AI Drafter 
TaxTMI 
TaxTMI 
2024 (12) TMI 1051
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....)(b) without appreciating that shares were issued at DCF Method. valued and certified by chartered accountant on 24.09.2012, hence, rule 11UA was not applicable, which came into existence w.e.f. 29.11.2012. 3. Ld. CIT(A) erred in law as well as on fact in confirming addition of Rs. 6,80,48,500 made by ld. AO being addition of securities premium under section 56(2)(vii)(b) without appreciating the fact that the Id. AO cannot disregard valuation of shares and substitute own method without pointing out any defects in the same. 4. Ld. CIT(A) erred in law as well as on fact in confirming addition of Rs. 6,80,48,500 made by Id. AO being addition of securities premium under section 56(2)(vii)(b) without appreciating that shares were issued to existing shareholders as Right issue is genuine transaction and provisions of section 56(2)(vii)(b) being anti abusive measure is not applicable to genuine transactions. 5. Ld CIT(A) erred in law as well as on fact in confirming addition of Rs. 7,10,00,000 (restricted to Rs. 29,51,500) u/s. 68 the Act made by ld. AO without appreciating evidences available on record to discharge onus u/s. 68 with regards to identity, capaci....
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....ir market value and the share @Rs.3.07. Thus, he applied one of the method under Rule 11UA and concluded that assessee received share premium of Rs. 46.93/- per share which comes to Rs. 6,80,48,500/- which is to be treated as 'income from other sources.' 5. Thereafter, he further held that valuation report submitted by the assessee is based on DCF method which although cannot be accepted as it is prior to introduction of Rule 11UA, however, assessee had relied upon various variables like debt equity ratio, cost of debt, beta rate, Interest rate, the terminal value rate, terminal value on perpetuity, etc. which are purely subjective in nature and which can change over the period of time. Further, he held that while considering these variables, the assessee has considered best possible rates so that the valuation of the shares comes at par with the issue price or higher than that. For e.g., the company has taken risk free rate of 8% while calculating the cost of equity which is a general industry practice for a sound NBFC. But, this is totally unjustified in the instant case for the reason that the net worth of the company was negative prior to the issue of shares. Further, the as....
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..... 1,75,00,000/- and has declared returned income at Rs. 16,89,812/-. b) M/s Shipra Fabrics Pvt. Ltd. has given loan of Rs. 1,00,00,000/- and has declared returned income at Rs. 21,76,016/-. c) M/s Rajat Diamonds Exim Pvt. Ltd. has given loan of Rs 15,00,000/- and has declared returned income at Rs. 3,73,602/- d) M/s Nikunj Alloys & Steel Pvt. Ltd. has given loan of Rs. 40,00,000/- and has declared returned income at Nil. e) M/s Bhavishya Electrical Lamination has given loan of Rs. 1,30,00,000/- and has declared returned Income at Nil. 8. Thus, the entire basis of the AO was that the quantum of loan given by the above-mentioned parties do not match with the receipts and returned income and accordingly, he made the addition u/s. 68 also. Thus, the ld. AO has made primary addition u/s. 56(1)(viib) of Rs. 6,80,48,500/- and then, alternatively of Rs. 7.10 Cores. The addition has been bifurcated by him into two in the following manner:- "3.11 In view of the above, receipts of share premium of Rs. 6,80,48,500/- is treated as income of the assessee company U/s 56(2)(viib) of the Income-tax Act, 1961 and accordingly the same is added to the to....
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.... by the assessee are nothing but paper plans that have no relation with the reality?" 5. Mr. Ajit Sharma, learned Senior Standing Counsel for the Appellant- Revenue submitted that the learned ITAT has erred in deleting the additions made by the AO as confirmed by the CIT(A). He argued that the Respondent-Assessee was asked to submit the basis of projection/estimated figures as presented in the valuation report. However, no efforts were made to justify the projection made in the said report under Rule 11UA and for premium as per Section 56(2)(viib) of the Act. Mr. Sharma further submitted that the CIT(A) had concluded that no independent enquiry was done by the valuer to verify the truth or the figures furnished by the Respondent-Assessee and that the valuation was based on assumption without independent verification of the truth/accuracy and completeness of the information and data provided by the company. He further argued that the AO had conducted a detailed analysis of allotment of shares at premium and further investment by the Respondent-Assessee and noted that the ratio of allotment of shares at premium is 1:2602, whereas further investment made by Respondent-Assesse....
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....ribed methods under the Rules adopted by the valuer. On this aspect, after examining the statutory provisions and the factual position, the ITAT 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% compulsorily convertible debentures of group companies. They are trying to suggest that 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 based on certain future projection and undertakes all kind of risks. It is the risk factor alone which gives a higher return to a businessman and the income tax department or revenue official cannot guide a businessman in which manner risk has to be undertaken. Such an approach of the revenue has been judicially frowned by the Hon'ble Apex Court on several occasions, for instance in the cas....
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....ed on arithmetical precision as value is always worked out based on approximation and catena of underline 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 ld. Counsel, for instance: i) Securities &Exchange Board of India & Ors [2015 ABR 291 (Bombay HC)] "48.6.......... The attempt on the part of SEBI to challenge the valuation which is by its very nature based on projections by applying what is essentially a hindsight view that the performance did not match the projection is unknown to the law on valuations. Valuation being an exercise required to be conducted at a particular point of time has of necessity to be carried out on the basis of whatever information is available on the date of the valuation and a projection of future revenue that valuer may fairly make....
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....spondent-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......" {Emphasis in bold is ours} 11. Thus, DCF is one of the recognized methods wherein the value is based on estimated future projections and these projections are base....
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.... exercise required to be conducted at a particular point of time has of necessity to be carried out on the basis of whatever 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." 15. If ld. AO had any doubt on the valuation based on DCF method, then ld. AO may exercise an option to conduct his own valuation and determined the FMV by another independent Valuer on same methodology. He himself is not an expert to carry out such valuation without pointing out what factors should have been applied in projections or what is the error in the formula. Thus, respectfully following the judgment of the Hon'ble Delhi High Court in the case of PCIT vs. Cinestaan Entertainment P. Ltd., (supra), we hold that ld. AO cannot reject the DCF method and the valuation report as per DCF method cannot be tinkered with ld. AO without giving substantial reasons and not based on his own premise. Accordingly, the valuation done by the assessee is accepted and no addition u/s. 56(1)(viib) can be upheld. 16. Now coming to the additions u/s. 68 added by the AO alternatively, it is seen that Assessee Company ha....