TaxTMI 
TaxTMI 
TaxTMI 
2023 (10) TMI 398
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....the basis of DCF method supported with valuation report. The AO has made an addition of Rs. 2,43,32,640/- u/s 56(2)(viib) of the Income-tax Act, 1961 (for short 'the Act'). AO has made the addition on the basis of following grounds: a. Projections are unrealistic b. valuer has not done any due diligence and refused to own the financial projections c. there are certain differences in valuation report d. Directors failed to appear to give personal deposition After considering the facts of the case, the AO rejected the valuation made by the valuer under DCF method and valued the share at Rs. 196 per share being book value of shares and thus made the addition of differential amount as mentioned above. 4. Upon assessee's appeal, ld. CIT (A) observed that the assessee company was constructing a hotel at McLeodganj, Dharamshala which is famous for the seat of His Holiness Dalai Lama; that in support of valuation of shares, the AR for the assessee has filed two valuation reports dated 15.03.2012 and 09.03.2015 before AO; that valuation report dated 15.03.2012 prepared by the Chartered Accountant as per rule 11UA wherein value of shares has been calculated at Rs. 1509/-; t....
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....ny, which is running its flagship hotel "Fortune Park Moksha" at McLeodGanj, Dharamshala, as on the valuation date. 6.13 Valuable and important management tie up with ITC's - Fortune Brand name franchisee which gives the hotel Moksha a distinctive edge and access to large network of ITC. This relationship is also valuable as an intangible as it is not easy to secure this kind of relationship with ITC by every another hotel. 6.14 Financial projections based on 59 room's of premium facility befitting the standard of ITC - Fortune which command premium, accordingly price tariff for each room and escalation in tariff considering the season, non-season, business and tourism activities in the state and near to hotel location etc. 6.15 Further the appellant company also had additional land bank near to existing hotel for which the company planned to develop as a part; of its expansion and make the existing facility from 59 to 120 rooms. This additional facility is expected to get operational by the end of FY 2021- 2022. The company decided to expand considering the response of its current business operations and tourism pro-motion activities of the state. 6.16 It is also n....
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....er in point no. 3 on page 14 of the valuation report dated 09/03/2015 that "we carried out the review of such data for consistency and reasonableness. Nothing has come to our attention to indicate that the information provided had material mis- statements or would not afford reasonable grounds upon which to base the report." This clearly indicates that the valuer has done necessary due diligence regarding projections given by the management. once it is establishes that the appellant is able to meet its projections than the question, whether due diligence was done or not, does not arise. 6.23 The Ld. AR further submitted that in the memorandum explaining the provisions of Finance Bill, 2012, the amendment to section 56(2) by insertion of a sub-clause (viib), was classified under the heading "Measures to Prevent Generation and Circulation of Unaccounted Money". Therefore, this section is an anti-abuse provision aimed at arresting circulation of unaccounted money in the economy, as prior to this companies were issuing shares at a substantial premium to convert the unaccounted money through shell companies without providing any valuation justifying the premium. 6.24 On going throug....
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....evidences and confirmed the premium as well as the investment. 6.27 However, once it is established that the value at which shares are issued is correct and the purpose of investment and transaction for issuance of share is genuine. The above contentions and submissions do not call for any comments though they are supported by the case law relied upon by the appellant. 6.28 In view of the facts and circumstances of this case and in law as discussed in foregoing paragraphs, it is clear that valuation of share at Rs. 1,500/- is in accordance with law where shares are issued at fair market value considering different basis on sound footings. Therefore, rejection of the same by AO with book value of shares is not tenable and addition made by the AO u/s 56(2)(viib) amounting to Rs. 2,43,32,640/- is hereby deleted." 5. Against the above order, Revenue is in appeal before us. We have heard both the parties and perused the records. 6. Ld. DR for the Revenue relied upon the order of Delhi Bench of the ITAT in the case of Agro Portfolio (P.) Ltd. vs. ITO 94 taxmann.com 112 (Delhi-Trib.) for the proposition that valuation made on unrealistic forecast is not sustainable. 7. Per contra, ....
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....e- (i) as may be determined in accordance with such method as may be prescribed; or (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, 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; Following clauses (aa) and (ab) shall be inserted after clause (a) of Explanation to clause (viib) of sub-section (2) of section 56 by the Act No. 23 of 2019, w.e.f. 1.4.2020 : (aa) "specified fund" means a fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which has been granted a certificate of registration as a Category I or a Category II Alternative Investment Fund and is regulated under the Securities and Exchange Board of India (Alternative Investment Fund) Regulations, 2012 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992); (ab) "trust" means a trust established under the Indian Trusts Act, 1882 (2 of 1882) or under any other law for ....
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....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 if 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; (iv) any amount representing provisions made for meeting liabilities, other than ascertained liabilities; (v) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares; PE = total amount of paid up equity share capital as shown in the balancesheet; PV = the paid up value of such equity shares. (c) the fair market value of unquoted shares and securities other than equity shares in a company which are not listed in any recognized stock exchange shall be estimated to be price it would fetch if sold in the o....
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....[***] as per the Discounted Free Cash Flow method.]" 9. We note that the coordinate Bench of the Tribunal in the case of M/s. Kilitch Healthcare India Ltd. vs. DCIT ITA No.7061/Mum/2019 order dated 22.03.2022 has appreciated the provisions of law as under :- "17. Now coming to the mandate of the Act, it is noted that section 56(2)(vii)(b) provides for addition in case of premium obtained from shares exceeds the fair market value of the shares. Fair market value is defined to be the value as may be determined in accordance with such a method as may be prescribed or as may be substantiated by the company to the satisfaction of the Assessing Officer based on certain aspect specified in the rule. Rule 11UA of the Act provides the necessary rule. Rule 11UA(1)(C)(c) which is the relevant here, provides that the fair market value of unquoted shares and securities other than equity shares in a company which are not listed in any recognized stock exchange shall be estimated to be price it would fetch if sold in the open market on the valuation date and the assessee may obtain a report from a merchant banker or an accountant in respect of which such valuation. Admittedly, this rule is app....