TaxTMI 
TaxTMI 
2025 (9) TMI 1613
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.... filed by the Appellant and the settled legal position. 3. That on the facts and circumstances of the case and in law, the order passed by the ld. CIT(A) under section 250 of the Act is bad in law and liable to be quashed to the extent it dismisses the Appellant's appeal filed on 20 January 2017 against the impugned order. 4. On the facts and circumstances of the case and in law, the ld. CIT(A) has grossly erred in conferring the additionof INR 5,289.920 on account of addition of share premium received on sale of shares under section 56(2)(viib) of the Act without appreciating facts and law, inter alia as under : 4.1 That section 56(2)(viib) of the Act is not applicable on genuine, bonafide and commercial transactions. 4.2 That no powers have been vested to the office of ld. AO under the Act to change the method of valuation of shares opted by the Appellant. 4.3 The ld. CIT(A) has grossly erred in accepting the fair value of the shares computed by ld. AO at INR (303.11) without appreciating that the price at which the shares were issued was based on the valuation report issued by the independent Chartered Accountant following the Discoun....
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....at "Large share premium received during the year". During the year, the assessee company received Rs. 52,89,920/- against share premium account. From the details of equity shares issued, the AO noticed that the share of the face value of Rs. 10/- each have been issued at a hefty premium ranging from Rs. 5144/- to Rs. 5253/- per share. The AO asked the assessee as to why not the provisions of section 56(2)(viib) be invoked in its case. The ld. A/R of the assessee replied that though the provisions of section 56(2)(viib) are applicable in its case, but the fair market value of the share issued is not more than the share premium received. The assessee had worked out the fair market value of the shares as per Discounted Free Cash Flow method. The AO observed that the assessee company is a loss making company. Since its very inception in 2011, there have been continuous losses, as on the opening day of the current FY (01 April, 2013) the company had accumulated losses of Rs. 31.31 lacs. No prudent person would invest in a company with poor financial results, and that too at a hefty premium. The assessee tried to justify that the issue price of share including premium is below the FMV, c....
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.... is not tenable. He then proceeded to calculate the value of the sold shares by FMV method and make the addition of Rs. 52,89,920/- on the grounds that FMV calculated as per FMV method given in Rule 11UA(2)(a) is less that the face value of the shares sold. The assessee than went in appeal and before the CIT(A) he make the following points : i) That section 56(2)(viib) Explanation of the Act offers two methods of valuation of shares sold - (a) FMV as may be determined in accordance with such method as may be prescribed, or (b) As may be substantiated by the company to the satisfaction of the Assessing Officer. If we exercise the first option we have to go to Rule 11U and 11UA of the Income Tax Rules. Here also two methods for calculation of the value of unquoted shares and they are : a) FMV = (A-L) x PV/PE, and b) Fair Market Value of the unquoted equity shares determined by a merchant banker or an accountant as per the Discounted Free Cash Flow (DFCF) Method. Rule 11UA(2) also says that the option to chose one of the above two methods is of the assessee. According to the assessee, he has exer....
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....al statements etc. provided to him before submitting his report, by law. Therefore, the observation of the CIT(A) that the report is to be rejected because of non-verification of the financial statements, reveals lack of understanding of accounting standards and procedures. He has not understood the import of what is written in the report. His conclusion that the report is not worth accepting is erroneous, both on facts and in law. The CIT(A) has NOT pointed out any specific defect in the valuation report. Without pointing out specific defect, or fraud, he has no right under law to reject the valuation report. This is the position of law as established by the decisions of the various ITATs and High Courts, which are compiled and presented for the perusal of the Hon'ble ITAT. Hence, the conclusion of the CIT(A) is contrary to facts and the express provisions of the Income Tax Act, and needs to be quashed/set-aside. A perusal of the valuation report prepared by M/s. Vikram Kapoor & Co. shows that the procedures are based on Desk-top Analysis of the Financial projections and on Projections for 5 years period ending 31.03.2019. The report is based on sound principles ....
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.... ITO, Bengaluru (2020) 119 taxmann.com 378 (Bangalore-Trib.); iv) Valencia Nutrition Ltd. v. DCIT, Bangalore (2020) 120 taxmann.com 238 (Bangalore-Trib.); v) Cinestaan Entertainment (P) Ltd. v. ITO, New Delhi (2019) 106 taxmann.com 300 (Delhi-Trib.); vi) Vodafone M-Pesa Ltd. v. DCIT, Mumbai (2020) 114 taxmann.com 323 (Mumbai-Trib.); vii) Clearview Healthcare (P) Ltd. v. ITO, New Delhi (2020) 114 taxmann.com 167 (Delhi-Trib.); viii) LalithaaJewellery Mart (P) Ltd. v. ACIT Chennai (2019) 108 taxmann.com 490 (Chennai-Trib.); ix) SB Industrial Engineering (P) Ltd. v. ACIT (2022) 145 taxmann.com 356 (Chennai-Trib.); x) ITO,Bhubaneshwar v. Ashoka Industries Ltd. (2020) 120 taxmann.com 214 (Cuttack-Trib.) xi) ACIT v. Safe Decore (P) Ltd. (2018) 90 taxmann.com 161 (Jaipur-Trib.) On the other hand, the decision relied upon by the CIT(A), i.e., ITO, Hyderabad v. M/s. Quark Enterprises P. Ltd., ITA 1270/Hyd/2019 is based on different facts, and so, is not applicable to the facts of the present case for the following reasons : " As per 11UA of the I.T. Rules, it gives an option to the assessee to value th....
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....gh the orders of the lower authorities and the case laws cited by both the parties. We note from the submission of the Ld AR for the assessee that the assessee company had issued 1,013 equity shares of a face value of Rs. 10/- at a premium ranging between Rs. 5,144/- to Rs. 5,253/- per share. In total share premium of Rs. 52,89,920/- was received by the assessee during the year under consideration. We note that the Ld AO doubted on such premium by stating that the assessee Company was a continuous loss making company and hence no prudent person would invest in a company with poor financial results and that too at a high premium. Further we note that the report of valuer, which was prepared by following Discounted Cash Flow method was not reliable as the valuer has mentioned in the report that the management of the company had provided financial results for preparing the report which was not verified and audited by them and hence the report so submitted was not reliable. Since the assessee company is in existence since 2011 and therefore working of FMV of share based on Discounted Cash Flow method is not applicable. We note that on such basis, the AO doubted the premium so received ....
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....r consideration and therefore there may not be a question for application of the provisions of section 56(2)(viib) of the Income Tax Act, 1961. 2. As per explanation to section 56(2)(viib) two options are available to the appellant out of which the appellant has adopted first option which says that FMV may be determined in accordance with such method as may be prescribed and this option refers to rule 11U and 11UA of the Income Tax Rules, 1962 and for calculation of FMV two options are available wherein the option (b) refers to valuation may be determined by a merchant banker or an accountant as per the discounted Free Cash Flow method. Since the assessee has chosen the valuation method as permitted by law and therefore AO was not justified in rejecting the same. 3. The contention of the ld. CIT(A) that the appellant had chosen sub clause (ii) of explanation to section 56(2)(viib) of the Income Tax Act, 1961 is wrong as the appellant had chosen sub clause (i) of section 56(2)(viib) and has valued the price of share by following DFCF method. 4. The ld. CIT`s contention that the valuer has very categorically mentioned in the report that they have not verifi....
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....29.08.2016 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 ld. CIT(A) 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 u/r 11UA(2)(a) or whether the assessee has got a right to opt for the method of valuation given u/r 11UA(2)(b) and secondly, if the assessee is entitled to the adopt the DCF method to estimate the fair market value, the valuation submitted by the assessee was fair and reasonable in accordance with Rule 11UA(2). Before proceeding further, we would like to reproduce the relevant Provisions contained u/s 56(2)(vii)(b) of the Act and the relevant Rules, which reads as under: - "S. 56(2) (viia) where a firm or a company not being a company in which the public are substantially interested, receives, in any previous year, from any person or persons, on or after the 1st day of June, 2010, any property, being shares of a company not being a company in which the ....
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....tion to clause (23FB) of section 10; "[Rule 11UA(2) Notwithstanding anything contained in subclause (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 the following manner under clause (a) or clause (b), at the option of the assessee, namely:- (a) the fair market value of unquoted equity shares (A-L) x (PV) (PE) where, A = book value of the assets in the balance-sheet as reduced by any 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 and any amount shown in the balance-sheet as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset; L = book value of liabilities shown in the balancesheet, but not including the following amounts, namely:- (i) the paid-up capital in respect of equity shares; (ii) the amount set apart for payment....
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....under: "11. On a careful reading of the judgments discussed above, it is seen that the Courts have held that where a method has been prescribed by the legislature, that method alone shall be followed for computation of the fair market value. The A.O. and the Ld. CIT(A) have not followed the relevant provisions for adopting or computing the fair market value of the shares, but have adopted the market value at which some of the shares have been purchased by the assessee as FMV. This, in our opinion, is not correct. As held by the Courts in the above judgments, the A.O. has to compute the fair market value in accordance with the prescribed method but cannot adopt the market value as fair market value under Section 56(2)(viia) of the Act. The legislature in its wisdom has also given a formulae for computation of the fair market value which cannot be ignored by the authorities below." It is observed that in the instant case, the assessee company had exercised an option to value the share by DCF Method however, we find that the AO has worked out the value based on NAV Method though in the body of assessment order he has referred to Rule 11UA(2)(b) but in substance, he has val....
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.... valuation must be based on Discounted Free Cash Flow (DCF) Method only. To exercise the option under this clause, the assessee is not subjected to the fulfillment of any other condition except these two. It is not denied that the assessee did file the valuation report first one dated 31.03.2013 and the revised report dated 23.08.2016 valuing the FMV of the unquoted shares at Rs. 119.93 & 95.90 per equity share respectively prepared by a C.A. only. The reason for the difference was explained that in the earlier report, the figure of change in networking capital was left out by oversight, which has now been taken care and corrected in the revised report. This contention was supported by Paper Book Page No.21 of the earlier valuation report and the revised valuation report Paper Book Page No.46.We find nothing wrong if a bonafide mistake was corrected. 4.5.2 Before examining the fairness or reasonableness of valuation report submitted by the assessee, we have to bear in mind that the DCF Method, and is essentially based on the projections (estimations) only and hence these projection cannot be compared with the actuals to expect the same figures as were projected. The valuer....
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....e, the higher valuation has to be adopted. Moreover, it is only the Explanation (a)(ii) speaks of the satisfaction of the AO but there appears no such condition in the Explanation (a)(i) which therefore AO 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, we find no justification behind rejecting the declared valuation of the shares and in the impugned addition made by the AO but partly sustained by the CIT(A), which is hereby deleted." We have also gone through the order of the co-ordinate bench of ITAT Jaipur in the case of ACIT, Circle 2, Alwar v/s Safe Decore P Ltd. (ITA No. 716/JP/2017 order dated 12.01.2018) wherein following observations in para 4 and 4.1 are made :- "4. We have considered the rival contentions as well as the relevant material on record. There is no dispute that the assessee has issued the shares to M/s Jasmine Pvt. Ltd., during the year under consideration. Further, the fair market value as per the provision of section 56(2)(vii)(b) has to be determined in accordance with the method prescribed under Rule 11UA of the IT Rules and as per sub-Rule (2....