ORDER
Dr. Manish Borad, Accountant Member.- The captioned appeal at the instance of Revenue and Cross Objection by the assessee are directed against the order dated 09.07.2024 framed by Ld.CIT(A), Pune-12 emanating out of Assessment Order dated 30.12.2022 passed u/s.143(3) of the Income Tax Act, 1961 (in short ‘the Act’).
2. First we will take up Revenue’s appeal. Following grounds have been raised by the Revenue :
“1) On the facts and in the circumstances of the case and in law, the Ld.CIT(A) has erred in deleting the addition of Rs. 10,33,59,732/- made on account of excess share premium received by the assessee on issue of shares to Wipro Enterprises Limited without appreciating the fact that Wipro Enterprises Limited is neither a venture capital undertaking nor a SEBI registered fund and accordingly the 1st proviso of section 56(2)(viib) of the Act are not applicable.
2) The appellant craves leave to add, amend, modify or alter any of the grounds of appeal.”
3. Brief facts relevant for the year under consideration are that the assessee which is a Private Limited Company engaged in the business of Beauty Wellness and Hospitality services under multiple brands at various locations in India and Abroad. Return of income for A.Y. 2020-21 declaring loss of Rs.33,65,16,728/- furnished on 15.03.2022. Case selected for scrutiny followed by validly serving statutory notices and submissions were filed by the assessee. Ld. Assessing Officer (AO) observed that various foreign and domestic investments were made during the year under consideration amounting to Rs.169.73 crore. In the details filed by the assessee, ld. AO observed that shares have been issued as per two valuation reports and as per the First Valuation Certificate the Fair Market Value is Rs.50,176/- and in the Second Valuation Certificate the Fair Market Value per share is Rs.1,61,077/-. Justification filed by the assessee for the increase in the valuation of shares within period of 8 months mainly on account of covid-19 and fast growth was not found satisfactory by the AO and he made addition u/s.56(2)(viib) and u/s.56(2)(x) at Rs.56,58,60,902/- and Rs.35,66,57,616/-respectively.
4. Assessee preferred appeal before ld.CIT(A) and able to succeed on major issues. Against the addition deleted by ld.CIT(A) Revenue has only raised a single ground challenging the deletion of addition of Rs.10,33,59,732/- towards the amount received from Wipro Enterprise Limited (in short ‘WEL’) and the contention of the Revenue is that WEL is neither a venture Capital undertaking nor a SEBI registered fund and accordingly the first proviso to section 56(2)(viib) of the Act is not applicable.
5. On the other hand, ld. Counsel for the assessee has submitted that WEL is a resident Limited Company and the shares have been issued at the Valuation rate calculated under the Discounted Cash Flow method issued by a certified authority.
6. We have heard the rival contentions and perused the record placed before us. We note that the Revenue’s grievance is only against the deletion of Rs.10,33,59,732/- which has been received by the assessee from WEL against the issue of its Equity shares. Revenue’s contention is that second proviso to section 56(2)(viib) is not applicable on the investment received from WEL.
7. Section 56(2)(viib) reads as under :
” (viib) where a company, not being a company in which the public are substantially interested, receives”, in any previous year, from any person,[***], 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 for a specified fund]; or |
| (ii) | | by a company from a class or classes of persons as may be notified by the Central Government in this behalf: |
[Provided further that where the provisions of this clause have not been applied to a company on account of fulfilment of conditions specified in the notification issued under clause (ii) of the first proviso and such company fails to comply with any of those conditions, then, any consideration received for issue of share that exceeds the fair market value of such share shall be deemed to be the income of that company chargeable to income-tax for the previous year in which such failure has taken place and, it shall also be deemed that the company has under reported the said income in consequence of the misreporting referred to in sub-section (8) and sub-section (9) of section 270A for the said previous year.]
[Provided also that the provisions of this clause shall not apply on or after the Ist day of April, 2025.]
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, |
| [(aa) | | “specified fund” means a fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which has been granted a certificate of registration as a Category I or a Category II Alterna-tive Investment Fund and is regulated under the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992) 42[or regulated under the “[International Financial Services Centre Authority (Fund Manage-ment) Regulations, 2022 made under the] International Financial Services Centres Authority Act, 2019 (50 of 2019)]; |
| (ab) | | “trust” means a trust established under the Indian Trusts Act, 1882 (2 of 1882) or under any other law for the time being in force;] |
| (b) | | “venture capital company”, “venture capital fund” and “venture capital undertaking” shall have the meanings respectively assigned to them in clause (a), clause (b) and clause (c) of “[Explanation] to clause (23FB) of section 10;]” |
8. On perusal of the above section, we note that as per clause (i) of first proviso section 56(2)(viib) of the Act will not be applicable if the consideration for issue of share is received by a Venture Capital Undertaking from a Venture Capital Company or Venture Capital fund or a specified fund. We further observe that ld.CIT(A) while deleting the impugned addition has dealt with the investments received from Ascent Private Equity Trust and M/s. Wipro Enterprise Limited observing as follows :
“Findings:
6.1 I have considered the assessment order, the statement of facts and the submission made by the appellant. In this case, the Ld. AO made an addition of Rs. 56,58,16,902/- under section 56(2)(vii)(b) towards the premium received from Wipro-Enterprise Limited(Wipro) and Ascent Private Equity Trust(Ascent). The details of shares and the valuation are as under :
| Sr. No. | Name of the Shareholder | No. of CCPS/equity shares issued | Issue price per share (INR) | Assessed price per share (INR) | Amount Added |
| 1 | Ascent | 4,160 | 1,61,077 | 50,176 | 46,13,48,160 |
| 2 | Ascent | 10 | 1,61,077 | 50,176 | 11,09,010 |
| 3 | Wipro | 932 | 1,61,077 | 50,176 | 10,33,59,732 |
| | | | | 56,58,16,902 |
During the assessment proceedings, the Ld. AO noticed that the appellant has issued shares at a premium to various resident and non-resident applicants at a price of Rs. 50,176/- per share and at a price of Rs. 1,61,077/-. Since the shares are not issued at face value, the Ld. AO held that provisions of Sec. 56(2)(vii)(b) get instantly attracted to this transaction. In the assessment order, the Ld.AO has rejected the valuation report made by Category I Merchant Banker viz. V.B. Desai Financial Services Ltd. dated 31.12.2020 and restricted the share premium to Rs. 50,176/- as against Rs. 1,61,077/- as per valuation report dated 30.04.2020. The appellant has submitted two valuation reports during the assessment proceedings. Both the valuation reports were prepared by V.B. Desai Financial Services Ltd, a Category I Merchant Banker.
6.2 The Ld. AO rejected the said valuation report on the following grounds.
As per the Balance Sheet submitted by the assessee company, significant amount of debt is taken by the assessee company. However, while computing the weighted average cost of capital in the valuation. report, it is not evident whether cost of debt is considered and if it is, what is debt equity ratio that is considered. Weighted Average cost of capital(WACC) is computed on the basis of the actual debt equity ratio in the balance sheets which is applied to the cost of equity and cost of debt. Thus, is absence of any explanation, the WACC at 20% is not acceptable.
For the purpose of calculating terminal value of the business, the valuation report suggests that a growth rate of 5% is taken. Again, it is an assumption. It is imperative to understand that growth rate should be correlated with the date of valuation and the industry in which the appellant is operating as on the date of valuation. The CAGR for the sector of beauty products is less than 4% especially in post- covid scenarios. Therefore, the CAGR adopted by assessee company cannot be accepted.
Further, there is no basis for projecting the results for future years, be it sales cost, depreciation, capex or Net Working Capital. No basis is provided at all.
Also, the company is a private limited company and is not a listed company. The value which has been determined is not a fair estimated value also because of the fact that the shares of private limited company are discounted for lack of liquidity and marketability. However, it is not clear whether the valuer has considered the same at all.
6.3 The appellant has argued that the first proviso to section 56(2)(vii)(b) expressly exempts the amounts received by a Venture Capital Undertaking(VCU) from an Alternative Investment Fund(AIF), towards issue of shares, from the applicability of the provisions of said section. As per the first proviso to section 56(2)(viib) of the Act, the consideration for issue of shares received by a Venture Capital Undertaking from specified fund shall be outside the rigors of section 56(2)(viib) of the Act. Therefore, for falling into the exemption, two conditions are to be satisfied –
| 1. | | Assessee needs to be a Venture capital undertaking(VCU) and |
| 2. | | Investor should be one of the specified persons, i.e. in the present case, Specified Fund(SF). |
6.4 In the present case, the investor is Ascent. As per Explanation to section 56(2)(viib) of the Act, ‘specified fund’ means a fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which has been granted a certificate of registration as a Category I or a Category II Alternative Investment Fund and regulated under SEBI (Alternative Investment Fund) Regulations 2012. As submitted by the appellant, Ascent is registered as Securities and Exchange Board of India (‘SEBI’) Category II Alternative Investment Fund (‘AIF’) effective from 7 August 2017 (Copy of the registration certificate is also submitted by the appellant). Thus, the appellant has argued that given the express exemption to a ‘Specified Fund’ from the applicability of provisions of section 56(2)(viib) of the Act, no addition ought to be made in respect of the amount received from Ascent. Further, as per the Explanation to section 56(2)(viib), the terms “venture capital company”, “venture capital fund” and “venture capital undertaking” shall have the meanings respectively assigned to them in clause (a), clause (b) and clause (c) of Explanation to clause (23FB) of section 10. As per Clause (c) of Explanation to clause (23FB) of section 10 of the Act. ‘venture capital undertaking’ shall be a venture capital undertaking as defined in clause (n) of regulation 2 of the Venture Capital Funds (‘VCF’) Regulations; OR clause (aa) of sub-regulation (1) of regulation 2 of the Alternative Investment Funds (‘AIF’) Regulations.
As per clause (aa) of the AIF Regulations (prior to amendment), “venture capital undertaking” means a domestic company:
| (i) | | which is not listed on a recognised stock exchange in India at the time of making investment; and |
| (ii) | | which is engaged in the business for providing services, production or manufacture of article or things and does not include following activities or sectors: |
| (1) | | non-banking financial companies; |
| (3) | | activities not permitted under industrial policy of Government of India; |
| (4) | | any other activity which may be specified by the Board in consultation with Government of India from time to time; |
6.5 The Appellant has been incorporated on 12 August 2015 as a private limited entity. Further, the appellant undertakes manufacturing of its products, markets and sells the said products under its brand name ‘Myglamm’. Therefore, the appellant argued that as it is engaged in the manufacturing of varieties of beauty, cosmetic and skin care products, and being an unlisted entity thereby fulfilling both the aforesaid conditions and consequently ought to be considered to be a ‘Venture Capital Undertaking’ as per the AIF Regulations. The appellant contended that on account of specific exemption provided in section 56(2)(viib) to the venture capital undertaking receiving consideration from specified funds, the said addition of Rs. 46,24,57,170/- made by the Ld. AO is, therefore, unwarranted and deserves to be deleted.
Similarly, as regards to the amount of disallowance of Rs. 11,09,010/- in respect of Ascent Private Equity Trust and Rs. 10,33,59,732/- in respect of Wipro
Enterprises Ltd is concerned, the appellant submitted that as per rule 2, sub rule 2(A)(c) of GSR 685(E) no disallowance is warranted in the case of the appellant. The relevant portion of the sub rule is reproduced hereunder:
“(c) where any consideration is received by a venture capital undertaking for issue of unquoted equity shares, from a venture capital fund or a venture capital company or a specified fund, the price of the equity shares corresponding to such consideration may, at the option of such undertaking, be taken as the fair market value of the equity shares to the extent the consideration from such fair market value does not exceed the aggregate Consideration that is received from a venture capital fund or a venture capital company or a specified fund:
Provided that the consideration has been received by the undertaking from a venture capital fund or a venture capital company or a specified fund, within a period of ninety days before or after the date of issue of shares which are the subject matter of valuation.
Explanation – For the purposes of this clause,-
| (i) | | “specified fund” shall have the same meaning as assigned to it in clause (aa) of Explanation to clause (viib) of sub-section (2) of section 56; |
| (ii) | | “venture capital company”, “venture capital fund” and “venture capital undertaking shall have the same meaning assigned to them in clause (b) of Explanation to clause (viib) of sub-section (2) of section 56. |
Illustration: If a venture capital undertaking receives a consideration of fifty thousand rupees from a venture capital company for issue of one hundred shares at the rate of five hundred rupees per share, then such an undertaking can issue one hundred shares at this rate to any other investor within a period of ninety days before or after the receipt of consideration from venture capital company.”
6.6 The appellant has relied on the case of Hon’ble ITAT Delhi Bench in the case of ACIT v. Drishti Soft Solutions Pvt. Ltd. (ITA No. 8523/Del/2019) wherein it was held that section 56(2)(vii) (b) would not be applicable where consideration for issued of shares is received by a venture capital undertaking from a venture capital company or venture capital fund. Further, reliance is also placed on the decision of the Kolkata bench of the Hon’ble ITAT in the case of Milk Mantra Dairy Pvt. Ltd. v. Deputy Commissioner of Income-tax (ITA No. 413/Kol/2020) wherein it was held that transaction of issue of shares by venture capital undertaking to venture capital company or venture capital fund is squarely covered by first proviso to section 56(2)(vii) (b) wherein it has been stated that said section shall not apply.
6.7 The appellant also placed reliance on the decision of the Delhi bench of Hon’ble ITAT in the case of Bigfoot Retail Solution Pvt. Ltd. ACTI (ITA No. 3161/Del/2016) wherein also it has been held that since assessee fulfils the requisite condition of being a venture capital undertaking, it falls within the ambit of the exclusionary provision contained in the first proviso to section 56(2)(vii)(b) when consideration is received from a venture capital undertaking.
6.8 In view of the above discussion, it is held that the appellant being a Venture Capital Undertaking, the investments made by the SEBI registered Alternate Investment Fund are not subject to rigors of the provisions of section 56(2)(viib) of the Act and hence no additions on these count are warranted. The addition made by the AO u/s 56(2) (viib) on account of Share Premium u/s 56(2)(viib) of the Act amounting to Rs.56,58,16,902/- is therefore deleted. The ground no. 8 of the appeal is hereby allowed. The contention of the appellant in the ground no. 3 is therefore allowed in this regard.”
9. Now on going through the above finding, we notice that the basis of relief given by ld.CIT(A) is that since the appellant is a Venture Capital Undertaking and investments have been made by a SEBI registered alternate investment fund therefore such investments are not subject to rigours of provisions of section 56(2)(viib) of the Act. However, before us, ld. Counsel for the assessee has fairly admitted that WEL is not a SEBI registered alternate investment fund and that ld.CIT(A) while dealing with the issue of investments received from Ascent Private Equity Trust and WEL, has taken the basis of Ascent Private Equity Trust which is a SEBI registered alternate investment fund and therefore while giving relief to the assessee ld.CIT(A) failed to take note that WEL is not a SEBI registered alternate investment fund. Therefore, the very basis of giving relief to the assessee by ld.CIT(A) is incorrect. However, since the assessee has furnished various other details of WEL in support of its contention that source of the investment is duly explained along with relevant documentary evidences and the shares have been issued at Fair Market Value arrived at by the Registered Valuer applying Discounted Cash Flow method, we deem it appropriate that the issue deserves to be restored back to the file of ld.CIT(A) for afresh adjudication in light of the details filed before this Tribunal.
10. Accordingly, the issue of investment from WEL at Rs.10,33,59,732/- received by the assessee towards issue of Equity shares is hereby remitted back to the file of ld.CIT(A) for afresh adjudication. Needless to mention that in the set aside proceedings assessee shall be given reasonable opportunity of being heard. Assessee is directed to remain vigilant and make satisfactory compliance to the notice(s) of hearing issued by ld.CIT(A) and it should refrain from taking adjournments unless otherwise required for reasonable cause. Effective grounds of appeal raised by the Revenue are allowed for statistical purposes.
11. Ground No.2 raised by the Revenue is general in nature and needs no adjudication.
12. So far as grounds raised by the assessee in the Cross Objection, they only indicate that the Valuation Report on the basis of which the shares have been issued at the Fair Market Value have been prepared by SEBI registered independent Merchant banker. Since we have already restored the issue raised by the Revenue in its Ground of appeal No.1 for afresh adjudication, grounds raised by the assessee in the Cross Objection on the very same issue are also restored to the file of ld.CIT(A) for afresh adjudication in accordance with law.
13. In the result, both the appeal filed by the Revenue as well as Cross Objection filed by the assessee are allowed for statistical purposes.