DREAMS DWELLERS LLP(AS LEGAL REPRESENTATIVE OF MEGACORP DEVELOPERS PVT LTD,MUMBAI vs. ACIT -24(1) (EARLIER ACIT CIR 10(1)(1), MUMBAI), MUMBAI

“Further with regards to the ratio “Further with regards to the rationale for the valuation done nale for the valuation done by the valuer, in order to determine the fair value of the by the valuer, in order to determine the fair value of the by the valuer, in order to determine the fair value of the redeemable preference shares, the assesse company has redeemable preference shares, the assesse company has redeemable preference shares, the assesse company has adopted the method to value the cash flows in the form of adopted the method to value the cash flows in the form of adopted the method to value the cash flows in the form of investment, dividend and redemption proceeds of the investment, dividend and redemption proceeds of the investment, dividend and redemption proceeds of the redeemable preference shares which are discounted at an mable preference shares which are discounted at an mable preference shares which are discounted at an appropriate discount rate to arrive at the present value of appropriate discount rate to arrive at the present value of appropriate discount rate to arrive at the present value of future cash inflows. Such model is akin to the dividend future cash inflows. Such model is akin to the dividend future cash inflows. Such model is akin to the dividend discounting model or discounting cash model which is an discounting model or discounting cash model which is an discounting model or discounting cash model which is an internationally accepted valuatio internationally accepted valuation methodology. It is submitted that applying the above technique, the It is submitted that applying the above technique, the It is submitted that applying the above technique, the valuation report has derived the the present value per share of valuation report has derived the the present value per share of valuation report has derived the the present value per share of Rs 10268.89/ Rs 10268.89/-. Hence on the basis of the fair value of the said . Hence on the basis of the fair value of the said preference shares in the valuation report the assesse preference shares in the valuation report the assesse preference shares in the valuation report the assesse company has issued preference shares at Rs.10000/ pany has issued preference shares at Rs.10000/- each pany has issued preference shares at Rs.10000/

(Rs 10 Face Value and Rs 9990/ (Rs 10 Face Value and Rs 9990/- Share premium). Therefore, Share premium). Therefore, it is submitted that the assesse company has issued the it is submitted that the assesse company has issued the it is submitted that the assesse company has issued the shares at a price which is not above the fair market value of shares at a price which is not above the fair market value of shares at a price which is not above the fair market value of the said preference shares the said preference shares. Further before the date of Further before the date of redemption it is submitted that the assessee company has redemption it is submitted that the assessee company has redemption it is submitted that the assessee company has been merged with M/s. Keystone Realtors Pvt. Ltd. i.e. to been merged with M/s. Keystone Realtors Pvt. Ltd. i.e. to been merged with M/s. Keystone Realtors Pvt. Ltd. i.e. to whom the shares were issued. Hence it is submitted that the whom the shares were issued. Hence it is submitted that the whom the shares were issued. Hence it is submitted that the assesse company has justified in issuing shares at a assesse company has justified in issuing shares at a assesse company has justified in issuing shares at a premium of Rs.9990/ of Rs.9990/- per share and therefore the share premium per share and therefore the share premium cannot be taxed u/s. 56(2)(vii) of The Income Tax Act, 1961 cannot be taxed u/s. 56(2)(vii) of The Income Tax Act, 1961 cannot be taxed u/s. 56(2)(vii) of The Income Tax Act, 1961 during the year under consideration. It is therefore submitted during the year under consideration. It is therefore submitted during the year under consideration. It is therefore submitted that addition made by the Learned Assessing Officer is that addition made by the Learned Assessing Officer is that addition made by the Learned Assessing Officer is unjustified an unjustified and on the basis of assumptions & presumption d on the basis of assumptions & presumption and without understanding the facts of the case. It is therefore and without understanding the facts of the case. It is therefore and without understanding the facts of the case. It is therefore prayed to your honour that such addition made by the learned prayed to your honour that such addition made by the learned prayed to your honour that such addition made by the learned assessing officer should be deleted and necessary guidance assessing officer should be deleted and necessary guidance assessing officer should be deleted and necessary guidance shall be given in this rega shall be given in this regard.” 5.1 Further, the assessee explained Further, the assessee explained that entire money entire money of preference share capital was received from preference share capital was received from group entities entities only. The ld AO has not invoked section 68 of the Act ld AO has not invoked section 68 of the Act as he has as he has not doubted the nature and source of money received urce of money received. The Ld. Assessing Officer The Ld. Assessing Officer however was not agreed with the methodology however was not agreed with the methodology of computation of the computation of the fair market value of the share premium received of the share premium received by the independent by the independent valuer. According to him net worth of company does not justify According to him net worth of company does not justify According to him net worth of company does not justify issue of share premium. issue of share premium. On the issue of valuation, the Ld. CIT(A) ue of valuation, the Ld. CIT(A) has rejected the report mainly on the basis that firstly, the has rejected the report mainly on the basis that has rejected the report mainly on the basis that valuation by the assessee is not as per rule 11UA of the Rules, valuation by the assessee is not as per rule 11UA of the Rules valuation by the assessee is not as per rule 11UA of the Rules secondly, the assessee has not submitted intention the assessee has not submitted intention the assessee has not submitted intention for issue of preference share, thirdly thirdly, the valuation report is not uation report is not a conclusive basis to determine the fair market value, lastly, value as per any basis to determine the fair market value, , value as per any rationale investors would not be more than the net asset value of rationale investors would not be more than the net asset value of rationale investors would not be more than the net asset value of the shares. The relevant finding of the Ld. CIT(A) is reproduced as the shares. The relevant finding of the Ld. CIT(A) is reproduced as the shares. The relevant finding of the Ld. CIT(A) is reproduced as under:

“6.26 In view “6.26 In view of the above, I am of the considerate opinion of the above, I am of the considerate opinion that the valuation adopted by the appellant is not in that the valuation adopted by the appellant is not in that the valuation adopted by the appellant is not in accordance with Rule 11UA r.w.r. 11U. The appellant has also accordance with Rule 11UA r.w.r. 11U. The appellant has also accordance with Rule 11UA r.w.r. 11U. The appellant has also not submitted intention/ end use of funds. After issuance of not submitted intention/ end use of funds. After issuance of not submitted intention/ end use of funds. After issuance of preference shares, it got merged w preference shares, it got merged with group company, thus it ith group company, thus it can not be contended that security premium was received can not be contended that security premium was received can not be contended that security premium was received with anticipation of further benefits. The net asset value of the with anticipation of further benefits. The net asset value of the with anticipation of further benefits. The net asset value of the shares of the appellant are negative and after knowing that shares of the appellant are negative and after knowing that shares of the appellant are negative and after knowing that the appellant company would not survive for lon the appellant company would not survive for long, no rational g, no rational investor would invest such whopping premium. Thus, the investor would invest such whopping premium. Thus, the investor would invest such whopping premium. Thus, the preference shares issued by the appellant would have not preference shares issued by the appellant would have not preference shares issued by the appellant would have not fetched such high premium in open market. Accordingly, the fetched such high premium in open market. Accordingly, the fetched such high premium in open market. Accordingly, the fair market value of preference shares may be restricted to fair market value of preference shares may be restricted to fair market value of preference shares may be restricted to only face value and the premium so received is found to be value and the premium so received is found to be value and the premium so received is found to be unjustified in the underlined case.” unjustified in the underlined case.” 5.2 On perusal of facts of instant case, we find that ld CIT(A)’s has On perusal of facts of instant case, we find that ld CIT(A)’s has On perusal of facts of instant case, we find that ld CIT(A)’s has not appreciated the facts of the case properly. Firstly Firstly, the rule not appreciated the facts 11UA of Rules prescribe for Rules prescribe for valuation of unquoted shares of other valuation of unquoted shares of other than equity share i.e. preference shares as under: than equity share i.e. preference shares as under:

“Determination of fair market value. Determination of fair market value. 11UA. 30[(1)] For the purposes of section 56 of the Act, the fair market value of a property, [(1)] For the purposes of section 56 of the Act, the fair market value of a property, [(1)] For the purposes of section 56 of the Act, the fair market value of a property, other than immovable property, shall be determined in the following manner, namely, ther than immovable property, shall be determined in the following manner, namely, ther than immovable property, shall be determined in the following manner, namely,— (a) valuation of jewellery, valuation of jewellery,— (i) …… (ii) ……. (iii) ……. (b) valuation of archaeological collections, drawings, paintings, sculptures or any work of valuation of archaeological collections, drawings, paintings, sculptures or any work of valuation of archaeological collections, drawings, paintings, sculptures or any work of art,— (i) …………… (ii) ………….. (iii) ……………… ……………… (c) valuation of shares and securities, valuation of shares and securities,— ………………………………. ……………………………….

(c) the fair market value of unquoted shares and securities other than the fair market value of unquoted shares and securities other than the fair market value of unquoted shares and securities other than equity shares in a company which are not listed in any recognized equity shares in a company which are not listed in any recognized equity shares in a company which are not listed in any recognized stock exchange stock exchange shall be estimated to be price it would fetch if sold in shall be estimated to be price it would fetch if sold in the open market on the valuation date and the assessee may obtain a the open market on the valuation date and the assessee may obtain a the open market on the valuation date and the assessee may obtain a report from a merchant banker or an accountant in respect of such report from a merchant banker or an accountant in respect of such report from a merchant banker or an accountant in respect of such valuation.] n.]” 5.3 The assessee following the above rule has The assessee following the above rule has The assessee following the above rule has submitted a valuation report from an independent chartered account, which in valuation report from an independent chartered account, which in valuation report from an independent chartered account, which in of the Rules. Secondly, our opinion, is as per the rule 11UA is as per the rule 11UA(1)©© of the Rules. the assessee explained that it was engaged in the construction and the assessee explained that it was engaged in the construction and the assessee explained that it was engaged in the construction and development of real estate projects and is pa development of real estate projects and is part of a large real estate rt of a large real estate group, which expresses intention of use of fund. Thirdly Thirdly, for the group, which expresses intention of use of fund. purpose of section 56(2)(viib) purpose of section 56(2)(viib) of the Act, requirement is not that a requirement is not that a conclusive value of conclusive value of share premium has to be determined determined by the assessee but the requirement is but the requirement is to determine a value which a share to determine a value which a share will fetch in open market and for that purpose rule has prescribed will fetch in open market and for that purpose rule has prescribed will fetch in open market and for that purpose rule has prescribed to obtain a valuation report from an independent valuer , which the to obtain a valuation report from an independent valuer , which the to obtain a valuation report from an independent valuer , which the assesses has obtained. No mistake has been pointed out in the assesses has obtained. No mistake has been pointed out in the assesses has obtained. No mistake has been pointed out in the methodology adopted by t methodology adopted by the valuer either by the AO or the ld he valuer either by the AO or the ld CIT(A). Lastly, in the case of n the case of Deputy Commissioner of Income Deputy Commissioner of Income- tax vs. Weldon Polymers (P.) L. 163 taxmann.com 773 (Delhi – tax vs. Weldon Polymers (P.) L. 163 taxmann.com 773 (Delhi tax vs. Weldon Polymers (P.) L. 163 taxmann.com 773 (Delhi Trib.), the Co-ordinate Bench of the Tribunal addressed issue of ordinate Bench of the Tribunal addressed issue of ordinate Bench of the Tribunal addressed issue of violation of preference u/s 56 violation of preference u/s 56(2)(viib) of the Act under Rule 11UA of of the Act under Rule 11UA of the Rules. The ITAT ruled that correct provision of the valuation of the Rules. The ITAT ruled that correct provision of the valuation the Rules. The ITAT ruled that correct provision of the valuation preference share are under Rule 11UA(1)(c) of the Rules which preference share are under Rule 11UA(1)(c) of the Rules which preference share are under Rule 11UA(1)(c) of the Rules which mandates that fair market value of unquoted redeemable preference mandates that fair market value of unquoted redeemable mandates that fair market value of unquoted redeemable shares be determined be determined with the assistance of a report prepared by a with the assistance of a report prepared by a merchant banker or an accountant. The Bench held that valuation merchant banker or an accountant. The Bench held that valuation merchant banker or an accountant. The Bench held that valuation report prepared by the qualified report prepared by the qualified experts is presumed presumed to be correct under the law unless proven otherwise, as tho unless proven otherwise, as those experts possess se experts possess the necessary technical knowledge and experience to undertake echnical knowledge and experience to undertake echnical knowledge and experience to undertake such valuations. Further Further, it is held that the Assessing Officer has , it is held that the Assessing Officer has limited authority to alter or challenge the valuation methodology limited authority to alter or challenge the valuation methodology limited authority to alter or challenge the valuation methodology employed by such experts unless there is a clear evidence of employed by such experts unless there is a clea employed by such experts unless there is a clea fundamental errors or apparent mistakes in the valuation process or apparent mistakes in the valuation process. or apparent mistakes in the valuation process To challenge the expert valuation challenge the expert valuation, the Assessing Officer must the Assessing Officer must demonstrate that said valuation said valuation had fundamental error fundamental error. In the instant case also, the AO or ld CIT(A) has instant case also, the AO or ld CIT(A) has not provide not provided a sound basis for questioning the expert’s basis for questioning the expert’s dividend discount rate discount rate of valuation method. Therefore, r Therefore, relying on the above decision, we are elying on the above decision, we are of the opinion that it was not sufficient of the opinion that it was not sufficient for the Assessing Officer to the Assessing Officer to merely express dissatisfaction dissatisfaction on expert methodo logy or results. The Assessing Officer has not provided any substantial evidence Assessing Officer has not provided any substantial evidence Assessing Officer has not provided any substantial evidence and credible alternatives and credible alternatives while challenging expert valuation process. challenging expert valuation process. The Chartered Accountant has applied proper method of dividend The Chartered Accountant has applied proper method of dividend The Chartered Accountant has applied proper method of dividend discounting cash flow method. Further, we discounting cash flow method. Further, we note that the Tribunal in note that the Tribunal in the case of DQ Entertainment in for DQ Entertainment in for DQ Entertainment in ITA No. 151/Hyd/2015 for assessment year 2010 assessment year 2010-11 has observed that matter of valuation has observed that matter of valuation should be left to be the wisdom should be left to be the wisdom of expert and method adopted for method adopted for estimate cash flow of the future years cannot estimate cash flow of the future years cannot be replaced with the be replaced with the actual down the line. actual down the line. In that case, the Assessing Officer was of the he Assessing Officer was of the view that future projected revenue projected revenue was estimated at higher side estimated at higher side whereas there were no actual revenues were no actual revenues in subsequent years. The in subsequent years. The Tribunal in the said case has held that Tribunal in the said case has held that Revenue cannot replace the evenue cannot replace the future projections with the actual. projections with the actual. The Hon’ble High Court of Delhi The Hon’ble High Court of Delhi in the case of CIT Vs Vibhu Talwar ( 11 taxmann.com 419) CIT Vs Vibhu Talwar ( 11 taxmann.com 419) CIT Vs Vibhu Talwar ( 11 taxmann.com 419) and Hon’ble Supreme Court in the case of CIT Vs Bharti Cellular Ltd CIT Vs Bharti Cellular Ltd Hon’ble Supreme Court in the case of (330 ITR 239) held that the Revenue held that the Revenue authorities should take expert should take expert opinion from independent expert independent expert while deciding matter of valuation while deciding matter of valuation. The Amaritsar Bench of the ITAT in the case of Him Agri Fresh (P) Him Agri Fresh (P) The Amaritsar Bench of the ITAT in the case of Ltd vs ITO (2021) 129 taxmann.com 250 /190 ITD 429 held that Ltd vs ITO (2021) 129 taxmann.com 250 /190 ITD 429 Ltd vs ITO (2021) 129 taxmann.com 250 /190 ITD 429 method of valuation of shares method of valuation of shares adopted by the assessee could be adopted by the assessee could be challenged by the AO only if it was not a recognised method of challenged by the AO only if it was not a recognised method of challenged by the AO only if it was not a recognised method of valuation as per rule 11UA(2) of Rules. The Bangluru Bench of The Bangluru Bench of valuation as per rule 11UA(2) of Rules. ITAT in the case Flutura Business Solutions P Ltd Vs ITO ITAT in the case Flutura Business Solutions P Ltd Vs ITO ITAT in the case Flutura Business Solutions P Ltd Vs ITO (2020)_ 117 taxmann.com 567 (2020)_ 117 taxmann.com 567 held that the AO can determine a held that the AO can determine a fresh valuation by himself or by calling a fresh valuation by himself or by calling a determination determination from an independent valuer to confront to the assessee but he cannot valuer to confront to the assessee but he cannot valuer to confront to the assessee but he cannot change the method change the method of valuation which has been opted by the which has been opted by the assessee and for scrutinizing valuati assessee and for scrutinizing valuation report , facts and data on report , facts and data available on date of valuation has to be considered and actual available on date of valuation has to be considered and actual available on date of valuation has to be considered and actual results of future cannot be a basis to deicide about reliability of results of future cannot be a basis to deicide about reliability of results of future cannot be a basis to deicide about reliability of projections. The Hon’ble Bombay High Court in the case of The Hon’ble Bombay High Court in the case of The Hon’ble Bombay High Court in the case of Vodafone M pesa Ltd Vodafone M pesa Ltd Vs PCIT reported in 92 taxmnn.com 73 92 taxmnn.com 73 has held that department should not interfere in the method of has held that department should not interfere in the method of has held that department should not interfere in the method of valuation selected by the assessee. The relevant finding of Hon’ble valuation selected by the assessee. The relevant finding of Hon’ble valuation selected by the assessee. The relevant finding of Hon’ble High Court is reproduced as under: High Court is reproduced as under:

5.4 We are of the considered view that, in the instant case, We are of the considered view that, in the instant case, We are of the considered view that, in the instant case, the AO has valued the share premium invoking Net Asset Value (NAV) has valued the share premium invoking Net Asset Value (NAV) has valued the share premium invoking Net Asset Value (NAV) method substituting the dividend di method substituting the dividend discounting method applied by scounting method applied by the independent valuer. N the independent valuer. No fundamental flaw or deficiency has been o fundamental flaw or deficiency has been identified in the valuation report identified in the valuation report of independent valuer by the AO of independent valuer by the AO that would warrant its rejection. The report cannot be dismissed that would warrant its rejection. The report cannot be dismissed that would warrant its rejection. The report cannot be dismissed solely on the grounds that th solely on the grounds that the assessee has received a high e assessee has received a high premium. Accordingly, and in respectful agreement with the premium. Accordingly, and in respectful agreement with the premium. Accordingly, and in respectful agreement with the findings of the Hon’ble Courts/ Hon’ble Courts/Tribunal cited above, we set aside Tribunal cited above, we set aside the conclusions of the Learned CIT(A) on the issue in dispute and the conclusions of the Learned CIT(A) on the issue in dispute and the conclusions of the Learned CIT(A) on the issue in dispute and direct the deletion of the additio direct the deletion of the addition made by the Assessing Officer. n made by the Assessing Officer. The grounds of appeal raised by the assessee are accordingly The grounds of appeal raised by the assessee are The grounds of appeal raised by the assessee are allowed.