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Income Tax Appellate Tribunal, A BENCH: BANGALORE
Before: SHRI CHANDRA POOJARI & SMT. BEENA PILLAI
ITA No.676/Bang/2023 & CO 5/Bang/2023 Irunway India Pvt. Ltd., Bangalore
IN THE INCOME TAX APPELLATE TRIBUNAL “A’’ BENCH: BANGALORE BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA No.676/Bang/2023 Assessment Year: 2014-15 Irunway India Pvt. Ltd. 1st Floor, AMR Tech Park I Annexe No.23 @ 24, Hongasandra, ITO Ward-3(1)(3) Hosur Road Vs. Bangalore Bangalore 560 068 Karnataka
PAN NO : AABCI5613D APPELLANT RESPONDENT C.O. No.5/Bang/2023 (Arising out of ITA No.676/Bang/2023) Assessment Year: 2014-15 Irunway India Pvt. Ltd. ITO Ward-3(1)(3) Bangalore 560 068 Vs. Bangalore Karnataka APPELLANT RESPONDENT Appellant by : Shri T. Suryanarayana, Sr. A.R. Respondent by : Shri Nischal B., D.R. Date of Hearing : 24.01.2024 Date of Pronouncement : 24.01.2024 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: This appeal by revenue and CO by assessee are directed against the order of NFAC dated 15.9.2022 for the assessment year 2014-15. The revenue has raised following grounds of appeal: 1. Whether ld. CIT(A) was correct in rejecting the working of fair market value of shares at Rs.36.76/- per share by assessing officer and allowing the fair market value of shares at Rs.185.92 per share as per DCF method by assessee and thus deleting the addition of Rs.3,63,91,076/- made by Assessing Officer in assessment order by invoking provisions of section 56(2)(viib) wherein it is mentioned that where a closely held company issues its shares at a price which is more than its fair market value then the amount received in excess of fair market value of shares will be charged to tax in the hand of the company as income from other sources. Tax effect: Rs.1,23,69,326/-
ITA No.676/Bang/2023 & CO 5/Bang/2023 Irunway India Pvt. Ltd., Bangalore `Page 2 of 21 2. The assessee has raised following grounds of appeal in the CO:
That the order passed by the Assessing Officer ("AO") and Commissioner of Income-tax (Appeals) ("CIT(A)) to the extent questioned herein are contrary to the facts and circumstances of the case, the provisions of the Income-tax Act, 1961 ("the Act") and thus liable to be quashed. 2. That the AO erred in invoking Section 56(a)(viib) of the Act and the CIT(A) erred in affirming the same, without appreciating that the price at which the shares were issued by the Respondent to United Lex BPO Pvt. Ltd. was the same price at which United Lex BPO Pvt. Ltd. acquired the shares of the Respondent from erstwhile shareholders of the Respondent and in view of the above two transactions being independent third party transactions and therefore comparable, the price at which the Respondent issued its share ought to be accepted. 3. That the AO erred in invoking Section 56(2)(viib) of the Act and the CIT(A) erred in affirming the same, without appreciating that the price at which the shares were issued by the Respondent to United Lex BPO Pvt. Ltd. was the same price at which the Respondent paid bonus to its employees after receipt of funds from United Lex BPO Pvt. Ltd. and in view of the above two transactions being independent uncontrolled transaction and therefore comparable, the price at which the Respondent issued its shares out to be accepted. 4. That the AO and the CIT(A) failed to appreciate that Section 56(2)(viib) of the act has no application to the shares issued by the Respondent to Mr, Jaikesh Dani, inasmuch the same was issued by the Respondent under its employee stock option plan, the price under which was agreed way back in the year 2008. 5. That without prejudice and in any event, while computing the fair market value of the equity shares of the Respondent, the AO erred in taking into consideration the value of assets and liabilities as per the balance sheet as at 31.03.2014 instead of the values as at 31.03.2013, The Respondent craves leave to add to or alter, by deletion, substitution or otherwise, the above grounds, at any time before or during the hearing of the appeal.
There was a delay of 302 days in filing the appeal before this Tribunal by revenue. The revenue has filed a condonation petition stating that during the F.Y 202-23, there was backlog of huge judicial work in Department due to Covid Pandemic in FY 2020-21 and 2021-22. During the month of March-2023, there was huge time barring work regarding issue of 148 notices and the time barring assessments wherein majority
ITA No.676/Bang/2023 & CO 5/Bang/2023 Irunway India Pvt. Ltd., Bangalore `Page 3 of 21 of the cases were non responsive and resultantly there was huge work pressure on different sections of the Department which takes care of the Judicial work in addition to other regular work of the Department. In respect of the office of deponent, there were 153 cases assigned in month of February 2023 wherein orders u/s 148A(d) were to be passed along with notices u/s 148 after following detailed procedure as per section 148A of the Act. Also, there were 28 time barring assessments u/s 147 which were to be completed before 31.03.2023. Further, during the March time barring time, the focus was totally on completion of assessment proceedings and the filing of appeal for the above-mentioned case in ITAT was missed out inadvertently. This omission has been recently observed on reconciliation of the judicial records of this charge. Hene, the ld. D.R. requested to kindly condone the delay in filing the appeal. 4. The ld. A.R. strongly opposed the admission of appeal stating that there is no reasonable cause in filing the appeal belatedly before this Tribunal. 5. We have heard the rival submissions and perused the materials available on record. In this case, it is explained before us that after Covid period, there was a huge work pending before the Income Tax Officer Ward-3(1)(3) and he was very busy in various administrative and assessment works, as such, there was a delay of 302 days in filing the appeal before this Tribunal. The reason explained by the ld. AO is very reasonable as he was suffering from huge work pressure during this period. Accordingly, in our opinion, it is a fit case to condone the delay and the appeal is admitted for adjudication. 6. Facts of the case are that during the course of assessment proceedings, it was noted by the AO that the appellant had received large
ITA No.676/Bang/2023 & CO 5/Bang/2023 Irunway India Pvt. Ltd., Bangalore `Page 4 of 21 share premium during the concerned year in question. Various notices were issued from time to time and were complied by the appellant. On perusal of the balance sheet of the appellant company, it revealed that the appellant company had collected premium of Rs.4,29,79,874/- as securities premium. The details of the shares issued by the appellant on premium to the different shareholders during the year as incorporated by the AO in his impugned assessment order are as under:- S.No Name of the No. of Value per Amount of shares share share shareholder premium 1. Jaikesh Dani 72 53.5 3132 2. 74 19.8 717 Deepesh Hiran 3. 244293 185.92 42976025 United Lex BPO Pvt. Ltd.
6.1 The AO observed that since the appellant had issued shares at huge premium which was way above the face value of shares at base price of Rs.10/- per share, the provisions of section 56(2)(viib) came into the question. The AO has reproduced the provisions of section 56(2)(viib) and rule 11UA of the Act. The appellant was requested to furnish the basis and to substantiate the share premium so collected. The appellant vide its letter dated nil furnished the copy of the valuation certificate issued by a chartered account dated 22.07.2014 in support of its claim. The AO observed that the certificate furnished by the CA by opting for DCF Method was based on the data furnished by the management of the appellant company. The submissions furnished by the appellant were duly examined by the AO. However, the AO was not satisfied with the explanation furnished by the appellant. The AO noted that the appellant had arrived at fair market value of Rs. 185.92/- by applying rule 11 UA(2)(b) of the IT Act and furthermore there was no scientific basis for arriving the projected figures and valuation report of the CA was also on the basis of the value provided by the appellant. The AO therefore calculate the Fair market value of the shares as per Rule 11 UA(2)(a) and
ITA No.676/Bang/2023 & CO 5/Bang/2023 Irunway India Pvt. Ltd., Bangalore `Page 5 of 21 arrived at the figure of Rs.36.76/- as fair market value as against the fair market value adopted by the appellant at Rs.185.92/- by applying rule 11UA(2)(b) of the IT Act. Thus, AO rejected the valuation of Rs.185.92/- adopted by the appellant as per rule 11UA (2)(b) of the IT Act. The AO concluded that the DCF method for FMV adopted by the appellant is based on the future projections and does not present true picture of the financials of the company. The method adopted by the appellant was considered by the AO as irrational and that to without any basis. The AO also incorporated comparative chart of the projections of profit before as per first valuation and profit before tax as per return for AY 2014-15, 2015-16 and 2016-17 as under:- AY Profit Profit Achievement before tax before tax (5) of as per first as per projections valuation return 2014-15 263.69 84.42 32 2015-16 320.4 56.42 17.6 2016-17 315.7 46.01 14.5
6.2 Thus, the AO observed that the projected and actual figures were nowhere close and had huge difference. Appellant was unable to explain the discrepancy which would directly affect the profit. Thus, the AO rejected the contention of the appellant to be based on projections which were misleading. Hence, the AO concluded that the discrepancy between the projected figures and the actual figures as per the return of income no way was near the projected figures, since these projections were provided by the management without any justification and with an ulterior motive only to justify the share premium received by hiking the fair market value by DCF method.
6.3 Before the NFAC the appellant vehemently argued that it was the AO who has disregarded the provisions of law that allows a taxpayer an option to choose BV or DCF as a method of valuation of its equity shares. In the instant case, the appellant has determined the FMV of the share
ITA No.676/Bang/2023 & CO 5/Bang/2023 Irunway India Pvt. Ltd., Bangalore `Page 6 of 21 by applying Discounted cash flow method as per Rule 11UA(2)(b) whereas the AO has computed the FMV of shares at Rs.36.76 by applying Rule 11UA(2)(a) and rejected the methodology adopted by the appellant. Moreover, the valuation report furnished by the appellant has also been rejected by the AO.
6.4 The NFAC observed that 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 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 there is no 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 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
ITA No.676/Bang/2023 & CO 5/Bang/2023 Irunway India Pvt. Ltd., Bangalore `Page 7 of 21 the period of time and thus, the value which is relevant today may not be relevant after certain period of time. From time to time various courts/Tribunals have held that as per section 56(2)(viib) r.w.R 11UA, the assessee has the option to do valuation of shares and determine FMV either on DCF Method or NAV method and AO cannot substitute his own value in place so determined. For coming to the above observations, NFAC relied on the following judgements and allowed the appeal of the assessee:
a) Decision of ITAT Mumbai Bench ‘F’ in the case of Vodafone M- Pesa Ltd. Vs. DCIT, Circle-8(2), Mumbai reported in (2020) 114 taxmann.com 323 (Mumbai) b) Decision of ITAT Cuttack Bench in the case of ITO, Ward-1(1), Bhubaneswar Vs. Ashoka Industries Ltd. reported in (2020) 120 taxmann.com 214 (Cuttack Trib.) c) Decision of ITAT Delhi ‘B’ Bench in the case of Cinestaan Entertainment P. Ltd. Vs. ITO Ward 6(2), New Delhi reported in (2019) 106 taxmann.com 300 (Delhi Trib.) d) Decision of ITAT Bangalore ‘C’ Bench in the case of I-Exceed Technology Solutions P. Ltd. Vs. ITO Ward-3(1) Bengaluru reported in (2020) 119 taxmann.com 378 (Bangalore Trib). Against this revenue is in appeal before us. 7. We have heard the rival submissions and perused the materials available on record. In our opinion, similar issue came for consideration before the Coordinate Bench of Delhi Tribunal in the case of Cinestaan Entertainment P. Ltd. in ITA No.8113/Del/2018 dated 27.5.2019, wherein held as under:
“25. We have heard the rival contentions, perused the relevant findings given in the impugned orders as well as material referred to before us at the time of hearing. In various grounds of appeal, the sole issue raised by the appellant assessee relates to the addition of Rs.90,95,46,200/- made by the AO, by invoking the deeming provisions of Section 56(2)(viib) by adopting fair market value of the share premium received by the Assessee Company from the investors at Nil. What has been sought to be taxed is mainly the share premium Issued on equity shares which
ITA No.676/Bang/2023 & CO 5/Bang/2023 Irunway India Pvt. Ltd., Bangalore `Page 8 of 21 according to the AO far exceeded the FMV of the shares. Though facts have been discussed in detail in the foregoing paragraphs, however in the succinct manner, the relevant facts and background are reiterated in order to appreciate the controversy and the issue for adjudication. The assessee company was incorporated on 19th September, 2013, i.e., in the Assessment Year 2014-15, with the objective of carrying of business of production and distribution of feature film, tele films, video films, documentary films etc. During the year under consideration assessee company was in the initial phase of the setting up of the business, therefore, there was no business of film production as such. The assessee company to start its venture of its film production approached accredited ace investors of India to join in as equity partners, namely, Shri Rakesh Jhunjhunwala, Shri Anand Gopal Mahindra & Shri Radhakishan Damani. The funds were raised "by way of issue of equity shares to the aforesaid equity partners and by raising premium on such shares over and above the face value of Rs.10/- per share. The details and quantum of premium received from each of the equity partners are as under: S.No. Name of equity No. of Premium Amount Date of partner shares (Rs.) per of premium (Rs.) Issue share 06.01.2015; 4,15,385 80,95,85,365/- 1. Shri Anand 1949 2302.2015 Mahindra 24.03.2015 4,99,80,7937- 2. Shri Rakesh 19,207 2602 Jhunj hunwala 24.03.2015 4,99,80,793/- 3. Shri 19,207 2602 Radhakishan Damani Total 4,53,799 90,95,46,2007-
The assessee before issuing the shares had got the share valued by Chartered Accountant, i.e., 'Accountant' as provided under Rule 11UA(2) by using the TCF Method' which is one of the prescribed method in Rule HUA(2)(b) r.w.s. 56(2)(viib). Based on the said valuation report dated 15.12.2014, the assessee company had issued the shares to the aforesaid equity partners on premium. The Id. Assessing Officer has discarded the valuation report of the CA mainly on the ground that valuation of the equity shares carried out by the assessee was based on projection of revenue which did not match with the actual revenues of the subsequent years. He further held that no efforts have been made by the assessee to substantiate the figures of projected revenue in the valuation report and has also failed to submit any basis for projection. Instead, AO held that assessee should have invested the share premium amount to earn some income, whereas assessee has made investment in debentures of its associate company and hence the basic substance of receiving the high premium was not justified. After invoking the
ITA No.676/Bang/2023 & CO 5/Bang/2023 Irunway India Pvt. Ltd., Bangalore `Page 9 of 21 provision of Section 56(2)(viib), AO took fair market value of premium at Nil and face value of Rs. 10/- per share. 27. 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 ld. 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. 28. Now what we are required to examine whether under these facts and circumstances Assessing Officer after invoking the deeming, provision of Section 56(2)(vii) could have determined the fair market value of the premium on shares issued at Nil after rejecting the valuation report given by the Chartered Accountant on one of the prescribed methods under the rules adopted by the Valuer. Before us, learned counsel, Mr. Dinodia, first of all had harped upon the spirit and intention of the Legislature in introducing such a deeming provision and submitted that such a provision cannot be invoked on a 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. His main contention was that, being a deeming fiction, it has to be strictly interpreted and there is no mandate to the Assessing Officer to arbitrarily reject the valuation done by the assessee on his own surmises and whims. We are in tandem with such a reasoning of the Id. Counsel, because the deeming fiction not only has to be applied strictly but also have to be seen in the context in which such deeming provisions are triggered. It is a trite law well settled by the Constitutional Bench of Supreme Court, in the case of Dilip Kumar 85 Sons (supra) 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 have been subscribed by unrelated independent parties, who are one of
ITA No.676/Bang/2023 & CO 5/Bang/2023 Irunway India Pvt. Ltd., Bangalore `Page 10 of 21 fhe leading industrialists and businessman of the country, after considering the valuation report and future prospect of the company, have chosen to make investment as an equitypartners in a 'start-up company1 like assessee, then can it be 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 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 Id. CIT(A), then no investor in the country will invest in a 'start-up company3, because investment can only be lured with the future prospects and projection of these companies. 29. 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: "Income from other sources. 56. (I) 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 -^
ITA No.676/Bang/2023 & CO 5/Bang/2023 Irunway India Pvt. Ltd., Bangalore `Page 11 of 21 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, 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 i§ 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. Before us, the Id. counsel from the facts and material placed on record had pointed out that the basis of projection adopted by the valuer was based on very scientific analysis and method, like number of movies to be released in the upcoming years and such movies were further segregated into big, medium, small and micro films with reasonable number of movies in hand, like one big film, two medium films and one or two small or micro film a year. Further, the estimate of projected revenue was also kept on a conservative side keeping in mind of the following: - > Engagement of successful directors like Rakesh Om Prakash Mehra who has given block buster films like Bhaag Milkha Bhaag which made a box office collection of INR 164 Crores, and Rang De Basanti which made a box office collection of INR 97 Crores etc. In support Ld. Counsel had referred to Annexure-III, giving details of Track records v. Projections for movies signed with Rakesh Mehra.
ITA No.676/Bang/2023 & CO 5/Bang/2023 Irunway India Pvt. Ltd., Bangalore `Page 12 of 21 > Engagement of veteran writers and music directors-Like Gulzar and Shankar Ehsaan Roy. > Interesting start cast, including the launch of Anil Kapoor's son- Harshvardhan Kapoor and Shabana Azmi's niece Saiyami Kher; along with veteran actors like Om Puri, Anu Malik etc. > Keeping in view of engagement of renowned star cast and previous success of directors, the appellant has projected revenue for only Rs. 55 Crores for 1 Big Film in first year which went till Rs. 93.10 Crores in 5th Year. While for other movies, the projections ranged between 22 lacs to 50 Crores. Further the projected revenues were discounted in later years to account for fluctuations in economic cycles. > The number of movies and total revenue and average revenue for such movies are as projected under:
Particulars Year 1 Year 2 Year 3 Year 4 Year 5 (2020) (2018) (2016 (2017) (2019) Number of 1 Big, 2 1 Big, 2 1 big, 2 1 Big, 2 1 Big, 2 movies Medium, 1 Medium, 1 Medium, 2 Medium, 3 Medium, 3 small, 1 small, 1 small, 1 small, 1 small, 2 Micro Micro Micro Micro Micro 238.16 274.76 Total revenue 121,62 142.50 197.68 projected (Rs. «,•* Crores) 24.32 28.5 32.95 34.02 34.35 Average revenue per movie (Rs. crores)
It has been submitted that the assessee had made all the efforts to achieve these projects and in fact had received 100 films scripts out of which it had short listed its initial stage of movies. The Id. counsel has also drawn our attention on various agreements for production of these films. He also pointed out that the assessee was projected to make five movies which it had actually commenced and released and has also pointed out that assessee has worked upon with 25 movies inception. Not only that, assessee had also taken into account the cost incurred in production of various movies and also the comparison of projected revenue and cost of three movies which were actually released by the assessee with actual revenue and cost, for which separate annexure were filed before us. Nowhere^ the Assessing Officer and Id. CIT (A) has either disputed the details of projects, revenues, cost incurred and the manner in which it was substantiated by the actual revenue. In fact, the projected revenue really commensurate with the actual state of affairs based on subsequent year financials. It has been pointed out that assessee had incurred huge cost which were precisely as per the estimates as projected.
ITA No.676/Bang/2023 & CO 5/Bang/2023 Irunway India Pvt. Ltd., Bangalore `Page 13 of 21 However, the revenue could not be generated as much expected, because the film did not do well in the box office. Ld. Counsel has also highlighted various reasons as to why assessee could not achieve the projected revenue from various documentary evidences. None of these averments and the and the manner in which the valuation of the shares has been adopted in the valuation report has been disputed by the Assessing Officer or by the Id. CIT(A) or any material facts have been brought on record to show that either the methodology or the contents of the report are not correct. 32. 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 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. 33. 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
ITA No.676/Bang/2023 & CO 5/Bang/2023 Irunway India Pvt. Ltd., Bangalore `Page 14 of 21 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 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 Id. Counsel, for instance: - i) Securities & Exchange Board of India &Ors [2O15 ABR 291 - (Bombay HC)J "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 bu its very nature based on projections bu 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 \uhatever 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-TIOL- 1358-ITAT- Jaipur] "4.5.2. Before examining the fairness or reasonableness of valuation report submitted by the assesses 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 actuals 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
ITA No.676/Bang/2023 & CO 5/Bang/2023 Irunway India Pvt. Ltd., Bangalore `Page 15 of 21 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 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 actuals after 3 or 4 years down the line. Accordingly, the grounds raised by the assessee are allowed". The aforesaid ratios clearly endorsed our view as above. 34. 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 investors like, Anand Mahindra, Rakesh Jhunjhunwala, and Radhakishan Damania, who are one of the top investors and businessman of the country and if they have seen certain potential and accepted this valuation, then how AO or Ld. CIT(A) can question their wisdom. 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, albeit their decision is guided by business and commercial prudence to evaluate a start-up 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 company. In a way Revenue is trying to question even the commercial prudence of such big investors like. According to 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 interest or dividend. Thus, under these facts and circumstances of the case, we do not approve the approach and the finding of the Id. Assessing Officer or Id. CIT(A) so to take the fair market value of the share at 'Nil' under the provision" of Section 56(2)(viib) and thereby making the addition of Rs.90.95 crores. The other points and various other arguments raised by the Id. counsel which kept open as same has been rendered purely academic in view of finding given above.” 7.1 This view of Tribunal was confirmed by Hon’ble Delhi High Court reported in 433 ITR 82 by observing as under:
ITA No.676/Bang/2023 & CO 5/Bang/2023 Irunway India Pvt. Ltd., Bangalore `Page 16 of 21 “8. We have heard and duly considered the arguments and contentions advanced by the learned counsel for both the parties.
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 discounted cash flow method which is one of the methods stipulated under section 56(2)(viib) read with rule llUA(2)(b). Based on the valuation report dated December 15, 2014, the respondent- assessee issued shares to various equity partners at a premium as per the following table:
SI. Name of equity Date of No. Of Premium Amount of "" No. partner issue shares (Rs.) per premium (Rs.) share 6-1-2015 ; 4,15,385 80,95,85,365 1. Shri Anand 1949 23 -2-2015 Mahindra 4,99,80,793 24-3-2015 19,207 2602 2. Shri Rakesh Jhunjhunwala 24-3-2015 19,207 4,99,80,793 3. Shri Radhakishan 2602 Damani 4,53,799 90,95,46,200 Total 10. The Assessing Officer 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\ears. The Assessing Officer 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 the provisions of section 56(2) (viib) read with section 2(24)(xvi) of the Act. Further, the Assessing Officer held that the respondent-assessee has failed to submit any basis for the 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 per cent, 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 Assessing Officer 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 Assessing Officer. The learned Income-tax Appellate Tribunal thus, after due consideration of the record, concluded that neither the identity, nor the creditworthiness and genuineness of the investors and the pertinent transaction could be doubted. This fact stood fully established, before the Assessing Officer
ITA No.676/Bang/2023 & CO 5/Bang/2023 Irunway India Pvt. Ltd., Bangalore `Page 17 of 21 and has not been disputed or doubted. Therefore, the nature and source of the credit stood accepted. 12. In this factual background, the learned Income-tax Appellate Tribunal then proceeded to examine whether the Assessing Officer after invoking the deeming provision under section 56(2)(viib), could have determined the fair market value of the premium on the shares issued at nil after rejecting the valuation report given by tbe 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 Income-tax Appellate Tribunal inter alia observed as under : "32. 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 per cent, compulsorily convertible debentures of group companies. They are trying to suggest that the 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 baaed on certain future projection and undertakes all kinds 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 Revenue has been judicially frowned by the hon'ble apex court on several occasions, for instance in the case of S. A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 (SC) and CIT v. Panipat Woollen and General Mills Co. Ltd. [1976] 103 ITR 66 (SC). The courts have held that the 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, the 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 the Assessing Officer has to accept the same and in case he is not satisfied, then we do not find any express provision under the Act or rules, where Assessing Officer can adopt his own valuation in discounted cash flow method or get it valued by some different valuer. There has to
ITA No.676/Bang/2023 & CO 5/Bang/2023 Irunway India Pvt. Ltd., Bangalore `Page 18 of 21 be some enabling provision under the Rule or the A"ct where the 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 discounted cash flow 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 discounted cash flow 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 arithmetical precision as value is always worked out based on approximation and catena of underlying 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 learned counsel, for instance: (i) Kakinada Fertilizer Ltd, In re, (SEBI) (2016) 195 C-C 325, 328 (Bom) ; [2015] ABR 291 (Bom) '48.6 Thirdly, it is a well-settled position of law with regard to the valuation that valuations 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 by 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 the valuer may fairly make on the basis of such information.
(ii) Rameshwaram Strong Glass Pvt. Ltd. v. ITO [2018] TIOL-1358- ITAT-Jaipur
'4.5.2. Before examining the fairness or reasonableness of valuation report submitted by the assessee we have to bear in mind that the discounted cash flow method and is essentially based on the projections (estimations) only and hence these projection cannot be compared with the actuals 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 figures is beyond its control. At the time of making a valuation for the
ITA No.676/Bang/2023 & CO 5/Bang/2023 Irunway India Pvt. Ltd., Bangalore `Page 19 of 21 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 startup is a good example and as submitted the Income-tax Act has also recognized and is encouraging the startups.' (iii) DQ (International) Ltd. v. Asst. CIT (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 actuals after 3 or 4 years down the line. Accordingly, the grounds raised by the assessee are allowed'.
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 an 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 investors like, Anand Mahindra, Rakesh Jhunjhunwala, and Radhakishan Damania, who are one of the top investors and businessmen of the country and if they have seen certain potential and accepted this valuation, then how the Assessing Officer or learned Commissioner of Income-tax (Appeals) can question their wisdom. It is only when they have seen future potentials that they have invested around Rs. 91 crores in the current year and also huge sums in the subsequent years as informed by the learned 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 the 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- company. In a way the Revenue is trying to question even the commercial prudence of such big investors. According to the Assessing Officer either these investors should not have made investments because the fair market value of the share is nil or the assessee should have further invested in securities earning interest or dividend, Thus, under these facts and circumstances of the case, we do not approve the approach and the finding of the learned Assessing Officer or the learned Commissioner of Income-tax (Appeals) so to take the fair
ITA No.676/Bang/2023 & CO 5/Bang/2023 Irunway India Pvt. Ltd., Bangalore `Page 20 of 21 market value of the share at "nil" under the provision of section 56(2)(viib) and thereby making the addition of Rs. 90.95 crores. The other points and various other arguments raised by the learned counsel which kept open as the same has been rendered purely academic in view of the finding given above.
Other grounds are either consequential or have become academic, hence same are treated as infructuous. In the result appeal of the appellant assessee is allowed."
From the aforesaid extract of the impugned order, it becomes clear that the learned Income-tax Appellate Tribunal 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 the fair market value as per prescribed methodology. The appellant- Revenue had the option to conduct its own valuation and determine the fair market value on the basis of either the discounted cash flow or net asset value method. The respondent-assessee being a start-up company adopted discounted * cash flow 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 the methodology adopted by the respondent-assessee has been done applying a recognized and accepted method. Since the performance did not match the projections, the Revenue sought to challenge the valuation, on that footing. This approach lacks material foundation and is irrational since the valuation is intrinsically based on the projections which can be affected by various factors. We cannot lose sight of the fact that the valuer makes forecast or approximation, based on the potential value of business. However, the underlying 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- assessee is not correct. The Assessing Officer 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 the 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 Income-tax Appellate Tribunal, 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
ITA No.676/Bang/2023 & CO 5/Bang/2023 Irunway India Pvt. Ltd., Bangalore `Page 21 of 21 present case, as the respondent-assessee adopted a recognized method of valuation and the 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 goac to the root of the valuation process. 14. In view of the foregoing, we find that the question of law urged by the appellant-Revenue is purely based on the facts and does not call for our consideration as a question of law.”
7.2 In view of the above, taking a consistent view on the issue in dispute, we dismiss the ground taken by the revenue. 8. In the result, appeal of the revenue in ITA No.676/Bang/2023 is dismissed. 9. Since we have dismissed the appeal of the revenue, the CO filed by the assessee is supportive and the same is dismissed as infructuous. 10. In the result, CO filed by the assessee is dismissed. Order pronounced in the open court on 24th Jan, 2024
Sd/- Sd/- (Beena Pillai) (Chandra Poojari) Judicial Member Accountant Member
Bangalore, Dated 24th Jan, 2024. VG/SPS Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The DR, ITAT, Bangalore. 5 Guard file By order
Asst. Registrar, ITAT, Bangalore.