TaxTMI 
TaxTMI 
2026 (9) TMI 1879
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....IT(A) has erred in confirming the addition of INR.51,73,81,524 under section 56(2)(viib) of the Act by treating the same as excessive share premium received from resident shareholder. 1.2. On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A)/learned AO has erred in not appreciating that facts of current year are identical to earlier year-investors are same, premium is same, nature of investment is also same and the said facts have already been evaluated and accepted by learned AO in earlier year in greater detail. 1.3. On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A)/learned AO has erred in rejecting the Discounted Cash Flow ('DCF') method without appreciating the fact that it is a recognized and most appropriate method for valuation of shares as per Rule 11UA(2)(b) of the Income-tax Rules, 1962 for the purpose of Section56(2)(viib) of the Act. 1.4. On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A)/learned AO has erred in questioning the valuation report issued by an independent valuer without appreciating that the same is backed up by robust working....
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....pellant for underreporting income. 4. Ground No. 4: Levy of penalty under section 271AAC of the Act: 4.1. On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A)/learned AO has erred in initiating the penalty proceedings under section 271AAC of the Act against the Appellant without appreciating the fact that there is no unexplained expenditure as contemplated under section 69C of the Act" 3. The relevant facts in brief are that the Assessee is a private limited company engaged in providing healthcare services at home and other related services. For the Assessment Year 2018-2019, the Assessee filed return of income on 24/09/2019, declaring a total loss of INR.37,44,76,803/-. 4. The case of the Assessee was selected for regular scrutiny. The Assessing Officer noted that the during the relevant previous year, the Assessee-company has issued 10 equity shares to Bennett Coleman and Company Limited at an issue price of INR.6,357/- per share (at face value INR.10/- and premium INR.6,347/- per share) and 82,686 Compulsorily Convertible Preference Shares (CCPS) to Mahindra Holdings Limited at an issue price of INR.6,357/- per share (face ....
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....ed to provide. As no valuation report was submitted with details on the projections taken and estimations taken to compute the valuation of shares, the valuation relied upon by the appellant was not considered and a show cause notice was issued by the AO by proposing an addition of Rs. 51,73,81,524/- by carrying out valuation by NAV method instead of DCF method and Rs. 18,37,373/- as unexplained expenditure u/s 69C of the Act. Order u/s 143(3) rws 143(3A) & 143(3B) was passed on 12.03.2021 making the above additions. Aggrieved, the appellant filed this appeal. 9.3 During the appellate proceedings the appellant has raised the following grounds. Ground No.1 with respect to addition of Rs. 51,73,81,524/- u/s 56(2)(viib) of the Act During the captioned year of AY 2018-19 Appellant issued 10 equity shares to resident shareholder and 102,249 Compulsory convertible preference shares (CCPS) to resident as well as non-resident shareholders. Appellant had issued 10 equity shares to resident shareholder at a premium of INR.6,347 per share over face value of INR.10 per share and 82,586 CCPS shares to resident shareholders at a premium of INR.4,357 per share over the ....
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....isory services dt December 2017 wherein some data is furnished with no basis given categorically Also, the said document does not show acceptance or communication made with Key Managerial persons or Investors and no documents proving that this memorandum was furnished in December 2017 was brought up. It is clear that there is large variation in projected data and the actual data. Though should be less le. around 5%. In the present case for FY 2018-19, the variation the actual and the projected data are difficult to be matched, yet the variation 80%. In fact the projection should be made on the basis of past performance is more than 50% and for FY the variation shown by the appellant is more than achieved by the company and looking over the financials of past 5 years, it is seen that Profit before Tax in negative for the past 5 years. 9.6 Further, as observed by the Assessing Officer, it is seen that the projection of the appellant itself show that in FY 2017-18, 2018-19 and 2019-20, the PBT will be in negative and the cumulative losses will be Rs. 124.86 Crore as per projection and which mean that the entire net worth of the company will be eroded at that time and only due....
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....e figures should be near to the projections taken else too much varied projections cast doubt on method of valuation adopted 9.9 During the appellate proceedings, the appellant has contested that the Assessing Officer is not entitled to change the valuation methodology adopted by the taxpayer In this regard reliance is placed on the judgment of Hon'ble ITAT Bangalore, in the case of Innoviti Payments Solutions Pvt. Ltd. v. ITO (TS -4-ITAT-2019-Bang), wherein the ITAT laid down guidelines regarding application of DCF method of share valuation for Sec 56(2)(viib) of the Act. Hon'ble ITAT rules on application of Discounted Cash Flow (DCF) method of share valuation for the purpose of Sec 56(2)(viib), holds that the first and foremost critical input for DCF method is cash flow projection. ITAT relied upon 'Technical guide on Share valuation' by ICAI Research Committee, holds that cash flow projections should reflect 'the best estimates of the management and take into account various macro and micro economic factors affecting the business'; Holds that if assessee cannot establish that projections are reliable estimate achievable with reasonable certainty,....
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....), is found to be proper. Accordingly, the addition of Rs. 51.73.81.524/- made u/s 56(2)(vib) of the Income Tax Act is upheld. 10. With respect to the ground raised by the appellant on the addition made by the Assessing Officer u/s 69C of the Act amounting to Rs. 18,37,373/-, it is seen that during the assessment proceedings, M/s Google India Pvt Ltd, M/s Centirgrade brand Creative Solutions Pvt Ltd and M/s Karunadu Cabs submitted their confirmations towards the payment received from the appellant, however there was a difference in amount claimed by the appellant and as per the reply filed to the notice u/s 133(6) of the Act in the case of M/s Google India Pvt Ltd and M/s Karunadu Cabs The difference amount of Rs. 18,37,373/- was considered as unexplained expenditure and the AO added the same u/s 69C of the Act. 10.1 During the appellate proceedings, the appellant added that the Assessing Officer has not provided the reply furnished by the above parties to the appellant for reconciliation and hence not provided opportunity to explain the difference. In this regard, it is pertinent to mention that the appellant has been issued show cause notices by proposing the sa....
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....is inherently forward-looking based on business projections as on the valuation date, and actual cash flows realized in subsequent years cannot be the basis of reject the projections made by the independent valuer using the discounted cash flows and the terminal value determined. It was further submitted that the authorities below had failed to appreciate that the Assessee company started operation in financial year 2015. The valuation report prepared in December 2017 and the Certificate of Valuation, dated 25/01/2018, (which also taken into consideration the convertible preference shares and employee stock options issued by the Assessee company) were placed before the Assessing Officer as well as the CIT(A). However, the authorities below failed to appreciate the same and rejected the DCF Method on incorrect understanding of facts and legal position. 8. Per Contra, the Learned Departmental Representative relied upon the orders passed by the Assessing Officer and the Learned CIT(A). The Learned Departmental Representative submitted that the DCF Projections were unrealistic as the same showed a deviation of 50% to 80% from actual business performance. Relying upon judicial preced....
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....g Officer: "With reference to above notice, we are pleased to submit required information as under. 1. On verification of the balance sheet, it is seen that during the year, you have issued certain shares at heavy premium. In this regard, you are requested to submit the details of shares issued in the following format: You are requested to furnish the copy of valuation report based on which premium amount have been decided along with copy of Form 2 filed in ROC. Further, you are requested to discharge the onus casted upon you u/s 68 of the Act and furnish proof of identity and creditworthiness of the person/party to whom shares have been issued and genuineness of the transactions. * Please refer Annexure 1 for share issued along with premium details and their credit worthiness * Please refer Annexure 1A for valuation Report * Please refer Annexure 18 for form PAS 3 (New form in place of Form 2) filed with ROC." 11.1. On perusal of the material on record, we note the vide Reply Letter, dated 08/11/2019, the Assessee had placed before the Assessing Officer (a) Share Valuation Certificate, dated 25/01/2018, and (b) Valuation Rep....
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....e independent Chartered Accountant, dated 25/01/2018, shows audited financials result for the Financial Year 2016-17 and projected financial rules for the Financial Years 2017-18 to 2021-22 were taken into consideration. Perusal of the calculation shows that projected cash flows match with the projections contained in the he Valuation Report. Therefore, we rejected the contention of the Revenue that the valuation adopted by the Assessee was not based upon the proper Valuation Report/Certificate. 11.6. Thus, it emerges that the Assessee had filed Valuation Certificate and Valuation Report during the assessment proceedings. The valuation done using DCF Method was based upon projected cashflows as contained in the Valuation Report prepared after considering the nature of business and undertaking analysis of the prevailing market conditions, project costs and revenue. The valuation was done after taking into consideration the convertible preference shares and employee stock options. 11.7. Further, the Revenue was not able to dispute that the same valuation the share had been issued in the immediately preceding financial year and no addition had been made in the hands of the Asses....
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....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 achieve the said projection, the Respondent-Assessee should have invested the share premium amount to earn certain income/return and whereas the Respondent-Assessee made investments in zero percent debentures of its associate company and therefore the basic substance of receiving a high premium is not justified. 11. We note that in the instant case, the AO had issued notice under Section 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....
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....m 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 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 qualificat....
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....ially 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 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 or 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". 34. The aforesaid ratios ....
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.... 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 basis of information and material available on the date of valuation and projection of future revenue. There is no dispute that methodology adopted by the Respondent-Assessee has been done applying a recognized and accepted method. Since the performance did not match the projections. Revenue sought to challenge the valuation, on that footing. This approach lacks material foundation and is irrational since the valuation is intrinsically based on projections which can be affected by various factors. We cannot lose sight of the fact that the valuer makes forecast or approximation, based on potential value of business. However,....
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....n this issue. We hold that the Assessing Officer erred in rejecting the DCF Method (and the same substituting NAV Method). Therefore, the addition of INR.51,73,81,524/- made by the Assessing Officer under Section 56(2)(viib) of the Act cannot be sustained and the same is deleted. Accordingly, Ground No. 1 to 1.6 raised by the Assessee are allowed, and Ground No.1.7 containing alternative contention is dismissed as having been rendered infructuous. Ground No.2 to 2.3 13. During the course of scrutiny assessment proceedings, the Assessing Officer issued show-cause notice, dated 11/02/2021, proposing to make addition of INR.5,74,04,048/- on the ground that following parties (to which payment of expenses were made by the Assessee) had not given reply/confirmation in response to notice issued by the Assessing Officer under Section 133(6) of the Act. (a) Google India Private Limited (b) Centigradebrand Creative Solutions Private Limited (c) Karunadu Cabs 14. In response, the Assessee filed Submission, 23/02/2021 furnishing following details: Sr. No. Name of the party Amount (INR) Remarks 1 Google India Private Limited 2,34,11,202 ....