TaxTMI 
TaxTMI 
TaxTMI 
2023 (5) TMI 1463
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....4,60,320/- under normal provisions and Book Profit u/s I15JB of the Income Tax Act, 1961. The case was selected for limited scrutiny and the Assessing Officer issued notice u/s 143(2) of the Act dt.14.07.2017. In response to the said notices, assessee company filed the required information / details. 2.1 However, the Assessing Officer did not satisfy with the submissions made by the assessee and the Assessing Officer added back the income to the tune of Rs.3.75 crore in the hands of the assessee. Thereafter, the Assessing Officer had completed the assessment by making certain additions including the addition of Rs.3,75,00,000/- towards share premium. Thereby assessed the total income of the assessee at Rs.5,91,25,461/-. The findings of the Assessing Officer as mentioned in Para 7.2 which is to the following effect : "7.2 From the above, the following conclusions are drawn for assessing the share premium received by the assessee as income from 'other sources' as per provisions of section 56(2)(viib) a) The assessee was having no business for the last several years, and yet it was valued at Rs.400/- per share (Rs. 100/- face value + Rs.300/- premium). b) Generally sh....
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.... 43.26 114.69 43.66 57.18 Tax 15.15 0 13.41 0 1353 0 Profit after Tax 33.72 41.36 29.85 114.69 30.12 57.18 From the above statistics for three F. Ys., it can be observed that projections under DCF method are nowhere matching with the actual statistics. For the purpose of illustration depreciation and interest amounts can be compared they are not at all near to projections, there is huge variation to projections and actual. Further, in the valuation report, the average share value was arrived by taking the share valued as per DCF method, Book Value Method and Market value of properties, but, in the same valuation report it failed to submit book value method valuation report and how the market value of the properties was valued also not produced. Therefore, the assessee failed to substantiate how valued under DCF method, hence, the valuation adopted under DCF method may be rejected. 4.7 On the other hand, AR in his rejoinder dealt AO's objections as under: On verification of the certificate issued, the AO observed that the value fixed by the Chartered Accountant is not correct and at para 5, page-2 of the remand report, AO arrived at the profit after ....
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.... of the above, the method adopted by the appellant under Rule 11UA(1)(c)(b) r.w.s. 56(2)(viib) of the Act is held to be correct and hence, the action of the AO in treating the share premium received of Rs.3,75,00,000/- u/s 56(2)(viib) of the Act is not justified and hence directed to be deleted. As a result, the grounds raised in this regard are allowed." 4. Feeling aggrieved by the order passed by the Ld. CIT(A), the Revenue is in appeal before us on the grounds mentioned herein above. 5. Before us, ld. DR for the Revenue had submitted that the assessee during the year under consideration had issued the shares at a premium of Rs.300/- to its holding company namely, M/s. NCL Altek and Seccolor Limited. During the assessment year, the Assessing Officer has called upon the assessee to justify the valuation of the shares. The assessee, in response, thereto had filed reply on 17.12.2018 and in that reply, he has categorically mentioned as under : "Since the company was not actively doing business and allotment was made to holding company on right basis, the company as not considered valuation as contemplated under Rule 11UA(1)(c)(b) and the price of share was arrived based on the ....
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....esentations or warranty, express or implied as to the accuracy, reasonableness or completeness of the information contained in the report. All such parties and entities expressly disclaim any and all liability for, or based on. or relating to any such information contained in, or errors in or omissions from, this report or based on or relating to the recipients use of this report." 7. The ld. DR had further submitted that the ld.CIT(A) had not examined the Chartered Accountant, who had given the report on valuation of the shares and further the assessee was not having any business prior to issuance of shares. It was the contention of ld. DR that the issuance of shares at premium rates by the assessee to its holding company is just a camouflage to bring the undisclosed income of the assessee in the form of share capital. Lastly, it was submitted that the assessee had not paid any taxes in the assessment years 2016-17 to 2018-19. 8. Per contra, ld. AR had vehemently submitted that the order passed by the ld.CIT(A) is in accordance with the law. It was submitted that once the assessee has opted for valuation of shares as per section 56(2)(viib) read with 11UA, then the Assessing Of....
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..... 2016-17, 2017-18 and 2018-19 for the F.Ys.2015-16, 2016-17 and 2017-18 respectively. *** Image left intentionally. 5.1 From the above statistics for the three F.Y-s. it can be observed that projections under DCF method are now here matching with the actual statistics. For the purpose of illustration depreciation and interest amounts can be compared they are not at al near to projections, there is huge variation to projections and actual. Further, in the valuati9on report, the average share value was arrived by taking the share valued as per DOE method, Book Value Method and Market value of properties, but, in the same valuation report it failed to submit book value method valuation report 'and how the market value of the properties was valued also not produced. Therefore, the assessee failed to substantiate how the value of share was valued under DCF method, hence, the valuation adopted under DCF method may be rejected." 9. We have heard the rival submissions and perused the material on record. Section 56(2)(viib) provides as under : "(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall b....
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....sideration, by an individual or a Hindu undivided family, in any previous year from any person or persons on or after the 1st day of April, 2006 39[but before the 1st day of October, 2009], the whole of the aggregate value of such sum: Provided that this clause shall not apply to any sum of money received- (a) from any relative; or (b) on the occasion of the marriage of the individual40; or (c) under a will or by way of inheritance; or (d) in contemplation of death of the payer; or (e) from any local authority as defined in the Explanation to clause (20) of section 10; or (f) from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of section 10; or (g) from any trust or institution registered under 41[section 12AA or section 12AB]. (a) any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum; 44[(b) any immovable property,- (i) without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property; ....
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....; 46[or] 46[(h) by way of transaction not regarded as transfer under clause (vicb) or clause (vid) or clause (vii) of section 47.] (f) "stamp duty value" means the value adopted or assessed or assessable by any authority of the Central Government or a State Government for the purpose of payment of stamp duty in respect of an immovable property;] 52[(viia) 53where a firm or a company not being a company in which the public are substantially interested, receives, in any previous year, from 53aany person or persons, on or after the 1st day of June, 2010 54[but before the 1st day of April, 2017], any property, being shares of a company not being a company in which the public are substantially interested,- (i) without 53aconsideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property; (ii) for a 53aconsideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such 53aconsideration : Provided that this clause shall not apply to any such property received by way of....
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....und established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which has been granted a certificate of registration as a Category I or a Category II Alternative Investment Fund and is regulated under the Securities and Exchange Board of India (Alternative Investment Fund) Regulations, 2012 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992) 60a[or regulated under the International Financial Services Centres Authority Act, 2019 (50 of 2019)]; (ab)"trust" means a trust established under the Indian Trusts Act, 1882 (2 of 1882) or under any other law for the time being in force;] (b) "venture capital company", "venture capital fund" and "venture capital undertaking" shall have the meanings respectively assigned to them in clause (a), clause (b) and clause (c) of 61[Explanation] to clause (23FB) of section 10;] 9.1. The Rule 11UA of I.T. Rules 1962 provides as under : Determination of fair market value. 11UA.30[(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,- (....
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....cases where on the valuation date there is no trading in such shares and securities on any recognized stock exchange; 31[(b) the fair market value of unquoted equity shares shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner, namely:- the fair market value of unquoted equity shares = (A + B + C + D - L) x (PV)/(PE), where, A = book value of all the assets (other than jewellery, artistic work, shares, securities and immovable property) in the balance sheet as reduced by,- (i) any amount of income-tax paid, if any, less the amount of income-tax refund claimed, if any; and (ii) any amount shown as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset; B = the price which the jewellery and artistic work would fetch if sold in the open market on the basis of the valuation report obtained from a registered valuer; C = fair market value of shares and securities as determined in the manner provided in this rule; D = the value adopted or assessed or assessable by any authority of the Government for the purpose of payment of stamp duty in respect of the....
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....rtised amount of deferred expenditure which does not represent the value of any asset; L = book value of liabilities shown in the balance sheet, but not including the following amounts, namely:- (i) the paid-up capital in respect of equity shares; (ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company; (iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation; (iv) any amount representing provision for taxation, other than 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, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto; (v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities; (vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preferen....
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....t was held that if this is satisfied than the liability is not a contingent liability. In the second case, the issue in dispute was about provision of warranty expenses to be incurred in future. Para 10 of this judgment is very relevant and therefore, it is reproduced herein below:- 10. What is a provision ? This is the question which needs to be answered. A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when : (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized. 10. From this Para of this judgment, it is seen that it was held that if a reliable estimate cannot be made than the provision cannot be recognized. In the present case in connection with DCF, we have seen that estimate/ projection of future cash flow has to be made and as per Para 2.10 of this report of research committee of (ICAI) as reproduced above, the first and most critical input of DCF model....
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....ling for a final determination from an independent valuer to confront the petitioner. However, the basis has to be the DCF Method and it is not open to him to change the method of valuation which has been opted for by the Assessee. If Mr. Mohanty is correct in his submission that a part of demand arising out of the assessment order dated 21st December, 2017 would on adoption of DCF Method will be sustained in part, the same is without working out the figures. This was an exercise which ought to have been done by the Assessing Officer and that has not been done by him. In fact, he has completely disregarded the DCF Method for arriving at the fair market value. Therefore, the demand in the facts need to be stayed." 12. As per above Para of this judgment of Hon'ble Bombay High Court, it was held that the AO can scrutinize the valuation report and he can determine a fresh valuation either by himself or by calling a final determination from an independent valuer to confront the assessee. But the basis has to be DCF method and he cannot change the method of valuation which has been opted by the assessee. Hence, in our considered opinion, in the present case, when the guidance of H....
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.... same to the assessee. But the basis has to be DCF method and he cannot change the method of valuation which has been opted by the assessee. (2) For scrutinizing the valuation report, the facts and data available on the date of valuation only has to be considered and actual result of future cannot be a basis to decide about reliability of the projections. (3) The primary onus to prove the correctness of the valuation Report is on the assessee as he has special knowledge and he is privy to the facts of the company and only he has opted for this method. Hence, he has to satisfy about the correctness of the projections, Discounting factor and Terminal value etc. with the help of Empirical data or industry norm if any and/or Scientific Data, Scientific Method, scientific study and applicable Guidelines regarding DCF Method of Valuation. 15. In the result, the appeal of the assessee is allowed for statistical purposes." 10. In view of the above, it is abundantly clear that the method adopted by the assessee namely, DCF, is required to be adopted by the Assessing Officer for the purpose of estimating Fair Market Value of the shares allotted by the assessee to its shareholding ....