JETSYNTHESYS PRIVATE LIMITED,PUNE vs. ACIT, CIR-4 , PUNE

Facts of the case, in brief, are that the assessee is a company engaged in the business of music, celebrity video blogging, digital advertising, big data analytics, designer clothes and digital technology innovation factory to deliver a range of next gen digital products for the year under consideration. It filed its original return of income on 17.11.2016 declaring total loss at Rs.28,99,43,954/-. Subsequently the assessee filed revised return on 25.01.2018 declaring total loss at Rs.27,04,08,372/-. The case of the assessee was selected for complete scrutiny under CASS. Accordingly, statutory notice u/s 143(2) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) was issued and served on the assessee. Subsequently the Assessing Officer issued and served notice u/s 142(1) along with a questionnaire in response to which the assessee filed its reply with supporting documents.

During the course of assessment proceedings the Assessing Officer observed from the Balance Sheet and the financial statements of the assessee for the year under consideration that the assessee company has issued 2,00,000 equity shares of face value of Rs.10 at a premium of Rs.2,240/- to one M/s. Prathiti Investment Trust on 23.04.2015. Thus, the assessee company has received an amount of Rs.44,80,00,000/- in the year under consideration as share premium against the allotment of said shares. The assessee company while charging the premium of Rs.2,240/- per share has adopted the fair market value of the share at Rs.2,250/- as per the report of the Chartered Accountant wherein the valuation of the shares as on 31.03.2015 of the assessee company was made on the basis of Discounted Cash Flow (DCF) Method. The Assessing Officer reproduced the report of the valuer along with statement of valuation of shares.

According to the Assessing Officer the DCF Method requires a lot of details to make an estimate of the intrinsic value of a stock and in respect of each of those details, the analyst must have high degree of confidence about the assumptions being made of future performance. Otherwise, the fair value generated will not be accurate. According to him, a perusal of the share valuation report prima facie shows that the report is diminutive of several vital requirements and therefore, the report is not worth to be relied upon. He, therefore, proceeded to value the shares of the assessee company independently by adopting the Net Asset Valuation (NAV) Method according to which the fair market value of the shares of the assessee company as on 31.03.2015 comes to Rs. (-) 10. 55. He accordingly noted that there is a wide variation in the fair value computed by the assessee company as per DCF method and the fair value as computed as per NAV method. He, therefore, was of the opinion that the assessee company has received large consideration on allotment of shares as a premium even though the fair value of the shares is far below than the sale price and therefore the provisions of section 56(2)(viib) r.w.s. 2(24)(xvi) of the Act gets attracted. He, therefore, asked the assessee to explain as to why an amount of Rs.44,80,00,000/- should not be treated as ‘Income from other sources u/s 56(2)(viib) and added to the total income of the assessee.

The assessee in response to the same submitted that it has issued shares as per valuation done by an independent share valuer. It was submitted that this is in accordance with the provisions of section 56(2)(viib) r.w.s. 11UA of the Income Tax Rules, 1962 (hereinafter referred to as ‘the Rules’) where the assessee has the option to value the shares as per DCF method which is according to the framework of law. Further the valuation arrived at by the Assessing Officer at Rs.(-) 10.55 by using the Net Asset Value Method which is the orthodox method considering the nature of activity carried out by the assessee company and more so even when it is start up. Therefore, it is natural and fair to adopt the Discounted Cash Flow method of valuation of share. It was argued that as per Rule 11UA (2) the assessee has an option to value the shares as per the Discounted Cash Flow Method. Therefore, the rule cannot be read in isolation stating that only NAV method is the Fair Value Method for valuing the shares of the company. Without prejudice to the above, it was submitted that Angel investors invest in the companies on the basis of "idea" in these startups, which cannot be valued under any method of valuation other than Discounted Cash Flow methods. Therefore, in this method future cash flows and revenue is estimated on the basis of idea will be successful and accordingly Discounted Cash Flow method is used for the valuation of shares. If the investor is willing to invest in the idea at that value, he is allotted the share. The investors generally conduct their own due diligence before investing in the shares of the company and the fair price to be paid for the investment. It was further submitted that the transaction is genuine.

However, the Assessing Officer was not satisfied with the arguments advanced by the assessee. Rejecting the DCF method adopted by the assessee valuing the shares at Rs.2,250/- on the basis of unrealistic projections and unverified data, he made addition of Rs.44,80,00,000/- as ‘Income from other sources’ as per the provisions of section 56(2)(viib) r.w.s. 2(24)(xvi) of the Act by observing as under:

In appeal, the Ld. CIT(A) / NFAC upheld the action of the Assessing Officer.

Aggrieved with such order of the Ld. CIT(A) / NFAC the assessee is in appeal before the Tribunal by raising the following grounds:

The Ld. Counsel for the assessee submitted that the assessee company has issued 2,00,000 equity shares of face value of Rs.10/- each for a consideration of Rs.45,00,00,000/- to M/s. Pratithi Investment Trust on 23.04.2015. M/s. Pratithi Investment Trust belongs to Mr. Kris Gopalakrishan, co-founder of Infosys and enjoying high esteem for his key role in mentoring leading Start-ups in India. He submitted that the assessee had adopted the fair market value of the equity shares at Rs.2,250/- (inclusive of premium of Rs.10) (face value of Rs.10 + Rs.2,240/- as premium) as per the share valuation report as on 31.03.2015 on the basis of DCF method. He submitted that the Assessing Officer has no authority to reject the valuation made in accordance with the guidelines as per Rule 11UA of the Rules when the assessee has valued the shares issued strictly in accordance with the valuation guidelines prescribed under Rule 11UA of the Rules. He submitted that there is no enabling provision under which the Assessing Officer could have rejected such valuation and substituted his own valuation.

Referring to the decision of the Hon’ble Delhi High Court in the case of Agra Portfolio (P.) Ltd. vs. PCIT reported in (2024) 161 taxmann.com 303 (Del) he submitted that the Hon’ble High Court, following the decision of the Hon’ble Bombay High Court in the case of Vodafone M-Pesa Limited vs. PCIT (2018) 92 taxmann.com 73 (Bom), has held that 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 and the Assessing Officer cannot reject the valuation made in accordance with the guidelines of Rule 11UA.

Referring to the decision of the Hyderabad Bench of the Tribunal in the case of JCIT (O ) vs. MLR Auto Ltd vide ITA No.115/Hyd/2021 order dated 28.12.2023, he submitted that the Tribunal in the said decision has held that 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 fair market value of the unquoted shares.

Referring to the decision of the Mumbai Bench of the Tribunal in case of DCIT vs. Credtalpha Alternative Investment Advisors (P.) Ltd. reported in (2022) 94 ITR (Trib) 596 he submitted that the Tribunal in the said decision has held that although the net asset value method and the DCF method for valuation of the shares of the company gives a wide variation between them, however, there is no reason to find fault with the assessee in such cases. It was held that both these methods have different approaches and methodologies and therefore, there are bound to be differences but it does not give any authority to the Assessing Officer to pick and choose one of the methods and make the addition. It is the assessee valuing the shares.

Relying on various other decisions he submitted that where the assessee has exercised the option of DCF valuation method as per Rule 11UA the Assessing Officer has no juri iction to substitute NAV method of valuation of shares. For the above proposition he relied on the following decisions: PCIT vs. M/s. Cinestaan Entertainment Pvt Ltd reported in (2021) 433 ITR 82 (Del)

The Ld. Counsel for the assessee in his next plank of argument submitted that the shares issued with premium as referred above were not subscribed by any closely related person or any sister concern of the assessee but by an independent investor Pratithi Investment Trust managed by Mr. Kris Gopalakrishnan, a highly respected Start-up mentor. Further, the Assessing Officer had issued notices u/s 133(6) of the Act to the above investor seeking confirmation and relevant information and documents pertaining to transaction of issue of shares. In response to the same the Assessing Officer had also received all the details and confirmation directly from the investor. Thus, neither the identity nor the creditworthiness of the investor nor the genuineness of the transaction has been doubted by the Assessing Officer.

Relying on the decision of the Mumbai Bench of the Tribunal in the case of Vodafone M-Pesa Ltd. vs. DCIT reported in (2020) 114 taxmann.com 323 (Mumbai), the Ld. Counsel for the assessee submitted that the Tribunal in the said decision has held that when the Assessing Officer had issued notice u/s 133(6) of the Act to the investors to seek confirmation, information and documents pertaining to transaction of issuance of shares in response to which those parties have directly given the details to the Assessing Officer confirming the transaction, therefore, neither the identity nor the creditworthiness of the investors nor the genuineness of the transactions can be doubted and therefore, the deeming provisions of section 68 of the Act are not applicable.

Referring the decision of the Hon’ble Delhi High Court in the case of PCIT vs. M/s. Cinestaan Entertainment Pvt Ltd reported in (2021) 433 ITR 82 (Del), he submitted that the Hon’ble High Court upheld the decision of the Tribunal where it has been held that when independent investors have invested in shares of a company as per valuation adopted on DCF basis, not only should their commercial prudence come to be doubted, but also the question of tax abuse via infusion of unaccounted money cannot be raised.

The Ld. Counsel for the assessee in his third plank of argument submitted that in the assessment year 2017-18 even on squarely identical facts the same Assessing Officer had accepted the DCF valuation after due consideration in the scrutiny assessment.

Referring to the show cause notice dated 18.11.2019 issued by the Assessing Officer for assessment year 2017-18, copy of which is placed at paged 127 to 131 of the paper book, the Ld. Counsel for the assessee drew the attention of the Bench to the Annexure where the Assessing Officer as per clause 3 of the said notice has noted that the assessee has received an amount of Rs.41,23,30,170/- on account of security premium on shares issued. At clause 3(vi) the Assessing Officer has asked the assessee to submit the copy of valuation report and its basis / detailed working in respect of determination of price of shares and to explain as to how the valuation adopted is correct for assessment year 2017-18. 19. Referring to pages 130 to 142 of the paper book he drew the attention of the Bench to the reply submitted by the assessee to the query raised by the Assessing Officer. Referring to pages 143 to 156 of the paper book he drew the attention of the Bench to the copy of assessment order for assessment year 2017-18 and submitted that no such addition on account of issue of shares at premium of Rs.4,790/- has been added. He submitted that the shares were issued with premium at the value of Rs.4800/- per share for assessment years 2017-18 and 2018-19. Therefore, once the Assessing Officer has accepted the valuation of shares at Rs.4800/- in assessment year 2017-18 on the basis of the same valuation method, there is no justification on the part of the Assessing Officer to disregard the value adopted by the assessee and the Ld. CIT(A) / NFAC was not justified in upholding the same.

The Ld. DR on the other hand heavily relied on the order of the Ld. CIT(A) / NFAC. He submitted that the valuation report was prepared on the basis of information furnished by the company. The valuer has not confirmed the veracity, accuracy or completeness of any of the financial or qualitative information on which his report is based. He does not accept any kind of responsibility for the report or its accuracy or realization of the forecasts. Therefore, the Assessing Officer was fully justified in rejecting the DCF method adopted by the assessee company and the value of share at Rs.2,250/- on the basis of unrealistic projections and unverified data.

We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and the Ld. CIT(A) / NFAC and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the assessee company in the impugned assessment year has issued 2,00,000 equity shares of face value of Rs.10/- at a premium of Rs.2,240/- per share to one M/s. Pratithi Investment Trust on 23.04.2015 and thus has received an amount of Rs.45,00,00,000/-. The assessee while charging the premium @ Rs.2,240/- per share has adopted the fair market value of the shares at Rs.2,250/- as per the report of the CA wherein the valuation of the shares as on 31.03.2015 of the assessee company was made on the basis of DCF method. According to the Assessing Officer the DCF Method requires a lot of details to make an estimate of the intrinsic value of a stock and in respect of each of those details, the analyst must have high degree of confidence about the assumptions being made of future performance. Otherwise, the fair value generated will not be accurate. According to him, a perusal of the share valuation report prima facie shows that the report is diminutive of several vital requirements and therefore, the report is not worth to be relied upon. He, therefore, proceeded to value the shares of the assessee company independently by adopting the Net Asset Valuation (NAV) Method according to which the fair market value of a shares of the assessee company as on 31.03.2015 comes to Rs. (-) 10. 55. He, therefore, was of the opinion that the assessee company has received large consideration on allotment of shares as a premium even though the fair value of the shares is far below than the sale price and therefore the provisions of section 56(2)(viib) r.w.s. 2(24)(xvi) of the Act gets attracted. Rejecting the various explanations given by the assessee the Assessing Officer made addition of Rs.44,80,00,000/- to the total income of the assessee, the reasons of which have already been reproduced in the preceding paragraphs. We find in appeal the Ld. CIT(A) / NFAC upheld the action of the Assessing Officer.

It is the submission of the Ld. Counsel for the assessee that (a) when the assessee has valued its shares in accordance with the valuation guidelines as per Rule 11UA, therefore, in absence of any enabling provisions, the Assessing Officer could not have arbitrarily rejected the valuation so made; (b) the shares have been issued to non-related parties who in response to the notice u/s 133(6) have directly furnished all the relevant details including the confirmation to the Assessing Officer and therefore, their identity, creditworthiness and genuineness of the transaction have been established and not doubted by the Assessing Officer and (c) in assessment year 2017-18 under identical facts the Assessing Officer after going through the various details furnished by the assessee has accepted the DCF method adopted by the assessee and accepted the shares issued with premium at a price of Rs.4.800/- per share.

We find sufficient force in the above arguments of the Ld. Counsel for the assessee. A perusal of the details filed by the assessee in the paper book as well as the order of the Assessing Officer shows that the assessee has adopted the DCF method for valuation of its shares. The provisions of Rule 11UA were duly followed. Therefore, once the assessee has adopted the DCF method the Assessing Officer has to examine the same but cannot substitute his own method for arriving at the valuation of shares. He could not have rejected the valuation made in accordance with the guidelines of Rule 11UA.

We find the Hon’ble Delhi High Court in the case of Agra Portfolio (P.) Ltd. vs PCIT (supra) has held that while it would be open for the Assessing Officer, 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. While doing so, the Hon’ble High Court followed the decision of the Hon’ble Bombay High Court in the case of Vodafone M-Pesa Limited vs. PCIT (supra). The relevant observations of the Hon’ble High Court read as under:

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 Juri ictional High Court in the case of Vodafone M-Pesa Ltd. v PCIT (2018) 164 DTR 257/ 256 Taxman 240 (Bom)(HC). As far as the worth of food division is concerned, the Ld. Counsel for the assessee submitted that assessee has followed the method prescribed under section 50B(3) of the Act alongwith Explanation (2). He submitted that in the net worth computed by the assessee and in the AO, there is only one difference. It was submitted that the assessee following the Explanation-2 below section 50B(3) of the Act has adopted written down value of the block asset in case of the depreciable asset as per the proviso to section 43 of the Act, which the AO has omitted.

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."

Proceeding along similar lines, the Hyderabad Bench of the ITAT in Joint Commissioner of Income Tax vs. M/s MLR Auto Limited12 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. ........."

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. Commissioner of Income Tax 6(2)(1) vs. Credtalpha Alternative13 and the relevant parts whereof are reproduced hereunder:- "

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."

We find the Hon’ble Gujarat High Court in the case of Akash Ceramics (P.) Ltd. vs. ITO (2024) 168 taxmann.com 407 (Gujarat) has held that where the assessee had exercised option for DCF method of valuation of equity shares during course of regular assessment, the Assessing Officer could not have assumed juri iction to reopen assessment on ground that the assessee did not fulfill projected growth as per DCF method in subsequent year. The relevant observations of the Hon’ble High Court read as under:

We find the Hon’ble Himachal Pradesh High Court in the case of PCIT vs. I.A. Hydro Energy (P) Ltd. (supra) has held that where the assessee has exercised option of DCF valuation method as per Rule 11UA, the Assessing Officer has no juri iction to substitute NAV method of valuation of shares. The relevant observations of the Hon’ble High Court read as under:

We find the Delhi Bench of the Tribunal in the case Cinestaan Entertainment (P.) Ltd. vs. ITO reported in (2019) 177 ITD 809 (Delhi-Trib.) has held that as per section 56(2)(viib) read with rule 11UA the assessee has an option to do valuation of shares and determine fair market value either on DCF Method or NAV method, and Assessing Officer cannot examine or substitute his own value in place of value so determined.

We find on further appeal by the Revenue, the Hon’ble Delhi High Court in the case of PCIT vs. Cinestaan Entertainment Pvt. Ltd (supra) dismissed the appeal filed by the Revenue by observing as under:

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 commercial prudence of an assessee relating to valuation of an asset. The law requires determination of the fair market value as per prescribed methodology. The appellant-Revenue has the option to conduct its own valuation and determine the fair market value on the basis of either the discounted cash flow or net asset value method. The respondent-assessee being a start-up company adopted discounted cash flow method to value its shares. This was carried out on the basis of information and material available on the date of valuation and projection of future revenue. There is no dispute that the methodology adopted by the respondent-assessee has been done applying a recognized and accented method. Since the performance did not match the projections, the Revenue sough to challenge the valuation, on that footing. This approach lacks material foundation and is irrational since the valuation is Intrinsically based on the projections which can be affected by various factors We cannot lose sight of the fact that the valuer makes forecast or approximation, based on the potential value of business. However, the underlying 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 wi om of experts in the field of accountancy, having regard to the imponderables which enter the process of valuation of shares. The appellant- Revenue is unable to demonstrate that the methodology adopted by the respondent-assessee is not correct, The Assessing Officer has simply rejected the valuation of the respondent-assessee and failed to provide any alternate fair value of shares. Furthermore, as noted in the impugned order and as also pointed out by Mr. Vohra, the shares in the present scenario have not been subscribed to by any sister concern or closely related person, but by outside investors. Indeed, if they have seen certain potential and accepted valuation, then the appellant-Revenue cannot question their wi om. The valuation is a question of fact which would depend upon appreciation of material or evidence. The methodology adopted by the respondent-assessee, accepted by the learned Income-tax Appellate Tribunal, is a conclusion of fact drawn on the basis of material and facts available. The test laid down by the courts for interfering with the findings of a valuer is not satisfied in the present case, as the respondent-assessee adopted a recognized method of valuation and the appellant-Revenue is unable to show that the assessee adopted a demonstrably wrong approach, or that the method of valuation was made on a wholly erroneous basis, or that it committed a mistake which goes to the root of the valuation process.

In view of the foregoing, we find that the question of law urged by the Appellant-Revenue is purely based on facts and does not call for our consideration as a question of law."

In view of the above decisions, we hold that since the assessee in the instant case has valued its shares as per Rule 11UA by determining the fair market value on DCF method, therefore, the Assessing Officer in our opinion could not have substituted his own valuation in place of the valuation so determined.

We further find the shares issued with premium in the instant case were not subscribed by any closely related person or any sister concern of the assessee but by an independent investor Pratithi Investment Trust managed by Mr. Kris Gopalakrishnan, a highly respected Start-up mentor and one of the founder members of Infosys. Further, the submission of the Ld. Counsel for the assessee that the Assessing Officer had issued notices u/s 133(6) of the Act to the above investor seeking confirmation and relevant information and documents pertaining to transaction of issue of shares in response to which the said investor had directly furnished all the details including the confirmations. Therefore, the identity and the creditworthiness of the investor and the genuineness of the transaction has also been established. It has been held by the Mumbai Bench of the Tribunal in the case of Vodafone M-Pesa Ltd. vs. DCIT (supra) has held that when the Assessing Officer had issued notice u/s 133(6) of the Act to the investors to seek confirmation, information and documents pertaining to transaction of issuance of shares, in response to which the Assessing Officer has received all the details the deeming provisions of section 68 of the Act are not applicable. The relevant observations of the Tribunal read as under:

It has further been held that when independent investors have invested in shares of a company as per valuation adopted on DCF basis, not only should their commercial prudence come to be doubted, but also the question of tax abuse via infusion of unaccounted money cannot be raised. We, therefore, hold that the Ld. CIT(A) / NFAC was not justified in upholding the action of the Assessing Officer.

We, further find for the intervening year assessment year 2017-18 the Assessing Officer has accepted the DCF valuation after due consideration in the scrutiny assessment. A perusal of the show cause notice dated 18.11.2019 issued by the Assessing Officer for assessment year 2017-18, copy of which is placed at pages 127 to 131 of the paper book shows that the Assessing Officer in query No.3 has noted that the assessee has received an amount of Rs.41,23,30,170/- on account of security premium on shares issued for which he has asked various details. Similarly in clause 3(vi) he has asked the assessee to submit the copy of valuation report and its basis / detailed working in respect of determination of price of shares and to explain as to how the valuation adopted is correct for assessment year 2017-

We find after considering the various submissions made by the assessee the Assessing Officer has not made any addition in the said assessment year, copy of which is placed at pages 143 to 150 of the paper book. No 263 or 147 proceedings are initiated for assessment year 2017-18 where under identical circumstances, the shares were issued at much higher premium i.e. Rs.4490/- per share as against Rs.2240/- during the instant year. In view of the above discussion and respectfully following the decisions cited (supra), we hold that the Assessing Officer was not justified in disregarding the valuation adopted by the assessee as per Rule 11UA determining the valuation of shares by adopting DCF method. We, accordingly, set aside the order of the Ld. CIT(A) / NFAC and allow the grounds raised by the assessee.

The appeal filed by the assessee is accordingly allowed.

Grounds raised by the assessee read as under:

Ground of appeal No.1 relates to the order of the Ld. CIT(A) / NFAC in confirming the addition of Rs.21,48,96,972/- made by the Assessing Officer invoking the provisions of section 56(2)(viib) r.w.s. 2(24)(xvi) and Rule 11UA.

After hearing both the sides we find the above ground raised by the assessee is identical to the ground of appeal No.1 in ITA No.2967/PUN/2025. We have already decided the issue and allowed the said ground. Following similar reasonings, we allow the ground of appeal No.1. 37. Ground of appeal No.2 relates to the order of the Ld. CIT(A) / NFAC in confirming the disallowance of Rs.18,17,690/- made by the Assessing Officer u/s 14A of the Act.

Facts of the case, in brief, are that the Assessing Officer during the course of assessment proceedings noted from the Balance Sheet, Profit and Loss Account and submissions made by the assessee that the assessee during the impugned assessment year has made substantial investment in equity shares. He, therefore, asked the assessee to explain as to why the disallowance u/s 14A read with Rule 8D of the IT Rules, 1962 should not be made. The assessee in response to the same submitted that during the year under consideration the assessee has not earned any exempt income, thus, there is no question of disallowance u/s 14A. However, the Assessing Officer was not satisfied with the arguments advanced by the assessee. Following the provisions of section 14A read with Rule 8D, the Assessing Officer computed the disallowance at Rs.18,71,690/- being one percent of the average investment of Rs.18,71,69,019/-.

In appeal, the Ld. CIT(A) / NFAC upheld the action of the Assessing Officer.

Aggrieved with such order of the Ld. CIT(A) / NFAC, the assessee is in appeal before the Tribunal.

The Ld. Counsel for the assessee referring to the decision of the Hon’ble ITR 33 (Del) submitted that the Hon’ble High Court in the said decision has held that if there is no exempt income, there can be no question of making any disallowance u/s 14A. Referring to the decision of the Hon’ble Delhi High Court in the case of CIT vs. Holcim India P. Ltd. reported in (2014) 90 CCH 081-Del- HC, he submitted that here also similar view has been taken.

The Ld. Counsel for the assessee submitted that the amendment to section 14A brought in by the Finance Act, 2022 provides that the disallowance u/s 14A would be called for notwithstanding no receipt of income during the year. Referring to the decision of the Hon’ble Delhi High Court in the case of PCIT vs. Era Infrastructure (India) Ltd reported in (2022) 448 ITR 674 (Del), he submitted that the Hon’ble High Court has considered the amendment carried out to section 14A of the Act and has held that the above amendment is prospective in nature.

Referring to the decision of the Co-ordinate Bench of the Tribunal in the case of Deepak Pandurang Gadre for assessment year 2017-18, he submitted that the Tribunal in the said decision has restricted the disallowance u/s 14A to the extent of the actual tax free dividend earned during the year as against the computation of disallowance made by the Assessing Officer by invoking the provisions of section 14A read with Rule 8D. He accordingly submitted that since disallowance is called for.

The Ld. DR on the other hand heavily relied on the orders of the Assessing Officer and the Ld. CIT(A) / NFAC.

We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and the Ld. CIT(A) / NFAC and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. It is an admitted fact that the assessee during the course of assessment proceedings has categorically stated that he has not earned any dividend income during the year despite investing huge amount in shares. The above fact remains uncontroverted and nothing has been brought on record to show that the assessee has actually earned any dividend income.

We find the Hon’ble Delhi High Court in the case of Cheminvest Ltd. vs. CIT (supra) has held that if there is no exempt income, there can be no question of making any disallowance u/s 14A. Similar view has been taken by the Hon’ble according to which disallowance u/s 14A would be called for notwithstanding non receipt of any exempt income during the year. However, such amendment has been held to be prospective in nature in view of the decision of the Hon’ble Delhi High Court in the case of PCIT vs. Era Infrastructure (India) Ltd (supra). Since the assessment year involved in the instant case is assessment year 2018-19, therefore, the amendment to section 14A by the Finance Act, 2022 will not be applicable. Further, since the assessee has not earned any exempt income during the year, therefore, no disallowance u/s 14A read with Rule 8D is called for in view of the decisions of the Hon’ble Delhi High Court in the case of Cheminvest Ltd. vs. CIT (supra) and in the case of CIT vs. Holcim India P. Ltd. (supra). We, therefore, set aside the order of the Ld. CIT(A) / NFAC and direct the Assessing Officer to delete the disallowance. The ground of appeal No.2 raised by the assessee is accordingly allowed.

The appeal filed by the assessee is accordingly allowed.

To sum up, both the appeals filed by the assessee are allowed.

The concerned Pr.CIT, Pune

DR, ITAT, ‘A’ Bench, Pune 5. ग र्ड फ ईल / Guard file. आदेशानुसार/ BY ORDER, ////