LEARNING CURVE EDUTECH SOLUTIONS PVT LTD.,MUMBAI vs. PR CIT-7, MUMBAI

We have heard the rival submissions and perused the material available on record. We find that the assessee in its grounds had challenged both assumption of jurisdiction under section 263 of the Act by learned PCIT as well as directions issued by learned PCIT to the Assessing Officer on merits. The assessee is engaged in the business of running day-care centres and nursery. The return of income for assessment year 2015-16 was filed by the assessee company on 30.7.2015 declaring total income of Rs Nil after claiming carry forward of current year loss of Rs. 3,02,87,682/-. The assessment was completed under section 143(3) of the Act by the learned Assessing Officer on 11.12.2017 accepting returned loss of the assessee both under normal 2 Learning Curve Edutech Solutions Pvt. Ltd. provisions of the Act as well as in the computation of the book profit under section 115JB of the Act. In this assessment order, the Assessing Officer in paragraph 2 had stated that the authorized representative of the assessee company had attended hearings conducted from time to time and filed various details which were placed on record and all those details were duly verified by him during the course of assessment proceedings. This assessment order was sought to be revised by learned PCIT under section 263 of the Act on the ground that the order passed by the Assessing Officer is erroneous in as much as it is prejudicial to the interest of revenue on certain aspects which were discussed elsewhere in this order.

We find that during the year under consideration the assessee had issued shares to the following persons as under :

The assessee filed a reply to the second show-cause notice vide its letter dated 23.10.2019 meeting each and every point raised by learned PCIT in the show-cause notice. In the said letter, the assessee also drew attention of learned PCIT that learned Assessing Officer indeed had already carried out necessary enquiries in this regard during the course of assessment proceedings. In the said reply letter dated 23.10.2019, the assessee had on without prejudice basis, also submitted that reference of Tree House (a listed company) made in the valuation report with an observation that the same is considered only to triangulate valuation under DCF method and not for comparison. The assessee further stated that the valuation of Tree House having market capitalization of Rs. 1182 crore as quoted in the letter of learned PCIT had substantially come down to less than Rs. 25 crore at present. This was apparently submitted to drive home the point that the nature of uncertainty that is prevailing in different times and hence projections using DCF method cannot be compared with actuals.

The sum and substance of learned PCIT disbelieving the valuation report for justification of share premium are summarized as under : i) Statistics for financial year 2015-16 reveal that projected sales and other income as well as earnings before interest and tax were higher than the actual. ii) Valuation report has been worked out on the basis of period from 1st June to 31st May and not from 1st April to 31st March. iii) Details of new centres to be opened are not mentioned on the basis of which capital expenditure and revenue has been forecasted. iv) Valuation is in excess of market capitalization of a listed company being Tree House Education Accessories Ltd. v) Valuation report itself mentions that the assessee’s profit after tax including cash flow would be negative for the first two years. vi) Basis of sales and other income does not have any supporting empirical data for the projections made. vii) There is no mention of accounting standard used to value the shares.

In view of the above, learned PCIT alleged that the valuation arrived by independent valuer cannot be treated as fair market value of shares and accordingly invoked his revision jurisdiction under section 263 of the Act by setting aside the assessment order with the direction to learned Assessing Officer to allow an opportunity of hearing to assessee and reexamine the said issue in accordance with law.

Moot question that is to be decided is as to whether requisite enquiries were indeed carried out by learned Assessing Officer on the issue of share premium in the course of assessment proceedings or not. We find that as stated supra that the Assessing Officer had issued questionnaire dated 9.11.2017 along with notice under section 142(1) f the Act wherein a specific query was raised calling for justification of receipt of share premium to the assessee. This query was duly responded to by the assessee by furnishing details of share holders, number of shares allotted, issue price face value, issue price premium value, value received thereon, name of shareholders, valuation report for justification of issue price, confirmatory letters from share 11 Learning Curve Edutech Solutions Pvt. Ltd. applicants together with their ITR acknowledgment. These documents were indeed examined by the Assessing Officer which is evident from paragraph 2 of the assessment order wherein it has been categorically stated that various documents were furnished by the assessee from time to time and the same were duly verified by the learned Assessing Officer. The assessee had duly justified receipt of share premium with relevant documentary evidences before the Assessing Officer. Merely because there is no discussion regarding documents filed by the assessee on the receipt of share premium, order of the Assessing Officer, in our considered opinion, would not become erroneous. The law is very well settled that the Learned Assessing Officer would normally discuss only those issues on which he is in disagreement with the assessee. There cannot be any presumption on that account that no enquiry or requisite enquiry was not carried out by the Assessing Officer. Reliance in this regard is placed on the decision of Hon'ble Jurisdictional High Court in the case of CIT Vs. Nirav Modi (reported in 390 ITR 292), Idea Cellular Ltd. (reported in 301 ITR 407) and CIT Vs. Fine Jewellery India Ltd. (reported in 55 Taxman.com 514). Further we find that Hon'ble Gujarat High Court in the case of Nirma Chemical Works (309 ITR 67) had observed that “if an assessment order were to incorporate the reasons for upholding the claim made by an assessee, the result would be an epitome and not an assessment order.” Merely because learned PCIT does not agree with the possible view taken by learned Assessing Officer, assessment cannot be the subject matter of revision. Reliance in this regard is placed on Hon'ble Jurisdictional High Court in the case of CIT Vs. Gabriel India Ltd. (reported in 203 ITR 108) and decision of Hon'ble Supreme Court in the case of CIT Vs. Max India Ltd. (295 ITR 282).

We find that learned Departmental Representative during the course of hearing had placed reliance on various decisions as under :- • CIT Vs. Eastern Medikit Ltd. (337 ITR 56)(Del) • Raj Mandir Estates (P) Ltd. Vs. PCIT (77 taxmann.com 285)(SC)

Even on merits, we find that all the allegations levelled by learned PCIT for disbelieving valuation report had been duly met by the learned authorized representative before us. We find that the valuation report had duly captured incurrence of loss before interest and tax by the assessee in the first two years while drawing projections. We are in the agreement with the arguments 13 Learning Curve Edutech Solutions Pvt. Ltd. advanced by learned AR that academic year of Centre and nursery schools which assessee is engaged in, would start only from the months of June and hence valuer was duly justified in preparing projections by considering period of 1st June to 31st May instead of 1st April to 31st March. Learned AR also placed record of business plan containing details of centres opened or to be opened in future, year on year. These details were very much available before the valuer as part of the documents submitted by the assessee. In fact the existence of business plan and furnishing of the same by the management of the assessee company had been duly acknowledged by the valuer in the valuation report itself. Hence the arguments advanced by learned Departmental Representative before us that the business plan which is part of the paper book filed by the assessee was not available before the valuer while preparing valuation report, is dismissed. Admittedly this business plan would be the very basis of making projections under Discounted Cash Flow method by the management and valuer while preparing valuation report. In fact we find that the valuer also had compared valuation made with a comparable listed company i.e. Tree House Education Accessories Ltd. in his valuation report and takes cognizance of its market capitalization while preparing valuation report. Hence, observation by learned PCIT that even listed company like Tree House does not command an issue price as the assessee, cannot be accepted, as the same is without any basis. When valuer had already taken cognizance of the comparable listed company and still justified the issue price of Rs. 8275 per share for the assessee company, the same cannot be merely ignored by learned PCIT on the ground that the said price for the startup company is in far excess of a listed company’s price. From the perusal of the valuation report, we find that the entire basis of projections had been explained in detail in the valuation report itself. We find that the valuer had carried out analysis of historical financial statements and budgets to determine forecasts of revenues and expenses. He has also carried out research and analysis of available empirical data to assess in determining fair value. In his valuation report he has also referred to the valuation processes 14 Learning Curve Edutech Solutions Pvt. Ltd. available being income approach or the asset approach or market approach and reasons why he considers income approach to be relevant in the present case. He has stated that income approach is based on DCF method which is the method prescribed under Rule 11UA(2)(b) of the I.T. Rules. We find that the valuer with a view to corroborate the said value had referred to the price earnings of listed company i.e. Tree House Education Accessories Ltd. and the market capitalization of its shares to conclude that the price earning multiple in this industry would be approximately 20.5 times. The said company market capitalization was Rs. 1,182 crore. The assessee’s profit for next four years were estimated at Rs. 1.96 crore and applying the price earnings multiple of 20.5, the value of its equity would come to Rs. 40.18 crore. Since this value was estimated based on earnings for four financial years, the said value was discounted to determine the present value at Rs. 21 crore. Hence, comparable listed company has also been duly taken cognizance by the valuer in the valuation report. We find that the market capitalization is computed on the basis of total number of shares multiplied with current price per share. In any event, simplicitor comparison of market capitalization for valuation of shares of two companies is inappropriate. The manner of estimation of sales and other income was duly reflected in the business plan and workings notes of the valuer which also captured data of new centres to be opened year after year. Learned PCIT had also referred that there is no mention of the Accounting Standard used by the Chartered Accountant to value the shares. In fact at the relevant point of time, no accounting standard had been prescribed by the Institute of Chartered Accountants of India (ICAI) for valuing the shares. There was only a Technical Guide on share valuation published by the ICAI which was available for technical guidance of the Chartered Accountants. Hence, we hold that all the allegations levelled by learned PCIT for disbelieving the valuation report had been duly met hereinabove. Accordingly, even on merits, there cannot be any addition on account of share premium either under section 68 or under section 56(2)(vii)(b) of the Act as the issue of shares in the instant case has been done in accordance with Rule 11UA(2)(b) of the I.T.

In the result, appeal by the assessee is allowed.