TECHPARK HOTELS PVT LTD,GURGAON vs. ADDI. CIT SPECIAL RANGE-9, NEW DELHI

That the CIT(A) erred on facts and in law in holding that the premium charged by the appellant on shares issued was unjustified and unsatisfactory without considering the detailed justification provided by the appellant.

That the CIT(A) erred on facts and in law in rejecting the Discounted Cash Flow ['DCF'] method for valuation of shares and in considering the Net Asset Value ['NAV'] method without appreciating that the FMV of the shares was computed keeping in view the future growth of the enterprise and was certified by a Chartered Accountant.

That the CIT(A) erred on facts and in law in failing to appreciate that the estimates are made considering the future growth of the entity and any prident investor would invest its money only when he is sure of a reasonable return.

That the CIT(A) erred on facts and in law in stating that the appellant was unable to adduce any cogent evidence justifying the high projection of revenue whereas, as a matter of fact, the appellant furnished detailed explanation to corroborate the reasons for differences between estimated projections vis-à-vis actual numbers and also elaborated that the reasons for such variation was a result of certain unforeseen factors.

That the CTT(A) erred on facts and in law in failing to appreciate that NAV method cannot be taken as the price at which transaction would take place in case of going concern and moreover, valuation of share is, in essence, a prophesy as to the future and must be based on facts available about future at the required date of valuation and not based on historical information. 9. That the CIT(A) erred on facts and in law in not appreciating that the appellant was a 100% subsidiary of Triguna Hospitality Ventures (India) Pvt. Ltd. (parent company) and the premium on share issue was on account of a capital account transaction and does not give rise to any income.

That the CIT(A) erred on facts and in law in not appreciating that even on the allotment of shares, there was no dilution in the shareholding and the parent company continued to be the 100% shareholder of the appellant company.

That the assessing officer erred in not allowing set off of the current year business losses of the company against the income from other sources assessed in the impugned assessment order, that too, without assigning any reason and that the rectification application under section 154 of the Act is not yet disposed off.

That the assessing officer erred on facts and in law in charing interest under section 234D of the Act.”

Ld. Authorized Representative for appellant assessee submitted that the appellant had received share application money from Triguna Hospitality Ventures (India) Private Limited ("Triguna"), against which shares were duly allotted. It is respectfully submitted that Triguna, in turn, had received share application money from (i) InterGlobe Enterprises Ltd., (ii) AAPC Singapore Pte. Ltd., and (iii) APHV India Investco Pte Ltd., against which shares were also allotted.

1 Hon'ble ITAT, in the case of Caddie Hotels (P.) Ltd. vs. PCIT/DCIT [202 ITD 351]-a sister concern of the appellant-had comprehensively adjudicated upon the issue and thereafter accepted the valuation of shares issued by the assessee to (i) Hon'ble High Court of Delhi vide order dated 02.09.2024has affirmed that the order of Caddie Hotels (supra) in the case of Pr. CIT vs. Caddie Hotels Pvt. Ltd. ITA 470/2024, however following its own order passed in the case of Agra Portfolio (P.) Ltd. vs. Principal Commissioner of Income-tax: IT Appeal No.1385 of 2018 remitted the matter to the file of Ld. AO with directions and liberty to undertake an exercise of valuation afresh in accordance with the discounted cash flow by having the same independently determined by a valuer appointed for the aforesaid purpose.

3 FMV for the purpose of section 56(2)(viib) of the Act, shall be the value as on valuation date, which has been defined in Rule 11U(j) of the Rules to mean "the date on which the property or consideration, as the case may be, is received by the appellant". Thus, it is the FMV on the date of allotment which has to be determined. Further, the FMV of unquoted shares is determined by reducing the book value of liabilities from the assets as shown in the balance-sheet.

4 As per Rule 11U(b) of the Rules balance sheet means the (i) balance sheet of such company as drawn up on the valuation date or (ii) where the balance sheet on the valuation date is not drawn up, the balance-sheet drawn up as on a date immediately preceding the valuation date which has been approved in the annual general meeting of the shareholders of the company.

5 Reliance in this regard is placed on the decision of the Delhi Bench of the Tribunal in the case of Cinestaan Entertainment (P.) Ltd. vs. TIO :177 ITD 809 wherein, the context of valuation of shares under section 56(2)(viib) of the Act read with Rule 11UA of the Income Tax Rules, 1961 (‘the Rules’), it was held that if law provides the assessee to get the valuation done from a prescribed expert (Chartered The entire interest income earned by the appellant for the year under consideration, amounting to Rs.34,96,215/- ought to be adjusted with the current business loss of the appellant, as per the provisions of section 71 of the Act.

8 The AO erred in not granting the appellant the benefit of set off losses, even if he decided to make the additions in the assessment order. The assessed loss, as per the impugned assessment order, would still be around Rs.13 crores and therefore, the relevant adjustment was required to be made as per law. The demand raised as per the notice of demand as per section 156 of Act would have no legs to stand once this error is corrected.

Ld. Departmental Representative submitted as under: “1. Validity of Section 56(2) (viib) Application:  Legislative Intent: Section 56(2) (viib) of the Income Tax Act, 1961, is a deeming provision introduced to curb the practice of closely held companies issuing shares at inflated premiums, thereby converting unaccounted money into share capital. The AO and CIT(A) have correctly applied this provision to address the appellant's evident attempt to issue shares at values exceeding their fair market value (FMV).  Capital Receipts as Income: The provision creates a statutory exception where share premiums, otherwise capital in nature, are taxed as income if they exceed FMV. The appellant's inability to substantiate the higher valuation justifies invoking this provision. 2. Infirmities in the Appellant's Valuation Reports:  Lack of Evidence: The appellant relied on two valuation reports based on the Discounted Cash Flow (DCF) method, dated 31.03.2014 and 09.09.2014. Both reports lacked critical documentation and evidentiary support, such as: o Assumptions for projected cash flows. o Basis for the high terminal value and discounting factors, including the beta rate. o Realistic projections backed by historical data or market trends.  Unrealistic Projections: The AO highlighted that the growth rates projected in the valuation reports were exponentially high and did not align with the actual financial results achieved by the appellant in subsequent years. This stark deviation underscores the speculative and unreliable nature of the appellant's valuation.

Judicial Precedent on Valuation Methods:  In Agro Portfolio (P.) Ltd. v. ITO [94 taxmann.com 112 (Delhi-Trib)], the Hon'ble ITAT held that the AO is justified in rejecting the DCF method if the projections are not substantiated by evidence or appear speculative. The disclaimer by the merchant banker in the present case further supports the AO's decision to disregard the DCF valuation. 4. AO's Authority to Adopt FMV Method:  Rule 11UA Compliance: Rule 11UA allows the adoption of the FMV method when the valuation report provided by the assessee is incomplete, inconsistent, or unsupported. The AO exercised due diligence in assessing the appellant's reports and correctly determined FMV using the NAV method in accordance with Rule 11UA.  No Binding Effect of DCF Method: While the appellant has the discretion to choose a valuation method, it is not binding on the Revenue if the valuation is demonstrably flawed. This principle is upheld by judicial precedents, including the decision in Agro Portfolio (P.) Ltd. 5. CIT(A)'s Detailed Validation of AO's Findings:  Comprehensive Analysis: The Ld. CIT(A) conducted a detailed examination of the appellant's submissions, reports, and factual matrix, concluding that:  The appellant failed to justify its high projections.  The DCF method was applied without supporting evidence, rendering the valuation speculative.  The AO correctly applied the FMV method under Rule 11UA to ensure compliance with Section 56(2)(viib).  Sustenance of Addition: The CIT(A) rightly sustained the addition made by the AO, as the appellant could not produce credible evidence even during appellate proceedings to rebut the findings. 6. Disclaimer in Valuation Reports: The merchant banker's disclaimer explicitly stated that the valuation relied solely on data provided by the appellant without independent verification. This renders the valuation unreliable and inadmissible as credible evidence. 7. Taxpayer's Obligation to Prove Valuation:  The burden of proof lies on the appellant to substantiate the valuation and the assumptions underlying it. In the absence of such evidence, the AO's findings and the CIT(A)'s order are unassailable.” 6. From examination of record in light of aforesaid rival contention, it is crystal clear that Ground of Appeal Nos. 2 to 8 are regarding addition u/s 56(2) (viib), Ld. CIT(A) upheld addition of Rs.9,06,45,649/- assessee had received assessee had received broad submissions and stated that the appellant had received share application money from Triguna Hospitality Ventures (India) Private Limited ("Triguna"), against which shares were duly allotted. It is respectfully submitted that Triguna, in turn, had received share application money from (i) InterGlobe Enterprises Ltd., (ii) AAPC Singapore Pte. Ltd., and (iii) APHV India Investco Pte Ltd., against which shares were also allotted.

1 Hon'ble ITAT, in the case of Caddie Hotels (P.) Ltd. vs. PCIT/DCIT [202 ITD 351]-a sister concern of the appellant-had comprehensively adjudicated upon the issue and thereafter accepted the valuation of shares issued by the assessee to (i) Inter Globe Enterprises Ltd., (ii) AAPC Singapore Pte Ltd., and (iii) APHV India Investco Pte Ltd., i.e., the very same investors involved in the present case.

2 Hon'ble High Court of Delhi vide order dated 02.09.2024has affirmed that the order of Caddie Hotels (supra) in the case of Pr. CIT vs. Caddie Hotels Pvt. Ltd. ITA 470/2024, however following its own order passed in the case of Agra Portfolio (P.) Ltd. vs. Principal Commissioner of Income-tax: IT Appeal No.1385 of 2018 remitted the matter to the file of Ld. AO with directions and liberty to undertake an exercise of valuation afresh in accordance with the discounted cash flow by having the same independently determined by a valuer appointed for the aforesaid purpose. 7. The ITAT Delhi in the case of Cinestaan Entertainment (P.) Ltd. vs. ITO has held as under: “8. We have heard and duly considered the arguments and contentions advanced by the learned counsel for both the parties. 9. In the present case, the Respondent-Assessee has received share premium from various subscribers/equity partners. These funds were required by the Respondent- Assessee for film production: The shares were issued based on the valuation received from the prescribed expert i.e.. a Chartered Accountant who used the DCF method which is one of the methods stipulated under Section 56(2)(viib) read with Rule 11UA(2)(b). Based on the valuation report dated 15.12.2014, the Respondent-Assessee issued shares to various equity partners at a premium as per the following table:

The AO has disregarded the valuation report of the Respondent-Assessee primarily on the ground that the projections of revenue as considered for the purpose of valuation do not match the actual revenues of subsequent years. The AO has made additions based on the assumption that the Respondent-Assessee made no efforts to achieve the projection as made out in the valuation report and therefore the share premium received by the Respondent-Assessee is without any basis and contrary to provisions of Section 56(2)(viib) read with Section 2(24)(xvi) of the Act. Further, the AO held that the Respondent-Assessee has failed to submit any basis of projection. He also held the view that in order to achieve the said projection, the Respondent-Assessee should have invested the share premium amount to earn certain income/return and whereas the Respondent-Assessee made investments in zero percent debentures of its associate company and therefore the basic substance of receiving a high premium is not justified.

We note that in the instant case, the AO had issued notice under Section 133(6) to all the investors to seek confirmation, information and documents pertaining to the issuance of shares. Further, the venture agreement between the Respondent-Assessee and the investors was also filed before the AO. 12. In this factual background, the learned ITAT then proceeded to examine whether the AO after invoking the deeming provision under Section 56(2)(viib), could have determined the FMV of the premium on the shares issued at nil after rejecting the valuation report given by the Chartered Accountant based on one of the prescribed methods under the Rules adopted by the valuer. On this aspect, after examining the statutory provisions and the factual position, the ITAT inter-alia observed as under:

Section 56(2) (viib) is a deeming provision and one cannot expand the meaning of scope of any word while interpreting such deeming provision. If the statute provides that the valuation has to be done as per the prescribed method and if one of the prescribed methods has been adopted by the assessee, then Officer can adopt his own valuation in DCF method or get it valued by some different Valuer. There has to be some enabling provision under the Rule or the Act where Assessing Officer has been given a power to tinker with the valuation report obtained by an independent valuer as per the qualification given in the Rule 11U. Here, in this case, Assessing Officer has tinkered with DCF methodology and rejected by comparing the projections with actual figures. The Rules provide for two valuation methodologies, one is assets based NAV method which is based on actual numbers as per latest audited financials of the assessee company. Whereas in a DCF method, the value is based on estimated future projection. These projections are based on various factors and projections made by the management and the Valuer, like growth of the company, economic/market conditions, business conditions, expected demand and supply, cost of capital and host of other factors. These factors are considered based on some reasonable approach and they cannot be evaluated purely based on 32 arithmetical precision as value is always worked out based on approximation and catena of underline facts and assumptions Nevertheless, at the time when valuation is made, it is based on reflections of the potential value of business at that particular time and also keeping in mind underline factors that may change over the period of time and thus, the value which is relevant these factors have been judicially appreciated in various today may not be relevant after certain period of time. Precisely. judgments some of which have been relied upon by the Id Counsel, for instance:

The aforesaid ratios clearly endorsed our view as above. In any case, if law provides the assessee to get the valuation done from a prescribed expert as per the prescribed method, then the same cannot be rejected because neither the Assessing Officer nor the assessee have been recognized as expert under the law.

There is another very important angle to view such cases, is that, here the shares have not been subscribed by any sister concern or closely related person, but by an outside investor like, Anand Mahindra, Rakesh Jhunjhunwala, and Radhakishan Damania, who are one of the top investors and businessman ofthe country and if they have seen certain potential and accepted this valuation, then how AO or Ld. CIT(A) can question their wi om. It is only when they have seen future potentials that they have invested around Rs.91 crore in the current year and also huge sums in the subsequent years as informed by the Id. counsel. The investors like these persons will not make any investment merely to give dole or carry out any charity to a startup company like, albeit their decision is guided by business and commercial prudence to evaluate a startup company like assessee, what they can achieve in future. It has been informed that these investors are now the major shareholder of the assessee company and they cannot become such a huge equity stock holder if they do not foresee any future in the assessee commercial prudence of such big investors like. According to the company. In a way Revenue is trying to question even the Assessing Officer either these investors should not have made investments because the fair market value of the share is Nil or assessee should have further invested in securities earning the case, we do not approve the approach and the finding of the interest or dividend. Thus, under these facts and circumstances of Id. Assessing Officer or Id. CITIA) so to take the fair marker value of the share at 'Nil' under the provision of Section 56(2)(viib) and thereby making the addition of Rs.90.95 ITAT has followed the dicta of the Hon'ble Supreme Court in matters relating to the commercial prudence of an assessee relating to valuation of an asset. The law requires determination of fair market values as per prescribed methodology. The Appellant- Revenue had the option to conduct its own valuation and determine FMV on the basis of either the DCF or NAV Method. The Respondent-Assessee being a start-up company adopted DCF method to value its shares. This was carried out on the basis of information and material available on the date of valuation and projection of future revenue. There is no dispute that methodology adopted by the Respondent-Assessee has been done applying a recognized and accepted method. Since the performance did not match the projections, Revenue sought to challenge the valuation, on that footing. This approach lacks material foundation and is irrational since the valuation is intrinsically based on projections which can be affected by various factors. We cannot lose sight of the fact that the valuer makes forecast or approximation, based on potential value of business. However, the underline facts and assumptions can undergo change over a period of time. The Courts have repeatedly held that valuation is not an exact science, and therefore cannot be done with arithmetic precision. It is a technical and complex problem which can be appropriately left to the consideration and wi om of experts in the field of accountancy, having regard to the imponderables which enter the process of valuation of shares. The Appellant-Revenue is unable to demonstrate that the methodology adopted by the Respondent-Assessee is not correct. The AO has simply rejected the valuation of the Respondent-Assessee and failed to provide any alternate fair value of shares. Furthermore, as noted in the impugned order and as also pointed out by Mr. Vohra, the shares in the present scenario have not been subscribed to by any sister concern or closely related person, but by outside investors. Indeed, if they have seen certain potential and accepted this valuation, then Appellant-Revenue cannot question their wi om. The valuation is a question of fact which would depend upon appreciation of material or evidence. The methodology adopted by the Respondent- Assessee, accepted by the learned ITAT, is a conclusion of fact drawn on the basis of material and facts available. The test laid down by the Courts for interfering with the findings of a valuer is not satisfied in the present case, as the Respondent-Assessee adopted a recognized method of valuation and Appellant-Revenue is unable to show that the assessee adopted a demonstrably wrong approach, or that the method of valuation was made on a wholly erroneous basis, or that it committed a mistake which goes to the root of the valuation process.

In view of the foreign, we find that the question of law urged by the Appellant Revenue is purely based on facts and does not call for our consideration as a question of law.” 8. Hon’ble High Court of Delhi in Agra Portfolio (P.) Ltd. vs. Principal Commissioner of Income tax: IT Appeal No.1385 of 2018 has held as below:

In our considered opinion, the language of Rule 11UA(2) indubitably places a choice upon the assessee to either follow the route as prescribed in clause (u) or in the alternative to place for the consideration of the AO a Valuation Report drawn by a merchant banker as per the DCF method. However, and as is manifest from a conjoint reading of Section 56(2)(viib) read along with Rule 11UA(2), the option and the choice stands vested solely in the hands of the assessee.

While it would be open for the AO, for reasons so recorded, to doubt or reject a valuation that may be submitted for its consideration, the statute clearly does not appear to empower it to independently evaluate the face value of the unquoted equity shares by adopting a valuation method other than the one chosen by the assessee. It is this aspect which was duly acknowledged by the Bombay High Court in Vodafone M-Pesa Ltd. (supra).

We note that the view as taken by the Bombay High Court in the aforenoted judgment appears to have been consistently followed by Tribunals of different regions as would be evident from the discussion which ensues. We, in this regard, firstly take into consideration the judgment rendered by the Mumbai Bench of the ITAT in Dy, CIT V. Sodexo Facilities Management Services India (P.) Ltd. (IT Appeal No. 2945 (Mum.) of 2022, dated 25-5-20231.”

In view of above material facts and well settled principle of law, the action of Ld. A.O. in rejecting the discount cash flow (DCF) method of valuation of shares and in considering the Net Asset Value (NAV) method without appearing the Fair Order is pronounced in the Open Court on 20.03.2026. -/- (S. RIFAUR RAHMAN) (VIMAL KUMAR) ACCOUNTANT MEMBER JUDICIAL MEMBER