TaxTMI 
TaxTMI 
2024 (4) TMI 447
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.... which is more than its fair market value then the amount received in excess of fair market value of shares will be charged to tax in the hand of the company as income from other sources. Tax effect: Rs. 1,23,69,326/- 2. The assessee has raised following grounds of appeal in the CO: 1. That the order passed by the Assessing Officer ("AO") and Commissioner of Income-tax (Appeals) ("CIT(A)) to the extent questioned herein are contrary to the facts and circumstances of the case, the provisions of the Income-tax Act, 1961 ("the Act") and thus liable to be quashed. 2. That the AO erred in invoking Section 56(a)(viib) of the Act and the CIT(A) erred in affirming the same, without appreciating that the price at which the shares were issued by the Respondent to United Lex BPO Pvt. Ltd. was the same price at which United Lex BPO Pvt. Ltd. acquired the shares of the Respondent from erstwhile shareholders of the Respondent and in view of the above two transactions being independent third party transactions and therefore comparable, the price at which the Respondent issued its share ought to be accepted. 3. That the AO erred in invoking Section 56(2)(viib) of the ....
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....dvertently. This omission has been recently observed on reconciliation of the judicial records of this charge. Hene, the ld. D.R. requested to kindly condone the delay in filing the appeal. 4. The ld. A.R. strongly opposed the admission of appeal stating that there is no reasonable cause in filing the appeal belatedly before this Tribunal. 5. We have heard the rival submissions and perused the materials available on record. In this case, it is explained before us that after Covid period, there was a huge work pending before the Income Tax Officer Ward-3(1)(3) and he was very busy in various administrative and assessment works, as such, there was a delay of 302 days in filing the appeal before this Tribunal. The reason explained by the ld. AO is very reasonable as he was suffering from huge work pressure during this period. Accordingly, in our opinion, it is a fit case to condone the delay and the appeal is admitted for adjudication. 6. Facts of the case are that during the course of assessment proceedings, it was noted by the AO that the appellant had received large share premium during the concerned year in question. Various notices were issued from time to time and were ....
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....considered by the AO as irrational and that to without any basis. The AO also incorporated comparative chart of the projections of profit before as per first valuation and profit before tax as per return for AY 2014-15, 2015-16 and 2016-17 as under:- AY Profit before tax as per first valuation Profit before tax as per return Achievement (5) of projections 2014-15 263.69 84.42 32 2015-16 320.4 56.42 17.6 2016-17 315.7 46.01 14.5 6.2 Thus, the AO observed that the projected and actual figures were nowhere close and had huge difference. Appellant was unable to explain the discrepancy which would directly affect the profit. Thus, the AO rejected the contention of the appellant to be based on projections which were misleading. Hence, the AO concluded that the discrepancy between the projected figures and the actual figures as per the return of income no way was near the projected figures, since these projections were provided by the management without any justification and with an ulterior motive only to justify the share premium received by hiking the fair market value by DCF method. 6.3 Before the NFAC the appellant vehemently argu....
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.... the period of time and thus, the value which is relevant today may not be relevant after certain period of time. From time to time various courts/Tribunals have held that as per section 56(2)(viib) r.w.R 11UA, the assessee has the option to do valuation of shares and determine FMV either on DCF Method or NAV method and AO cannot substitute his own value in place so determined. For coming to the above observations, NFAC relied on the following judgements and allowed the appeal of the assessee: a) Decision of ITAT Mumbai Bench 'F' in the case of Vodafone M- Pesa Ltd. Vs. DCIT, Circle-8(2), Mumbai reported in (2020) 114 taxmann.com 323 (Mumbai) b) Decision of ITAT Cuttack Bench in the case of ITO, Ward-1(1), Bhubaneswar Vs. Ashoka Industries Ltd. reported in (2020) 120 taxmann.com 214 (Cuttack Trib.) c) Decision of ITAT Delhi 'B' Bench in the case of Cinestaan Entertainment P. Ltd. Vs. ITO Ward 6(2), New Delhi reported in (2019) 106 taxmann.com 300 (Delhi Trib.) d) Decision of ITAT Bangalore 'C' Bench in the case of I-Exceed Technology Solutions P. Ltd. Vs. ITO Ward-3(1) Bengaluru reported in (2020) 119 taxmann.com 378 (Bangalore Trib). Against thi....
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....- 3. Shri Radhakishan Damani 24.03.2015 19,207 2602 4,99,80,793/- Total 4,53,799 90,95,46,2007- 26. The assessee before issuing the shares had got the share valued by Chartered Accountant, i.e., 'Accountant' as provided under Rule 11UA(2) by using the TCF Method' which is one of the prescribed method in Rule HUA(2)(b) r.w.s. 56(2)(viib). Based on the said valuation report dated 15.12.2014, the assessee company had issued the shares to the aforesaid equity partners on premium. The Id. Assessing Officer has discarded the valuation report of the CA mainly on the ground that valuation of the equity shares carried out by the assessee was based on projection of revenue which did not match with the actual revenues of the subsequent years. He further held that no efforts have been made by the assessee to substantiate the figures of projected revenue in the valuation report and has also failed to submit any basis for projection. Instead, AO held that assessee should have invested the share premium amount to earn some income, whereas assessee has made investment in debentures of its associate company and hence the ....
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....ng fiction, it has to be strictly interpreted and there is no mandate to the Assessing Officer to arbitrarily reject the valuation done by the assessee on his own surmises and whims. We are in tandem with such a reasoning of the Id. Counsel, because the deeming fiction not only has to be applied strictly but also have to be seen in the context in which such deeming provisions are triggered. It is a trite law well settled by the Constitutional Bench of Supreme Court, in the case of Dilip Kumar 85 Sons (supra) that in the matter of charging section of a taxing statute, strict rule of interpretation is mandatory, and if there are two views possible in the matter of interpretation, then the construction most beneficial to the assessee should be adopted. Viewed from such principle, here is a case where the shares have been subscribed by unrelated independent parties, who are one of fhe leading industrialists and businessman of the country, after considering the valuation report and future prospect of the company, have chosen to make investment as an equitypartners in a 'start-up company1 like assessee, then can it be said that there is any kind of tax abuse tactics or laundering of ....
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....ssessing 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;" Further, as per clause (i) of the Explanation as reproduced above, the FMV is to be determined in accordance with such method as may be prescribed. Clause (ii) admittedly is not applicable on the facts of the assessee's case. The method to determine the FMV is further provided in Rule 11UA(2). The relevant extract of the applicable rules is reproduced below: "11UA, {{1}] For the purposes of section 56 of the Act, the fair market value of a property, other than immovable property, shall be determined in-the following manner, namely,- (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 as determined in th....
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....2 lacs to 50 Crores. Further the projected revenues were discounted in later years to account for fluctuations in economic cycles. > The number of movies and total revenue and average revenue for such movies are as projected under: Particulars Year 1 (2016 Year 2 (2017) Year 3 (2018) Year 4 (2019) Year 5 (2020) Number of movies 1 Big, 2 Medium, 1 small, 1 Micro 1 Big, 2 Medium, 1 small, 1 Micro 1 big, 2 Medium, 2 small, 1 Micro 1 Big, 2 Medium, 3 small, 1 Micro 1 Big, 2 Medium, 3 small, 2 Micro Total revenue projected (Rs. Crores) 121,62 «,** 142.50 197.68 238.16 274.76 Average revenue per movie (Rs. crores) 24.32 28.5 32.95 34.02 34.35 31. It has been submitted that the assessee had made all the efforts to achieve these projects and in fact had received 100 films scripts out of which it had short listed its initial stage of movies. The Id. counsel has also drawn our attention on various agreements for production of these films. He also pointed out that the assessee was projected to make five movies which it had actually commenced and released....
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....ce in the case of SA Builders, 288 ITR 1 (SC) and CIT vs. Panipat Woollen and General Mills Company Ltd., 103 ITR 66 (SC). The Courts have held that Income Tax Department cannot sit in the armchair of businessman to decide what is profitable and how the business should be carried out. Commercial expediency has to be seen from the point of view of businessman. Here in this case if the investment has made keeping assessee's own business objective of projection of films and media entertainment, then such commercial wisdom cannot be questioned. Even the prescribed Rule 11UA (2) does not give any 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 ....
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....tion being an exercise required to be conducted at a particular point of time has of necessity to be carried out on the basis of \uhatever information is available on the date of the valuation and a projection of future revenue that valuer may fairly make on the basis of such information." ii) Rameshwaram Strong Glass Pvt. Ltd, v. ITO [2018-TIOL- 1358-ITAT- Jaipur] "4.5.2. Before examining the fairness or reasonableness of valuation report submitted by the assesses we have to bear in mind the DCF Method and is essentially based on the projections (estimates) only and hence these 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 shar....
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....d. Assessing Officer or Id. CIT(A) so to take the fair market value of the share at 'Nil' under the provision" of Section 56(2)(viib) and thereby making the addition of Rs. 90.95 crores. The other points and various other arguments raised by the Id. counsel which kept open as same has been rendered purely academic in view of finding given above." 7.1 This view of Tribunal was confirmed by Hon'ble Delhi High Court reported in 433 ITR 82 by observing as under: "8. We have heard and duly considered the arguments and contentions advanced by the learned counsel for both the parties. 9. In the present case, the respondent-assessee has received share premium from various subscribers/equity partners. These funds were required by the respondent-assessee for film production. The shares were issued based on the valuation received from the prescribed expert i. e., a chartered accountant who used the discounted cash flow method which is one of the methods stipulated under section 56(2)(viib) read with rule llUA(2)(b). Based on the valuation report dated December 15, 2014, the respondent- assessee issued shares to various equity partners at a premium as per the follo....
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....ssing Officer after invoking the deeming provision under section 56(2)(viib), could have determined the fair market value of the premium on the shares issued at nil after rejecting the valuation report given by the chartered accountant based on one of the prescribed methods under the-Rules adopted by the valuer. On this aspect, after examining the statutory provisions and the factual position, the Income-tax Appellate Tribunal inter alia observed as under : "32. What is seen here is that, both the authorities have questioned the assessee's commercial wisdom for making the investment of funds raised in 0 per cent, compulsorily convertible debentures of group companies. They are trying to suggest that the assessee should have made investment in some instrument which could have yielded return/profit in the revenue projection made at the time of issuance of shares, without understanding that strategic investments and risks are undertaken for appreciation of capital and larger returns and not simply dividend and interest. Any businessman or entrepreneur, visualise the business baaed on certain future projection and undertakes all kinds of risks. It is the risk factor alone ....
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....als of the assessee-company. Whereas in a discounted cash flow 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 factors are considered based on some reasonable approach and they cannot be evaluated purely based on arithmetical precision as value is always worked out based on approximation and catena of underlying facts and assumptions. Nevertheless, at the time when valuation is made, it is based on reflections of the potential value of business at that particular time and also keeping in mind underline factors that may change over the period of time and thus, the value which is relevant today may not be relevant after certain period of time. Precisely, these factors have been judicially appreciated in various judgments some of which have been relied upon by the learned counsel, for instance: (i) Kakinada Fertilizer Ltd, In re, (SEBI) (2016) 195 C-C 325, 328 (Bom) ; [2015] ABR 291 (Bom) '48....
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....ted because neither the Assessing Officer nor the assessee have been recognized as an 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 businessmen of the country and if they have seen certain potential and accepted this valuation, then how the Assessing Officer or learned Commissioner of Income-tax (Appeals) can question their wisdom. It is only when they have seen future potentials that they have invested around Rs. 91 crores in the current year and also huge sums in the subsequent years as informed by the learned counsel. The investors like these persons will not make any investment merely to give dole or carry out any charity to a startup company like, albeit their decision is guided by business and commercial prudence to evaluate a startup company like the assessee, what they can achieve in future. It has been informed that these investors are now the major shareholder of the assessee-company and they canno....
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....the potential value of business. However, the underlying 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 Assessing Officer has simply rejected the valuation of the respondent-assessee and failed to provide any alternate fair value of shares. Furthermore, as noted in the impugned order and as also pointed out by Mr. Vohra, the shares in the present scenario have not been subscribed to by any sister concern or closely related person, but by outside investors. Indeed, if they have seen certain potential and accepted this valuation, then the appellant- Revenue cannot question their wisdom. The valuation is a question of fact which would depend upon appreciation of material or evidence. The methodology ....