this office not to entertain the Additional Evidences as the conditions specified under Rule 46A are not satisfied. Decision on admission of additional evidence 15. Examination of facts shows that the appellant had made an attempt to submit certain reply and details vide letter dated 06. 12 .2018. This fact is established by the Speed Post details, affi....
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.... under the law itself. vi. Whether there is any requirement to show the existence of intention to evade tax in order to invoke provisions of section 56 (2)(viib) of the Act. vii. Whether the AO erred in observing that the appellant should have deposited advance tax as per the projection figures. 17. The decision of Ld. CIT(A) on each of these issues is at para 20 -26 of the order which has been duly perused. Issue no. 1 : 18. Whether AO is correct in rejecting the DCF method and the FMV determined under DCF method by comparing the actual performance figures with the projections used under the DCF method? The appellant had issued shares to M/ s Sapphire Foods India Pvt. Ltd. at Rs.65 .56per share of face value Rs.10/- per share. The valuation has been carried out by Shri Ashok Verma, CA who determined the value based on DCF method. He has relied upon the projections as estimated by the Management. The question here is whether he is required to independently verify the correctness of the projections given by the Management. It is a fact that a chartered accountant / valuer is an expert in valuing the shares as per certain set rules and guidelines i....
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....projections adopted in DCF method and those achieved during the first two years post-valuation date. Issue no. 2 : 20. Whether the AO can change the method of valuation of unquoted shares under Rule 11UA of I.T. Rules 1962? 21. The provisions of Section 56 and Rule 11UA as under: " 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", i f 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) dividends; (ia) income referred to in sub- clause (viii) of clause (24) of section 2; ib)............ (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....
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....x Act and any amount shown in the balance- sheet as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset; L = book value of liabilities shown in the balance- sheet, but not including the following amounts, namely:- (i) the paid- up capital in respect of equity shares; (ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company; (iii) reserves and surplus, by whatever name called, even i f the resulting figure is negative, other than those set apart towards depreciation; (iv) any amount representing provision for taxation, other than amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount 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; (v....
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....und. Issue no. 4 : 27. Whether DCF is the most appropriate method in the instant case as espoused by the appellant? 28. The appellant besides explaining DCF in detail has also submitted that DCF method is a scientific method of valuation of share duly recognized by professional and accounting bodies worldwide and also the ICAI. DCF method is often used for valuation of unquoted equity shares of a going concern as it is based on present value of projected future cash flow of the business, which are dependent on various variable factors. 29. The provisions of Rule 11UA shows that the legislature has not made any distinction as going concern or otherwise in valuation of unquoted equity shares. The Rules give option to choose between the two methods and the only criteria to choose is the option to be exercised by the assessee. In the absence of any such prescription under the law, one cannot read into the statute anything without showing that the Legislature intended it. Hence, the AO has erred in not accepting DCF as the most appropriate and scientific method for valuing shares of the appellant. Issue no. 5 : 30. Whether AO can reject the DCF method when this method ....
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....holders. 35. The AO cannot be burdened with proving the intension to avoid tax by introducing unaccounted money in the garb of share premium. The law is very clear that the moment there is a difference in the FMV of the shares and the consideration received therein, the provisions of section 56(2)(viib) would trigger. There is no requirement to prove or show that the company or its shareholders are trying to introduce their unaccounted money. This is very clear by the language used in the charging provision of section 56(2)(viib). Therefore, the ground raised by the assessee to this effect cannot be accepted. Issue no. 7 : 36. Whether the AO erred in observing that the appellant should have deposited advance tax as per the projection figures? 37. The AO has observed in the assessment order that non- payment of advance tax as per the projection of financial figures in the DCF method would show that the projections were meant only to arrive at the desired value of shares under DCF method. 38. Thus, after detailed analysis of the issue, the ld. CIT(A) deleted the addition. 39. Aggrieved by the order of CIT(A), the revenue has filed appeal before us. 40. The ld. DR....
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....l (WACC), Beta Factor and Equity Risk Premium. Q.7. What do you mean by Weighted average cost of capital and hoe have you calculated it in respect of M/ s Gamma Pizza Kraft (Overseas) Pvt. Ltd. (PAN: AACCG8016 D)? Ans: WACC is a weighted average of companies equity and debt the said has been worked out using the following prescribed formula: Risk Free Return + (Beta x Equity Risk Premium) 0.8. What was the risk premium return and equity risk premium for the M/ s Gamma Pizza Kraft (Overseas) Pvt. Ltd. (PAN: AACCG8016D) and how have you calculated this? Ans: Risk free return I have taken at 7. 85 based on return of government securities. Further, I consider equity risk premium equal to 7%. This is based on the expected market return over and above risk free rate considering the risk of investment in the security. Q.9. Can you provide the details of Government securities where risk free return is 7 .8 % and equity risk premium which is 7% in this case as taken by you? Further, these figures has been taken by you or given by the assessee company i.e. equity risk premium which is 7% in this case i.e. M/ s Gamma Pizza Kraft (Overseas)....
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....ns: The selection of the method of valuation of shares depends upon several factors in the present case as the company was not listed and further as the company was running as a going concern I consider this DCF method which is appropriate for the valuation of shares. Q.20. You have prepared share valuation report in respect of M/ s Gamma Pizza Kraft (Overseas) Pvt. Ltd. (PAN: AACCG8016D) without mentioning the basis of valuation, valuation process in detail, market situation, growth phase. Why? Ans: There are different templates of share valuation reports. Although my report might not have contained mention of these attributes, I considered all these attributes to the extent possible for compiling valuation report. Q.21. What do you understand by discount factor? And haw have you calculated discounts factor of 0. 51 in the present case and what material documents/ papers did you use for calculating this discount factor? Ans: As the name DCF stands for discounted cash flow it is based on future projections, the future incomes and other financial information needs to be discounted to ascertain the present value. The discounted factor as shall be e....
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....icial of the company. As discussed in the para 4. 6 I also discussed with the concern staff about the projections. Q.29. You have not mentioned any formula in your report with regard to DCF, why? Ans: The whole process has been explained very clearly in terms of para 6 of the report. Q.30. What do you understand by WACC? On what basis/ calculation WACC has been taken as 14. 85%? Ans: As has been explained earlier WACC stands for weighted average cost of capital. Please see page 6 of our report last two tables, the set two tables contains complete details about the calculation of WACC Q.31. In the valuation report prepared by you, you have not mentioned any formula/ calculation, you have just arrived at the different values such as cash flow of explicit period as 34641, present value for the terminal value as 270696. Kindly explain. Ans: Terminal value was calculated on the basis of the specific formula, this has been calculated in excel sheet. Q.32. And what about cash flow for explicit period? Ans: The figure of cash flow has been ascertained and taken from annexure 1 above. Q.33. You have not annexed....
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.... Q.41. Do you want to say any this else? Ans: No Oath taken Ashok Kumar Verma Chartered Accountant Oath Administered, Prashant Shukla (DCIT) 45. We have re-examined the pertinent questions raised by the ld. DR. The AO asked about CAPM method for calculating equity risk premium which the valuer is not aware. The valuer could not answer the details of CAPM method or its full form. This led to a passive allegation that the valuation made by the valuer is not correct and the valuer is not competent enough We find that the Capital Asset Pricing Model (CAPM) is a model that describes the relationship between the expected return and risk of investing in a security. It shows that the expected return on a security is equal to the risk-free return plus a risk premium, which is based on the beta of that security. CAPM formula is as under: Expected Return (Ra) = Risk-Free Rate (Rrf) + [Beta (Ba) x Expected Return of the Market (Rm) - Risk-Free Rate (Rrf)] i.e. Ra = Rrf + [Ba x (Rm-Rrf)] 46. Thus, we find that the query of the AO with regard to CAPM to the valuer is irrelevant and does not castigate the DCF method resorted by ....
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....ble jurisdictional High Court has also been followed in Abhirvey Projects Pvt. Ltd. Vs. ACIT, Circle-1 (2) in I. T.A. No. 9400/ DEL/2019. 51. With regard to the actual performance, we also find that the actual performance did not fall short of the projections as duly submitted before the AO vide letter dated 06.12 .2018 which was reproduced in his order by the ld. CIT(A). 52. With regard to the contents of the Valuation Report, we find that the same is prepared by covering all the required points as per the valuation methodology prescribed under DCF method. The Valuer has approached the valuation in a systematic manner. He has included at Para-4 of his report a detailed list of source of information relied upon by him that includes Five years' financial projections, provisional Financial Statements etc. as well the different topics which he discussed with the Management. Thereafter he has discussed the methodology of valuation approached by him describing therein the different methods of valuation available and why he has adopted the DCF method. Further he has given very detailed step- wise process of Valuation done as per DCF method. From the same it would be seen that t....