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2026 (4) TMI 1703
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....issued 57,620/- equity shares having face value of Rs. 1/- each at a premium of Rs. 2602.26 per share and later 94,588/- equity shares having face value of Rs. 1/- each were issued at a premium of 2642.04 per share to same party. The AO further observed that the assessee has taken premium based on the valuation report dt. 15.12.2014 from the approved valuer for determination of Fair Market Value (FMV) wherein the Discount Cash Flow Method (DCF) was selected by the valuer. This report was obtained in immediately preceding assessment year i.e. in AY 2015-16 when the assessee had issued shares at a premium of Rs. 2602.04 per share. The AO observed that during the year under appeal no fresh valuation report for determination of FMV of the shares issued was obtained and based on the valuation report dated 15.12.2014 obtained in preceding year, shares were issued at a premium. The AO, thus, issued summon u/s 131 to the valuer and his statements were recorded wherein he denied of issue fresh valuation report for determination of FMV of the equity shares issued during the year under appeal. The valuer further stated that before issue of shares during the year under appeal, the assessee sho....
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....x Rules, 1962 ("the Rules"). Admittedly since the assessee has not obtained any valuation report before the issue of shares in the Financial Year 2015-16 relevant to assessment year before us under appeal, the AO has rightly taken the FMV of the shares issued at Rs. 1/- per equity share. Ld. CIT DR further submits that the assessee based on valuation report obtained in immediately preceding assessment year has issued the shares at a premium where the shares were issued on two occasions. Ld. CIT DR drew our attention to the fact that 57,620/- shares were issued on 07.05.2015 at a Premium of Rs. 2602.26 per share to M/s Derive Investments represented by its Partners namely Sh. R.S. Damani and Sh. Rakesh Jhunjhunwala (28810 shares each). Thereafter on 05.01.2016, 94,588/- shares were issued at a Premium of Rs. 2642.04 per share to same share holders (47294 shares each). Ld. CIT DR submits that the premium charged on second occasion is higher than the FMV as valued by the valuer in its report dt. 15.12.2014 based on which the shares were allotted in immediately preceding year and on 07.05.2015 i.e. in the year under appeal. As per ld. CITDR the premium charged is not on the basis of th....
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....valuer dated 15.12.2014 and therefore, assessee has issued the shares in the year under also on the same valuation. Ld. AR submits that in the immediately preceding year, the AO had made the addition u/s 56(2)(viib) of the Act and addition was made for the share premium received and the matter traveled up to ITAT, Delhi bench wherein the Co-ordinate Bench vide its order dated 27.05.2019 in ITA No. 8113/Del/2018 has deleted the addition so made. Ld. AR further drew our attention to the fact that the order of the Co-ordinate Bench of the Tribunal was confirmed by the Hon'ble Jurisdictional High Court in ITA No.1007/2019 vide its order dated 1st March, 2021, copies of both the orders are placed before us. It is thus submitted that the issue of FMV has already been decided by the jurisdictional High Court where the hon'ble high court has approved the valuation report obtained by the assessee based on DCF method and following the said report share were allotted, therefore, no addition could be made u/s 56(2)(viib) of the Act. Ld. AR also filed a chart wherein the issues raised and the corresponding observation of the coordinate bench of Tribunal and of Hon'ble High Court are tabulated, ....
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....of ere projects in hand had adopted DCF method to value its shares. Under the DCF Method, the fair market value of the share is of ns required to be determined either by the Merchant Banker or On by the Chartered Accountant. The valuation of shares based on DCF is basically to see the future year's revenue and d profits projected and then discount the same to arrive at the present value of the business. Before us, the ld. counsel from the facts and material placed on record had pointed out that the basis of projection adopted by the valuer was based on The very scientific analysis and method, like number of movies to be released in the upcoming years and such movies were 8, further segregated into big, medium, small and micro films ng with reasonable number of movies in hand, like one big film, The two medium films and one or two small or micro film a year. 31.........Nowhere the Assessing Officer and Id. CIT (A) has either disputed the details of projects, revenues, cost incurred and the manner in which it was substantiated by the actual with the actual state of affairs based on subsequent year a revenue. In fact, the projected revenue really commensurate financials. ....
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....less, 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." Hon'ble Delhi High Court in para 13 on page 14 of its order has upheld ITAT's view by holding that: - "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 s. commercial prudence of an assessee relating to valuation is 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 at carried out on the basis of information and material available on the date of valuation and projection of future Co revenue. There is no dispute that methodology adopted by e the Respondent- Assessee has been d....
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....n 133(6) to all the investors to seek confirmation, information and documents pertaining to the issuance of shares. Further, the venture agreement between the Respondent-Assessee and the investors was also filed before the AO. The learned ITAT thus, after due consideration of the record, concluded that neither the identity, nor the creditworthiness and genuineness of the investors and the pertinent transaction could be doubted. This fact stood fully established, before the AO and has not been disputed or doubted. Therefore, the nature and source of the credit stood accepted." Share premium is justified as shares have been subscribed by existing investors through a joint agreement in 2 tranches, one falling in AY 2015-16 and subsequent tranche falling in AY 2016-17 (years under consideration) AO has alleged on page 21 of its order as follows: - "7.6 It is apparent from the P&L account that the investments has not moved at all in the direction to achieve towards the revenue generation and there is no scope of achievements of projection made by the valuer in report 11UA, hence, the share premium is not justified. Hence, it can be concluded on the basis above figures, that the....
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....ts order alleged that:- "7.5 Further from the perusal of the Balance Sheet 31.03.2016, it is noticed that the assessee company shown an amount of Rs. 125,86,00,000/-as Noncurrent investments as per note-7. The note-7 details were not provided during the course of assessment proceedings. On the above investment, the assessee company has shown gain on investments amounting to Rs. 28,00,693/-. The above gain on the investment of crores is only a meagre gain, which clearly depicts that the investment does not commensurate with business. The above shows that there is no business prudence. 7.5.1 Further from the Balance Sheet, it is apparent that the assessee company has no fixed assets. Furthermore, the Profit & Loss account for the F.Y. 2015-16 shows that the assessee company declared NIL income from operations. The only income the assessee company offered to tax is Other Income amounting to Rs. 2,801,517/-. There are no major expenses claimed or incurred during the F.Y. 2015-16. This clearly shows that the company has no profit apparatus, no generating business model and also no genuine profit. The above fact very specifically proves that the amount raised through Share Pr....
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....futures without any corresponding and substantive evidence as there is a vast difference between the projections made by the assessee and the actual results which shows an entirely different picture and assessee has failed to show a single reason for the vast difference of the projection projected and actually delivered. Ld. CIT DR further submits that section 56(2) (viib) of the Act provides that where a company (not being a company in which the public are substantially interested) issues shares at a price exceeding their FMV, the excess amount received over the FMV is taxable as income from other sources. Rule 11UA of the Income Tax Rules, 1962, allows the assessee to determine the FMV using the DCF method, among others, provided the valuation is substantiated and reflects a realistic assessment of the company's worth. It is thus submitted by ld. CIT DR that the addition made by the AO deserves to be restored. 9. Heard both the parties at length and perused the material available on record. Brief facts of the case are that assessee company was incorporated on 19th September, 2013 with the object of carrying out all the kinds of business of production and distribution of fe....
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....ty shares of INR 1 (Indian Rupees One) each. (iii) Equity Shareholding Pattern SR. No. NAME OF THE SHAREHOLDERS EQUITY SHARES HELD SHAREHODING PERCENTAGE (1) RK 100,000 19.40% (2) AM 415,385 80.6% Total 5,15,385 100% Part B-Capital Structure & Shareholding Pattern At Initial Tranche Completion (i) Issued Subscribed and Paid Up Share Capital INR 5,53,799 (Indian Rupees Five Lakhs Fifty Three Thousand Seven Hundred Ninety Nine only) divided into 5,53,799 (Five Lakhs Fifty Three Thousand Seven Hundred Ninety Nine) equity shares of INR 1 (Indian Rupees One only) each. (ii) Equity Shareholding Pattern SR. No. Name of the Shareholder Number of Equity Shares Held Shareholding Percentage (1) Anand Mahindra 4,15,385 75% (2) Rohit Khattar 1,00,000 18.06% (3) Rakesh Jhunjhunwala 19,207 3.47% (4) Derive Investments 19,207 3.47% Total 553,799 100% Part C-Shareholding Pattern Post Investment of Subsequent Tranche Subscription Amount SR. No. Name of the Shareholder Number of Equity Shares Held Shareholding Percentage ....
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.... or meaning thereof, be deemed to mean and include its successors and permitted assigns) of the FIFTH PART Each party above named shall be referred to as a 'Party' when referred to individually and shall be referred to as the "Parties' which referred to collectively. The Parties of the Second and Third Part shall hereinafter be collectively referred to as the "Promoters The Parties of the Fourth and Fifth Part shall hereinafter be collectively referred to as the "Investors and individually as an "Investor'. WHEREAS (A) The Company is a private company limited by shares incorporated and existing under the Companies Act, 1958. (B) As on the Execution Date (as defined hereinafter), issued, subscribed and paid-up share capital of the Company is held in the manner sel forth in Part A-Schedule 1 hereto; (C) The Company, in order to raise funds, undertook a rights issue offering to the existing equity shareholders of the Company in proportion to their equity shareholding in the Company, a total of 38.414 (Thirty Eight Thousand Four Hundred Fourteen) equity shares of the Company at the rate of INR 2,603.22 (Rupe....
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....ity Shares of the company having face value of Rs. 1 was worked out at Rs. 2603.26 per share based on which the shares were allotted in immediately preceding year as well as during the year 57620 shares were allotted. 13. It is observed that in AY 2015-16, additions was made u/s 56(2)(viib) of the Act, for the amount of premium received by assessee company by alleging that the same as excessive and unreasonable which was deleted by the Co-ordinate Bench of the Tribunal in ITA No.8113/Del/2018 vide order dated 27th May, 2019 which order is upheld by the Hon'ble Delhi High Court in ITA No.1770/2009 vide order dated 1st March, 2021 wherein the Hon'ble High Court has made following observations: "25. We have heard the rival contentions, perused the relevant findings given in the impugned orders as well as material referred to before us at the time of hearing. In various grounds of appeal, the sole issue raised by the appellant assessee relates to the addition of Rs. 90,95,46,200/- made by the AO, by invoking the deeming provisions of Section 56(2) (viib) by adopting fair market value of the share premium received by the Assessee Company from the investors at Nil. What has b....
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.... held that no efforts have been made by the assessee to substantiate the figures of projected revenue in the valuation report and has also failed to submit any basis for projection. Instead, AO held that assessee should have invested the share premium amount to earn some income, whereas assessee has made investment in debentures of its associate company and hence the basic substance of receiving the high premium was not justified. After invoking the provision of Section 56(2)(viib), AO took fair market value of premium at Nil and face value of Rs. 10/- per share. 27. From the perusal of the records and the impugned orders, it transpires that Assessing Officer had also issued notices u/s. 133(6) to all the 3 investors to seek confirmation, information and documents pertaining to transaction of issuance of shares. In response to the said notices, Assessing Officer has received all the details and replies directly from these investors confirming the transaction. The venture agreement between the assessee and the investors were also filed before the Assessing Officer and in this regard, our attention was also drawn by the ld. counsel that the investment was to be made by these....
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....scribed by unrelated independent parties, who are one of the leading industrialists and businessman of the country, after considering the valuation report and future prospect of the company, have chosen to make investment as an equity partners in a 'start-up company' like assessee, then can it be said that there is any kind of tax abuse tactics or laundering of any unaccounted money. It cannot be the unaccounted or black money of investors as it is their tax paid money invested, duly disclosed and confirmed by them; and nothing has been brought on record that it is unaccounted money of assessee company routed through circuitous channel or any other dubious manner through these accredited investors. If such a strict view is adopted on such investment as have been done by the Assessing Officer and by ld. CIT(A), then no investor in the country will invest in a 'start-up company', because investment can only be lured with the future prospects and projection of these companies. 29. Now, whether under the deeming provision such an investment received by the assessee company be brought to tax. The relevant provision of Section 56 for the sake of ready reference i....
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....ng manner, namely,- (2) Notwithstanding anything contained in sub-clause (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 (vib) 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:- (b) the fair market value of the unquoted equity shares determined by a merchant banker or an accountant as per the Discounted Free Cash Flow method." 30. Ergo, the assessee has an option to do the valuation and determine the fair market value either on DCF Method or NAV Method. The assessee being a 'start-up company' having lot of projects in hand had adopted DCF method to value its shares. Under the DCF Method, the fair market value of the share is required to be determined either by the Merchant Banker or by the Chartered Accountant. The valuation of shares based on DCF is basically to see the future year's revenue and profits projected and then discount the same to arrive at the present value of....
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....n fact had received 100 films scripts out of which it had short listed its initial stage of movies. The ld. counsel has also drawn our attention on various agreements for production of these films. He also pointed out that the assessee was projected to make five movies which it had actually commenced and released and has also pointed out that assessee has worked upon with 25 movies inception. Not only that, assessee had also taken into account the cost incurred in production of various movies and also the comparison of projected revenue and cost of three movies which were actually released by the assessee with actual revenue and cost, for which separate annexure were filed before us. Nowhere the Assessing Officer and Id. CIT (A) has either disputed the details of projects, revenues, cost incurred and the manner in which it was substantiated by the actual revenue. In fact, the projected revenue really commensurate with the actual state of affairs based on subsequent year financials. It has been pointed out that assessee had incurred huge cost which were precisely as per the estimates as projected. However, the revenue could not be generated as much expected, because the film did not....
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.... 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 provision. If the statute provides that the valuation has to be done as per the prescribed method and if one of the prescribed methods has been adopted by the assessee, then Assessing Officer has to accept the same and in case he is not satisfied, then we do not we find any express provision under the Act or rules, where Assessing Officer can adopt his own valuation in DCF method or get it valued by some different Valuer. There has to be some enabling provision under the Rule or the Act where Assessing Officer has been given a power to tinker with the valuation report obtained by an independent valuer as per the qualification given in the Rule 11U. Here, in this case, Assessing Officer has tinkered with DCF methodology and rejected by comparing the projections with actual figures. The Rules provide for two valuation methodologies, one is assets based NAV method which is based on actual numbers as per latest audited financials of the assessee company. Whereas in a DCF method, the val....
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....f 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 there is no commencement of production or of the business, does not mean that its share cannot command any premium. For such cases, the concept of start-up is a good example and as submitted the income-tax Act also recognized and encouraging the start-ups." iii) DQ (International) Ltd. vs. ACIT (ITA 151/Hyd/2015) "10...... In our considered view, for valuation of an intangible asset, only the future projections along can be adopted and such valuation cannot be reviewed with actuals after 3 or 4 years down the line. Accordingly, the grounds raised by the assessee are allowed". The aforesaid ratios clearly endorsed our view as above. 34. In any case, if law provides the assessee to get the valuation done from a prescribed expert as per the prescribed method, then the same cannot be rejected because neither the Assessing Officer nor the assessee have been recognized as expert under the law. 35. There is another ver....
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.... per Equity. For this, assessee had made a detailed written submission which has been reproduced hereinabove and the crux of the argument of the assessee is that once it had entered into an agreement for investment of Rs. 50 Crs. with the Investors and agreed to allot specific number of shares as per Schedule-1 Part-B and Part-C to the investors, the rate per share at which fresh shares are to be issued is thus fixed between the parties and such price is supported by the valuation report which is now accepted by the Hon'ble jurisdictional high court. Since the premium taken in the immediately preceding year has been accepted by the Hon'ble High Court, therefore no addition is required to be made in the year under appeal. 15. It is observed that during the year under appeal, assessee has issued share on two occasions and when 57620 shares were issued, the same were issued at a premium of Rs. 2602.26 per share i.e., the premium taken in immediately preceding year. However, when 94588 shares were issued, the premium taken was of Rs. 2642.02 per share, which is different from the premium taken on earlier occasion of shares and no valuation report was obtained by the assessee. At thi....
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....ings, sculptures or any work of art,- (i) ........ (ii) ....... (iii) ...... (c) valuation of shares and securities,- (a) the fair market value of quoted shares and securities shall be determined in the following manner, namely,- (i)......... (ii) ....... (a) ....... (b) ....... (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....
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....quity shares =| (A-L)(PE)| x (PV) 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 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....
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....ort has to be obtained. Section 56(2)(viib) of the Act r.w.s 11UA has specifically provided that for the purpose of issue of Unquoted Equity Shares at premium, assessee should obtained the valuation report before issue of shares. In the instant case, no such report was obtained by the assessee. It is true that the price at which share was to be issued was determined in the joint venture agreement but that would be for the purpose of issue of shares to the investors and that cannot be taken as sacrosanct valuation for the purpose of taxability as per provisions of 56(2)(viib) of the Act as Income Tax is separate Code and, the assessee has to obtained report from the valuation. 20. It is further observed that the Assessing Officer has raised doubts on the valuation report and the projection taken by the valuer in the report dated 15.12.2014, however, as observed above, the said report cannot be doubted as the same has got approved by the Hon'ble Delhi High Court in the assessee's own case in immediately preceding year. 21. Since the assessee has not filed any report in support of the Fair Market Value for issue of shares during the year under appeal, it was the duty of the Asse....
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....ll as net asset value method. He submitted that when the legislation has conferred an option on the assessee to choose a particular method of the valuation, the AO cannot find fault in the said recognized method and adopting the method of his own choice. In support of this, he relied on the decision of the Hon'ble Jurisdictional High Court in the case of Vodafone M-Pesa Ltd. v PCIT (2018) 164 DTR 257/ 256 Taxman 240 (Bom)(HC). As far as the worth of food division is concerned, the Ld. Counsel for the assessee submitted that assessee has followed the method prescribed under section 50B(3) of the Act alongwith Explanation (2). He submitted that in the net worth computed by the assessee and in the AO, there is only one difference. It was submitted that the assessee following the Explanation-2 below section 50B(3) of the Act has adopted written down value of the block asset in case of the depreciable asset as per the proviso to section 43 of the Act, which the AO has omitted. 19. We have heard rival submissions on the issue in dispute and perused the material on record. We find that computation of LTCG on the transfer of undertaking as the slump sale consists of two compon....
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.... the AO has to carry out a fresh valuation report by applying the same valuation method and determine the fair market value of the unquoted shares. 18.Therefore, in our view, the Assessing Officer was incorrect in concluding that the DCF method is "quite unrealistic and inapplicable" to the terms of the Income Tax Act. On the contrary, the DCF method is quite applicable and was required to be applied by the Assessing Officer to determine the FMV of the unquoted shares. ........." 20. A more detailed discussion on the issue which confronts us in this appeal is found in the judgment rendered by the Mumbai Bench of the ITAT in Dy. CIT vs. Credtalpha Alternative Investment Advisors (P.) Ltd. [2022] 134 Taxmann.com 223/193 ITD 502 and the relevant parts whereof are reproduced hereunder:- "15. Thus, the fair market value of the share shall be higher of the value as determined in accordance with the provisions of rule 11 UA or any other method, which can be substantiated by the assessee before the Assessing Officer. For the purpose of determining "fair (2022) 94 ITR (Trib) 596 market value" of unquoted shares provisions of rule 11 UA (2) applies which gives an o....
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.... based on review of historical data and projected financial information provided by the management. Further report of expert will always include limitation and responsibilities but that does not make his report incorrect. Of course, if there are errors in the working of projected cash flow, estimating the projected revenue and projected expenditure as well as in adoption of cost of equity and discount factor, the learned Assessing Officer is within his right to correct it after questioning the same to the assessee. The learned Assessing Officer can also question the basic assumptions made by the valuer. If they are unreasonable or not based on historical data coupled with the management expectation, the learned Assessing Officer has every right to question it and adjust the valuation so derived at. However, if he does not find any error in those workings, he could not have rejected the same. Further the reason given by the learned Assessing Officer that the net asset value method and the discounted cash flow method for valuation of the shares of the company gives a wide variation between them, we do not find any reason to find fault with the assessee in such cases. Both these metho....
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....s been opted by the Assessee. The decision of ITAT, Delhi in the case of Agro Portfolio Ltd. 171 ITD 74 has also been considered by the ITAT, Bangalore in the case of VBHC Value Homes Pvt. Ltd.(supra). 12. In view of the above legal position, we are of view that the issue with regard to valuation has to be decided afresh by the AO on the lines indicated in the decision of ITAT, Bangalore in the case of VBHC Value Homes Pvt. Ltd., Vs ITO (supra) i.e., (i) the AO can scrutinize the valuation report and he can determine a fresh valuation either by himself or by calling a 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. (ii) 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. 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 s....