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Income Tax Appellate Tribunal, ‘B’ BENCH : BANGALORE
Before: SHRI A.K GARODIA & SMT. BEENA PILLAI
PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by assessee against order dated 21/02/2019 passed by Ld. CIT (A)-2, Bangalore for assessment year 2015-16 on following grounds of appeal: “On the facts and circumstances of the case and in law, the learned Commissioner of Income tax (Appeals)-2 ('the learned CIT(A)"), Bengaluru has erred in confirming the additions made by the Deputy Commissioner of Income-tax, Circle 2(1)(1), Bengaluru ('the learned AO") in the assessment order passed under section 143(3) of the Income-tax Act, 1961 ("the Act") for the captioned Assessment Year ("AY").
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Each of the ground is referred to separately, which may be kindly considered independent of each other. 1. Ground 1: The learned CIT(A) has erred in fact and in law, in confirming the addition of INR 97,173,230 made by the learned AO to the Appellant's returned loss of INR 19,86,50,599, under section 56(2)(viib) of the Act read with rule 11UA(2)(b) of the Income-tax Rules, 1962 ("the Rules"), by disregarding the valuation report prepared under the Discounted Cash Flow ("DCF") method, and adopting the Net Asset Value ("NAV") method for computation of the fair market value ("FMV") of shares issued by the Appellant during FY 2014-15. 2. Ground 2: That while the Appellant has valued the shares by following a method prescribed in the Rules, the AO erred in disregarding the same on an arbitrary basis, and the CIT(A) further erred in confirming the same. 3. Ground 3: That the CIT(A) and the AO grossly erred in comparing the actual revenue generated with the projections to reject the valuation made by the Appellant. 4. Ground 4: That the CIT(A) and the AO grossly erred in rejecting the valuation made by the Appellant on conjectures and surmises. 5. Ground 5: The learned CIT(A) I the learned AO has erred in fact and in law by computing the FMV of preference shares under the NAV method as per Rule 11UA(1)(c)(b), as against applying the open market value as per Rule 11 UA(1)(c)(c). 6. Ground 6: CIT(A) erred in placing misplaced reliance on the decision of this Hon'ble Tribunal in the • case of Cornerstone Property Investments Pvt. Ltd. while holding against the Appellant, in as much as the said case does not have any application to the Appellant's case. 7._Ground 7: Notwithstanding the contentions of the Appelalte in Grounds 1 and 2 above, even where the NAV method was to be adopted in determinng the FMV of the shares, the ld. CIT(A)/ the learned AO has erred in fact and in law, in adopting the values of assets and liabilities as on March 31, 2015 instead of March 31, 2014. 8. Ground 8: On facts and in the circumstances of the case and in law, the learned AO erred in initiating penalty proceedings under section 271 (1 )(c) of the Act. All the above grounds are without prejudice to each other. The Appellant craves for leave to add, amend, vary, omit or substitute or withdraw any of the aforesaid grounds at any time before or at the time of hearing of the matter with the Income Tax Appellate Tribunal.” Brief facts of the case are as follows: 2. Assessee is a company and filed its return of income for year under consideration on 30/09/2015 declaring total income of Rs.Nil, and current year losses of Rs.19,86,50,599/-. The case was selected for scrutiny and notices under section 143(2) was issued to assessee along with notice under section
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142(1) of the Act. In response to statutory notices, representative of assessee appeared before Ld.AO and filed requisite details as called for. 3. Ld.AO noted that, assessee is engaged in providing high- quality print and digital solutions to photographs. During the course of assessment proceedings, the Ld.AO noted that assessee has issued shares at face value of rupees one and the share premium of Rs.1204/- including the face value. It was noted that, as per share valuation certificate provided by assessee, shares were valued at Rs.1242.05/- as the fair market value per share. Ld.AO accordingly called upon assessee to show cause as to why the value should be accepted as the fair market value. 4. In response assessee filed various details vide letter dated 22/12/2017, 29/12/2017. From the details filed, Ld.AO observed that, assessee had computed the value as per DCF method and that there was nothing to suggest that DCF method was an appropriate method to value the shares. Ld.AO rejected DCF method adopted by assessee for the reasons that cash flow from operations were not positive, the growth rate was taken at 50% is unrealistically high and far from reality and assessee was suffering loss year by year. Ld.AO also noted that assessee is a company in which public is not substantially interested and therefore as per explanation to section 56(2)(viib) the method adopted should be net asset value for determining the fair market value rather than discounted cash flow method which is as per Rule 11UA(1)(c)(b) of Income tax Rules.
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Ld.AO thus computed value of share premium at Rs.51.32 per share and disallowed excess share premium of Rs.9,71,73,320/-and treated as excess fair market value under section 56(2)(viib) of the Act. 6. Aggrieved by the addition, assessee preferred appeal before Ld.CIT(A). 7. Ld.CIT(A) was of the opinion that the primary onus to prove the correctness of the valuation report is on assessee as he has special knowledge is privy to the facts of the company and only assessee has opted for this method. Ld.CIT(A) also observed that assessee failed to achieve the projected targets are not acceptable for the reason that independent value should have taken the scientific approach of estimation. Ld.CIT(A) upheld the disallowance made by Ld.AO. 8. Aggrieved by the addition confirmed by Ld.CIT(A) assessee is in appeal before us now. 9. At the outset Ld.AR submitted that there is a delay of about 305 days in filing the present appeal before this tribunal. She the delay was neither wilful nor wanted but was only account of the circumstances set out in affidavit dated 06/03/2020. Ld.AR submitted that as there was conflicting views of various forum, the consultant handling assessee’s case advised assessee not to prefer appeal against the impugned order passed by Ld.CIT(A). Ld.AR submitted that, subsequently assessee started internally evaluating the ramifications of penalty proceedings initiated by Ld.AO for the year as well as other assessment years and took a decision to pursue the issue before this Tribunal. On coming to such conclusion assessee
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immediately appointed new tax consultants and requested to consider the case to be filed before this Tribunal. Ld.AR submitted that this cost the delay in filing the present appeal before this Tribunal. She placed reliance on decision of Hon’ble Supreme Court in case of Collector, Land Acquisition and another vs Katiji and Ors., reported in (1987) 2 SCC 107. 10. Ld.Sr.DR though objected to the condonation of delay, could not controvert the submissions advanced by Ld.AR. 11. We have considered the rival submissions in the light of arguments advanced by both sides. 12. In our view, the delay caused in filing the present appeal would not stand in benefit of assessee. We also are of the view that substantial Justice must be granted as there was no malafide intention on behalf of assessee. We also note that there was sufficient and bona fides reasons that caused delay as expressed by assessee in its application for condonation of delay. 13. Hon’ble Supreme Court in case of Collector, Land Acquisition and another vs Katiji and Ors., (Supra) where substantial Justice is pitted against technicalities, the judicial review must tilt in favour of justice rather than technicalities. Therefore in our view condonation of delay is warranted and the appeal should be decided on merits. 14. Respectfully following the ratio laid down by Hon’ble Supreme Court in case of Collector, Land Acquisition and another vs Katiji and Ors., (Supra), we admit the appeal to be decided on merits.
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On merits, Ld.AR submitted that on identical reasoning by Ld.CIT(A)/Ld.AO, this Tribunal has considered the valuation of shares in the following decisions: • Vodafone M-Pesa Pvt.Ltd vs DCIT reported in (2018) 92 Taxmann.com 73 (BOM) • Innoviti Payment Solutions Pvt.Ltd. vs ITO reported in (2019) 102 Taxmann.com 59 (Bang) • VBHC Value Homes Pvt.Ltd. vs ITO in ITA No. 2541/Bang/2019 by order dated 12/06/2020. 16. She thus submitted that, the issue may be remanded to Ld.AO for scrutinizing the valuation report filed by assessee. Ld.Sr.DR did not object for the issue to be remanded to Ld.AO for reconsideration based on the valuation report filed by assessee. 17. We have perused submissions advanced by both sides in light of records placed before us. 18. We note that this Tribunal in case of Innoviti Payment Solutions Pvt.Ltd. vs ITO (supra) while considering an identical issue had followed the ratio laid down by Hon’ble Bombay High Court in case of Vodafone M-Pesa Pvt.Ltd vs DCIT (supra). This Tribunal observed in Innoviti Payment Solutions Pvt.Ltd. vs ITO (supra)as under: "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 11 UA (2), the assessee can opt for DOE method and if the assessee has so opted for DCF method, the AC cannot discard the same and adopt other method i.e. NAV method of valuing shares. In the case of M/s. Rameshwaram Strong Glass (F) 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
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tribunal held that if the assessee has opted for DCF method, the AO cannot challenge the same but the AC 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 note of having been rendered in the case of Vodafone M-Pesa Ltd. vs. POIT 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 callrg a final determination from an independent valuer to confront the asesee. 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 orders. Respectfully following this judgment of Honble Bombay High Court, we set aside the order of CIT (A) and restore
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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 has to be DOE 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.
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From the paras reproduced above, it is seen that in this case, the Tribunal has followed the judgment of Honble 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 Honble 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 DOE method and he cannot change the method of valuation which has been opted by the assessee. The Tribunal has followed the judgment of Honble 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 Honbie Bombay High Court rendered in the case of Vodafone M-Pesa Ltd., Vs. Pr. CIT (supra) in preference to the judgment of the Honble 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. Vs Pr. CIT (supra), these tribunal orders are not relevant In le case of Innoviti Payment Solutions Pvt. Ltd. Vs. ITO (supra). this judgment of Honble 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 Honble Bombay High Court. The relevant paras of this Tribunal order are already reproduced above which contain the directions given by the Tribunal to the AD 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.” 18. From the above observations, under Rule 11UA assessee has option to determine fair market value being NAV method or DCF method. As per observation of Hon’ble Bombay High Court in case of Vodafone M-Pesa (Supra). If assessee determines the fair market value in any one method as prescribed under Rule 11UA, the assessing officer can not dispute the method so adopted.
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In the present case, we note that assessing officer has not rejected the DCF method followed by assessee based on any discrepancy found in the valuation, but is based on the reasoning that, the valuation is based on estimates. 19. We therefore, remand this issue back to Ld.AO for scrutinising valuation report filed by assessee by following DCF method either by himself or by calling a determination from an independent valuer and to confront the same with assessee. Ld.AO shall not reject the DCF method as it is the appropriate method prescribed under Rule 11UA. Assessee is also directed to establish the correctness of the valuation report based on documents/evidences. Assessee has to satisfy the correctness of the projection of discounting factor with the help of empirical data or industry norm. 20. Accordingly, the issue is remanded to Ld.AO for deciding it afresh by affording proper opportunity of being heard to assessee in accordance with law. In the result appeal filed by assessee stands allowed for statistical purposes. Order pronounced in the open court on 2nd Nov, 2020.
(A.K GARODIA) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 2nd Nov, 2020. /Vms/
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Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore 6. Guard file By order
Assistant Registrar, ITAT, Bangalore