ORDER
Manish Agarwal, Accountant Member. – This appeal is filed by the Revenue against the order of Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [CIT(A) in short], dated 13.06.2025 in Appeal No. CIT(A), Delhi-2/10173/2018-19 arising out of the order passed u/s 143 of the Income Tax Act, 1961 (the Act, in short) dated 20.12.2018 for Assessment Year 2016-17.
2. Brief facts of the case are that assessee has e-filed its return of income on 05.10.2016 declaring total income of Rs.2,77,520/-. The case of the assessee was selected for limited scrutiny for examination of issue of its shares at premium. The AO observed that during the year under appeal, assessee has 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 should have obtained fresh report from the approved valuer. Than the AO observed certain deficiencies in the valuation report obtained in previous year and by comparing the projections taken for Five years in the said report with the actual results available for certain years hold that the report so obtained suffers serious errors and thus, such report cannot be made basis issue of shares at premium. The AO further observed that since no fresh valuation report was obtained prior to the issue of shares in the year under appeal, he invoked the provisions of section u/s 56(2)(viib) of the Act made the additions of the entire share premium received during the year under appeal at Rs. 39,98,47,792/-by taking the fair market value at Rs. 1/- per equity share.
3. Against the said order, the assessee preferred the appeal before the Ld. CIT(A) wherein the Ld. CIT(A) by following the order of the Tribunal in assessee’s own case for AY 2015-16 in ITA No.8813/Del/2018 deleted the additions so made.
4. Aggrieved by the said order, the Revenue is in appeal before the Tribunal by taking following grounds of appeal:
| “1. |
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Whether the Ld. CIT(A) has erred on the facts in deleting the addition of Rs. 39,98,47,792/- made by the Assessing Officer under section 56(2)(viib) of the Income-tax Act, 1961, and accepting a stale and invalid share valuation report dated 15.12.2014, which was originally prepared for a prior year and not applicable to the year under assessment. |
| 2. |
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That the Ld. CIT(A) erred in following the ITAT order for AY 2015-16 without examining whether the facts for AY 2016-17 were materially different, especially in terms of financial performance and business conduct. |
| 3. |
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The appellant craves leave to add, alter or amend any/all of the grounds of appeal before or during the course of the hearing of the appeal.” |
5. Since both the effective grounds of appeal taken by the revenue are with respect to the deletion of addition of Rs.39,98,47,792/- made by the AO u/s 56(2)(viib) of the Act thus, they are taken together for consideration.
6. Before us, Ld. CIT-DR vehemently supported the orders of the AO and submits that as per section 56(2)(viib) of the Act, where unquoted equity shares are issued at a premium, it is mandatory to obtained the valuation report of FMV of such shares as per the process provided in Rule 11UA of the Income Tax 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 the valuation report available with the assessee. Ld. CIT DR further drew our attention to the statements of the valuer wherein in reply to Question No.8, he has categorically stated that the company has not contacted him during Financial Year 2015-16 for any such valuation report. As per the Ld. CIT-DR since no valuation report was obtained before the issue of shares which is the mandatory precondition therefore the difference between the FMV calculated by the Ao and the excess premium taken by the assessee is to be added u/s 56(2)(vii)(b) of het Act and the AO has rightly made the addition for the same. Ld. CIT DR, therefore, supported the additions made by the AO and requested for confirmation of the same.
7. Per contra, Ld. AR for the assessee vehemently supported the order of ld. CIT(A) and submits that shares were allotted to two high net worth individuals (“Investors”) namely Shri Radha Kishan Dhamani through partnership firm M/s Drive Investments and to Shri Rakesh Jhunjhunwala in terms of Joint Investment agreement for investment dated 21.02.2015 executed between the assessee company, its existing shareholders namely Shri Rohit Khattar and Shri Anand Gopal Mahindra. As per the said agreement the investors have agreed to invest R.s 10.00 crores in FY 2014-15 by subscribing 38414 shares of face value of Rs. 1/- each at a value of Rs. 2603.26 per share. Ld. AR submits that the investors further agreed to invest Rs. 40.00 crores in FY 2015-16 and it was decided that total 152,208 equity shares of -each will be issued to the investors. Ld. AR submits that for the purpose of determination of FMV, assessee obtained the valuation report from the valuer as prescribed under Rule 11UA of the Rules who determined the FMV at R.s 2603.26 per share in terms of the valuation report dt. 15.12 2014 as per DCF Method. The Ld. AR submits that sole allegations of the AO was that no fresh report was obtained before the issue of share during the year under appeal. In this regard, ld. AR submits that the shares were allotted in terms of joint investment agreement executed between the parties and as stated above total amount of investment in both the years and the shares allotted against such investments was agreed between the parties in the said agreement. Ld. AR submits that valuation of shares to be issued as per said agreement was as the valuation report issued by the 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 in Cinestaan Entertainment (P.) Ltd. V. ITO [IT Appeal No. 8113(Del) of 2018, dated 27-5-2019] 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 Pr. CIT v. Cinestaan Entertainment (P.) Ltd. [2021] 433 ITR 82 (Delhi/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, the same is reproduced as under:
| Issue |
Allegation of Ld. AO in order dt. 20.12.2018 |
Hon’ble ITAT’s view in AY 2015-16 (ITA no 8113/Del/2018 |
Hon’ble High Court’s view in AY 2015-16 (Pr. CIT v. Cinestaan Entertainment (P.) Ltd. [2021] 433 ITR 82 (Delhi/ITA No.1007/2019) |
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Comparison of projections with actual figures is contrary to the very concept of valuation under the DCF method.
Further, valuation cannot be judged in hindsight or based on actuals 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 subsequent and tranche falling in AY 2016-17 (year under consideration)
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Ld. AO in Para 7.2 on Page 15 of order has alleged that “the reply of the company is devoid of merits due to the reasons that in the projections relied upon, there was a vast incomparable difference from the Projections made in the Share Valuation Report dated 5.12.2014 duly authenticated by Sh. Unmesh Singhal Prop. M/s V.R. Associates and relied upon by the assessee company to value it’s Equity Shares as compared to the actual figures. In all the years from March 14 to March 18, Revenue is NIL and losses rising at higher peak as depicted in the Profit after Tax/(loss) column. Further, Ld. AO on page 20 of its order alleged that:- “The valuation made was relied w upon by the C.A. who finally fi accepted the data provided by h the management and which has p duly been mentioned as (as m provided by the management) as of depicted in the table of w projection made. From analysis of projected v/s actual figures achieved by the assessee be company, it is seen that C.A has taken projected revenue, future ho cash flow and other information me as certified by the management. No verification of what so ever method was done by CA, thereby ex making the report as per the convenience and requirement of the management. The above fact on has been accepted by Sh. Unmesh Singhal in the statement ca recorded on oath on 06.12.2018. Projected figures of revenue ad from operations in valuation report dated 15.12.2014 without any basis and the same has nothing to do with the reality.” |
Hon’ble ITAT on page 35,37, and 39 of its order has held as follows:
30. Ergo, the assessee has an option to do the valuation and determine the fair market value either on DCF Method or NAV be he Method. The assessee being a ‘start-up company’ having lot 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. It has been huge cost which pointed out that assessee had incurred were precisely as per the estimates as as projected. However, the revenue could not be generated as c as much expected, because the film did not do well in the box as office. Ld. Counsel has also highlighted various reasons as to of why assessee could not achieve the projected revenue from sis various documentary evidences. None of these averments and the and the manner in which the valuation of the shares has been adopted in the valuation report has been disputed by the as Assessing Officer or by the ld. CIT(A) or any material facts re have been brought on record to show that either the s on methodology or the contents of the report are not correct.
” 33. Section 56(2) (viib) is a deeming provision and one cannot expand the meaning of scope of any word while interpreting e such deeming provision. If the statute provides that the of 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 e 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 DCF methodology and rejected by comparing the projections 11U. Here, in this case, Assessing Officer has tinkered 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 value is based on estimated future projection. These projections are based on various factors and projections made by the management and the Valuer, like growth of the company, economic/market conditions, business conditions, expected demand and supply, cost of capital and host of other factors. These factors are considered based on some reasonable approach and they cannot be evaluated purely based on arithmetical precision as value is always worked out based on approximation and catena of underline facts and assumptions. Nevertheless, 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.”
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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 done applying a as 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, the underline facts and assumptions can undergo change over – a period of time. The Courts have repeatedly held that valuation is not an exact science, and therefore cannot be -done with arithmetic precision. It is a technical and complex problem which can be appropriately left to the consideration and wisdom of experts in the field of accountancy, having regard to the imponderables which enter the process of valuation of shares. The Appellant-1 Revenue is unable to demonstrate that the methodology Sadopted by the Respondent-Assessee is not correct. The AO has simply rejected the valuation of the Respondent-Assessee and failed to provide any alternate fair value of shares.
” Hon ble Delhi High Court in para 10 and 11 on page 9 of its order has upheld ITAT’s view by holding that: – “10. The AO has disregarded the valuation report of the Respondent-Assessee primarily on the ground that the projections of revenue as considered for the purpose of and valuation do not match the actual revenues of subsequent and years. The AO has made additions based on the assumption ain that the Respondent-Assessee made no efforts to achieve the Ld. projection as made out in the valuation report and therefore ave the share premium received by the Respondent-Assessee is 91 without any basis and contrary to provisions of Section the 56(2) (viib) read with Section 2(24)(xvi) of the Act. Further, ors the AO held that the Respondent- Assessee has failed to ive submit any basis of projection. He also held the view that in eir order to achieve the said projection, the Respondent-to Assessee should have invested the share premium amount to an earn certain income/return and whereas the Respondent-are Assessee made investments in zero percent debentures of its associate company and therefore the basic substance of mot 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. 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.”
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| 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 premium taken by the assessee is not justified even on merits.
7.7 The projection made in the report as per rule 11UA is not justified, and share premium received is without any substantial basis, and is contrary to the provisions of section 56(2)(viib) read with section 2(24)(xvi) if the IT Act, 1961 and is liable to be disallowed.
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Hon’ble ITAT has held as follows:- 35. There is another very important angle to view such cases, is that, here the shares have not been subscribed by any sister R concern or closely related person, but by an outside investors like, Anand Mahindra, Rakesh Jhunjhunwala, and Radhakishan Damania, who are one businessman of the country and if they have seen certain of the top investors and potential and accepted this valuation, then how AO or Ld. CIT(A) can question their wisdom. It is only when they have the seen future potentials that they have invested around Rs.91 crore in the current year and also huge sums in the 56 subsequent years as informed by the Id. counsel. The investors the like these persons will not make any investment merely to give dole or carry out any charity to a startup company, albeit their decision is guided by business and commercial prudence to evaluate a start-up company like assessee, what they can achieve in future. It has been informed that these investors are now the major shareholder of the assessee company and they cannot become such a huge equity stock holder if they do not foresee any future in the assessee company. In a way Revenue is trying to question even the commercial prudence of such big investors like. According to the Assessing Officer either these investors should not have made investments because the fair market value of the share is Nil or assessee should have further invested in securities earning interest or dividend. Thus, under these facts and circumstances of the case, we do not approve the approach and the finding of the ld. Assessing Officer or ld. CIT(A) so to take the fair market value of the share at ‘Nil’ under the provision of Section 56(2) (viib) and thereby making the addition of Rs.9-95 crores. The other points and various other arguments raised by the ld. counsel which kept open as same has been rendered purely academic in view of finding given above. |
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| Tax authorities cannot question business decision/investments by assessee. |
AO on page 20 of its 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 Non current 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 Premium was invested without any business prudence and with no profit generating apparatus.”
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Hon’ble ITAT on page 38 of its order held that: “32. What is seen here is that, both the authorities have of questioned the assessee’s commercial wisdom for making the investment of funds raised in 0% compulsorily convertible he debentures of group companies. They are trying to suggest that assessee should have made investment in some instrument as which could have yielded return/ profit in the revenue projection made at the time of issuance of shares, without re understanding that strategic investments and risks are of undertaken for appreciation of capital and larger returns and the not simply dividend and interest. Any businessman entrepreneur, visualise the business based on certain future on projection and undertakes all kind of risks. It is the risk factor alone which gives a higher return to a businessman and the on income tax department or revenue official cannot guide a businessman in which manner risk has to be undertaken. Such rly an approach of the revenue has been judicially frowned by the Des Hon’ble Apex Court on several occasions, for instance in the case of SA Builders (SC)/[2007] 288 ITR 1 (SC) (SC) and CIT Woollen and General Mills Company Ltd, [1976] 103 ITR 66 (SC) . The Courts have held that Income Tax Department cannot sit in the armchair of businessman to decide what is profitable and how the business should be carried out. Commercial 1 businessman. Here in this case if the investment has made expediency has to be seen from the point of view of keeping assessee’s own business objective of projection of films and media entertainment, then such commercial 2 wisdom 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.” |
Hon’ble Delhi High court upheld the view of Hon’ble ITAT by reiterating the ITAT’s judgement on page 10 of its order. |
8. In rejoinder, ld. CIR DR submits that under DCF Method, assessee cannot be given a free hand to project high revenues for the 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 feature film, television film, video films, magazine tapes and video cassettes etc. The company was having two existing shareholders namely Shri Rohit Khattar and Shri Anand Gopal Mahindra having 19.40% and 80.60% equity respectively, out of total issued and subscribed share capital of 5,15,385 Equity Shares of face value of Rs. 1/- per share. Thereafter, in terms of joint venture agreement dated 23rd Feb. 2015 entered into between the assessee company, its two existing shareholders namely Svs. Anand Gopal Mahindra and Rohit Khatter and two investors namely Shri Rakesh Jhunjhunwala and M/s Drive Investments represented by its partner Shri Radhakrishan S. Damani. As per the said agreement, the company has offered 38414 Equity Shares at a rate of Rs.2603.22 per share (which includes 2602.22 as a premium) which were originally offered to its existing shareholder however, they have denied to subscribe them. Thereafter, the above stated two investors i.e., Shri Rakesh Jhunjhunwala and Shri Radhakrishan S. Damani had agreed to subscribed these 38414 shares at a price of 2603.22 per share for a total investment of Rs.10 Crs in FY 2014-15. The investors further agreed to make investment additional investment of 40 Crs.in FY 2015-16 against the issue of 152208 equity shares of fce value of Rs. 1/-each. It was agreed between the parties that against the total investment of Rs 50 Crs., both the investors would get 27% Equity Share jointly of the assessee company, which fact is defined in Schedule -1 Part-B and Part-C of the agreement. Part B described the Capital Structure and Shareholding Pattern of the company after issue of 38414 shares to the investors and Part-C shows the share holding pattern after issue of share against the investment of Rs. 40.00 Crs. Both Part A and Part B are reproduced as under:
SCHEDULE 1-CAPITAL STRUCTURE & SHAREHOLDING PATTERN
Part A-Capital Structure & Shareholding Pattern At the Execution Date
(i) Authorized Share Capital
INR 25,00,000 (Indian Rupees Twenty Five Lakhs only divided into 25.00,000 (Twenty Five Lakhs only) equity shares of INR 1 (Indian Rupees One) each.
(ii) Issued Subscribed and Paid Up Share Capital
INR 5,15,385 (Indian) Rupees Five Lakhs Fifteen Thousand Three Hundred Eighty-Five only) divided into 5,15,385 (Five Lakh Fifteen Thousand Three Hundred Eighty-Five) equity 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 |
100,000 |
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 |
| (1) |
Anand Mahindra |
415,385 |
58.84% |
| (2) |
Rohit Khattar |
100,000 |
14.16% |
| (3) |
Rakesh Jhunjhunwala |
95,311 |
13.5% |
| (4) |
Derive Investments |
95,311 |
13.5% |
| Total |
706,007 |
100% |
10. The preamble of the joint venture agreement dt. 23.02.2015 is reproduced as under:
JOINT VENTURE AGREEMENT
This JOINT VENTURE AGREEMENT (hereinafter this “Agreement”) is entered into on this 23 day of February. 2015
BY AND AMONGST
Act, 1955, and having its registered office at 203. Siddhartha Chambers, Hauz Khas, New Delhi (hereinafter CINESTAAN ENTERTAINMENT PRIVATE LIMITED, a company incorporated and registered under the Companies referred to as the “Company”, which expression shall unless it he repugnant to the context or meaning thereof, be deemed to mean and include its successors and permitted saaigna) of the FIRST PART.
AND
MR. ANAND GOPAL MAHINDRA, an Indian citizen, aged 08 years and residing at Goolestan, 85, Neperen See Road, Mumbai 400005 (hereinafter referred to as ‘AM’, which expression shall unless it be repugnant to the context or meaning thereof, be deemed to mean and include his heirs, successors, administrators and permitted assigns) of the SECOND PART
AND
MR. ROHIT KHATTAR, an Indian ollizen, aged 51 years and residing at 60/2 Friends Colony East, New Delhi 110000 (hereinafter referred to as “RK”, which expression shall, unless it be repugnant to the context of meaning thereof, be deemed to mean and include his heirs, successors, administrators and permitted assigns) of the THIRD PART,
AND
MR. RAKESH JHUNJHUNWALA, an Indian citizen, aged 55 years and residing at 16 C, II Palazzo CHS, Little Gibbe Road, Malabar Hill, Mumbai 400 006 (hereinafter referred to as the ‘Investor 1″, which expression shall, unless it be repugnant to the context or meaning thereof, be deemed to mean and include his heirs, successors, administrators and permitted assigns) of the FOURTH PART
AND
DERIVE INVESTMENTS, a partnership firm constituted under the Indian Partnership Act, 1932, having PAN NO AAGFD593BA and its principal office at 903, Dalamal House, 206, J.3. Marg, Nariman Point, Mumbai -400 021, being represented by its partner Mr. Radhakishan S. Damani (hereinafter referred to as the “Investor 2”, which expression shall, unless it be repugnant to the context 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) |
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The Company is a private company limited by shares incorporated and existing under the Companies Act, 1958. |
| (B) |
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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) |
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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 (Rupees Two Thousand Six Hundred Three and Twenty Two Paise only) (Rights Offer). |
| (D) |
|
The existing equity shareholders declined the aforesaid Rights Offer. The Board, pursuant to Section 62(1)(a)(i) of the Companies Act 2013, offered such 38,414 (Thirty Eight Thousand Four Hundred Fourteen) equity shares of the Company to the Investors on the same terms and conditions as the Rights Offer. |
| (E) |
|
The Investors have agreed to subscribe to such 38.414 (Thirty Eight Thousand Four Hundred Fourteen) equity shares of the Company for an aggregate consideration of INR 10,00,00,000 (Indian Rupees Ten Crores only) (‘Initial Tranche Subscription Amount) and subsequently invest a further aggregate amount of INR 40,00,00,000 (Indian Rupees Forty Crores only) Subsequent Tranche Subscription Amount) in the Company through subscription to the Subsequent Tranche Subscription Shares (as defined hereunder). |
| (F) |
|
The aggregate amount to be invested by the investors in the Company as the Initial Trancho Subscription Amount and the Subsequent Tranche Subscription Amount shall be INR 50,00,00,000/- (Indian Rupees Fifty Crores only) (“Investment Amount) and the equity shares issued by the Company to the Investors against infusion of the Investment Amount shall represent an aggregate shareholding of 27% (Twenty Seven percent) in the Company. |
11. In the said agreement Fair Market Value of the shares is defined as under:
“Fair Market Value’ shall mean the fair market value of the Securities as determined pursuant to a valuation carried out by a Registered Valuer or reputed chartered account appointed by the Board;”
12. As observed above, during the year under appeal, assessee issued first trench of 57620 Equity Shares at a premium of 2602.26 per shares to the investors, thereafter, 94588 Equity Shares were issued at a premium of Rs.2642.04 per share. It is relevant to state here that the premium charged on the issue of 94588 Equity Shares is different from the premium charged on the issue of share of earlier occasion as well as in preceding assessment years. The claim of the assessee was that it had obtained report under Rule-11UA from the Chartered Accountant, who had determined Fair Market Value based on DCF method where the projection of five years has been taken and in terms of the valuation report dated 15.12.2014, the value of the per Equity 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 been sought to be taxed is mainly the share premium issued on equity shares which according to the AO far exceeded the FMV of the shares. Though facts have been discussed in detail in the foregoing paragraphs, however in the succinct manner, the relevant facts and background are reiterated in order to appreciate the controversy and the issue for adjudication. The assessee company was incorporated on 19th September, 2013, i.e., in the Assessment Year 201415, with the objective of carrying of business of production and distribution of feature film, tele films, video films, documentary films etc. During the year under consideration assessee company was in the initial phase of the setting up of the business, therefore, there was no business of film production as such. The assessee company to start its venture of its film production approached accredited ace investors of India to join in as equity partners, namely, Shri Rakesh Jhunjhunwala, Shri Anand Gopal Mahindra & Shri Radhakishan Damani. The funds were raised by way of issue of equity shares to the aforesaid equity partners and by raising premium on such shares over and above the face value of Rs. 10/- per share. The details and quantum of premium received from each of the equity partners are as under:
| S. No. |
Name of equity partner |
Date of Issue |
No. of shares |
Premium (Rs.) per share |
Amount of premium (Rs.) |
| 1. |
Shri Anand Mahindra |
06.01.2015; 23.02.2015 |
4,15,385 |
1949 |
80,95,85,365/- |
| 2. |
Shri Rakesh Jhunjhunwala |
24.03.2015 |
19,207 |
2602 |
4,99,80,793/- |
| 3 |
Shri Radhakishan Damani |
24.03.2015 |
19,207 |
2602 |
4,99,80,79/- |
| 4 |
Total |
|
4,53,799 |
|
90,95,46,200/- |
26. The assessee before issuing the shares had got the share valued by Chartered Accountant, i.e., ‘Accountant’ as provided under Rule 11UA(2) by using the ‘DCF Method’ which is one of the prescribed method in Rule 11UA(2)(b) r.w.s. 56(2)(viib). Based on the said valuation report dated 15.12.2014, the assessee company had issued the shares to the aforesaid equity partners on premium. The Id. Assessing Officer has discarded the valuation report of the CA mainly on the ground that valuation of the equity shares carried out by the assessee was based on projection of revenue which did not match with the actual revenues of the subsequent years. He further 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 investors in various phases and transactions and it was only after they have gone by the projection and satisfied with the potentials and credentials of future growth, they were willing to make such huge investment in the ‘start-up company like assessee. Thus, neither the identity nor the creditworthiness of the investors nor the genuineness of the transaction can be doubted and in fact the same stands fully established to which Assessing Officer has also not raised any doubt or disputed this fact. Thus, under the deeming provisions of section 68, the test of proving the nature and source of the credit received stood accepted.
28. Now what we are required to examine whether under these facts and circumstances Assessing Officer after invoking the deeming provision of Section 56(2) (vii) could have determined the fair market value of the premium on shares issued at Nil after rejecting the valuation report given by the Chartered Accountant on one of the prescribed methods under the rules adopted by the Valuer. Before us, learned counsel, Mr. Dinodia, first of all had harped upon the spirit and intention of the Legislature in introducing such a deeming provision and submitted that such a provision cannot be invoked on a normal business transaction of issuance of shares unless it has been demonstrated by the Revenue authorities that the entire motive for such issuance of shares on higher premium was for the tax abuse with the objective of tax evasion by laundering its own unaccounted money. His main contention was that, being a deeming fiction, it has to be strictly interpreted and there is no mandate to the Assessing Officer to arbitrarily reject the valuation done by the assessee on his own surmises and whims. We are in tandem with such a reasoning of the ld. Counsel, because the deeming fiction not only has to be applied strictly but also have to be seen in the context in which such deeming provisions are triggered. It is a trite law well settled by the Constitutional Bench of Supreme Court, in the case of Dilip Kumar & Sons (supra) that in the matter of charging section of a taxing statute, strict rule of interpretation is mandatory, and if there are two views possible in the matter of interpretation, then the construction most beneficial to the assessee should be adopted. Viewed from such principle, here is a case where the shares have been subscribed 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 is reproduced hereunder:
“Income from other sources.
56. (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head “Income from other sources”, if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E.
(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head “Income from other sources”, namely:-
(i).
(vii) “where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue 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:
Provided that this clause shall not apply where the consideration for issue of shares is received-
(i) by a venture capital undertaking from a venture capital company or a venture capital fund; or
(ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf
Explanation -For the purposes of this clause, –
(a) the fair market value of the shares shall be the value –
(i) as may be determined in accordance with such method as may be prescribed: or
(ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher;”
Further, as per clause (i) of the Explanation as reproduced above, the FMV is to be determined in accordance with such method as may be prescribed. Clause (ii) admittedly is not applicable on the facts of the assessee’s case.
The method to determine the FMV is further provided in Rule 11UA(2). The relevant extract of the applicable rules is reproduced below:
“11UA. [(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,-
(2) Notwithstanding anything contained in sub-clause (b) of clause (c) of subrule (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 ‘startup 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 the business. Before us, the Id. counsel from the facts and material placed on record had pointed out that the basis of projection adopted by the valuer was based on very scientific analysis and method, like number of movies to be released in the upcoming years and such movies were further segregated into big, medium, small and micro films with reasonable number of movies in hand, like one big film, two medium films and one or two small or micro film a year. Further, the estimate of projected revenue was also kept on a conservative side keeping in mind of the following: – |
Engagement of successful directors like Rakesh Om Prakash Mehra who has given block buster films like Bhaag Milkha Bhaag which made a box office collection ofINR 164 Crores, and Rang De Basanti which made a box office collection of INR 97 Crores etc. In support Ld. Counsel had referred to Annexure-III, giving details of Track records v. Projections for movies signed with Rakesh Mehra.
Engagement of veteran writers and music directors-Like Gulzar and Shankar Ehsaan Roy.
Interesting start cast, including the launch of Anil Kapoor’s son-Harshvardhan Kapoor and Shabana Azmi’s niece Saiyami Kher; along with veteran actors like Om Puri, Anu Malik etc.
Keeping in view of engagement of renowned star cast and previous success of directors, the appellant has projected revenue for only Rs. 55 Crores for 1 Big Film in first year which went till Rs. 93.10 Crores in 5th Year. While for other movies, the projections ranged between 22 lacs to 50 Crores.
Further the projected revenues were discounted in later years to account for fluctuations in economic cycles.
The number of movies and total revenue and average revenue for such movies are as projected under:
| Particulars |
Year 1 (2016) |
Year 2 (2017) |
Year 3 (2018) |
Year 4 (2019) |
Year 5 (2020) |
| Number of movies |
1 Big, 2 Medium, 1 small, 1 Micro |
1 big, 2 Medium, 2 small, 1 Micro |
1 Big, 2 Medium, 3 small, 2 Micro |
1 Big, 2 Medium, 3 small, 2 Micro |
1 Big, 2 Medium, 3 small, 2 Micro |
| Total revenue projected (Rs. Crs) |
121.62 |
142.50 |
197.68 |
238.16 |
274.76 |
| Average revenue per movie (Rs. Crs) |
24.32 |
28.5 |
32.95 |
34.02 |
34.35 |
| 31. |
|
It has been submitted that the assessee had made all the efforts to achieve these projects and in 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 do well in the box office. Ld. Counsel has also highlighted various reasons as to why assessee could not achieve the projected revenue from various documentary evidences. None of these averments and the and the manner in which the valuation of the shares has been adopted in the valuation report has been disputed by the Assessing Officer or by the Id. CIT(A) or any material facts have been brought on record to show that either the methodology or the contents of the report are not correct. |
| 32. |
|
What is seen here is that, both the authorities have questioned the assessee’s commercial wisdom for making the investment of funds raised in 0% compulsorily convertible debentures of group companies. They are trying to suggest that assessee should have made investment in some instrument which could have yielded return/ profit in the revenue projection made at the time of issuance of shares, without understanding that strategic investments and risks are undertaken for appreciation of capital and larger returns and not simply dividend and interest. Any businessman or entrepreneur, visualise the business based on certain future projection and undertakes all kind of risks. It is the risk factor alone which gives a higher return to a businessman and the income tax department or revenue official cannot guide a businessman in which manner risk has to be undertaken. Such an approach of the revenue has been judicially frowned by the Hon’ble Apex Court on several occasions, for instance in the case of SA Builders (SC)/[2007] 288 ITR 1 (SC) (SC)and CIT v. Panipat Woollen and General Mills Company Ltd. , [1976] 103 ITR 66 (SC) (SC). The Courts have held that Income Tax Department cannot sit in the armchair of businessman to decide what is profitable and how the business should be carried out. Commercial expediency has to be seen from the point of view of businessman. Here in this case if the investment has made keeping assessee’s own business objective of projection of films and media entertainment, then such commercial wisdom 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 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 value is based on estimated future projection. These projections are based on various factors and projections made by the management and the Valuer, like growth of the company, economic/market conditions, business conditions, expected demand and supply, cost of capital and host of other factors. These factors are considered based on some reasonable approach and they cannot be evaluated purely based on arithmetical precision as value is always worked out based on approximation and catena of underline facts and assumptions. Nevertheless, 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. Precisely, these factors have been judicially appreciated in various judgments some of which have been relied upon by the Id. Counsel, for instance: – |
1) Securities & Exchange Board of India &Ors [2015 ABR 291 – (Bombay HC)]
“48.6 Thirdly, it is a well settled position of law with regard to the valuation. that valuation is not an exact science and can never be done with arithmetic precision. The attempt on the part of SEBI to challenge the valuation which is but its very nature based on , projections by applying what is essentially a hindsight view that the performance did not match the projection is unknown to the law on valuations, Valuation being an exercise required to be conducted at a particular point of time has of necessity to be carried out on the basis of whatever information is available on the date of the valuation and a projection of future revenue that valuer may fairly make on the basis of such information.”
(ii) Rameshwaram Strong Glass Pvt. Ltd. v. ITO [2018-TIOL 1358-ITAT-Jaipur)
“4.5.2. Before examining the fairness or reasonableness of valuation report submitted by the assessee we have to bear in mind the DCF Method and is essentially 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 ofdetermination 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. v. 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 very important angle to view such cases, is that, here the shares have not been subscribed by any sister concern or closely related person, but by an outside investors like, Anand Mahindra, Rakesh Jhunjhunwala, and Radhakishan Damania, who are one of the top investors and businessman of the country and if they have seen certain potential and accepted this valuation, then how AO or Ld. CIT(A) can question their wisdom. It is only when they have seen future potentials that they have invested around Rs.91 crore in the current year and also huge sums in the subsequent years as informed by the Id. counsel. The investors like these persons will not make any investment merely to give dole or carry out any charity to a start-up company, albeit their decision is guided by business and commercial prudence to evaluate a start-up company like assessee, what they can achieve in future. It has been informed that these investors are now the major shareholder of the assessee company and they cannot become such a huge equity stock holder if they do not foresee any future in the assessee company. In a way Revenue is trying to question even the commercial prudence of such big investors like. According to the Assessing Officer either these investors should not have made investments because the fair market value of the share is Nil or assessee should have further invested in securities earning interest or dividend. Thus, under these facts and circumstances of the case, we do not approve the approach and the finding of the Id. Assessing Officer or ld. CIT(A) so to take the fair market value of the share at ‘Nil’ under the provision of Section 56(2)(viib) and thereby making the addition of Rs.90.95 crores. The other points and various other arguments raised by the Id. counsel which kept open as same has been rendered purely academic in view of finding given above. |
| 36. |
|
Other grounds are either consequential or have become academic, hence same are treated as infructuous. In the result appeal of the appellant assessee is allowed.” |
14. The Hon’ble jurisdictional high court in the aforesaid judgement has accepted the valuation report filed by the assessee wherein the FMV was determined on DCF method, however as observed above, during the year under appeal, admittedly no valuation report was obtained by the before the issue of share at premium for Fair Market Value of 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 this juncture, we must refer the provision of section 56(2)(viib) of the Act which reads as under:
“Sec. 56(2)(viib)
“where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue 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:
Provided that this clause shall not apply where the consideration for issue of shares is received-
(i) by a venture capital undertaking from a venture capital company or a venture capital fund; or
(ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf.
Explanation. For the purposes of this clause, –
(a) the fair market value of the shares shall be the value-
(i) as may be determined in accordance with such method as may be prescribed; or
(ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, Whichever is higher;”
16. For the purpose of valuation u/s 56(2)(viib) of the Act, the following options are available to the taxpayer for calculating the fair market value of unquoted equity shares:
| (a) |
|
Valuation based on net asset value with certain adjustments (“NAV”); OR |
| (b) |
|
Valuation by a merchant banker as per Discounted Free Cash Flow (“DCF”) method |
17. As per section 56(2)(viib) of the Act, the Explanation Fair Market Value of share shall be the value as may be determined in accordance with method prescribed under Rule -40 which refers Rule -11UA of the IT Rules which are reproduced herein below:
11UA. Determination of fair market value.
(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,-
(a) valuation of jewellery,-
(i)…….
(ii)……
(iii) …….
(b) valuation of archaeological collections, drawings, paintings, 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)* (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 immovable property;
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 income-tax paid, if any, less the amount of income-tax claimed as refund, if any, 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 preference shares;
PV = the paid up value of such equity shares;
PE = total amount of paid up equity share capital as shown in the balance-sheet;]
(c) the fair market value of unquoted shares and securities other than equity shares in a company which are not listed in any recognized stock exchange shall be estimated to be price it would fetch if sold in the open market on the valuation date and the assessee may obtain a report from a merchant banker or an accountant in respect of which such valuation.
(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 (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)(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-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 preference shares;
PE= “total” amount of paid up equity share capital as shown in the balance-sheet;
PV= “the” paid up value of such equity shares; or
(b)the fair market value of the unquoted equity shares determined by a merchant banker or chartered accountant as per the Discounted Free Cash Flow method.”
18. As per section 56(2)(viib) of the Act r.w. Rule 11UA of the Rules, before issue of unquoted shares, the fair market value has to be computed. The joint venture agreement has binding force on the parties for specific performance as per said agreement where the investment of 50 Crs. by the investors was agreed by the issue of specific number of shares of assessee company thus determined the price per share to be issued to them. However, such agreement cannot has binding nature over the income tax proceedings where the income is to be computed in accordance with provisions of Income Tax Act and section 56(2)(viib) provides where the unquoted shares are issued above the FMV, the difference between the amount received over and above the FMV is the income of the recipient. Thus every time when unquoted equity shares are issued, it is incumbent upon the assessee to determine the Fair Market Value though valuation report obtained from the approved valuer in terms of the method prescribed under Rule 11UA of the Act. Nowhere in the Act, it is permissible to utilize the valuation report obtained in immediately preceding year for issue of shares at premium in any of the subsequent assessment year.
19. During the course of assessment proceedings, statements of the valuer were also recorded by the AO by issue of summon u/s 131 of the Act and the relevant question No.7, 8 and 22 are reproduced in the assessment order as per which the valuer had categorically admitted that no separate report before issue of shares at premium during the year under appeal was obtained by the assessee company. He further stated that before issue of shares at a premium, fresh valuation sreport 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 Assessing Officer to obtain the report from the approved valuer as AO is not entitled to comment upon the technical matters as has been held by the Hon’ble Supreme Court in the case of Saraswati Industrial Syndicate Ltd v. CIT (SC).
22. At this juncture, we may refer the judgement of Hon’ble Jurisdictional High Court in the case of Agra Portfolio (P) Ltd. v. PCIT 464 ITR 348 (Delhi) wherein the hon’ble court has remitted back the matter of valuation of unquoted shares to the file of the AO with the directions that AO should adopt the method followed by the assessee and carry out the fresh valuation after independent examination of the facts. The relevant observations of the Hon’ble Court are as under:
| 16. |
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In our considered opinion, the language of Rule 11UA(2) indubitably places a choice upon the assessee to either follow the route as prescribed in clause (a) or in the alternative to place for the consideration of the AO a Valuation Report drawn by a merchant banker as per the DCF method. However, and as is manifest from a conjoint reading of Section 56(2)(viib) read along with Rule 11UA(2), the option and the choice stands vested solely in the hands of the assessee. |
| 17. |
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While it would be open for the AO, for reasons so recorded, to doubt or reject a valuation that may be submitted for its consideration, the statute clearly does not appear to empower it to independently evaluate the face value of the unquoted equity shares by adopting a valuation method other than the one chosen by the assessee. It is this aspect which was duly acknowledged by the Bombay High Court in Vodafone M-Pesa (supra). |
| 18. |
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We note that the view as taken by the Bombay High Court in the aforenoted judgment appears to have been consistently followed by Tribunals of different regions as would be evident from the discussion which ensues. We, in this regard, firstly take into consideration the judgment rendered by the Mumbai Bench of the ITAT in DCIT, Circle 13(2)(2), Mumbai v. Sodexo Facilities Management Services [IT Appeal No. 2945(Mum) of 2022 dated 25.05.2023] where it was held as under:- |
“18. On the other hand, Ld. Counsel for the assessee submitted that the AO has not accepted the method of valuation which was furnished by the assessee. The valuer computed the FMV by averaging the valuation as per PECV method as well 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 (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 components. First component is sale consideration and the second component is the net worth or cost of acquisition. When the net worth of division is subtracted from the sale consideration, which results into LTCG on the slump sale. In the case of the assessee, the AO has taken FMV at Rs. 7,20,32,509/-which was worked out by the valuer following the PECV method, whereas the assessee has followed average value of PECV method as well as NAV method to justify the sale consideration actually received. We are of the opinion that ld Assessing Officer has not carried out valuation by an independent valuer and merely chosen a part of the valuation report submitted by the assessee. Therefore, we restore back the issue to the AO for referring the matter to a valuation expert by way of the issue of commission and thereafter, determining the FMV of the undertaking of the food division of the assessee.”
| 19. |
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Proceeding along similar lines, the Hyderabad Bench of the ITAT in Joint Commissioner of Income Tax v. M/s MLR Auto Limited [IT Appeal NO. 115 (Hyd.) of 2021, dated 28-12-2023] had held as follows:- |
“17.1. The conjoint reading of Section 56(2)(viib) and Rule 11U and 11UA makes it abundantly clear that in case assessee exercised his option for determination of the fair market value of the shares and exercise then such decision of the assessee shall be final and binding on the assessing officer. The option was given by the Act to the assessee either to apply the DCF method or net asset valuation method, this option is not available to the assessing officer. Rule 11UA provides the method of determining the FMV of a property other than the immovable property. Rule 11UA(2) reproduced hereinabove provides the method of providing the FMV of unquoted shares to be determined at the option of the assessee. 17.2. Once the assessee applied particular method of valuation, (in the present case DCF method), then it is the duty of the Assessing Officer / ld.CIT(A) to scrutinize the valuation report within the four corners or parameters laid down while making the valuation report under DCF method only. It is not permissible for the Assessing Officer to reject the method opted by the assessee and apply a different method of valuation and the Assessing Officer can definitely reject the valuation report but not the method. In case, the AO rejected the valuation report, then 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. |
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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 v. Credtalpha Alternative Investment Advisors (P.) Ltd.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 option to the assessee to either value the shares as per prescribed formula given in clause (a) or clause (b) which provides for the determination of the fair market value based on discounted cash flow method as valued by a merchant banker or a chartered accountant (till 24th of May 2018). In the present case the assessee has valued the shares according to one of the “options”available to assessee by adopting discounted cash flow method. Therefore, such an option given to the assessee cannot be withdrawn or taken away by the learned Assessing Officer by adopting different method of valuation i.e., net asset value method. The method of valuation is always the option of the assessee. The learned Assessing Officer is authorised to examine whether assessee has adopted one of the available options properly or not. In the present case, the learned Assessing Officer has thrust upon the assessee, net asset value method rejecting discounted cash flow method for only reason that there is a deviation in the actual figures from the projected figures. It is an established fact that discounted cash flow method is always based on future projections adopting certain parameters such as expected generation of cash flow, the discounted rate of return and cost of capital. In hindsight, on availability of the actual figures, if the future projections are not met, it cannot be said that the projections were wrong. To prove that the projections were unreliable, the learned Assessing Officer must examine how the valuation has been done. In a case future cash flow projections do not meet the actual figures, rejection of discounted cash flow method is not proper. If projected future cash flow and actual result matches, such situation would always be rare. For projecting the future cash flow certain assumptions are required to be made, there needs to be tested and then such exemptions becomes the base of estimation of such projected future cash flows. If there are no assumptions, there cannot be an estimate of future projected cash flows and then discounted cash flow method becomes redundant. For exercise of valuation, assumption made by the valuer and information available at the time of the valuation date are relevant. As the exercise of valuation must be viewed as on the date of the valuation looking forward and cannot be reviewed in retrospect. Further, the valuation is always made 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 methods have different approaches and methodologies therefore there are bound to be differences, but it does not give any authority to the learned Assessing Officer to pick and choose one of the method and make the addition. It is the assessee who has to exercise one of the options available under the provisions of the law for valuing the shares. The learned Assessing Officer needs to examine that method. Naturally, if the discounted cash flow method and net asset value method gives the same result, where would have been the need to prescribe the two methods in the law. In view of above facts, we do not find any infirmity in the order of the learned Commissioner of Income-tax (Appeals) in deleting the addition of Rs. 69,000,000 made by the learned assessing officer u/s 56 (2) (viib) of the act. Accordingly, ground Nos. 3 and 4 of the appeal of the learned Assessing Officer are dismissed.”
| 21. |
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We deem it apposite to lastly take note of the following pertinent observations as appearing in a decision rendered by the ITAT Bench at Bangalore in Taaq Music Pvt. Ltd. v. Income Tax Officer [2020] SCC Online ITAT 9482:- |
“11. The law provides that, the fair market value may be determined with such method as may be prescribed or the fair market value can be determined to the satisfaction of the Assessing Officer. The provision provides an Assessee two choices of adopting either NAV method or DCF method. If the Assessee determines the fair market value in a method as prescribed the Assessing Officer does not have a choice to dispute the justification. The methods of valuation are prescribed in Rule 11UA(2) of the Rules. The provisions of Rule 11UA(2)(b) of the Rules provides that, the Assessee can adopt the fair market value as per the above two methods i.e., either DCF method or fair market value of the unquoted equity shares determined by a merchant banker. The choice of method is that of the Assessee. The Tribunal has followed the judgment of Hon’ble 2020 SCC OnLine ITAT 9482 Bombay High Court rendered in the case of Vodafone M-Pesa Ltd. v. Pr. CIT (supra) and has taken the view that 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. 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., v. 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 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. The order of ld. CIT(A) is accordingly set aside and this issue is remanded to the AO for decision afresh, after due opportunity of hearing to the Assessee.”
| 22. |
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Accordingly, and for all the aforesaid reasons, we allow the instant appeal and set aside the order of the ITAT dated 16 May 2018. The Questions of Law as framed, namely, Question A and C are answered in the negative and in favor of the appellant assessee. In light of the answers rendered in respect of the aforenoted two questions, the additional questions which are framed would not merit an independent examination. The matter shall in consequence stand remitted to the AO which shall undertake an exercise of valuation afresh in accordance with the DCF method. |
| 23. |
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We also accord liberty to the AO to determine the FMV of the shares bearing in mind the DCF Method by having the same independently determined by a Valuer appointed for the aforesaid purpose. |
23. Further the hon’ble jurisdictional high court in the case of Pr. CIT v. Abhirvey Projects (P.) Ltd. (Delhi) under identical facts has also expressed the same view and made following observations:
| “2. |
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Today and before us, it is undisputed that the Assessing Officer [“AO”] while rejecting the valuation report which had been submitted by the respondent assessee had proceeded to frame the order on the basis of actual figures which had obtained. It was the aforesaid procedure adopted which fell for adverse comment of the Commissioner of Income Tax (Appeal) [“CIT(A)”] as well as Income Tax Appellate Tribunal [“ITAT”]. It becomes pertinent to observe that an estimation would to some extent be based on an approximate evaluation. That estimation would not be liable to be questioned on the basis of actual facts or figures. Ultimately, the correctness of an estimation would have to be tested on the basis of a legitimate and valid assessment. |
| 3. |
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In our considered opinion, while the ITAT was therefore justified in upholding the view taken by the CIT(A), it would have been appropriate for it to have remitted the matter to the AO for the purposes of examining the issue afresh and in light of Section 56(2)(viib) of the Income Tax Act, 1961 [“Act”]. |
| 4. |
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In view of the aforesaid, we set aside the impugned order of the ITAT dated 27 December 2022 and remit the matter to the desk of the AO who shall proceed to undertake a valuation afresh bearing in mind the provisions made in Section 56(2)(viib) and ensuring that while the DCF Method is adhered to, if in case the data which has been provided by the respondent assessee is found to warrant further examination, it would be open to the AO to enlist the services of an appropriate valuer. All rights and contentions of respective parties in respect of any such exercise undertaken or assessment made on merits are kept open.” |
24. Under these circumstances, we are of the considered opinion that for the purpose of taxability u/s 56(2)(viib) of the Act, the assessee should obtain valuation report for each assessment year separately and cannot rely the report obtained in preceding assessment year. Since neither the assessee nor the AO has obtained fresh report to justify their respective valuation, thus, we remand this issue to the files of AO with the directions that assessee to give opportunity to justify the premium on the basis of valuation report and, thereafter, the Ld. AO will be at liberty to accept or reject the same as per law. With these directions, both the grounds of appeal of the Revenue are partly allowed for statistical purposes.
25. In the result, the appeal filed by the Revenue is allowed for statistical purposes.
