AI Drafter 
TaxTMI 
TaxTMI 
2025 (8) TMI 761
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....he Ld. CIT(A) erred in deleting the addition made on account of security premium amounting to Rs. 10,73,82,810/-u/s 56(2)(viib) of the Act without considering the defects pointed out by the Assessing Officer in the valuation report of shares under Discounted cash flow method by Merchant Banker in its assessment order?" Ground no. 2 "Whether on the facts and circumstances of the case and in law, the CIT(A) erred in deleting the disallowance of depreciation @ 25% amounting to Rs: 6,25,00,000/- on the deposit of Rs. 25 Crores paid to the Society running the BN Nanavati hospital without appreciating the fact that the payment of deposit made by the assessee was only conditioned and that assessee would get refund of such deposit in case of cancellation?" Ground no. 3 "The appellant craves the leave to add, amend, alter and/or delete any of the grounds of appeal as above." 4. Briefly stated the facts of the case are that the assessee filed its return of income for AY 2016-17 on 14/10/2016 declaring total loss for the year at Rs. 5,49,54,209/-. The assessment u/s 143(3) of the Act was completed on 19/12/2018 accepting the returned income of the assessee. Later on, the ....
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....m on shares that of a rupee more than the face value but the value per share was determined at a rate as high as Rs. 10 per share, which is higher by 100% of the face value. 4. The assessee does not have any hidden assets in the form of patents, copy rights, intellectual property rights or even investments etc., belonging to the company based on which the assessee would be likely to substantially enhance its profits, which may have a bearing on the premium to be charged on allotment of the fresh shares. 5. The assessee has only adopted the Discounted Cash Flow method in valuation which in itself is unrealistic and purely based on vague projections without any supporting evidences. The assessee was new in to business in the year 2014, the basis on which such high estimate of revenues and profits is better known to the assessee as no evidences or prospects taken into consideration have been submitted in support thereof. Therefore, there is no credibility for the valuation as the future results shown in said report are proved to be mere wild guesses as the books of the assessee prove that the assessee could not generate the profits as indicated in the valuation repor....
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....of Rs. 10/- face value. The ld. CIT(A) observed that the AO was informed by the assessee about the additions u/s 56(2)(viib) of the Act in the AY 2016-17 and 2017-18, yet after applying his mind on the facts of the case and despite having knowledge that in the earlier AYs, the additions u/s 56(2)(viib) of the Act have been made on account of rejection of valuation report, the AO has accepted the same in AY 2018-19. The ld. CIT(A) deleted the addition of Rs. 10,73,82,810/-. Proceeding further, insofar as the issue of depreciation is concerned, the ld. CIT(A) found that the same was claimed on the WDV which means that the deprecation was allowed in the earlier year. Therefore, the ld. CIT(A) was of the opinion that the same cannot be disallowed in the subsequent years and deleted the disallowance of depreciation. 8. Before us, the ld. D/R strongly relied upon the findings of the AO, the ld. Counsel for the assessee reiterated what has been stated before the lower authorities. 9. We have given a thoughtful consideration to the orders of the authorities below. The undisputed fact is that the assessee has applied DCF method for the purpose of valuation of shares and has relied upo....
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....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 (supra) - (Bombay HC)] "48.6 Thirdly, it is a well settled position of law with regard to the valuation. that valuation is not an exact science and can never be done with arithmetic precision. The attempt on the part of SEBI to challenge the valuation which is bu 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 on the basis of such information." (ii) Rameshwaram Strong Glass (P.) Ltd. (supra) "4.5.2. Before examining the fairness or reasonableness of valuation report submitted by the asses....
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....a premium as per the following table: S. No. Name of equity partner Date of Issue No. of Shares Premium (Rs.) per share Amount of premium (Rs.) 1. Shri Anand Mahindra 06.01.2015; 23.02.2015 4,15,385 1949 80,95,85,365/- 2. Shri Rakesh Jhunjhunwala 24.03.2015 19,207 2602 4,99,80,793/- 3. Shri Radhakishan Damani 24.03.2015 19,207 2602 4,99,80,793/- Total 4,53,799 90,95,46,200/- 10. The AO has disregarded the valuation report of the Respondent-Assessee primarily on the ground that the projections of revenue as considered for the purpose of valuation do not match the actual revenues of subsequent 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 ac....
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.... revenue has been judicially frowned by the Hon'ble Apex Court on several occasions, for instance 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 provi....
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.... 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 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 assessee 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....
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.... circumstances of the case, we do not approve the approach and the finding of the ld. Assessing Officer or ld. 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 ld.counsel which kept open as same has been rendered purely academic in view of finding given above. 36. Other grounds are either consequential or have become academic, hence same are treated as infructuous. In the result appeal of the appellant assessee is allowed." 13. From the aforesaid extract of the impugned 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 basi....
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....on of law urged by the Appellant- Revenue is purely based on facts and does not call for our consideration as a question of law. 11. On finding parity of facts, respectfully following the decision of the Co-ordinate Bench and the Hon'ble Delhi High Court, we do not find any reason to interfere with the findings of the ld. CIT(A). Accordingly Ground No. 1 is dismissed. 12. Insofar as Ground No. 2 is concerned, there is no dispute that the depreciation was allowed in earlier assessment years and the assessee has claimed depreciation on the WDV. It is also not in dispute that the assessee had paid non-refundable deposit for getting the rights of operation and management of Nanavati Hospital and the said payment has been treated as purchase of intangible rights. The Hon'ble High Court of Karnataka in the case of Bangalore International Airport Ltd. Versus The Deputy Commissioner Of Income-Tax, Circle-11 (2) Bangalore, The Commissioner Of Income Tax-I Bangalore [2023] 457 ITR 229 (Kar), has held as under:- "10. It is not in dispute that the assessee has incurred certain expenditure. Shri Sanmathi's contention is, the expenditure was not proved before the Assessing Off....