TaxTMI 
TaxTMI 
TaxTMI 
2025 (10) TMI 651
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.... premium received on issue of shares. The addition made kindly be deleted. 3. At the outset, learned Counsel for the assessee, informs the Bench that assessee does not wish to press ground No. 1 raised by it, therefore, we dismiss ground No.1, raised by the assessee, as not pressed. 4. The relevant material facts, as culled out from the material on record, are as follows. The assessee has filed return of income for assessment year (A.Y.) 2015-16, on 13.09.2015, declaring total income at nil and current year loss at Rs. 2,26,57,224/-.The assessee`s case was selected for scrutiny through the CASS system and assessment u/s 143(3) of the Income Tax Act, 1961 was completed on 27.12.2017 accepting the total income. Thereafter, information was received by the Department in the category of High Risk Transaction on INSIGHT portal of the department that the assessee has received share premium of Rs. 3,99,20,000/-. Hence, after recording reasons of reopening and obtaining prior approval from the competent authority, the case was re-opened u/s 147 of the Income Tax Act. Accordingly, notice u/s 148 of the Act, was issued on 31.03.2021. The Assessee submitted its Return of income on 02.04.....
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....sessee-company had valued shares following DCF (Discounted Free Cash Flow) Method. The valuation report was obtained from a qualified Chartered Accountant, other than statutory auditor of the company. The copy of valuation report was submitted before the assessing officer, by the assessee. No dividend was declared for the relevant previous year as also in earlier years. The assessee submitted the valuation report, which is reproduced below: 8. However, the assessing officer rejected the above valuation report of the assessee- company and the explanations submitted by the assessee- company, by observing the following: (i) On going through the valuation report it was noticed by the assessing officer that the valuer in the valuation report stated that they estimate cash flow, which will grow by 10% in the first two years, and then 7% in the following three. Thereafter, long term Growth Rate will be 5%. The estimated cost of equity capital @14%. The terminal value, or long term valuation the company's growth approaches is calculated using the Gordon Growth Model. However, in the assessee's case, the valuer has not submitted the basis of the estimation on the ba....
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....rs were considered by the valuer in his report. Thus, it is imperative that the valuer should study and research and make an educated valuation of the shares. The key areas that require considerable attention are past performance growth prospects, earnings capacity, expansion etc. However, in the instant case the valuer has merely adopted the values provided by the management clearly ignoring the other factors. (iii) Further, ongoing through the projection for the period 2015 to 2018 provided by the assessee to the valuer for valuation and the actual financial for the Financial year 2015-16 to 2019-20, it was noticed by the assessing officer that the actual figure achieved by the company and the projections given by the assessee has no matching. It is acceptable that projections are not science and there may be some variations but if the variation is between 5 to 10% may be acceptable. But there is a big mismatch between fair market value of the share and share issue price during the period, the valuer used for Discounted Cash Flow System. Therefore, the projections are inflated such as the assessee company inflow the money required by them in the garb of share premium. ....
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....and the submission of the assessee vide its letter dated 19.02.2022 was rejected by the assessing officer. 9. Then after, assessing officer determined the fair market value of the shares of the assessee- company under Rule 11UA of the Rules. The assessing officer noticed that in the assessee`s case, the assessee has not submitted any data/financial on the date of issuing the share, during the current period. Therefore, the valuation of the share of per unit (NAV) is computed on the basis of financials, as on 31.03.2014, that is, last financial available before the share issue date. In terms of provisions of section 56(2)(viib) of the Income Tax Act, 1961, the fair market value of the share of the assessee -company under Rule 11UA of the Income Tax Rules, 1962 was determined as under: Fair Market Value as per Rule 11UA- Book value of assets excluding parameters as per Rule 11UA - (A) 8,00,00,000/- Book value of Liability excluding parameters as per Rule 11UA (L) (In the present case only after deducting paid up capital) 7,98,00,000/- PV (the paid up value of such equity shares) 10/- PE (total amount of paid up equity share capital as shown in the bal....
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....calculation in this regard. The exorbitant value of share computed by the valuer without any basis/process is not acceptable. (ii) Assessee stated that the very purpose of certification of DCF valuation by a merchant bank or Chartered Accountant is to ensure that the valuation is fair and reasonable. In the draft assessment order issued along with the show cause notice, the variation done by the assessee has been clearly pointed out and the reason for rejection of the valuation has been also discussed. It was also mentioned that for proper and scientific valuation of shares, which factors are to be considered as per the recommendations of the Technical guide on share valuation issued by ICAI, valuer is required to arrive at the value of a share after study and research. The key areas that require considerable attention are past performance growth prospects earnings, capacity, expansion etc. However, in the instant case the valuer has merely adopted the values provided by the management clearly ignoring the other factors. In absence of fair and reasonable value of the share, the valuation has been done on the basis of other method prescribed in Rules 11UA of Income Tax Rule....
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....ssue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares" As per the Act there is no mention regarding bonafide business transaction. In the present case, assessee- company has taken share premium on the basis of valuation report which is not as per the guidelines issued by the ICAI but on the basis of some arbitrary projections, and projections have not been achieved by the assessee. In this regard, assessee relied on various judicial precedents. In this regard, it is to be stated that the provisions of section 56(2)(vii) (b) of the Act was introduced in the Finance Act, 2013 w.e.f. A.Y. 2014-15. However, ongoing through the judicial precedents cited by the assessee, it is noticed that except 2 judgment, others are prior to the introduction of the provision of Section 56(2)(vii)(b) of the Income Tax Act, 1961 and in other two cases facts of the case is different. (vii) Assessee contended that the profitability was predicted based on the similar nature units viz. Balaji Wafers Private Limited. The contention of the assessee- company is not acceptable, there is lot....
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....any is not one in which the public has substantial interest, would be treated as income from other sources, as seen from Section 56(2) (viib) of the Act, which we do not think can be controlled by the provisions of Section 68 of the Act Section 68 on the other hand, as substituted with the provisos, treats any credit in the books of accounts, even by way of allotment of shares; for which no satisfactory explanation is offered. to be liable to income-tax. Clause (viib) of Section 56(2) is triggered at the stage of computation of income itself when the share application money received, from a resident, by a Company, in which the public are not substantially interested, is above the face value. Then the aggregate consideration received for the shares as exceeds the fair market value will be included as income from other sources. However, when the resident investor is not able to explain the nature and source for the credit seen in the books of accounts of the Company or the explanation offered is not satisfactory then the entire credit would be charged to income tax for that previous year. That is the entire amounts credited in the books of accounts, styled as. for allotment of shares....
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....untant had failed to explain the terminal value of Rs. 25,59,15,917/-. The Ld. Counsel submitted that certificate given by the Chartered Accountant, should be accepted and no addition should be made in the hands of the assessee, for that learned Counsel relied on the following judgements: (i) M/s Cinestaan Entertainment Pvt Ltd, ITA No.1007/2019, order dated 01.03.2021 (ii)M/s phenix Procon Pvt Ltd, ITA No.1032/Ahd/2019, order dated 25.01.2024 (iii)M/s Rameshwaram S Glass (p) Ltd, ITA No.884/JP/2016. 16. On the other hand, the ld.CIT-DR for the revenue explained that the valuation report of the Chartered Accountant had been given under Rule 11UA(2)(b) of the Rules, however, the Chartered Accountant has not adopted any base for estimation mentioned in the certificate, that is while making the estimation, no any base has been adopted by the Chartered Accountant, therefore, the valuation report is defective. The bank rate prevailing in that period, and risk involved in that period, and industry risk should be taken into account by the Chartered Accountant. The Chartered Accountant has also failed to make estimation for terminal value of Rs. 25,59,15,917/-....
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....nd circumstances, the judgment of the Hon'ble Delhi High Court in the case of M/s Cinestaan Entertainment Pvt. Ltd, ITA No. 1007/2019 & CM APPL 54134/2029 does not apply to the assessee's case under consideration. In the said judgment the Hon'ble High Court stated that the Revenue had the option to do its own valuation and determine the fair market value on the basis of either the DCF method or under NAV as per Rule 11UA of the Rules. Therefore assessing officer has adopted the same method since the assessee is not start up company and the judgment delivered by the Hon'ble Delhi High Court pertains to outside investors. However assessee's case is that it is a private limited company, therefore, inside investors are involved, that is family members are the investors in the assessee -company. Therefore judgment cited by the ld. Counsel for the assessee is distinguishable on facts. Therefore, learned DR for the revenue submitted that the order passed by the assessing officer may be upheld. 18. We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the ....
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....were overly optimistic and unrealistic. No dividend has been paid by the company since 2015 to 2024, that is, till date. 20. Technical Guide on Share Valuation, has not been considered by the Chartered Accountant. The AO referred to the "Technical Guide on Share Valuation" published by the Institute of Chartered Accountants of India (ICAI), which outlines the key factors to be considered for a proper and scientific valuation of shares. The appellant's valuation report did not adhere to these guidelines, particularly in the areas of cash flow projections, discount rate, and terminal value. Therefore, adoption of NAV Method by assessing officer, in these circumstances, is fair. In the absence of a credible DCF valuation, the AO adopted the Net Asset Value (NAV) method to determine the fair market value of the shares. The NAV method is a simpler and more straightforward approach that calculates the value of the company's shares based on its net assets (total assets minus total liabilities). The AO computed the FMV of the shares as Rs. 10 per share using the NAV method. This was significantly lower than the Rs. 5,000 per share determined by the appellant using the DCF method....