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Facts
The assessee, M/s. Mim Components Bangalore Pvt. Ltd., filed its return of income for AY 2016-17 declaring income of Rs. 3,40,220/-. The case was selected for scrutiny to verify the sources of share premium received. The Assessing Officer (AO) made an addition of Rs. 7,25,00,000/- under section 56(2)(viib) of the Act.
Held
The Tribunal noted that the valuation report was not supported by adequate data and the assessee failed to discharge the onus of justifying the valuation. The projected financials were found to be speculative and not based on empirical data. Therefore, the valuation was considered flawed.
Key Issues
Whether the share premium received by the assessee company for allotment of shares was rightly brought to tax under section 56(2)(viib) of the Act, considering the valuation method adopted and the evidence provided.
Sections Cited
56(2)(viib), 143(2), 142(1), 143(3), 131, 144A, 271(1)(c), 11UA
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Income Tax Appellate Tribunal, ‘B’ BENCH : BANGALORE
Before: SHRI CHANDRA POOJARI & SMT. BEENA PILLAI
IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH : BANGALORE
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER
ITA No. 683/Bang/2024 Assessment Year : 2016-17
M/s. Mim Components Bangalore Pvt. Ltd., Plot Nos. 395 & 396, The Income Tax Sub-Layout, Officer, Sompura Industrial Area, Ward – 4 (1) (3), 1st Stage, Near Dobaspet, Bangalore. Vs. Nelmangala Taluk – 562 132. PAN: AAGCM3281Q APPELLANT RESPONDENT
Assessee by : Shri A. Ravish Rao, CA Revenue by : Smt. S. Praveena, CIT-DR
Date of Hearing : 04-07-2024 Date of Pronouncement : 08-08-2024
ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal arises out of order dated 28.02.2024 passed by NFAC, Delhi for A.Y. 2016-17 on following grounds of appeal: “1. The impugned order of the Appeal is for the A.Y 2016- 17 and the same is opposed to Law and facts of the case to contention raised hereunder.
Page 2 of 15 ITA No. 683/Bang/2024 2. The learned FAA & AO have erred in Law by bringing to taxation u/s 56(2)(vii)(b) of the Act the share premium amount received to the extent of Rs 7,25,00,000. 3. The learned FAA & AO have erred in law by bringing into taxation of the share premium received against the allotment of the 5,00,000 shares to M/s Bharath Conductors Private Limited, a closely held company, under the same group. The learned FAA & AO failed to appreciate the fact that M/s Bharath Conductor Pvt Ltd was incorporated in the year 1971, the directors and the shareholders of this closely held company are none other than the directors or relatives of the directors and shareholders of MIM Components Pvt Ltd, the Appellant, itself. The learned FAA & AO failed to appreciate the fact that the allotment of shares was only an event of a family arrangement wherein the benefit of allotment of shares at premium passes to their own family and not any third person. There would be no scope in the Act to tax the said above arrangement made within the family. The allotment of shares to M/s Bharath Conductor Pvt Ltd is purely a family arrangement. 4. The learned FAA & AO have erred in Law by making a comparison of estimates used in arriving the Fair value of the shares and the actual achievements. The case laws referred by the AO, are not applicable to the facts of this case. 5. The learned FAA & AO have erred in law by levying tax under section 56(2)(vii)(b) of the Act. Section 56(2)(vii)(b) of the Act was introduced by the Finance Act 2012. The purpose of introduction of Section 56(2)(vii)(b) of the Act was to cover investment of unaccounted money by investing in shares with huge share premium, conferring benefit to the existing shareholders by enhancing the value of their shareholding. Thus sec 56(2)(vii)(b) of the Act was introduced to curb unconnected parties conferring benefit to the existing shareholders with an ulterior motive. Further the purpose of introduction of this Section, was to deter generation and use of the unaccounted money. In this case since the source of income is justified. PRAYER For the grounds urged herein above and such other grounds and arguments that may be put forth during the Appellate proceedings this honorable court may be pleased to set aside the impugned order as bad in Law.”
Page 3 of 15 ITA No. 683/Bang/2024 2. Brief facts of the case are as under: 2.1 The assessee is a private limited company and engaged in the business of metal injection molding. The assessee had filed its return of income electronically on 05.10.2016 for AY 2016- 17 declaring income of Rs. 3,40,220/-. The case was selected for scrutiny under CASS for limited scrutiny to verify 'whether the funds received in the form of share premium are from disclosed sources and have been correctly offered to tax.” Accordingly, notice u/s. 143(2) of the Act dated 02.08.2017 was issued to the assessee. Thereafter, notices u/s. 142(1) of the Act were also issued by the Ld.AO on various dates calling for the details. Assessment was completed u/s. 143(3) of the Act on 26.12.2018 at an assessed income of Rs. 7,28,40,218/-. The Ld.AO made addition of Rs.7,25,00,000/- as income u/s. 56(2) (viib) of the Act.
Aggrieved by the order of the Ld.AO, assessee preferred appeal before the Ld.CIT(A).
2.2 The Ld.CIT(A) after considering the submissions of the assessee observed and held as under:
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Aggrieved by the order of the Ld.CIT(A), assessee is in appeal before this Tribunal.
Page 8 of 15 ITA No. 683/Bang/2024 3. The Ld.AR submitted that assessee issued and allotted 5 lakh equity share at face value of Rs.10 per share during the year under consideration to M/s. Bharat Conductors Pvt. Ltd. on a premium of Rs.145/- per share. He submitted that M/s. Bharat Conductors Pvt. Ltd. paid Rs.7,25,00,000/- to the assessee which was valued at DCF method as per the valuation report dated 27.03.2016 prepared by one Shri D. Prasanna of M/s. D. Prasanna & Co. Bangalore. The Ld.AR vehemently argued that the valuer had originally valued the equity share at Rs. 155 per share under the DCF method. However the assessee adopted Rs.145 per share. He submitted that the valuation was based on the adopted and having regard to the working of the competitor company namely Indo MIM Pvt. Ltd. who was carrying out similar activity like that of assessee. The Ld.AR submitted that the competitor company was not holding license to manufacture the product that was manufactured by assessee. He thus submitted that the valuation adopted by the assessee may be accepted.
3.1 The Ld.AR further emphasized that the assessee also relied on the turnover that the assessee would earn based on two agreements with Polymer Technologies Inc. USA and Israel Weapon Industries Ltd. He thus submitted that future projection based on such valuation carried out as per DCF method is an accepted methodology prescribed under Rule 11UA of IT Rules.
3.2 He also submitted that the assessing officer is not empowered to evaluate face value to shares by adopting valuation
Page 9 of 15 ITA No. 683/Bang/2024 method other than one chosen by the assessee. He placed reliance on the decision of Hon’ble Delhi High Court in case of Agra Portfolio Pvt. Ltd. vs. PCIT & Anr. reported in (2024) 464 ITR 348 to support the contention. Referring to Rule 11UA and section 56(2)(viib) of the act, the Ld.AR submitted that two methods provided to determine the value of unquoted equity shares being discounted cash flow method and face market value, of which the assessee opted for discounted cash Flow method. He submitted that the assessee estimated its turnover and provided till 2020 based on its project salability in the market and valued its share at Rs.145 per share based on the DCF valuation over the anticipated and projected turnover and profitability.
3.3 He further submitted that the assessee was a newly established company during the relevant Assessment Year which was yet to gear up that their business and the projections and the prospects could be also estimated by looking into the profitability of another company which is in the same line of business activity as carried on by the assessee.
3.4 The Ld.AR submitted that, it is on this basic principle that the assessee opted to choose Indo MIM Pvt. Ltd. as a comparison which was a major competitor in Bangalore and a global supplier of precision-engineered products using Metal Injection Moulding (MIM) as the core manufacturing technology. He submitted that Indo MIM achieved leadership position in this field by providing
Page 10 of 15 ITA No. 683/Bang/2024 precision engineered products to customers in more than 40 countries in America, Europe and Asia. He emphasized that Indo MIM was also in the activity of manufacturing and exporting the component of Arms, which is a similar activity carried on by the assessee as a start-up company during the year under consideration.
3.5 The Ld.AR submitted that, it is based on the audited balance sheet of the Indo MIM and the agreement that was signed by the assessee with the US and Israeli companies that the DCF method was applied to determine the value per share of assessee. The Ld.AR further submitted that the average turnover of Indo MIM Pvt. Ltd. for 3 years was Rs.87,245.77 lakhs. However MIM components in its DCF valuation have considered an average turnover for 4 years to be Rs. 1760.92 lakhs only. Based on such estimation, the Ld.AR submitted that, the assessee computed its share price under DCF method at Rs. 145 per share.
3.6 He submitted that, the assessing officer without finding any inaccuracy in the method adopted by the assessee disallowed the premium amount received u/s. 56(2)(viib) of the act. The Ld.AR has placed reliance on the decision of Hon’ble Delhi High Court in case of PCIT vs. Cinestaan Entertainment Pvt. Ltd. reported in (2021) 433 ITR 82.
3.7 On the contrary, the Ld.DR submitted that the method of valuation adopted by the assessee by looking into financials and
Page 11 of 15 ITA No. 683/Bang/2024 turnover of competitor company in the same line of business cannot be considered as an independent one. He submitted that, in the remand proceedings, the Ld.AO called upon the materials based on which the valuation was made by the valuer and the statement of Shri D. Prasanna Kumar was also recorded u/s. 131 on 05.12.2018, wherein he stated that the valuation submitted by him was as per the financials submitted by the management.
3.8 The Ld.DR submitted that, the assessing officer in the remand proceeding also called upon to understand the revenue estimates in the preceding years as well as the subsequent year by the assessee which has been reproduced in the impugned order. He submitted that, the chart reproduced therein reveals that, the assessee never earned any profit as per the estimation as submitted by the Ld.AR based on the turnover of Indo MIM the competitor company. The Ld.DR submitted that, from the agreements that assessee entered into with USA and Israel also did not fetch any income to the assessee in the subsequent assessment years which is established from the chart reproduced in the impugned order. He thus submitted that, there is no material on record with the assessee of its own to substantiate the premium of Rs. 145 per share determined by the assessee under DCF method. The Ld.DR placed reliance on the decision of Coordinate Bench of this Tribunal in case of MobiCom Technologies Pvt. Ltd. vs. ITO in ITA No. 494/Bang/2023 for A.Y. 2016-17 vide order dated 12/09/2023 and the decision of Hon’ble Delhi High
Page 12 of 15 ITA No. 683/Bang/2024 Court in case of Agra Portfolio Pvt. Ltd. vs. PCIT & Anr. reported in (2024) 464 ITR 348.
We have perused the submissions advanced by both sides in the light of records placed before us.
It is noted that the Ld.AO found the valuation to be flawed, as the projections grossly varied with actual financial results. The Ld.AO observed that the projection was purely based on surmises and guesswork only and the valuation was far from realty. The Ld.CIT(A) noted that the premium was exorbitantly high. It was noted by the Ld.CIT(A) that the assessee and M/s. Bharat Conductors Pvt. Ltd., are associated and related party. The valuation report was also not supported by technical report, revenue and cost projection, cash flow justification, historical data, management plan, details of orders from potential customers etc.
4.1. The AR assailed that invoking provisions of section 56(2)(viib) for valuing the shares issued by the assessee to M/s. Bharat Conductors Pvt. Ltd. It was submitted that when the identity and creditworthiness of the shareholders, and genuineness of the transaction of allotment of shares by the assessee to the M/s. Bharat Conductors Pvt. Ltd. is established there was no justification with the authorities to have tested the aforesaid transactions by triggering the deeming provisions of section 56(2)(viib).
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4.2. It is further noted that the assessee determined the value of its equity share allotted to M/s. Bharat Conductors Pvt. Ltd., based on the financials / turnover of the competitor company who is in the same line of business. Admittedly, assessee did not have any income in the preceding assessment years as it was a start-up during the year under consideration. The agreement entered into by assessee with Israel and USA company is on 30.10.2014 and 28.05.2010. Looking into these and taking into consideration that the assessee holds a license to manufacture the precision engineered products using MIM technology, the said valuation was arrived at by the assessee. It has been vehemently argued by the Ld.AR that assessee was in possession of license to manufacture precision engineered products using metal injection moulding whereas such license was not available with Indo MIM Pvt. Ltd., and therefore the future projection would be much better than the competitor company. It is noted that the competitor company had average turnover of Rs.87,245.77 Lakhs in the preceding three years, whereas the assessee had average turnover of only Rs.1760.92 Lakhs in four years. Thus, it could be seen that both the authorities have questioned the valuation made by valuer. In our considered opinion, it was the onus of the assessee to justify the valuation by furnishing an acceptable valuation report which is duly corroborated by relevant material. This onus, in our opinion, has remained undischarged by the assessee
Page 14 of 15 ITA No. 683/Bang/2024 4.3. On a query raised by the Bench regarding the current situation of the assessee, the Ld.AR could not provide any satisfactory reply in respect of the success rate or increase in the turnover with the assessee might have subsequently earned. The assessee basically did not have any documents to support the valuation of shares at Rs.145 per share. It did not have any strong financials of its own in order to project a turnover that could justify its share price at Rs.145 based on the future projections.
4.4. Be that as it may, we agree to the submission of the Ld.AR that, the right to choose a particular method of valuation has been vested with the assessee and DCF method of valuation is one of the prescribed methods as observed in case of PCIT vs. Cinestaan Entertainment Pvt. Ltd. (supra). However, said argument could be accepted, only if the assessee discharges the onus of furnishing an acceptable valuation report. The valuation report is not mere empty formality rather the same should be based on valid assumptions and supported by empirical data which would justify adoption of projections. In the present case, the valuation lacks all these features. The actual financials of the assessee are nowhere near to the projections made in the valuation report. Accordingly, the case law relied by assessee and placed on record would have no application.
4.5. In the above background, we deem it fit to provide another opportunity to the assessee to justify the valuation of shares in
Page 15 of 15 ITA No. 683/Bang/2024 terms of Sec.56(2)(viib). Accordingly, the matter stand restored back to the file of Ld.AO to provide another opportunity to the assessee to justify valuation of the share and re-adjudicate the issue after affording reasonable opportunity of hearing to the assessee.
Accordingly the grounds raised by the assessee stand partly allowed for statistical purposes In the result, the appeal filed by the assessee stand partly allowed for statistical purposes Order pronounced in the open court on 08th August, 2024.
Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member
Bangalore, Dated, the 08th August, 2024. /MS / Copy to: 1. Appellant 2. Respondent 3. CIT 4. DR, ITAT, Bangalore 5. Guard file 6. CIT(A) By order
Assistant Registrar, ITAT, Bangalore