TaxTMI 
TaxTMI 
2022 (7) TMI 1490
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....g 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 venture capital fund and those issued to non- residents of Rs. 0.....
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....omestic 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 equity shares by applying NAV method and calculated it at negative Rs. 294/-. Since the FMV under rule 11UA of t....
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....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 Company; .................. .................. 1.37 "Equity Shares" shall mean the equity shares of par value of Rs. 10 each (Rupees Ten on....
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.... 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, agreements, undertakings, covenants, warranties and other provisions in the Agreement." 11.3 Also, there is Annexure No. 5 which sets out the conversion mechanism in terms of the investment agreement and the relevant extract from para 1 and 2 of this Annexure ....
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....ime 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 Online (P.) Ltd. v. ITO [2019] 104 taxmann.com 385 (Delhi - Trib.) wherein it was held that "Once the computation mechanism as per new prescribed method was not available at the time of issuance of shares, then it is unfathomable to apply such method so as to reject the assessee's valuation and assessee cannot be expected to comply with t....
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....ing 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 consequence of the misreporting referred to in sub-section (8) and sub-section (9) of section 270A for the said previous year. Explanation: - For the purposes of this clause,- (a) the "fair market value" of the shares shall be the value- (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 As....
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....-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 obligation is released. (iii) The cost of servicing the debt obligation by paying periodic interest is mitigated. (iv) The capital based in the form of own fund gets widened to leverage on the capital/stock markets. (v) The debt-equity ratio becomes favorable to various stakeholders of the assessee making it more investor attractive/lucrative. (vi) The risk of getting into the claim of insolvency resolution from the debt creditors in case of default in servi....
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....ares 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. 13.2 By referring to the first proviso to section 56(2)(viib) of the Act, ld. Counsel for the assessee submitted that share premium received by the assessee on issue of equity shares from Aavishkar is not chargeable to tax since Aavishkar is a 'Venture Capital Fund' (VCF) and the assessee is a 'Venture Capital Undertaking' (VCU), both of which falls within exclusion clause (i) of the first proviso to section 56(2)(vii)(b) of the Act. 13.3 To understand the definition of 'Venture Capital Fund' and 'V....
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....ous 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 the Act, we note that Aavishkar is a VCF as is evident from the certificate issued by SEBI placed on record at page 6 of the paper book. Also, ld. Counsel demonstrated that assessee falls within the definition of Venture Capital Undertaking enumerated above. We find that the transaction of issue of equity shares to Aavishkar is covered by clause (i) in first proviso to section 56(2)(vii)(b) wherein it states that section shall not apply where the consideration for issue of shares is received by a Venture Capital Undertaking from a Ven....
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....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 equity shares. 14.1 To arrive at the FMV of unquoted equity share, rule 11UA(2) of the Rules provide for its computation mechanism which is reproduced as under: Determination of fair market value. 11UA. (1)..... (2) Notwithstanding anything contained in sub-clause (b) of clause (c) of sub- rule (1), 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 a....
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....ific 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 Court had categorically held that "there is certainly no immunity from scrutiny of the valuation report submitted by the assessee. Therefore, the AO is undoubtedly entitled to scrutinize the valuation report and determination afresh either by himself or by calling for a final determination from an independent valuer to confront the petitioner. However, the basis has to be the DCF method and it is not open to him to change the method of valuation which has been opted for by the Assessee." 14.4 In respect of contention raised by the assessee on the aspect of rejection of valuation report by comparing projection....
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....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 the valuer and such action of the authorities below of rejecting such valuation report and adopting the NAV method for the purpose of valuation and thereby making an addition u/s 56(2)(viib) of the Act cannot be upheld. 16.2 Before examining the fairness or reasonableness of valuation report submitted by the assessee, we have to bear in mind that the DCF method is essentially based on projection (estimates) only and hence, this projection cannot be compared with the actual results to expect the same figures as were projected. The valuer has to make forecast on the basis of some material but to estimate the exact figu....
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....s 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 method, the AO cannot discard it and adopt another method, however, the AO is well within his rights to examine the methodology adopted by the assessee and the underlying assumptions and if he is not satisfied, he can challenge the same and suggest necessary modification. In the present case before us, as noted by the ld. CIT(A), assessee has not supplied the MIS data which was given to the valuer for the purpose of valuation of shares and also the details on the assumptions so as to conclusively establish that the projections used for DCF valuation were prepared scientifically. We find that it is imperative for the assessee to....