TaxTMI 
TaxTMI 
TaxTMI 
2023 (7) TMI 336
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....143(3) of the Act on 31.12.2017 determining the income of assessee at Rs. 78,33,064/-. In the course of assessment proceedings the Assessing Officer noticed that assessee allotted 1,42,856 equity shares of Rs. 10/- each at a premium of Rs. 130/- per share. The assessee was asked to submit the valuation report and the report was submitted. The Assessing Officer noticed that the assessee followed Discounted Cash Flow (DCF) Method for valuation of share price. The Assessing Officer referring to the provisions of section 56(2)(viib) and the explanation he was of the view that assessee has to consider the valuation whichever is higher between (i) the valuation according to Rule 11UA of Income Tax Rules or (ii) the value of shares to the satisfaction of the Assessing Officer. The Assessing Officer was of the view that DCF method followed by the assessee for the valuation of shares is nothing but assumption for projected of cash flow and stated to be not only unjustified and un-related to the actual financial position of the assessee company but also without any rational basis. Thus, the Assessing Officer is not satisfied with the valuation of shares submitted by the assessee, he himself ....
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....ib) of the Act where option is to determine the valuation by applying Rule 11 UA and carry valuation under DCF method as per clause (b) of said rule, in case assets of the company are not substantiated by factors such as Goodwill, Know how, patents, copy right etc. (explanation applicable herein is (a) (ii) of section 56(viib). However, assessing officer, giving a complete go-bye to the provisions of the Act, considered income under section 56(2)(viib) amounting to Rs. 97,62,947/- (i.e. share premium) by applying net asset liability method mentioned under rule 11UA. The fair market value of share as per Ld. Assessing Officer is Rs. 5.85 per share. 5.1 Ld. Counsel referred to Rule 11UA (2) of Income Tax Rules which Rule is as under:- "Notwithstanding anything contained in sub-clause (b) of clause (c) of sub-rule (1), "(2) 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) the fair ma....
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....e (viib) of section 56(2). The purpose of certification of DCF valuation by a merchant banker or a Chartered Accountant is to ensure that the valuation if fair and reasonable, and on the basis of established valuation methodologies. Such valuation is by an expert on the subject, which an Assessing Officer is not expected to be. 6. The ld. Counsel for the assessee further submitted that the method adopted by the assessee is one of the recognized methods for valuation of shares and there is no justification in discarding this method by the Assessing Officer simply stating that the valuation is full of assumptions and surmises for projected of cash flow, unjustified and un-related to the actual financial position of the assessee and without any rational basis. The ld. Counsel for the assessee placing reliance on the decision of the Hon'ble Delhi High Court in the case of Pr. CIT Vs. Cinestaan Entertainment Pvt. Ltd. which is placed at page Nos. 1 to 8 of the paper book, submits that this method has been accepted as one of the recognized methods and strongly placed reliance on the decision of the Hon'ble Delhi High Court. 7. On the other hand, the ld. DR placed reliance on the order ....
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.... 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 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 2602 4,99,80,793/- 3. Shri Radhakishan Damani 24.03.2015 19,207 2602 4,99,80,793/- Total : 4,53,799 90,95,46,200/- 10. The AO has disregarded the valuation report of the Respondent-Assessee primarily on the ground that the projections of revenue as considered for the purpose of valu....
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....tion 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 v. Panipat Woolen 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 profitable and how the business should be carried out Commercial expediency has to be seen from the point of view of businessman. Here in this case if the investment has made keeping assessee's own business objective of projection of films and media entertainment, then such commercial wisdom cannot be questioned. Even the....
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....judicially appreciated in various judgments some of which have been relied upon by the Id. Counsel, for instance: i) Securities & Exchange Board of India [2015 ABR 291] "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 fairly make on the basis of such information." ii) Rameshwaram Strong Glass Pvt. Ltd. Vs. ITO [2018-TIOL-1358) "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 w....
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....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 Id. Assessing Officer or Id. 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 the Id. counsel which kept open as same has been rendered. 36. Other grounds are either consequential or have become academic, hence same are treated as infructuous. In the result appeal of the appellant assessee is allowed." 13. From the aforesaid extract of the impugned order, it becomes clear that the learned ITAT has followed the dicta of the Hon'ble Supreme Court in matters relating to the commercia....