M/S. WATERLINE HOTELS PRIVATE LIMITED,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE- 7(1)(2), BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND Ms. PADMAVATHY S, ACCOUNTANT MEMBER

ITA No.388/Bang/2020 Assessment year : 2013-14 Waterline Hotels Pvt. Ltd., Vs. The Deputy Commissioner 10th Floor, Gamma Block, of Income Tax, Sigma Soft Tech Park No.07, Circle 7(1)(2), Airport Varthur Road, Bangalore. Whitefield, Bangalore – 560 066. PAN: AAACW 8059N APPELLANT RESPONDENT Appellant by : Shri Pranav Krishna, Advocate Respondent by : Shri V S Chakrapani, CIT(DR)(ITAT), Bengaluru. Date of hearing : 29.08.2022 Date of Pronouncement : 13.09.2022 O R D E R Per Padmavathy S., Accountant Member This appeal by the assessee is against the order of the CIT(Appeals)-7, Bengaluru dated 27.3.2019 for the assessment year 2013-14.

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(i) Method of valuation of shares (ii) Disallowance u/s. 40(a)(i)/(ia). 3. The assessee is engaged in the development of residential and commercial projects and ALILA Hotel and high end apartments. For the AY 2013-14, the assessee filed return of income on 25.9.2013 declaring total income of (-) Rs.12,44,36,532. The case was selected for scrutiny and notice u/s. 143(2) of the Income Tax Act (the Act) was duly served on the assessee. During the course of assessment, the AO noticed that the assessee has issued shares at a premium based on the valuation done using Discounted Cash Flow [DCF] method as certified by a Chartered Accountant. The AO rejected the method of valuation quoting various reasons and arrived at the valuation based on Fair Market Value [FMV] method using the book value of the assets & liabilities as per the financials. The AO invoked the provisions of section 56(2)(viib) and made an addition of Rs.33,71,77,500. The AO also made a disallowance u/s. 40(a)(ia) of the Act towards the payments made by the assessee for management fees, outsourcing expenses and license fees.

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assessee filed an affidavit with the reasons for the delay and prayed for condonation of delay. The relevant extract of the same is as follows:-

“3. In this regard, the Appellant humbly submits that the entire finance team was headed by one Mr. Ravindran Kolliakal, who was the Group Chief Financial Officer as well as the director in the Appellant Company from 18/07/2013. The said Director and CFO Mr. Ravindran Kolliakal was looking after and coordinating the first appeal proceedings and handling other appellate work of the Appellant Company. 4 The Appellant submits that during the month of March, 2019, Mr. Ravindran Kolliakal was forced to resign from his role in the Appellant Company due to certain diverse reasons and the fact of the first appellate order being passed by the learned Commissioner of Income Tax [Appeals]-7, Bengaluru for the impugned assessment year was not brought to the attention of the group chairman or any other staff of the Appellant Company by the said person. 5. It was only when the jurisdictional Income Tax officer, Ward 7[1][2] issued a notice for imposing penalty u/s 271[1][c] of the Act on 18/03/2020, it came to the knowledge of the Appellant that the CIT[A] order for A.Y. 2013-14 was passed. 6. The Appellant, thereafter approached its authorised representative who had appeared before the learned CIT [A] for advice as to the next course of remedy available. The Appellant was advised to immediately prefer further appeal before the Hon'ble Tribunal. 7. The Appellant thereafter, took immediate measures and the appeal papers were drafted by the authorised representative and sent to the office of the Appellant for attestation during the third week of March, 2020. 8. On March 24, 2020, the Government of India under the Hon'ble Prime Minister Shri. Narendra Modi ordered a

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nationwide lockdown for 21 days limiting movement of the entire population of the Country as a preventive measure against the COVID - 19 pandemic. As the end of the first lockdown period approached, State Governments and other advisory committees recommended extending the lockdown and the State of Karnataka extended the lockdown for another fortnight. The lockdown continued into different phases throughout the Country and the restrictions were lifted with certain relaxations from Mid May in Karnataka permitting movement of people only in green zones. 9. It is humbly submitted that due to the national lockdown, the appeal papers could be physically filed before the Hon'ble Tribunal only on 15/05/2020 when the lockdown was lifted. It is humbly requested that the Hon'ble Income Tax Appellate Tribunal, Bangalore takes a lenient and compassionate view and condone the delay of 355 days in filing the Appeal before your Honours and hear the same on merits for the advancement of substantial cause of justice. The reason for the delay in filing the present appeal of about 355 days was due to reason beyond the control of the Appellant.” 6. The ld. DR contended that the delay should not be condoned.

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Valuation of shares

Parties to whom share No. of shares Face Value Value of allotted of Share Premium/Share M/s.UKN Properties Pvt Ltd 13,00,000 Rs.10 Rs.165 Ivils Ksherna Geo 6,33,000 Rs.10 Rs.165 Holdings Pvt Ltd Mr. Gautam Nambisan 65,000 Rs.10 Rs.165 M/s Glow Crane Project 45,500 Rs.10 Rs.165

“A survey action was carried out in the business premises of M/s. UKN Properties Private Limited on 18.11.2015; during the course of which, it was found that the company has been allotted equity shares by M/s. Waterline Hotels Private Limited a company assessed by your office, during the FY: 2012-13 at a huge premium. In his statement recorded u/s 133A of the Income-tax Act, during the course of survey action, Sri Gautam Namibisan, Director of M/s. UKN Properties Private Limited, who is also Chairman of the UKN Group, stated that no valuation of shares of M/s. Waterline Hotels Private Limited was done prior to the payment of share premium by M/s UKN Properties Private Limited to M/s. Waterline Hotels Private Limited.” 10. Based on the above information, the AO called upon the assessee to furnish the basis on which the shares are issued at a premium. The assessee filed the valuation report in which the fair

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market value of the shares are arrived at using DCF method at Rs.208.58 given by a Chartered Accountant. The AO rejected the valuation report by stating that –

i. Valuation under DCF method is not acceptable as the projections done for 10 years for valuation has no basis and lacks justification. ii. The valuation report was not obtained prior to the issue of shares at a premium iii. Assessee is continuously making loss for 5 years and given that shares being valued at premium is not acceptable. iv. The director of the company during the survey proceedings in the case of UKN Properties Ltd. has stated that no valuation of shares was done. v. Shares are issued to the related party vi. The JDA submitted by the assessee as a supporting document for valuation of shares cannot be accepted as it is a mere agreement with out of uncertainty. 11. The AO rejected the valuation of shares done by the assessee and proceeded to recompute the value of the shares using FMV method by taking into consideration the book value of assets and liabilities. As per the workings of the AO the value of shares was arrived at (-) 47.05. The AO therefore invoked the provisions of section 56(2)(viib) and made addition of the entire amount of share premium of Rs. 33,71,77,500

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determining the valuation of shares and the valuation is done solely with an intention to arrive at the higher value of issue of shares at the premium. In this regard, the CIT(A) relied on the order of the Kerala High Court in the case of Sunrise Academy of Medical Specialties India P. Ltd., 96 taxmann.com 43. Aggrieved, the assessee is in appeal before the Tribunal.

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“56. (1) ***** (2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head "Income from other sources", namely :— *** *** (viib) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares:” 16. As per the provision, a company not being a company in which public are not substantially interested, the consideration received by the issuing company in excess of the FMV to the extent it exceeds the face value of such shares, shall be liable to tax. For the purpose of this section, FMV shall be the value higher of the following:-

(i) as may be determined in accordance with such method as may be prescribed (method prescribed under Rule 11UAR (Net Value Method (NAV) or DCF method; 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;

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“8. With regard to the correctness of DCF method adopted by the Assessee for valuing shares and the procedure to be followed when such method of valuation is not accepted by the AO we notice that the ITAT, Bangalore Bench in the case of VBHC Value Homes Pvt. Ltd., Vs ITO in ITA No.2541/Bang/2019 order dated 12-06-2020, after relying on the decision of the Hon’ble Bombay High Court in the case of Vodafone MPesa Ltd Vs Pr.CIT 164 DTR 257 and decision of the ITAT, Bangalore Bench in the case of Innoviti Payment Solutions Pvt. Ltd., Vs ITO(2019) 102 Taxmann.com 59 held as follows:- “9. We have considered the rival submissions. First of all, we reproduce paras 11 to 14 from the Tribunal order cited by learned AR of the assessee having been rendered in the case of Innoviti Payment Solutions Pvt. Ltd., Vs. ITO (supra). These paras are as follows: "11. As per various tribunal orders cited by the learned AR of the assessee, it was held that as per Rule 11UA (2), the assessee can opt for DCF method and if the assessee has so opted for DCF method, the AO cannot discard the same and adopt other method i.e. NAV method of valuing shares. In the case of M/s. Rameshwaram Strong Glass (P) Ltd. vs. The ITO (Supra), the tribunal has reproduced relevant portion of another tribunal order rendered in the case of ITO vs. M/s Universal Polypack (India) Pvt. Ltd. in ITA No. 609/JP/2017 dated 31.01.2018. In this case, the tribunal held that if the assessee has opted for DCF method, the AO cannot challenge the same but the AO is well within his rights to examine the methodology adopted by the assessee and/or underlying assumptions and if he is not satisfied, he can challenge the same and suggest necessary modifications/alterations provided ITA No. 2541/Bang/2019 ITA No. 37/Bang/2020 S. P. Nos. 29 and 59/Bang/2020 the same are based on sound reasoning and rationale basis. In the same tribunal order, a judgment of Hon'ble Bombay High Court is also taken

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note of having been rendered in the case of Vodafone MPesa Ltd. vs. PCIT as reported in 164 DTR 257. The tribunal has reproduced part of Para 9 of this judgment but we reproduce herein below full Para 9 of this judgment. "9. We note that, the Commissioner of Income-Tax in the impugned order dated 23rd February, 2018 does not deal with the primary grievance of the petitioner. This, even after he concedes with the method of valuation namely, NAV Method or the DCF Method to determine the fair market value of shares has to be done/adopted at the Assessee's option. Nevertheless, he does not deal with the change in the method of valuation by the Assessing Officer which has resulted in the demand. There is certainly no immunity from scrutiny of the valuation report submitted by the Assessee. Therefore, the Assessing Officer is undoubtedly entitled to scrutinise the valuation report and determine a fresh valuation either by himself or by calling for a final determination from an independent valuer to confront the petitioner. However, the basis has to be the DCF Method and it is not open to him to change the method of valuation which has been opted for by the Assessee. If Mr. Mohanty is correct in his submission that a part of demand arising out of the assessment order dated 21st December, 2017 would on adoption of DCF Method will be sustained in part, the same is without working out the figures. This was an exercise which ought to have been done by the Assessing Officer and that has not been done by him. In fact, he has completely disregarded the DCF Method for arriving at the fair market value. Therefore, the demand in the facts need to be stayed." 12. As per above Para of this judgment of Hon'ble Bombay High Court, it was held that the AO can scrutinize the valuation report and he can determine a fresh valuation either by himself or by calling a final determination from an independent valuer to confront the assessee. But the basis has to be DCF method and he cannot change the method of valuation which has been opted by the assessee. Hence, in our considered opinion, in the present case, when the guidance of Hon'ble Bombay high Court is available, we should follow this judgment of Hon'ble Bombay High Court in preference to various tribunal orders cited by both sides and therefore, we are not required to examine and consider these tribunal

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orders. Respectfully following this judgment of Hon'ble Bombay High Court, we set aside the order of CIT (A) and restore the matter to AO for a fresh decision in the light of this judgment of Hon'ble Bombay High Court. The AO should scrutinize the valuation report and he should determine a fresh valuation either by himself or by calling a final determination from an independent valuer and confront the same to the assessee. But the basis has to be DCF method and he cannot ITA No. 2541/Bang/2019 ITA No. 37/Bang/2020 S. P. Nos. 29 and 59/Bang/2020 change the method of valuation which has been opted by the assessee. In our considered opinion and as per report of research committee of (ICAI) as reproduced above, most critical input of DCF model is the Cash Flow Projections. Hence, the assessee should be asked to establish that such projections by the assessee based on which, the valuation report is prepared by the Chartered accountant is estimated with reasonable certainty by showing that this is a reliable estimate achievable with reasonable certainty on the basis of facts available on the date of valuation and actual result of future cannot be a basis of saying that the estimates of the management are not reasonable and reliable. 13. Before parting, we want to observe that in the present case, past data are available and hence, the same can be used to make a reliable future estimate but in case of a start up where no past data is available, this view of us that the projection should be on the basis of reliable future estimate should not be insisted upon because in those cases, the projections may be on the basis of expectations and in such cases, it should be shown that such expectations are reasonable after considering various macro and micro economic factors affecting the business. 14. In nutshell, our conclusions are as under:- (1) The AO can scrutinize the valuation report and the if the AO is not satisfied with the explanation of the assessee, he has to record the reasons and basis for not accepting the valuation report submitted by the assessee and only thereafter, he can go for own valuation or to obtain the fresh valuation report from an independent valuer and confront the same to the assessee. But the basis

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has to be DCF method and he cannot change the method of valuation which has been opted by the assessee. (2) For scrutinizing the valuation report, the facts and data available on the date of valuation only has to be considered and actual result of future cannot be a basis to decide about reliability of the projections. (3) The primary onus to prove the correctness of the valuation Report is on the assessee as he has special knowledge and he is privy to the facts of the company and only he has opted for this method. Hence, he has to satisfy about the correctness of the projections, Discounting factor and Terminal value etc. with the help of Empirical data or industry norm if any and/or Scientific Data, Scientific Method, scientific study and applicable Guidelines regarding DCF Method of Valuation." 10. From the paras reproduced above, it is seen that in this case, the Tribunal has followed the judgment of Hon'ble Bombay High Court rendered in the case of Vodafone M-Pesa Ltd., Vs. Pr. CIT (supra). The Tribunal has noted that as per the judgment of Hon'ble Bombay High Court, it was held that AO can scrutinize the valuation report and he can determine a fresh valuation either by himself or by calling a determination from an independent valuer to confront the assessee but the basis has to be DCF method and he cannot change the method of valuation which has been opted by the assessee. The Tribunal has followed the judgment of Hon'ble Bombay High Court and disregarded various other Tribunal orders against the assessee which were available at that point of time. In the present case also, we prefer to follow the judgment of Hon'ble Bombay High Court rendered in the case of Vodafone M-Pesa Ltd., Vs. Pr. CIT (supra) in preference to the judgment of the Hon'ble Kerala High Court cited by DR of the Revenue rendered in the case of Sunrise Academy of Medical Specialities (India) (P.) Ltd. Vs. ITO (supra) because this is settled position of law by now that if two views are possible then the view favourable to the assessee should be adopted and with regard to various Tribunal orders cited by learned DR of the Revenue which are against the assessee we hold that because we are following a judgment of Hon'ble Bombay High Court rendered in the case of Vodafone M-Pesa Ltd.,

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Vs. Pr. CIT (supra), these tribunal orders are not relevant. In the case of Innoviti Payment Solutions Pvt. Ltd., Vs. ITO (supra), this judgment of Hon'ble Bombay High Court was followed and the matter was restored back to the file of AO for a fresh decision with a direction that AO should follow DCF method only and he cannot change the method opted by the assessee as has been held by the Hon'ble Bombay High Court. The relevant paras of this Tribunal order are already reproduced above which contain the directions given by the Tribunal to the AO in that case. In the present case also, we decide this issue on similar line and restore the matter back to the file of AO for a fresh decision with similar directions. Accordingly, ground No.3 of the assessee's appeal is allowed for statistical purposes.” 9. The gist of the conclusion is that the law contemplates invoking provisions of section 56(2)(viib) of the Act only in situations where the shares are issued at a premium and at a value higher than the fair market value. The fair market value contemplated in the provisions above is as under: - “(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) any other value to the satisfaction of the Assessing Officer……..” 10. The law provides that, the fair market value may be determined with such method as may be prescribed or the fair market value can be determined to the satisfaction of the Assessing Officer. The provision provides an Assessee two choices of adopting either NAV method or DCF method. If the Assessee determines the fair market value in a method as prescribed the Assessing Officer does not have a choice to dispute the justification. The methods of valuation are prescribed in Rule 11UA(2) of the Rules. The provisions of Rule 11UA(2)(b) of the Rules provides that, the Assessee can adopt the fair market value as per the above two methods i.e., either DCF method or fair market value of the unquoted equity shares determined by a merchant banker. The choice of method is that of the Assessee. The Tribunal has followed the judgment of Hon'ble Bombay High Court rendered in the case of Vodafone M-Pesa Ltd., Vs. Pr. CIT (supra) and has taken the view that

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the AO can scrutinize the valuation report and he can determine a fresh valuation either by himself or by calling a determination from an independent valuer to confront the Assessee but the basis has to be DCF method and he cannot change the method of valuation which has been opted by the Assessee. The decision of ITAT, Delhi in the case of Agro Portfolio Ltd. 171 ITD 74 and the decision of the Bangalore Bench in the case of TUF Rheinland NIFE Academy Pvt.Ltd. (TS-92-ITAT- 2019(Bang)has also been considered by the ITAT, Bangalore in the case of VBHC Value Homes Pvt. Ltd.(supra). 11. In view of the above legal position, we are of view that the issue with regard to valuation has to be decided afresh by the AO on the lines indicated in the decision of ITAT, Bangalore in the case of VBHC Value Homes Pvt. Ltd., Vs ITO (supra) i.e., (i) the AO can scrutinize the valuation report and he can determine a fresh valuation either by himself or by calling a determination from an independent valuer to confront the assessee but the basis has to be DCF method and he cannot change the method of valuation which has been opted by the assessee. (ii) For scrutinizing the valuation report, the facts and data available on the date of valuation only has to be considered and actual result of future cannot be a basis to decide about reliability of the projections. The primary onus to prove the correctness of the valuation Report is on the assessee as he has special knowledge and he is privy to the facts of the company and only he has opted for this method. Hence, he has to satisfy about the correctness of the projections, Discounting factor and Terminal value etc. with the help of Empirical data or industry norm if any and/or Scientific Data, Scientific Method, scientific study and applicable Guidelines regarding DCF Method of Valuation. The order of ld.CIT(A) is accordingly set aside and this issue is remanded to the AO for decision afresh, after due opportunity of hearing to the Assessee. 12. In the result, the appeal is allowed for statistical purposes.”

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assessee. We notice that the lower authorities have rejected the DCF method of valuation on the ground that the same is not based on any scientific method and that since the assessee is making a loss, there is no possibility of valuing the shares of the assessee at a premium. Further, the lower authorities have not gone into the details used by the assessee under DCF method to arrive at the valuation and rejected the entire methodology as adopted by the assessee. It is also noticed that one of the reasons as quoted by the AO for not considering the valuation report is that the Director during the survey proceedings has stated that there is no valuation report. We are unable appreciate this reason for rejection as the satisfaction to be recorded by the AO should not be objective satisfaction exercised at his discretion, but a subjective satisfaction based on the facts of the case. The lower authorities have not examined the basis on which the valuation is done and from the perusal of facts, no details in this regard have been called for by the lower authorities. The valuation report is rejected based on the objective satisfaction and not based on detailed examination.

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Disallowance u/s. 40(a)(i)/(ia)

Particulars Amount (Rs.) Management Fees 48,45,276 Outsourcing Expenses 5,68,544 License Fees 4,51,424 Total 58,65,244

“6.1 The submission of the appellant has been considered. As regards the disallowance of payment of management fees of Rs - 18.45,276/- the appellant submits that TDS is not applicable on this payment as the income of the payee does not accrue or arise in India. However. no details and evidence has been brought on record by the appellant to substantiate this claim. The AR Was required to submit the copy of the agreement for payment of management. fee (order sheet entry dated 07-03-2019). However,

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on 13-03-2019 the AR submitted that the agreement cannot be filed as it is not available. Therefore. the claim of the appellant that the payment is not liable for TDS. is found to be unsubstantiated. It is further submitted by the appellant that out of this amount. 'I DS has been made on an amount of Rs 22,08,464/- . In view of this. the AO is directed to verify the position of TDS compliance by the assessee and disallow the amount on which TDS has not been made. 6.2 As regards out sourcing expenses of Rs 5.68.424'- disallowed by the AO under section 40(a)(ia), the contention of the appellant that the payment is not in nature of any professional or technical services and hence TDS not applicable. has been verified. From the details filed by the appellant, the payments appear to have been made for food and beverages out sourcing services. out sourced driver and valet hire cost, tours and travels etc. The payment for these services are liable for TDS. Therefore, the disallowance by the AO of Rs 5,68.424/- for non compliance of IDS provision is found to be justified. 6.3 The AO has disallowed Rs 4,51,421/- paid on account of license fees for non deduction of tax. The assessee claims that license fees paid are in the nature of statutory payment and does not come under purview of TDS. However. on the basis of details filed, the AR explained that these payments are on account of payment for Liquor license and the amount has been paid to the person who is the license holder for Liquor. Thus, the payment amount cannot be said to be license fee for the assessee company. Therefore, the payment will attract due TDS. Hence, the disallowance by the AO is found to be in order.” 22. Before us, the ld. AR submitted that the details and evidence with regard to applicability of TDS provisions are already submitted before the lower authorities which have not been examined by them. He further submitted that the payees have included these payments as their income and paid taxes on the same and therefore there is no loss of revenue. He therefore prayed that the issue may be remitted back to the AO to examine the details and evidence furnished by the assessee

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and also to give opportunity to submit Form 26AS to substantiate that the payees have included the impugned payments as their income and paid taxes on the same.

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Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order

Assistant Registrar ITAT, Bangalore.