TaxTMI 
TaxTMI 
2024 (6) TMI 465
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....es, was examined. The assessee had claimed that the shares were issued against the unsecured loans received in preceding years from M/s Enlightned Consultancy Service Private Limited. The Assessing Officer considered the facts and was of the view that the assessee has not furnished report from merchant banker with respect to computation and rational behind price of each share for the purpose of Rule 11UA of the Income Tax Rules and made the addition by following observation in para 3.4 of the Assessment Order: "3.4 In view of the above facts of the case it is clear that provision of Section u/s 56(2)(viib) of the I.T. Act, 1961 is applicable in the assessee's case. The amount after computing fair market value of shares as per rule 11UA is Rs. 81,10,640/- (formula for computing fair market value as per rule 11UA is (A-L)*PV/PE). Therefore, to compute price of each share the fair market value as computed above (81,10,640/-) is to be divided by total no. of shares issued (15,13,040/-). Hence, the computation done by AO as per Rule 11UA for price of each share is Rs. 5.36/- (81,10,640/15,13,040/-) as explained above. However assessee has issued 5% Preference share capital ....
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.... for valuation of the 5% Non Cumulative Redeemable Preference Shares (NCRPS) issued by the appellant company. (vi) The AO had raised two objections in the remand report, on the FMV determination report of an Independent Chartered accountant, which had been discussed above in para 5.5. Even the judicial precedent on the issue cited above, recognise that the Net Asset Value of the company does not reflect the FMV of Preference shares and FMV of these shares had to be done by merchant banker or chartered accountant. Further reference is invited to the comments that "DCF method is a recognised method where future projections of various factors by applying hindsight view and it cannot be matched with actual performance, and what Ld. CIT (A) is trying to do is to evaluate from the actual to show that the Company was running into losses, therefore, DCF is not correct. Valuation under DCF is not exact science and can never be done with arithmetic precision, hence the valuation by a Valuer has to be accepted unless, specific discrepancy in the figures and factors taken are found. Then AO or CIT(A) may refer to the a Valuer to examine the same." Here the Tribunal h....
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....made by the AO u/s 56(2)(viib) is not sustainable and hereby deleted. 6. The Ld. DR has supported the order of the Ld. AO and submitted that the assessee had failed to justify the valuation report on the basis of any facts and figures. Taking the bench across the valuation report, it was submitted that the same is not descriptive and does not have many details for analysis, so AO did not have the opportunity to establish its sustainability. 7. On the other hand, the Ld. Counsel for the assessee has taken the Bench across all the findings, and the observations of the CIT(A) to defend the order of the CIT(A). 8. After taking into consideration the material before us and the submissions, it comes up that admittedly, the assessee had allotted 5% non-cumulative redeemable preference shares to M/s Enlightened Consultancy Service Private Limited, at the consideration of Rs. 3,02,60,800/- / 15,13,040/- preference share of Rs. 10 each at premium of Rs. 10 each. The dividend rate was agreed at 5% per annum, and redemption period was decided at 20 years. As agreed between the assessee and investor, the said preference shares will be redeemed at premium of Rs. 55 each after a period o....
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....which was rounded off to Rs. 20/- per share, Discounting factors were taken considering the market discounting rate at relevant time for discounting the dividend by dividend discount method. Working of Fair Value of 5% Non-Cumulative Redeemable Preference Share to arrive at present value of each shares is given below for your reference: Fair Value ( per Share) 10.00 Dividend Rate 5.00% Redemption period (in Years) 20 Premium at Redemption 55.00 Discount Factor 7.67% Formula for Discounting factors for various years 1/1+ Discounting Factor for First year and for all subsequent years, previous year's discounting factor /1+ discounting factor) Years Annual Dividend Discount Factor Present Value 1 0.50 0.93 0.46 2 0.50 0.86 0.43 3 0.50 0.80 0.40 4 0.50 0.74 0.37 5 0.50 0.69 0.35 6 0.50 0.64 0.32 7 0.50 0.60 0.30 8 0.50 0.55 0.28 9 0.50 0.51 0.26 10 0.50 0.48 0.24 11 0.50 0.44 0.22 12 0.50 0.41 0.21 13 0.50 0.38 0.19 14 0.50 0.36 0.18 15 0.50 0.33....
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....port of the expert. Therefore, this objection of the AO is not sustainable. 5.4.2 The other objection of the AO was that there was no earning to the appellant company in the year 2016 & 2017 and no dividend had been paid in these years, therefore the basic assumption to apply DDVM cannot fulfilled. It is submitted that it is the prerogative of the company to pay dividend on equity shares as per its Dividend Payout Policies. The company may not have paid any dividend to equity shareholders in the past and there are pre conditions for declaring dividend to equity shareholders like existence of profits, free reserves etc. coupled with the dividend policy of the company. The past performance on dividend payments to equity holders cannot be ground for doubting the proposed contracted coupon rate payments on redeemable preference shares on the valuation date Preference shareholders have priority for payment of dividend over-equity shareholders. There is no separate resolution or AGM/EGM required for dividend to preference shareholders. The liability to pay the dividend to Preference shareholders is unconditional, absolute and less restrictive than equity shares. There is possibi....