TaxTMI 
TaxTMI 
2024 (2) TMI 882
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.... 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 flow method. It was further submitted by th....
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....ich 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 liabilities other than arrears of dividends payable in respect of cumulative preference shares; PE = total amount of paid u....
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....ection (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), or sub-clause (e) of clause (A), at the option of the assessee, or based on the fair market value of unquoted equity shares determined in accordance with sub-clause (a), sub-clause (b), sub-clause (c), or sub-clause (e) of clause (A), at the o....
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....am 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 assessee could adopt any of methods mentioned under rule 11UA(2) - Whether when law had specifically given an option to assessee to choose any of method of valuation of his choice and assessee exercised an option by choosing a particular method (DCF here), chang....
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....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 (Appeals) finding difference between the figure of the two, rejected the report submitted by the assessee as absolutely unreliable and without any basis. Thus, the basic dispute between the parties is whether the authorities below could have applied the Net Asset Value as prescribed under rule 11UA(....
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....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 basis and for this purpose the Assessing Officer may call for independent expert valuer's report or may also invite comment on the report furnished by the assessee's valuer as the Assessing Officer is not an expert. It is not open for the Assessing Officer to challenge or change the method of valuation,....
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...., 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 taken as a basis to make projections of the production. It is further submitted that as the assessee is dealing in toughened glass which is related to real estate (construction) industry and at the relevant point of time, the real estate sector was in boom and there existed favourable conditions in the industry. The Directors of the as....
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....ould 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 denied and that the valuation reports were prepared as per the guidelines given by the Institute of Chartered Accountants of India and the Assessing Officer has not found any fault. Thus, there is no rational or sound basis in the order of the authorities below, Assessing Officer was unjustified in rejecting the valuation report submitte....
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....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 by the assessee was not found permissible by the Jaipur Bench in view of the strict interpretation of Rule 11UA of the IT Rules, since, no serious lacuna in the data applying in the valuation report was noticed or confronted to the assessee. In fact, the assessee in that particular case except citing the actual figure which were available at the tim....
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....mium 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 that neither the identity, nor the creditworthiness and genuineness of the investors and the pertinent transaction could be doubted. This fact stood fully established, before the AO and has not been disputed or doubted. Therefore, the nature and source of the credit stood accepted. 12. In this factual background, the learned ITAT then proceeded to examine whether the AO after invoking the deeming provision under Section 56(2)(viib), could have determined the FMV of the premium on the shares issued at nil after rejecting the valuation report given by the Chartered Accountant ....
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....nd 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 tinkered with DCF methodology and rejected by comparing the projections with actual figures. The Rules provide for two valuation methodologies, one is assets based NAV method which is based on actual numbers as per latest audited financials of the assessee company. Whereas in a DCF method, the value is based on estimated future projection. These projections are based on various factors and projections made by the management and the Valuer, like growth of the company, economic/market conditions, business conditions, expected demand and supply, cost of capital and host of other factors. These fa....
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....um. 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 provides the assessee to get the valuation done from a prescribed expert as per the prescribed method, then the same cannot be rejected because neither the Assessing Officer nor the assessee have been recognized as expert under the law. 35. There is another very important angle to view such cases, is that, here the shares have not been subscribed by any sister concern or closely related person, but by an outside investors like, Anand Mahindra, Rakesh Jhunjhunwala, and Radhakishan Damania, who are one of the top investors and businessman of the country and if they have seen certain potential and accepted this valuation, then how....
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....logy 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 undergo change over a period of time. The Courts have repeatedly held that valuation is not an exact science, and therefore cannot be done with arithmetic precision. It is a technical and complex problem which can be appropriately left to the consideration and wisdom of experts in the field of accountancy, having regard to the imponderables which enter the process of valuation of shares. The Appellant Revenue is unable to demonstrate that the methodology adopted by the Respondent Assessee is not correct. The AO has simply rejected the valuation of the Respondent-Assessee and failed to provide any alternate fair value of shares. Furthermore, as noted in th....