TaxTMI 
TaxTMI 
2022 (7) TMI 1490
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....asonable cause, the delay of 73 days in filing the appeal may be condoned and appeal be admitted for meritorious disposal. We have heard both the sides and find that vide order dated 10.01.2022, Hon'ble Supreme Court has directed that the period from 15.03.2020 to 28.02.2022 is to be excluded for the purpose of computing the limitation period during the COVID-19 pandemic. Further, a period of 90 days is allowed after 28.02.2022 vide same order. Considering the facts and the explanation of the assessee, we condone the delay in filing the appeal and admit it for adjudication. 3. Grounds taken by the assessee in the present appeal are reproduced as under: 1. That on the facts and in the circumstances of the case, the learned CIT (Appeals) erred in confirming addition made by the Assessing Officer to the extent of Rs. 6.8 crores as share premium in excess of Fair Market Value under section 56(2)(viib) of the Act; 2. That on the facts and in the circumstances of the case, the learned CIT(Appeals) grossly erred in upholding the action of the Assessing Officer in disallowing share premium of Rs 3.7 crores u/s 56(2)(viib) received in respect of shares issued to a ventu....
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....roducts like pasteurized milk, cottage cheese, curd, flavoured milk shake, etc. which primarily caters to the domestic market and has its manufacturing facilities in Konark, Orissa. During the year under consideration, assessee issued 13,40,629 equity shares of face value of Rs. 10/- per share at premium to various parties including Venture Capital Funds, Non-residents and other angel investors, details of which is tabulated as under: 5.1. Face value of equity shares issued by the assessee @ Rs. 10/- per share is Rs. 1,34,06,290/- and share premium of Rs. 16,11,00,710/-, thus, totaling to the issue price of Rs. 17,45,07,000/-. In the course of assessment proceedings, ld. AO alleged that the issue of equity shares has been made over and above the Fair Market Value (FMV) and applied the provisions of rule 11UA(2)(a) of the Rules by adopting Net Asset Value method/Book Value method (NAV) for computing the FMV and thus, proceeded to add the entire issue price of equity shares in the sum of Rs. 17,45,07,000/- u/s. 56(2)(vii)(b) of the Act as income from other sources. Ld. AO adopted the figures from the audited Balance Sheet of the assessee as on 31.03.2012 for calculating the FMV of....
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....s against the conversion of CCDs are that during AY 2010-11, the assessee vide Investment Agreement dated 31.01.2011 entered into an agreement with its investors for issuance of CCDs of Rs. 7,40,80,000/- at face value of Rs. 100/- each, spread over various tranches. Assessee issued CCDs amounting to Rs. 7,18,92,500/- during AYs 2011-12 and 2012-13 which have been subsequently converted into equity shares in AY 2013-14 i.e. the year under consideration before us in this appeal, at the pre-determined value range for conversion into equity shares of the assessee. 11.1 Investment agreement dated 31.01.2011 is placed on record in the paper book from page no. 280 to 364. Under the definition clause of this agreement, there are certain definitions which are relevant to the issue in hand before us and are, therefore, reproduced for ease of reference:- "1.31 "Conversion" shall mean the conversion of CCDS into Conversion Shares in the manner as set out in this Agreement; 1.32 "Conversion Shares"" shall mean the Equity Shares issued to each Investor upon Conversion of the Investor CCDs; 1.33 "Debenture Holders" shall mean holders of Investor CCDS issued by the Co....
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.... to the date of Conversion of the CCDs at the rate of 0.01% per annum, compounded on a quarterly basis, until the Conversion of the CCDs into the Conversion Shares ("Interest"). (ii) Interest on the CCDs will be calculated on the basis of the actual number of days in the relevant period and divided by 360 ("Interest Period"). b) Interest Payment i. Interest on the CCDs shall be on an accrual basis and the total interest due and payable by the Company to each of the Investors shall be added to the Subscription Amount for the purpose of calculation of the number of Conversion Shares to be issued by the Company to such Investors. 1.7. Acknowledgement of Liability: The Company hereby acknowledges its liability to the Debenture Holder in respect of the CCDs and covenants with the Debenture Holder that, as and when the CCDs are due to be converted in accordance with the provisions of the Agreement, the Company will effect such Conversion in accordance with the terms of Agreement. The Debenture Holder from time to time shall have the benefit of, be entitled to enforce, be bound by, and are deemed to be have notice of all obligations, liabilities, agreem....
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....9 Face Value of equity shares (Rs.) 1,34,06,290 Share Premium on the issue of equity shares (Rs.) 16,11,00,710 Total issue price for equity shares (Rs.) 17,45,07,000 11.6 During the course of hearing, ld. Counsel for the assessee vehemently submitted that the entire consideration was received by the assessee at the time of issuance of CCDs i.e., in AY 2011-12 and AY 2012-13. According to him, conversion of CCDs by issuing equity shares did not entail any further payment of money. He further submitted that the provision of Section 56(2)(viib) of the Act cannot be applied since this was not in existence in the statute when the money was received by the assessee on issue of CCDs. Ld. Counsel for the assessee submitted that the conversion price was pre-determined which was agreed upon between the parties in terms of investment agreement entered into by the parties prior to the insertion of Section 56(2)(vii) of the Act. He submitted that the investment agreement provides for the issue price range which is between Rs. 60/- per share to Rs. 180/- per share. He then placed reliance on the decision of the co-ordinate bench of ITAT Delhi in the case of India Today Onlin....
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....n any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares: Provided that this clause shall not apply where the consideration for issue of shares is received- (i) by a venture capital undertaking from a venture capital company or a venture capital fund or a specified fund; or (ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf: Provided further that where the provisions of this clause have not been applied to a company on account of fulfillment of conditions specified in the notification issued under clause (ii) of the first proviso and such company fails to comply with any of those conditions, then, any consideration received for issue of share that exceeds the fair market value of such share shall be deemed to be the income of that company chargeable to income-tax for the previous year in which such failure has taken place and, it shall also be deemed that the company has under reported the said income in cons....
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....ans a security that the owner has a right to convert it into a share. 12.3 Before delving into whether conversion entails any consideration, we would ponder upon the term "consideration", which in our view is a term of wider import when compared with words "amounts" or "money". Receipt of money is one of the several modes for having a consideration in a transaction. Consideration can partake many forms viz. tangible or intangible, pecuniary or non-pecuniary, direct or indirect. Section 56(2)(viib) contains the words "receives any consideration" which encompasses consideration in all forms and not limited to only receipt of money. In this backdrop let us understand what the assessee receives as consideration on the conversion of a debt security of CCDs into equity shares which subsequently forms part of the capital base of the assessee. Not listing these as an exhaustive list but some of the "considerations" which the assessee "receives" on the conversion of its CCDs into equity shares, are enumerated as under:- (i) The debt obligation on the assessee to repay is extinguished. (ii) The charge created on the assets/properties of the assessee to secure the debt ob....
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....e (P) Ltd. (supra), on which ld. Counsel of the assessee placed reliance are distinguishable on facts since the transactions dealt therein were not that of conversion of securities but receipt of share application money and allotment of shares thereon which was executed into two different accounting years and hence are not applicable to present factual matrix of the case. Accordingly, we hold that in the present case, the assessee is in receipt of consideration on conversion of CCDs into equity shares to which the provisions of Section 56(2)(viib) of the Act are applicable. Relevant ground of appeal is accordingly dismissed. 13. Having so held on the applicability of section 56(2)(viib) of the Act in terms of above para, we now take up the claim of the assessee for exclusion of share premium relating to conversion of CCDs into equity shares with VCF and Non-residents, essentially dealt by ground no. 2. 13.1 Ground no. 2 relates to share premium of Rs. 3,68,75,000/- from Aavishkar India Micro Venure Capital Fund (Aavishkar) and Rs. 64,53,066/- from certain non-residents claimed as not chargeable u/s. 56(2)(viib) of the Act, those being Venture Capital Fund and Non- residents. ....
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.... the share premium of Rs. 3,68,75,000/- from the issue of equity share to Aavishkar falls in the exclusion clause mentioned in first proviso to section 56(2)(vii)(b) of the Act since Aavishkar is a Venture Capital Fund and assessee is a Venture Capital Undertaking. Before we proceed on the issue in hand, it is worth noting of fact that assessee had made an investment agreement with certain investors including Aavishkar for issuance of Compulsorily Convertible Debentures (CCDs) of Rs. 7,40,80,000/- of face value of Rs. 100/- over various tranches. The share premium from Aavishkar was a result of conversion of CCDs into equity shares of the assessee company. The issue of whether conversion of CCDs into equity shares is covered by section 56(2)(vii)(b) of the Act has already been dealt separately in above para holding it to be covered u/s 56(2)(viib) of the Act. 13.8 Ld. CIT, DR relied on the order of ld. CIT(A) and ld. AO. From the detailed elucidation by the Ld. Counsel on the coverage of transaction with Aavishkar to demonstrate that it is a Venture Capital Fund and that the assessee is a Venture Capital Undertaking, falling within the exclusion clause of section 56(2(vii)(b) of....
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....(Kol) dated 19.06.2019, wherein at para 24, it is held that provisions of section 56(2)(vii)(b) of the Act does not apply to consideration received from a non-resident. Accordingly, ground no. 2 of the appeal by the assessee is allowed. We make is explicitly clear that our finding to exclude these transactions with VCF from the chargeability of it u/s 56(2)(viib) of the Act is in terms of clause (i) in first proviso to section 56(2)(vii)(b) and reference to 'receipt from any person being residents' in section 56(2) and not on the claim of the assessee that there is no receipt of any consideration on conversion of CCDs into equity shares which we have already held rejected. 14. We now take up the two inter-twined issues relating to valuation method and the valuation arrived therein covered by ground no. 4 and 5 which relates to valuation of equity shares issued on conversion of CCDs. This inter-twined issue which needs our deliberation is on the valuation of equity shares which ultimately leads to the quantification of the addition to be made u/s 56(2)(viib) in the hands of the assessee in the form of excess of aggregate consideration over and above the fair market value of the e....
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....ne by taking DCF method. Ld. Counsel reiterated that indicative value agreed upon by the assessee and the investors in the year 2011 when the investment agreement was executed, clearly demonstrates that the company valuation was anticipated to be in the range of Rs. 60 to Rs. 180/- per share falls in the same range as arrived at in the valuation report placed on record by opting DCF method. He further submitted that assessee had obtained the valuation report in accordance with the provision of Rule 11UA(2)(b) of the Rules from an independent Chartered Accountant and the ld. AO has not pointed out any specific discrepancy in the said report but has merely rejected the valuation on the basis of comparison of the projected figures with the actual results, which is devoid of any merits. 14.3 For the contention that the change of method of valuation by the ld. AO is beyond the scope of law since rule 11UA(2) provides an option only to the assessee to choose either of the two prescribed methods. For this contention, he placed reliance on the decision of Hon'ble High Court of Bombay in the case of Vodafone M-Pesa Ltd. v. DCIT [2018] 92 taxmann.com 73 (Bom) wherein the Hon'ble High Cour....
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....thought is baseless and devoid of any merits. 15. Per contra, ld. CIT DR pointed out the discrepancies and observations made by the ld. CIT(A) while giving his findings, recorded in para 19 of the impugned order in respect of DCF method adopted by the assessee. He placed reliance on the findings given by the Ld. CIT(A) who had confirmed the addition made by the ld. AO. 16. We have heard the rival contentions and given our thoughtful considerations made before us. We note that it is a trite law that "when a statute requires a thing to be done in a certain manner, it shall be done in that manner alone and not otherwise." This doctrine has been dealt in the case of CIT vs. SPL's Siddhartha Ltd. [2012] 17 taxmann.com 138 (Delhi). 16.1 Unlike explanation (a)(ii) to Section 56(2)(viib) where it has been specifically provided that valuation is to be substantiated to the satisfaction of the AO, there is no such provision specified in explanation (a)(i) of Section 56(2)(viib) as opted for by the assessee for substantiating its valuation to the satisfaction of the AO. Hence, on the facts of assessee's case, the AO was not empowered to disregard the DCF valuation as carried out by th....
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....valuation report. Ld. CIT(A) thus, held that correctness of the result of DCF method could not be verified since the assessee could not conclusively established that the projections used for DCF valuation were prepared scientifically. 16.5 To arrive at the conclusion on the issue and give our finding, we note that Rule 11UA(2) gives an option to the assessee to opt and adopt either of the two methods prescribed therein, viz. (a) the NAV method or (b) the DCF method. By taking guidance from the decision of Hon'ble High Court of Bombay in the case of Vodafone M-Pesa Ltd. (supra), we find that in the present case, ld. AO has no right to change the method of valuation adopted by the assessee who had opted for the DCF method for valuation of equity shares as ld. AO rejected the same and chose to take the NAV method. We, thus, hold that basis for valuation of equity shares in the present case has to be the DCF method opted by the assessee as prescribed under rule 11UA(2)(b) of the Rules. 16.6 We further note that the Coordinate Bench of ITAT, Bangalore in the case of Innoviti Payment Solutions Pvt. Ltd. v. ITO [ITS-4-ITAT-2019 (Bang.)] held that if the assessee has opted for DCF me....
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....ement Services Pvt. Ltd. (AVMSPL) tabulated in Para 6 above, we hold that owing to the observations made by the ld. CIT(A) on the non-submission of MIS data and other details relevant to the valuation report placed on record, the above conclusions drawn by the Co-ordinate Bench of ITAT Bangalore in the case of Innoviti Payment Solutions Pvt. Ltd. (supra) apply mutatis mutandis and we direct, both, the assessee and the ld. AO to comply with the same, for which in the conspectus of factual matrix, applicable law deliberated above, we remit the issue of valuation of shares to the file of ld. AO for the limited purpose of verification in terms of conclusions noted above so as to arrive at satisfaction on the scientific basis of valuation and rationality of assumptions adopted to build hypothesis on the valuation of shares. The assessee is also directed to make available the MIS data and all the other details of various assumptions adopted to arrive at the given valuation of equity shares issued by it. Ld. AO is also directed to analyze the data and projections which have undergone in arriving at the FMV on the basis of DCF method opted by the assessee and to come to a conclusion accord....