GERANIUM BAKERS PRIVATE LMITED,BALLABHGARH vs. ITO WARD-1(3), FARIDABAD

The Ld. Counsel for the assessees summarizing the issues involved in the above appeals, filed a chart showing common issues involved in the captioned Appeals which reproduced as under :-

The Ld counsel for the assessee has submitted that the CIT(A) has committed error by sustaining the addition made u/s 68 of the Act. The assessees have given the names, addresses and PAN number of the investors and also entries in ROC Website. The assessees have proved that identity of investors, creditworthiness of the investors and genuineness of the transaction as required u/s of 68 of the Act by filing the documents. In support their contention they have filed the paper books in the appeals. He has submitted that assessees have discharged their onus as required u/s 68 of the Act, therefore sought for deletion of the addition. The Ld counsel has also relied on the following decisions;- 7  Order of Tribunal in the matter of Mantram Commodities pvt. Ltd. Vs. ITO in for Assessment Year 2015-16.  Order of Tribunal in the matter of Mantram Commodities pvt. Ltd. Vs. ITO in for Assessment Year 2016-17.  Order of Tribunal in the matter of Dayalu Iron & Steel Pvt. Ltd. Vs. ITO in ITA No. 6173/Del/2019, Dayalu Fashion Pvt. Ltd. Vs. ITO in IETA o. 6174/Del/2019 and Devesh Cinemas Pvt. Ltd. Vs. ITO in ITA No. 6184/Del/2019 for Assessment Year 2015-16  Order of Tribunal in the matter of Sparsh Beauty Care Pvt. Ltd. Vs. ITO in ITA No. 170 and 246/Del/2022 for Assessment Year 2015-16.  Judgment of Hon'ble High Court of Delhi in the matter of Pr. Commissioner of Income Tax-2 Vs. M/s Cinestan Entertainment Pvt. Ltd. in ITA No. 1007/Del/2019.  Judgment of Hon'ble High Court of Delhi in the matter of Pr. Commissioner of Income Tax-2 Vs. Enrich Agro Food Products Pvt. Ltd. in reported [2023] 148 taxmann.com 26.  Order of Tribunal in the matter of Abhirvey Projects Pvt. Ltd. Vs. ACIT in ITA No. 9400/Del/2019 for Assessment Year 2015-16.  Copy of Judgment of Hon'ble Apex Court in the matter of Pr. Commissioner of Income Tax- Vs. Rohtak Chain Co. Pvt. Ltd. in reported [2019] 110 taxmann.com 59.  Copy of Judgment of Hon'ble Apex Court in the matter of Pr. Commissioner of Income Tax- Vs. BharatSecurities . Pvt. Ltd. in reported [2020] 113 taxmann.com 32.  Copy of Judgment of Hon'ble High Court of Madhya Pradesh in the matter of Pr. Commissioner of Income Tax- Vs.Chain House International Pvt. Ltd. In reported [2018] 98 taxmann.com 47.”

The Ld.DR has submitted that assessees have not produced the requisite documents to satisfied the ingredients of section 68 of the Act. He has not filed the confirmation of ITR, balance sheet, Bank account etc in some cases. The assessees have failed to discharge their burden u/s 68 of the Act. Therefore, he prayed that the orders of the Ld CIT(A) be upheld.

We have heard the both parties and perused the material available on record.

In the instant case the assessees have filed the return of income and the same was processed u/s 143(1) of the act and the cases were selected for limited scrutiny under CASS to verify ‘Whether the funds received in the form of share premium are from disclosed sources’. During the proceedings the AO issued statutory notice to the assessees. In the response the notice the assessees have filed certain documents such as certificate of incorporation MOA/AOA, auditor’s report along with balance sheet and profit and loss account for the relevant Financial Year 2016-17, ledger account of Axis Bank, bank statement. The assessees have also furnished the documents with respect to investor companies such as confirmation of accounts, share application, confirmation of accounts share certificate, certification of incorporation along with memorandum and article of association and article of association, and profit and loss account for the relevant F.Y. 2016-17. The particular of the investment made by the investors as per assessees as under;- 1- M/s People Care Hospitals Pvt Ltd. A.Y.2016- 17 Sl no particulars 1 Details of the investors M/s Amar Shree who made the Industries Ltd RS investment during the 2500000/- year M/s Goodluck industries Ltd Rs 2500000/- on 1-07- 2015 M/s Rishi Credit &Industries Ltd Rs 4500000/- on 27-10- 9 15 2 Evidence furnished in M/S Amar Shree PB Industries Ltd (PB96- 122) M/S Good Luck Industries (P) Ltd (PB- 123-148) M/s Rishi Credit &Industries (P) ltd (PB149-174)

On the perusal of the documents produced by the assessee, it is found that the assessees in order to prove the genuineness of the transaction identity and creditworthiness of the investors produced the copy of the certificate of incorporation along with MAO and AOA ,copy of auditor’s report ,balance sheet, trading and profit and loss account along with notes of financial statement, copy of acknowledgement of return of income for A.Y.2016-17 along with computation of income tax, copy of share application form, copy of confirmation of account, copy of bank account statement and copy of valuation report as per Rule 11U(2) of the Rules. Apart from the same, those companies are active in the MCA web site and credentials could be verified by the Department. It is the case of the assessee that they have filed all documents to prove the genuineness of the transactions so the transactions cannot be doubted.

The Ld. DR has stated that the assessees have not filed the documents in relation to the aforesaid investors. The Ld CIT(A) appreciated the documents, but did not agree with the assesses despite there were nothing brought on record contrary to the documents brought to the record by the assesses.

Further, on a reading of section 56(2)(viib) of the Act ,it becomes clear that fair market value of shares as on date of sale has to be determined by applying the methodology provided under rule 11UA of the 12 Rules. As per rule 11UA(2)(b) the fair market value of equity shares has to be decided by applying the methodology as provided under clause (a) or clause (b) at the option of the assessee. In the instant case the assessees have got fair market value of the shares determined through an accountant and follow the Act.

The Hon'ble Supreme Court in the case of CIT Vs. Lovely Export Pvt. Ltd. reported in 319 ITR 5 (ST) observed that even if the share capital money is received by the assessee from alleged bogus share holders, whose names are given to the A.O. The Department is free to proceed to reopen their individual assessment in accordance with law. But cannot regarded undisclosed income of the assessee Company. The present case, the assessee has substantially provided materials to prove the genuineness of the share holders apart from giving the Pan Card, name and ROC details. In our considered opinion, the Ld.CIT(A) has erred in confirming the addition of Rs. 12,00,000/- u/s 68 of the Act on account of unexplained share premium and share capital.

Now, whether under the deeming provision such an investment received by the assessee company be brought to tax. The relevant provision of Section 56 for the sake of ready reference is reproduced hereunder: 2018 "Income from other sources. 56. (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head "Income from other sources", if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. (2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head "Income from other sources", namely :-- (i)....... (viib) "where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares: Provided that this clause shall not apply where the consideration for issue of shares is received-- (i) by a venture capital undertaking from a venture capital company or a venture capital fund; or (ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf Explanation--For the purposes of this clause, -- (a) the fair market value of the shares shall be the value - (i) as may be determined in accordance with such method as may be prescribed: or ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher;" Further, as per clause (i) of the Explanation as reproduced above, the FMV is to be determined in accordance with such method as may be prescribed. Clause (ii) admittedly is not applicable on the facts of the assessee's case. The method to determine the FMV is further provided in Rule 11UA(2). The relevant extract of the applicable rules is reproduced below: "11UA. [(1)] For the purposes of section 56 of the Act, 16 the fair market value of a property, other than immovable property, shall be determined in the following manner, namely,-- (2) Notwithstanding anything contained in sub- clause (b) of clause (c) of sub-rule (1), the fair market value of unquoted equity shares for the purposes of sub-clause (i) of clause (a) of Explanation to clause (viib) of sub-section (2) of section 56 shall be the value, on the valuation date. of such unquoted equity shares as determined in the following manner under clause (a) or clause (b), at the option of the assessee, namely:-- (b) the fair market value of the unquoted equity shares determined by a merchant banker or an accountant as per the Discounted Free Cash Flow method."

Ergo, the assessee has an option to do the valuation and determine the fair market value either on DCF Method or NAV Method. The assessee being a 'start-up company' having lot of projects in hand had adopted DCF method to value its shares. Under the DCF Method, the fair market value of the share is required to be determined either by the Merchant Banker or by the Chartered Accountant. The valuation of shares based on DCF is basically to see the future year's revenue and profits projected and then discount the same to arrive at the present value of the business....................................................................... ................................................................................... 31. ..........................................................................

What is seen here is that, both the authorities have questioned the assessee's commercial wisdom for making the investment of funds raised in 0% compulsorily convertible debentures of group companies. They are trying to suggest that assessee should have made investment in some instrument which could have yielded return/ profit in the revenue projection made at the time of issuance of shares, without understanding that strategic investments and risks are undertaken for appreciation of capital and larger returns and not simply dividend and interest. Any businessman or entrepreneur, visualise the business based on certain future projection and undertakes all kind of risks. It is the risk factor alone which gives a higher return to a businessman and the income tax department or revenue official cannot guide a businessman in which manner risk has to be undertaken. Such an approach of the 17 revenue has been judicially frowned by the Hon'ble Apex Court on several occasions, for instance in the case of SA Builders, 288 ITR 1 (SC) and CIT vs. Panipat Woollen and General Mills Company Ltd., 103 ITR 66 (SC). The Courts have held that Income Tax Department cannot sit in the armchair of businessman to decide what is profitable and how the business should be carried out. Commercial expediency has to be seen from the point of view of businessman. Here in this case if the investment has made keeping assessee's own business objective of projection of films and media entertainment, then such commercial wisdom cannot be questioned. Even the prescribed Rule 11UA (2) does not give any power to the Assessing Officer to examine or substitute his own value in place of the value determined or requires any satisfaction on the part of the Assessing Officer to tinker with such valuation. Here, in this case, Assessing Officer has not substituted any of his own method or valuation albeit has simply rejected the valuation of the assessee.

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 Assessing Officer has to accept the same and in case he is not satisfied, then we do not we find any express provision under the Act or rules, where Assessing 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 18 capital and host of other factors. These factors are considered based on some reasonable approach and they cannot be evaluated purely based on 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 today may not be relevant after certain period of time. Precisely, these factors have been judicially appreciated in various judgments some of which have been relied upon by the ld. Counsel, for instance: - i) Securities & Exchange Board of India &Ors [2015 ABR 291 - (Bombay HC)] "48.6 Thirdly, it is a well settled position of law with regard to the valuation. that valuation is not an exact science and can never be done with arithmetic precision. The attempt on the part of SEBI to challenge the valuation which is but its very nature based on projections by applying what is essentially a hindsight view that the performance did not match the projection is unknown to the law on valuations. Valuation being an exercise required to be conducted at a particular point of time has of necessity to be carried out on the basis of whatever information is available on the date of the valuation and a projection of future revenue that valuer may fairly make on the basis of such information." ii) Rameshwaram Strong Glass Pvt. Ltd. v. ITO [2018- TIOL1358-ITAT- Jaipur] "4.5.2. Before examining the fairness or reasonableness of valuation report submitted by the assessee we have to bear in mind the DCF Method and is essentially based on the projections (estimates) only and hence these projections cannot be compared with the actual to expect the same figures as were projected. The valuer has to make forecast on the basis of some material but to estimate the exact figure is beyond its control. At the time of making a valuation for the purpose of determination of the fair market value, the past history may or may not be available in a given case and therefore, the other relevant factors may be considered. The projections are affected by various factors hence in the case of company where there is no commencement of production or of the business, does not mean that its share cannot command any premium. For such cases, the concept of start-up is a good example and 19 as submitted the income-tax Act also recognized and encouraging the start-ups." iii) DQ (International) Ltd. vs. ACIT (ITA 151/Hyd/2015) "10...... In our considered view, for valuation of an intangible asset, only the future projections along can be adopted and such valuation cannot be reviewed with actual after 3 or 4 years down the line. Accordingly, the grounds raised

We have heard the rival contentions, perused the relevant findings given in the impugned order as well as material referred to before us at the time of hearing. In various grounds of appeal

From the perusal of the records and the impugned orders, it transpires that Assessing Officer had also issued notices u/s. 133(6) to all the 3 investors to seek confirmation, information and documents pertaining to transaction of issuance of shares. In response to the said notices, Assessing Officer has received all the details and replies directly from these investors confirming the transaction. The venture agreement between the assessee and the investors were also filed before the Assessing Officer and in this regard, our attention was also drawn by the Id. counsel that the investment was to be made by these investors in various phases and transactions and it was only after they have gone by the projection and satisfied with the potentials and credentials of future growth, they were willing to make such huge investment in the 'start-up company' like assessee. Thus, neither the identity nor the creditworthiness of the investors nor the genuineness of the transaction can be doubted and in fact the same stands fully established to which Assessing Officer has also not raised any doubt or disputed this fact. Thus, under the deeming provisions of section 68, the test of proving the nature and source of the credit received stood accepted.

In the ITAT Appeal no 80, 81 and 86/Del/2021 the coordinate Bench has also adopted the same view.

The ratio laid down in the aforesaid decision of the Tribunal squarely applies to the facts of the present captioned appeals.

In so far as enhancement made by the Ld. CIT(A) u/s 251(1) r.w.s. 56(2) (viib) of the Act, the Ld. CIT(A) has not accepted the Valuation Report submitted by the Assessee as per Rule 11UA of the Rules. During the assessment proceedings the assessees have submitted the Valuation Report duly signed by the auditor by following NAV/DCF Method as required under Rule 11UA(2) of the Rules. The Valuation Reports are produced before us along with the paper book. Both the lower authorities have failed to follow the Rule 11UA of the Act, as per which the option to choose the valuation of the shares lies with the assessee and the same is binding on the Income Tax Authorities. For the sake of convenience, relevant provisions of Rule11UA of the Rules are extracted hereunder: ‘(2) Notwithstanding anything contained in sub-clause (b) of clause (c) of sub-rule (1), the fair market value of unquoted equity shares for the purposes of sub-clause 27 (i) of clause (a) of Explanation to clause (viib) of sub-section (2) of section 56 shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner under clause (a) or clause (b) at the option of the assessee, namely:- (a) The fair market value of unquoted equity shares (A-L(PV) (PE) A book value of the assets in the balance-sheet as reduced by any am of paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the become-tax Act and shown in the balance-sheet as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset, L=book value of liabilities shown in the balance-sheet, but not including the following amounts, namely: (i) the paid-up capital in respect of equity shares: (ii) the amount set apart for payment of dividends on preference shares and equity shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company (iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation. (iv) any amount representing provision for taxation, other than amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act. to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto, (v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities; (vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares. PE total amount of paid-up equity share capital as shown in the balance sheet PV= the paid-up value of such equity shares, or 28 (b) the fair market value of the unquoted equity shares determined by a merchant banker or an accountant formatted by the IT (sixth amendment) Rules, 2018 we .24.3.2018) as per Discounted Free Cash Flow Method’.

As per the aforesaid Rule, the fair market value of unquoted equity shares for the purposes of sub-clause (i) of clause (a) of Explanation to clause (viib) of sub-section (2) of section 56 shall be determined under clause (a) or clause (b), at the option of the assessee. The Assessees having the choice to opt for one of the methods enumerated in the above provision and the appellant has chosen to opt for clause (b) in most of the abovementioned cases for valuation of unquoted equity shares and based on the same, the value of the share had been computed. Accordingly, the new shares were issued and allotted to the investors during the captioned assessment year. During the assessment proceedings, computation of Fair Market Value of shares as per Rule 11UA(2) was submitted before the Ld.AO to justify that the shares issued by the appellants were at Fair Market Value (FMV) which was computed in accordance with Rule 11UA(2) of the Income Tax Rules, 1962. But the AO has not given any reasoning for rejecting the valuation of shares nor have they furnished any material to the contrary which justified the rejection of the valuation of shares.

The Hon’ble Jurisdictional High Court in the case of PCIT Vs Cinestaan Entertainment Pvt Ltd (2021) 433 ITR 82 (Delhi) held that No addition can be made for share issued at Premium based on prescribed methodology in following manners:- "13. From the aforesaid extract of the impugned order, it becomes clear that the learned 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 30 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 wisdom 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-Axesser 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 wisdom. 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 dronen 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-Reveme 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."

The assessees have issued the shares at fair market value computed in accordance of the rules and no fault has been found in the method applied by the assessees. The Ld CIT(A)

In the result, the appeals of the assesses are allowed.