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Facts
The assessee declared a loss for AY 2017-18. The Assessing Officer (AO) observed that the assessee issued share capital at a premium, but projected profits differed significantly from actual incurred losses. The AO rejected the assessee's valuation report and determined the fair market value using the Net Asset Value (NAV) method, leading to an addition under Section 56(2)(viib).
Held
The Tribunal held that the Assessing Officer erred in rejecting the Discounted Cash Flow (DCF) method adopted by the assessee's independent valuers and substituting it with the NAV method. The Tribunal noted that the subsequent sale of shares at a higher price justified the assessee's valuation and that projections, even if not perfectly accurate, cannot be replaced by the AO's chosen method.
Key Issues
Whether the Assessing Officer was justified in rejecting the DCF valuation method used by the assessee and applying the NAV method for determining the fair market value of shares under Section 56(2)(viib) of the Income Tax Act, 1961.
Sections Cited
143(2), 142(1), 56(2)(viib), 68, 11UA
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Income Tax Appellate Tribunal, DELHI BENCH ‘C’: NEW DELHI
(Assessment Year: 2017-18) IPSAA Holdings Private Limited, vs. ACIT, Circle 4 (1), 21 A, J Block, Mayfield Garden, Gurugram. Sector 51, Gurugram – 122 018 (Haryana). (PAN : AADCI2179Q) (APPELLANT) (RESPONDENT) ASSESSEE BY : Dr. Rakesh Gupta, Advocate Shri Shrey Jain, Advocate Shri Deepesh Garg, Advocate REVENUE BY : Shri Om Prakash, Sr. DR Date of Hearing : 04.06.2025 Date of Order : 23.07.2025 O R D E R
PER S.RIFAUR RAHMAN, ACCOUNTANT MEMBER :
This appeal is filed by the assessee against the order of ld. Commissioner of Income-tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘ld. CIT (A)] dated 03.08.2023 for Assessment Year 2017-18.
Brief facts of the case are, assessee filed its return of income for AY 2017-18 declaring loss of Rs.3,02,31,570/-. The case of the assessee was selected for CASS and notices under sections 143(2) and 142(1) of the Income-tax Act, 1961 (for short ‘the Act’) were issued and served on the assessee through e-portal. In response, assessee has filed relevant information as called for through e-portal. During assessment proceedings, the Assessing Officer observed that assessee has issued share capital on 19.09.2016 and 31.03.2017. As per the valuation report submitted by the assessee vide report dated 15.09.2016 and 25.02.2017, the shares were issued at a premium of Rs.30/- and Rs.100 respectively. The Assessing Officer observed that earning before tax projected in these reports for FY 2016-17 was at Rs.97,00,000/- whereas in reality assessee has incurred loss of Rs.3.02 crores for FY 2016-17 and the assessee was asked to substantiate the above. In response, assessee submitted as under :- “.................... ICPL had a turnover of INR 208.90 lakhs for the year ending March 31, 2016 at the time of acquisition and assessee paid an amount of INR 700 lakhs for the proposed acquisition of 100% equity shares of ICPL. Copy of Balance sheet and Profit & Loss account of ICPL for FY 16 & 17is attached. This valuation of ICPL in an Independent Arm's length deal was approximately done at 3.5 X of the turnover of the company and can be taken as comparable transaction for the purpose of valuation of share of assessee issued by Valuer on Feb. 25, 2017. Copy of ICPL acquisition agreement is attached. In order to make arrangement for the necessary funds for this acquisition of ICPL the assessee company raised its capital by another INR 550 Lacs. For this purpose, the assessee again approached the valuers M/s Sanjeev Anju & Associates, Chartered Accountants and filed them the revised business projections for the next 5 years and the valuers adopted the discounted cash flow method and also considered the acquisition amount paid by assessee to acquire the equity shares of ICPL which was broadly three times of the turnover of ICPL for the year ending March, 2017. Since March 2017 is passed now a figure of the top line of assessee combined with that of ICPL turnover shows that the assessee consolidated turnover was roughly INR 8 crores and the valuers have rightly valued the company at INR 2500 lacs which is a three times of the top line of the assessee. Similarly in the said valuation report enclosed the turnover of the assessee company was projected as 2500 Lacs for the year ending March 2019 and the assessee company has achieved a top line of INR 2576 Lacs as is evident from the consolidated balance sheet attached. In view of the above background it is evident that the turnover and profitability figures submitted by the assessee to the valuation firm, even though based on estimations in February 2017, turned out to be largely correct and broadly matches with the actual performance of the company for FY 18 & 19. Thus it is not correct to conclude that the valuation report filed by us in support of the valuation of the shares of the assessee company based on DCF method, as prescribed under rules 11 UA is incorrect or grossly wrong and therefore this valuation report should not be rejected without anything contrary on record.
Accordingly the share allotments done by the company during the financial year 2016-17 has been done at the FMV, which has been prescribed under Rule 11 UA and in the facts and circumstances of the case provisions of section 56(viib) of the Income Tax Act, 1961 should not be invoked ……….”
After considering the above, the Assessing Officer rejected the same and observed that assessee has projected the earning before tax at Rs.97 lakhs and also projected Rs.6.05 crores to achieve the result of earning before tax. He further observed that in actual, the assessee has incurred huge loss as well as Rs.4,11,00,695/- and he doubted the method adopted for valuation of shares by adopting such values. He also rejected the claim of favourable business environment for the company based on the passage of Maternity Bill by the Rajya Sabha. He further observed that as per the decision of ITAT in the case of Agro Portfolio Pvt. Ltd. vs. ITO, the valuation method of the assessee can be rejected by the Assessing Officer and can carry out his own independent valuation. Based on the above decision, he rejected the valuation of shares adopted by the assessee. He further observed that the value of the share which was used to allot the share of the company to its shareholders are excess and observed that the value of the share was not correctly determined with the help of DCF method, therefore, he proceeded to determine the same by applying the other method proposed in Rule 11UA of the Income-tax Rules, 1962 i.e. Net Asset Value Method. By adopting the same, he determined the value of shares at Rs.31/- per share. Therefore, he observed that as per the net asset value method, the fair market value of the shares is Rs.31/- per share whereas assessee has allotted share at premium of Rs.30/- to Rs.100/- to share applicants. Therefore, according to him, the provisions of section 56(2)(viib) of the Act is attracted, he determined the share premium issued in both tranches to the extent of Rs.6.82 crores. Accordingly, he calculated the difference as under :-
S.No. Share Holder’s Name No. of Issue FMV Difference Share Shares Price Premium Allotted A B C D E-C-D F=Bx E 1. Kanchan Mittal 100000 30 31 1 (100000) 2. IPSAA Day Care Private 150000 30 31 1 (150000) Limited 3. IPSAA Childcare Private 190000 30 31 1 (190000) Limited 4. Shiv Kumar Mittal 300000 100 31 69 20700000 5. Infotrade Resources (I)(P) 200000 100 31 69 3450000 Ltd.
6. Kristen Buildcon Private Ltd. 200000 100 31 69 13800000 Difference of share premium 3,75,10,000 4. Accordingly, he made addition of Rs.3.75 crores u/s 56(2)(viib) of the Act and assessed the income of the assessee at Rs.72,78,430/- instead of returned loss.
Aggrieved, assessee preferred an appeal before the NFAC, Delhi and filed detailed submissions. After considering the detailed submissions, judicial precedents and findings of the Assessing Officer, ld. CIT (A) sustained additions made by the Assessing Officer.
Aggrieved, assessee is in appeal before us raising following grounds of appeal :-
1. That on the facts and circumstances of the case and in the Law, the National Faceless Appeal Centre (NFAC), Delhi had grossly erred in confirming the addition of Rs.3,75,10,000 u/s 56(2)(vii)(b) of the Act.
2. That on the facts and circumstances of the case and in the Law the addition of Rs.3,75,10,000 u/s 56(2)(vii)(b) of the Act as made by the AD and confirmed by the NFAC is totally unwarranted under the law.
3. That on the facts and circumstances of the case and in the Law the NFAC while confirming the addition of Rs. 3,75,10,000 u/s 56(2)(vii)(b) could not identify any sort of fallacy in crucial submissions submitted on behalf of the assessee, interalia, to the effect that the provisions of section 56(2) being in the nature of anti abuse measure are aimed at preventing mala fide transactions and to tackle the problem of black money were never intended to be made applicable on genuine and bona fide commercial transactions; that the assessee had a choice to adopt either Discounted Cash Flow (DCF) or Net Assets Value (NAV) method for determining the Fair Market Value (FMV) of shares and that the AO cannot substitute his method for the method adopted by the assessee; that in the subsequent Financial Year 2020-21 the renowned French company M/s Sodexo SA has determined the FMV of shares at Rs. 264 on which shares were issued being much higher than the FMV adopted by the company in the current assessment year.”
7. At the time of hearing, ld. AR of the assessee submitted that assessee is engaged in the business of running play school and day care centres at various locations in India. In order to expand the operations, it has approached Bank of Baroda and borrowed loan in order to acquire another company, namely Integrated Child Care Pvt. Ltd. (ICPL). Further for the same reason, assessee has issued shares to its promoters in two tranches on 19.09.2016 and 31.03.2017 at a premium of Rs.31 per share and Rs.100 per share respectively. Before issue of shares to promoters, assessee has obtained valuation of its shares from independent valuers as per Rule 11UA of the Income-tax Rules, 1962, the independent valuers used another approved method of DCF method. He submitted that the Assessing Officer has rejected the valuation report so obtained by the assessee and replaced the same by NAV method, proceeded to make the addition. In this regard, he submitted that the projections adopted by the valuer cannot be accurate. In this regard, he submitted as under :- (1) That an independent French company bought the shares on 01.12.2020 at Rs.254/- per share which was far higher than the premium of Rs.100/-. (2) AO cannot substitute his NAV in place of DCF used by independent valuers as per the option given by Rule 11UA. (3) Object of section 56(2)(viib) is to curb, prevent use & generation of unaccounted money & AO verifies the share premium on the touchstone of section 68.
Further he brought to our notice observations of the Assessing Officer at pages 2 & 3 of the assessment order, also brought to our notice pages 6 to 14 of the appellate order for the detailed arguments of the assessee submitted before the ld. CIT (A). He also brought to our notice valuation reports placed on record and also brought to our notice share purchase agreement with Sodexo SA which is placed at pages 277 to 370 of the paper book. He further submitted that the objection of section 56(2)(viib) is to curb generation and use of unaccounted income and not to hinder the genuine and bonafide business transactions. In this regard, he relied on the following case laws :- (i) Vaani Estates (P) Ltd. vs. ITO – (2018) 98 taxmann.com 92 / 172 ITD 629 (Chennai-Trib.) (ii) ACIT vs. Subodh Menon (2019) 103 taxmann.com 15 / 175 ITR 449; (iii) Clearview Healthcare Pvt. Ltd. vs. ITO (2020) 114 taxmann.com 167 (Del-Trib.).
He further submitted that the Assessing Officer cannot substitute NAV method in place of DCF and relied on the following cases :- (i) Cinestaan Entertainment Pvt. Ltd. vs. ITO (2019) 106 taxmann.com 300 (Del.-Trib.); (ii) Rameshwaram Strong Glass Pvt. Ltd. vs. ITO (2018) 96 taxmann.com 542 (Jaipur-Trib.)
Finally, he submitted that projections have to be viewed as projections and it cannot be accurate, in this regard, he relied on the following case laws :-
(i) Rameshwaram Strong Glass (P.) Ltd. vs. ITO (2018) 96 taxmann.com 542 (Jaipur-Trib.); (ii) DQ (International) Ltd. vs. ACIT (2016) 72 taxmann.com 142; (iii) Vodafone M-Pesa Ltd. vs. DCIT (2020) 114 taxmann.com 323 (Mumbai – Trib.).
On the other hand, ld. DR of the Revenue brought to our notice findings of the Assessing Officer and ld. CIT (A), he submitted that he heavily relies on the findings of the lower authorities.
Considered the rival submissions and material placed on record. We observe that assessee is engaged in the business of running play school and day care centres at various locations in India and during the year, assessee has acquired another company, namely ICPL, in that process, assessee has borrowed loan from Bank of Baroda and also decided to issue fresh shares to its promoters. Accordingly, assessee has valued its shares before issue of shares to its promoters. The independent valuer submitted his valuation report dated 15.09.2016 and 25.02.2017. They have valued the shares and determined the premium at Rs.31 per share and Rs.100 per share respectively. The Assessing Officer analysed the valuation report and observed that the basic information for valuation of the report was submitted by the assessee to the valuer and these figures are not matching with the actuals. He observed that the assessee has projected net profit at the value which is contrary to the actual at the time of estimations were provided to the valuer and further observed that actual turn over achieved by the assessee is far less. Based on the above observations, he rejected the DCF method adopted by the valuer and proceeded to determine the value of shares based on the Net Asset Value (NAV). After careful consideration of various informations available on record, we observe that no doubt, the assessee has declared negative profit during the year under consideration. However, assessee has projected positive profits while projecting its revenue for the purpose of valuation of its own shares. It is fact on record that assessee has issued shares to its own promoters and it is business norm that whenever they value the shares with the intent to generate income in the future not on the basis of historical earnings of the business. In this case, assessee has not allotted shares to any other person, rather it was allotted shares only to its own promoters. It is also fact on record that assessee needs further funds for expansion of its own business and in that process, the assessee has acquired another company, namely, ICPL. We observe that the assessee has no doubt supplied the information for valuation of its own shares and independent valuer has valued the shares by adopting the above information and the valuer has adopted one of the accepted method as per Rule 11UA. The Assessing Officer found that the projections adopted by the assessee are not matching with the actual. We observe that Assessing Officer has found discrepancies in adoption of future gross revenue and proceeded to analyse the issue under consideration as per provisions of section 68 of the Act. Since the shares were allotted to its own promoters, there is no avenue for the assessee to generate or convert any unaccounted money and bring on record. Further there is no evidence brought on record by the Assessing Officer to question the genuineness of the transaction, rather he analysed only the projections.
It is brought to our notice that the assessee/ promoters have subsequently sold shares to a French company @ Rs.254 per share which was much higher than the share valued by the company. It justifies the value of shares determined by the valuer. As held in the various cases, namely, Cinestaan Entertainment Pvt. Ltd. (supra), wherein Assessing Officer cannot substitute NAV in place of DCF. Further it was held that the projections cannot replace actual and it Rameshwaram Strong Glass (P.) Ltd.; DQ (International) Ltd. vs. ACIT and Vodafone M-Pesa Ltd. vs. DCIT (supra). Therefore, with the above findings, we are inclined to allow the grounds raised
by the assessee.
14. In the result, the appeal filed by the assessee is allowed. Order pronounced in the open court on this 23rd day of July, 2025.