DCIT 2(2)(1), MUMBAI vs. MAX HOSPITALS AND ALLIED SERVICES LIMITED, MUMBAI

I.T.A. No. 3084/Mum/2025 3

8. The shares had no capability and no intrinsic value to give price to premium in the industrial, normal and actual worth of the company.

9. Further, the Hon’ble Supreme Court in the case of Sreelekha Banerjee & Others Vs. Commissioner of Income Tax held that if explanation is unconvincing and one which deserves to be rejected, the Department can reject and draw the inference that the amount represents income either from the source already disclosed by the assessee or from some undisclosed source.”

7. Referring to the provisions of Section 56(2)(viib) of the Act, the AO treated the premium of Rs. 10/- as assessee’s income for the year under consideration and made addition of Rs. 10,73,82,810/- in AY 2016-17. 7.1. Proceeding further, the AO noticed that the assessee has claimed depreciation @ 25% on the deposit paid of Rs. 25 Crores to the society running Nanavati Hospital. The assesse was asked to justify its claim of depreciation. In its reply, the assessee strongly contended that the payment of non-refundable deposit for acquisition of rights for operation and management of a hospital is an intangible asset for the assessee and, therefore, covered under the provisions u/s 32(1)(ii) of the Act and is eligible for depreciation. The assessee also pointed out that depreciation was allowed in AY 2015-16. All the contentions of the assessee were dismissed by the AO who went on to disallow the claim of depreciation of Rs. 6.25 Crores. 7.2. The assessee challenged the additions before the ld. CIT(A) and reiterated its claim. The ld. CIT(A) after considering the facts and the submissions found that in AY 2018-19, during the first appellate proceedings, the revenue has accepted the valuation report from the same valuer who valued the share premium at Rs. 29.60/- for shares of I.T.A. No. 3083/Mum/2025 I.T.A. No. 3084/Mum/2025 I.T.A. No. 3085/Mum/2025 5 Rs.10/- face value. The ld. CIT(A) observed that the AO was informed by the assessee about the additions u/s 56(2)(viib) of the Act in the AY 2016-17 and 2017-18, yet after applying his mind on the facts of the case and despite having knowledge that in the earlier AYs, the additions u/s 56(2)(viib) of the Act have been made on account of rejection of valuation report, the AO has accepted the same in AY 2018-19. The ld. CIT(A) deleted the addition of Rs. 10,73,82,810/-. Proceeding further, insofar as the issue of depreciation is concerned, the ld. CIT(A) found that the same was claimed on the WDV which means that the deprecation was allowed in the earlier year. Therefore, the ld. CIT(A) was of the opinion that the same cannot be disallowed in the subsequent years and deleted the disallowance of depreciation.

9. We have given a thoughtful consideration to the orders of the authorities below. The undisputed fact is that the assessee has applied DCF method for the purpose of valuation of shares and has relied upon the valuation report of the Chartered Accountant in this regard. There is a settled law on this issue that as per Section 56(2)(viib) of the Act r.w.r. 11UA of the Rules, every assessee has an option to do valuation of shares and determine its FMV either by DCF method or NAV method and that the AO cannot examine or substitute his own value in place of the value so determined. The ITAT Delhi bench in the case of Cinestaan Entertainment (P) Ltd. vs. ITO [2019] 106 taxmann.com 300 (Delhi), has held as under:-

I.T.A. No. 3084/Mum/2025 6 “32. 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 ld. Counsel, for instance: —

(i) Securities & Exchange Board of India (supra) - (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 bu 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 (P.) Ltd. (supra) "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 of determination of the fair market value, the past I.T.A. No. 3084/Mum/2025 7 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. (supra) "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.

33. 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.”

S. Name of equity Date of Issue No. of Premium (Rs.) Amount of No. partner Shares per share premium (Rs.) 1. Shri Anand 06.01.2015; 4,15,385 1949 80,95,85,365/- Mahindra 23.02.2015 Shri Rakesh 2. 24.03.2015 19,207 2602 4,99,80,793/- Jhunjhunwala 3. Shri Radhakishan 24.03.2015 19,207 2602 4,99,80,793/- Damani Total 4,53,799 90,95,46,200/- I.T.A. No. 3085/Mum/2025 8

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 valuation do not match the actual revenues of subsequent years. The AO has made additions based on the assumption that the Respondent-Assessee made no efforts to achieve the projection as made out in the valuation report and therefore the share premium received by the Respondent-Assessee is without any basis and contrary to provisions of Section 56(2)(viib) read with Section 2(24)(xvi) of the Act. Further, the AO held that the Respondent-Assessee has failed to submit any basis of projection. He also held the view that in order to achieve the said projection, the Respondent- Assessee should have invested the share premium amount to earn certain income/return and whereas the Respondent-Assessee made investments in zero percent debentures of its associate company and therefore the basic substance of receiving a high premium is not justified.

12. In this factual background, the learned ITAT then proceeded to examine whether the AO after invoking the deeming provision under Section 56(2)(viib), could have determined the FMV of the premium on the shares issued at nil after rejecting the valuation report given by the Chartered Accountant based on one of the prescribed methods under the Rules adopted by the valuer. On this aspect, after examining the statutory provisions and the factual position, the ITAT inter-alia observed as under:

“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, 288 ITR 1 (SC)and CIT vs. Panipat Woollen and General Mills Company Ltd., 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 I.T.A. No. 3085/Mum/2025 9 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.

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 of determination of the fair market value, the past history may or may not be available in a given case and therefore, the other relevant factors may be considered. The projections are affected by various factors hence in the case of company where there is no commencement of production or of the business, does not mean that its share cannot command any premium. For such cases, the concept of start-up is a good example and as submitted the income-tax Act also recognized and encouraging the start-ups. iii) DQ(International) Ltd. vs. ACIT (ITA 151/Hyd/2015)

10. In our considered view, for valuation or an intangible asset only the future projections along can be adopted and such valuation cannot be reviewed with actuals after 3 or 4 years down the line. Accordingly, the grounds raised by the assessee are allowed

14. 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.

11. On finding parity of facts, respectfully following the decision of the Co-ordinate Bench and the Hon’ble Delhi High Court, we do not find any reason to interfere with the findings of the ld. CIT(A). Accordingly Ground No. 1 is dismissed.

12. Insofar as Ground No. 2 is concerned, there is no dispute that the depreciation was allowed in earlier assessment years and the assessee has claimed depreciation on the WDV. It is also not in dispute that the assessee had paid non-refundable deposit for getting the rights of operation and management of Nanavati Hospital and the said payment has been treated as purchase of intangible rights. The Hon’ble High Court of Karnataka in the case of Bangalore International Airport Ltd. Versus The Deputy Commissioner Of Income-Tax, Circle-11 (2) Bangalore, The Commissioner Of Income Tax-I Bangalore [2023] 457 ITR 229 (Kar), has held as under:- “10. It is not in dispute that the assessee has incurred certain expenditure. Shri Sanmathi's contention is, the expenditure was not proved before the Assessing Officer. Shri Suryanarayana submitted that subject to assessee demonstrating I.T.A. No. 3085/Mum/2025 13 factual expenditure, assessee may be permitted to capitalize such expenditure and to claim depreciation on that expenditure.

11. In Areva T & D India Ltd., assessee-appellant therein had entered into Slump Sale Agreement and acquired know-how, business contacts, business information, etc. The Delhi High Court framed the following questions for consideration; "Whether on the facts and in the circumstances of the case, the Tribunal erred in law in holding that know-how, business contacts, business information, etc. acquired as part of the slump sale described as were not entitled for depreciation under Section 32(1)(ii) of the Income Tax Act?" and held that the intangible assets acquired under Slump Sale Agreement were in the nature of business or commercial rights of similar nature specified in Section 32 (1)(ii) of the Income Tax Act, 19614 and eligible for depreciation under the said act.

In our considered view, the ITAT has rightly held that such expenses can be capitalized. It is settled that assessee shall be entitled to claim depreciation on such expenses which can be capitalized.

13. Shri Sanmathi's contention that CIT(A) has recorded that the assessee has not proved the expenditure also merits consideration. It is relevant to note that CIT(A), on appreciation of material on record, has held in Para 4.9 that assessee had acquired business and commercial rights and licenses by making payment which were in the nature of 'intangible asset' entitled for claiming depreciation under Section 32(1)(ii) of the Act. This finding has not been challenged by the Revenue before the ITAT.

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