TaxTMI 
TaxTMI 
2024 (2) TMI 882
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....als available on record. 3. The brief facts leading to this case is this that the assessee filed an e-return on 28.09.2015 declaring total loss of Rs.1,27,24,329/-. During the year under consideration, the appellant issued 201680 equity shares to the shareholders of the company at Rs.119/- per share (face value Rs.10/- per share and premium Rs.109/- per share) on 05.03.2015 based on the valuation certificate obtained from the Chartered Accountant as per Rule 11UA(2)(b) of the Income Tax Rules, 1962 (hereinafter referred to as 'the Rule'). Subsequently, notice under Section 143(2) r.w.s. 142(1) of the Act was issued to the appellant directing the submission of details by the Ld. AO including a show cause notice as to why the valuation certificate prepared by the Valuer should not be rejected and as to why the fair market value of the shares not to be worked out as per Rule 11UA(2)(a) of the Rule instead of Rule 11UA(2)(b). The assessee categorically replied to this effect that the Rule 11UA(2) provides an option to the company to select any of the methods given in clause (a) or (b) and accordingly decided to opt to issue shares by discounted cash flo....
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....he 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 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; (v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities; (vi) any amount representing contingent....
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.... (v) Replacement Cost Methods; (e) where any consideration is received by a company for issue of unquoted equity shares, from any entity notified under clause (ii) of the first proviso to clause (viib) of sub-section (2) of section 56, the price of the equity shares corresponding to such consideration may, at the option of such company, be taken as the fair market value of the equity shares to the extent the consideration from such fair market value does not exceed the aggregate consideration that is received from the notified entity: Provided that the consideration has been received by the company from the entity notified under clause (ii) of the first proviso to clause (viib) of sub-section (2) of section 56, within a period of ninety days before or after the date of issue of shares which are the subject matter of valuation. (B) the fair market value of compulsorily convertible preference shares for the purposes of sub-clause (i) of clause (a) of the Explanation to clause (viib) of subsection (2) of section 56 shall be the value, on the valuation date, as determined- (i) in accordance with the provisions of sub-clause (b), sub-clause (c),....
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....Ld. AO shifted the method of DCF to ALV as prescribed in Rule 11UA of the IT Rules. This particular aspect has been duly considered by the Ld. CIT(A). On this plea, he considered the judgment passed by the ITAT, Jaipur in case of Rameshwaram Strong Glass Pvt. Ltd. as relied upon by the assessee where the following observations were made: "Section 56 of the Income-tax Act, 1961 read with rule 11UA of the Income-tax Rules, 1962-Income from other sources - Chargeable as (Sub-section (2) (viib)) - Assessment year 2013-14-Assessee-company issued 1,40,000 shares having face value of Rs. 10 each, at premium of Rs. 60 per share - Assessee had determined Fair Market Value (FMV) of shares on basis of Discount Cash Flow (DCF) method in accordance with rule 11UA(2)(b) read with section 56(2)(viib) - Assessing Officer rejected such valuation done by assessee and determined FMV of shares based on Net Asset Value (NAV) method - Consequently, excess premium charged by assessee was considered as income from other sources and was added to income of assessee - It was noted that law had specifically conferred an option upon assessee that for purpose of section 56(2) (viib) an asse....
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.... Thus, the excess premium of Rs. 81.72 lakhs received by the assessee was not justified and not in accordance with the amended provisions of section 56(2)(viib). Consequently, the excess premium by the assessee was considered as income from other sources and was added to the total income of the assessee. In appeal, the Commissioner (Appeals) partly confirmed the addition by rejecting the valuation done as per DSF method. On assessee's appeal to Tribunal. HELD From the order of the Commissioner (Appeals) it emerges that the parties appeared and the matter was discussed with them and they were asked to furnish the actual figures in respect of financial years 2013- 14, 2014-15 and 2015-16. In compliance of such direction, the parties attended before the Commissioner (Appeals) and filed another valuation report wherein the value of the share was worked out at the rate of 65.31 per share. It is clear from the order of the Commissioner (Appeals) that he made a comparison of the last report submitted to him based on the actual figures with the earlier reports submitted and prepared by the CA as per rule 11UA(2)(b) on DCF method, and the Commissioner....
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....rom the facts it is clear that the authorities below wanted to impose upon the method of valuation of their own choice, completely disregarding the legislative intent which has given an option to the assessee to choose any one of the two methods of valuation of his choice. When the law has specifically provided a method of valuation and the assessee exercised an option by choosing a particular method (DCF here), changing the method or adopting a different method would be beyond the powers of the revenue authorities. Permitting the revenue to do so will render the clause (b) of rule 11UA(2) as nugatory and purposeless. Thus, to this extent the action of the authorities below is not justified and it is held that the assessee has got all the right to choose a method which, cannot be changed by the Assessing Officer. Further, though the Assessing Officer can scrutinize the valuation report only if some arithmetical mistakes are found, he may make necessary adjustments. But if he finds the working of the C.A. or the assumptions made as erroneous or contradictory, he may suggest the necessary modification and alterations therein provided the same are based on sound reasoning and rational....
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....mmencement of production or of the business, does not mean that its share cannot command any premium For such cases, the concept of startup is a good example and as submitted, the Income-tax Act has also recognized and is encouraging the startups for which, a separate deduction under section SOLAC has been provided In this contest, a CBDT Instruction (File No. 173/14/2018-ITA) on dated 6-2-2018 given in the case of startup companies useful in the context of determination of fair market value of the unquoted equity shares under section 56(2)(viib) read with rule 11UA(2), which states that tough startup companies invariably submits valuation report in accordance with rule 110A(2)(b) but in the assessments such reports are not being accepted and rejected modified by the Assessing Officer's considering the same as based on abnormal valuations which results in additions The CBDT has accordingly directed not to take coercive measures in such comes for recovery of demand resulting in additions and the Commissioner (Appeals) have been directed to dispose such appeals expeditiously. (Para 4.5.2) Coming to the basis of the projections, it is submitted that the plant capacity was....
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....production in the initial years therefore, there was no production, which fact is admitted by the Assessing Officer also and hence, comparison of the projected sales figure with the actuals was not justified As already stated that the figures given by the CA. were mere projection estimations depending upon various factors which nobody could have anticipated or foreseen on the day when such valuation were made. Therefore, there was no justification yet to make a comparison of the estimations with the actuals. Such a comparison is otherwise principally against the contemplation of rule 11UA(2)(b) which required the CA. to prepare a report on DCF Method only i.e. based on mere projections and not actuals as against the NAV Method prescribed under rule 11UA(2)(a) For these reason there is no justifications behind the objection of the Commissioner (Appeals) that the valuation done by the C.A was based absolutely imaginary and incorrect figures or without any basis. The CA. had considered the plant capacity, industry and market conditions as prevailed in the state, the sanctioning of the loan by the bank are the factors which formed a reasonable basis of projections. Moreover it is not d....
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....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. Accordingly, the value computed under the rule at Rs. 95.90 per share is higher than Rs. 65.31 or Rs. 32.76 per share and therefore, the higher valuation has to be adopted. Moreover, it is only the Explanation (a)(ii) speaks of the satisfaction of the Assessing Officer but there appears no such condition in the Explanation (a)(i) which therefore Assessing Officer is not permitted to interfere in the valuation, once done in accordance with the method prescribed in the rule 11UA(2). For the reasons stated above, there is no justification behind rejecting the declared valuation of the shares and in the impugned addition made by the Assessing Officer but partly sustained by the Commissioner (Appeals), which is hereby deleted. (Para 4.5.6] In the result, the appeal of the assessee is partly allowed as indicated above. [Para 5.0]" 8. It appears that the adoption of NAV method by the Ld. AO against that of the DCF method applied ....
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....bsequent years. The AO has made additions based on the assumption that the Respondent-Assessee made no efforts to achieve the projection as made out in the valuation report and therefore the share premium received by the Respondent-Assessee is without any basis and contrary to provisions of Section 56(2)(viib) read with Section 2(24)(xvi) of the Act. Further, the AO held that the Respondent-Assessee has failed to submit any basis of projection. He also held the view that in order to achieve the said projection, the Respondent-Assessee should have invested the share premium amount to earn certain income/return and whereas the Respondent-Assessee made investments in zero percent debentures of its associate company and therefore the basic substance of receiving a high premium is not justified. 11. We note that in the instant case, the AO had issued notice under Section 133(6) to all the investors to seek confirmation, information and documents pertaining to the issuance of shares. Further, the venture agreement between the Respondent-Assessee and the investors was also filed before the AO. The learned ITAT thus, after due consideration of the record, concluded tha....
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....power to the Assessing Officer to examine or substitute his own value in place of the value determined or requires any satisfaction on the part of the Assessing Officer to tinker with such valuation. Here, in this case, Assessing Officer has not substituted any of his own method or valuation albeit has simply rejected the valuation of the assessee. 33. Section 56(2) (viib) is a deeming provision and one cannot expand the meaning of scope of any word while interpreting such deeming provision. If the statute provides that the valuation has to be done as per the prescribed method and if one of the prescribed methods has been adopted by the assessee, then Assessing Officer has to accept the same and in case he is not satisfied, then we do not we find any express provision under the Act or rules, where Assessing Officer can adopt his own valuation in DCF method or get it valued by some different Valuer. There has to be some enabling provision under the Rule or the Act where Assessing Officer has been given a power to tinker with the valuation report obtained by an independent valuer as per the qualification given in the Rule 11U. Here, in this case, Assessing Officer has ....
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....e projections cannot be compared with the actuals 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 figure is beyond its control. At the time of making a valuation for the purpose of determination of the fair market value, the past history may or may not be available in a given case and therefore, the other relevant factors may be considered. The projections are affected by various factors hence in the case of company where there is no commencement of production or of the business, does not mean that its share cannot command any premium. For such cases, the concept of startup is a good example and as submitted the income-tax Act also recognized and encouraging the start-ups. iii) DQ(International) Ltd. vs. ACIT (ITA 151/Hyd/2015) "10. In our considered view, for valuation or an intangible asset only the future projections along can be adopted and such valuation cannot be reviewed with actuals after 3 or 4 years down the line. Accordingly, the grounds raised by the assessee are allowed". 34. The aforesaid ratios clearly endorsed our view as above. In any case, if law ....
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.... order, it becomes clear that the learned ITAT has followed the dicta of the Hon'ble Supreme Court in matters relating to the commercial prudence of an assessee relating to valuation of an asset. The law requires determination of fair market values as per prescribed methodology. The Appellant-Revenue had the option to conduct its own valuation and determine FMV on the basis of either the DCF or NAV Method. The Respondent-Assessee being a start-up company adopted DCF method to value its shares. This was carried out on the basis of information and material available on the date of valuation and projection of future revenue. There is no dispute that methodology adopted by the Respondent-Assessee has been done applying a recognized and accepted method. Since the performance did not match the projections, Revenue sought to challenge the valuation, on that footing. This approach lacks material foundation and is irrational since the valuation is intrinsically based on projections which can be affected by various factors. We cannot lose sight of the fact that the valuer makes forecast or approximation, based on potential value of business. However, the underline facts and assumptions can u....