FREEDOM WEALTH SOLUTIONS PVT LTD.,MUMBAI vs. ITO WARD 9 (3)(3), MUMBAI

1. 1. The CIT (A) has erred in law and on facts in confirming the addition of Rs.1,36,03,086/- made by the Assessing Officer u/s. 56(2)(viib) of the Act in respect of share premium. The CIT(A) ought to have deleted the aforesaid addition of Rs.1,36,03,086/- as made by the Assessing Officer.

We further find that the prime object of insertion of Sec. 56(2)(viib) was to tax excessive share premium received unjustifiably by private companies on issue of shares without carrying underlying value. The 6 M/s Freedom Wealth Solutions Private Ltd. Assessment Years: 2013-14 & 2015-16 intent of the provision was to deter the generation and use of unaccounted money. However, there are no such allegations against the assessee since the assessee has demonstrated the fulfilment of primary ingredients of Section 68.

Our aforesaid findings are duly supported by the binding judicial pronouncement of Hon’ble Bombay High Court in the case of Vodafone M-Pesa Ltd. V/s PCIT (2018) 92 taxmann.com 73 (Bombay), wherein it was held that there was no immunity from scrutiny of the valuation report and AO was 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. Similarly is the ratio of decision of Hon’ble Madras High Court in CIT V/s VVA Hotels (P) Ltd. (2020) 122 taxmann.com 106. The Hyderabad Tribunal in DQ (International) Ltd. V/s ACIT (2016) 72 taxmann.com 142 held that projections could not be replaced with actuals down the line. The valuation will go either way. When it goes to north, the revenue may adopt the same and when it goes to south, the assessee may adopt and therefore, there won't be any consistency. What is important is the value available at the time of making business decision. It should be left to the wisdom of the businessman. The method adopted should be consistent and should be documented to review in the future. The review does not mean replacing the projection with actuals. It is the rational of adopting the values for making decision at the point of time of making decision. When the values are replaced 7 M/s Freedom Wealth Solutions Private Ltd. Assessment Years: 2013-14 & 2015-16 subsequently, it is not valuation but evaluation i.e. moving the post of result determined out of projections. Similar is the decision of Delhi Tribunal in Cinestaan Entertainment (P) Ltd. vrs. ITO (2019) 106 taxmann.com 300 wherein the coordinate bench concurred with assessee’s submissions that the deeming provisions of Sec. 56(2)(vii) could not be invoked on normal business transaction of issuance of shares unless it has been demonstrated by the revenue authorities that the entire motive for such issuance of shares on higher premium was for the tax abuse with the objective of tax evasion by laundering its own unaccounted money. The deeming fiction was to be strictly interpreted and there was no mandate to the Assessing Officer to arbitrarily reject the valuation done by the assessee on his own surmises and whims. It is a trite law, well settled by the Supreme Court, in the case of Commissioner of Customs (Imports) v. Dilip Kumar & Sons [20161 69 taxmann.com 206/55 GST 764 that in the matter of charging section of a taxing statute, strict rule of interpretation is mandatory and if there are two views possible in the matter of interpretation, then the construction most beneficial to the assessee should be adopted. Viewed from such principle, here is a case where the shares had been subscribed by unrelated independent parties, who were one of the leading industrialists and businessman of the country, and after considering the valuation report and future prospect of the company, had chosen to make investment as an equity partners in a 'start-up company' like assessee, then it cannot said that there is any kind of tax abuse tactics or laundering of any unaccounted money. It cannot be the unaccounted or black money of investors as it is their tax paid money 8 M/s Freedom Wealth Solutions Private Ltd. Assessment Years: 2013-14 & 2015-16 invested, duly disclosed and confirmed by them; and nothing has been brought on record that it is unaccounted money of assessee company routed through circuitous channel or any other dubious manner through these accredited investors. If such a strict view is adopted on such investment as have been done by the Assessing Officer and by Commissioner (Appeals), then no investor in the country will invest in a 'start-up company', because investment can only be lured with the future prospects and projection of these companies.

Drawing strength from the above cited judicial precedents, the facts and circumstances of the case do not convince us to confirm the impugned additions made u/s 56(2)(viib). By deleting the same, we allow the ground no.1 which render ground no.2 as infructuous. The appeal, thus, stand party allowed Assessment Year 2015-16 9. Facts are substantially the same in this year. In this year, the assessee fetched a premium of Rs.75/- per share on fresh issue of shares. The shares were issued to HUF entity of a director of the assessee and three other investors as detailed in para-7 of the order. The valuation was arrived at as per Rule 11UA by adopting DCF method of valuation. However, Ld. AO opined that excess premium was hit by the provisions of Sec. 56(2)(viib) since the Book value of the share was Rs.0.12 per share as against issue price of Rs.85/- per share. The valuation adopted exorbitant future cash flows. The assessee was a loss making entity and no investor would pay premium for loss making entity. Therefore, the excess premium of Rs.75/- per share was added to the income of the assessee.

We find that facts are pari-materia the same in this year. The valuation report has adopted DCF method of valuation of shares which has been rejected by Ld. AO by alleging that exorbitant estimation of future cash flows were made in the report. However, as observed by us in AY 2013-14, the valuation was as per one of the prescribed method and adoption of any method was optional for the assessee. Therefore, our findings as well as adjudication as for AY 2013-14 shall mutatis mutandis apply to this year also so far as the addition u/s 56(2)(viib) is concerned.

The Ld. AO, in the alternative, has invoked the provisions of Sec.68. However, upon perusal of assessment order, we find that the same are devoid of any concrete material on record. The assessment order itself records a finding that the assessee had furnished copies of ITR, confirmation, bank statement etc. in support of the transactions. It also takes note of the fact that the major investor funded the investment out of funds provided by group entities. Therefore, the assessee, in our 10 ITA Nos.6999-7000/Mum/2019 M/s Freedom Wealth Solutions Private Ltd. Assessment Years: 2013-14 & 2015-16 opinion, has successfully proved the identity of the investor entities, their creditworthiness and also the genuineness of the transactions. No further investigations are shown to have been carried out by Ld. AO to dislodge assessee’s documentary evidences and the allegations are bereft of any concrete material on record. It is trite law that no addition u/s 68 could be made merely on the basis of presumption, conjecture or surmises. There are no allegations that the assessee’s own unaccounted money was routed back in the garb of share application money. In the absence of such a finding, the alternative, as proposed by Ld. AO would have no legs to stand and accordingly, unsustainable in law.

Finally, by deleting impugned additions as made u/s 56(2)(viib), we allow ground nos.1 & 2 of the appeal. The others grounds have not been urged before us and hence, dismissed. The appeal stand partly allowed. Conclusion 14. Both appeals stand partly allowed. Order pronounced on 22nd September, 2021.