CLONZ BIOTECH PRIVATE LIMITED,HYDERABAD vs. ITO., WARD-1(4), HYDERABAD

The grounds raised by the assessee reads as under :

The Assessing Officer erred in making addition u/s 56(2)(vii) without considering evidences submitted by the appellant, including Allotment Forms filed with MCA, Certificates issued by the Company Secretary with respect to allotments, Bank Statements reflecting the transaction, and the valuation certificate issued by Chartered Accountants.

The CIT(A) erred in dismissing the appeal merely by relying on the order of the Assessing Officer.

The Assessing Officer & CIT(A) erred in not considering the unabsorbed losses & Unabsorbed depreciation, thus demonstrating a heedless manner of assessment and appeal.

The Assessing Officer misguided himself in calculating fair value due to a non-constructive reading of the provisions of Section 56(2)(viib) along with Rule 11UA.”

The brief facts of the case are that the assessee company is engaged in the business of manufacturing of Bio-Pharmaceuticals, filed its return of income on 31.10.2017 declaring taxable income of Rs.Nil for A.Y. 2017-18. The case was selected for limited scrutiny. During the assessment, notices u/s 143(2) dt.14.08.2018 and u/s 142(1) along with questionnaire calling for various details were issued to the assessee. After verification of the details furnished by the assessee, Assessing Officer observed that the assessee received a share premium of Rs.4,72,78,397/- in FY 2016-17 from multiple parties. Despite requests, the assessee failed to furnish necessary documents to substantiate the creditworthiness and genuineness of these transactions, including key bank details and transaction modes. Additionally, shares were allotted at differing premiums within the same financial year, ranging from Rs. 279 to Rs. 788 per share, raising valuation concerns as statutory auditors, not merchant bankers, provided the valuation. Due to the lack of adequate proof regarding the creditworthiness of the shareholders and the discrepancy in share valuation, the share premium amounting to Rs.4,72,78,397/-, along with the share capital of Rs. 87,19,700/-totaling Rs. 5,59,98,097/-, was added to the assessee’s income for AY 2017- 18. Finally, Assessing Officer completed the assessment u/s 143(3) of the Act dt.26.12.2019 determining the total income of the assessee at Rs.5,57,24,016/-.

Aggrieved with such assessment order, assessee filed an appeal before the LD.CIT(A), who dismissed the appeal of assessee.

None appeared on behalf of the assessee despite issuance of notices through the office of ld.DR.

On the other hand, ld.DR submitted that the assessee has relied on the report furnished by the statutory auditor for the purpose of valuation of shares. Ld.DR further submitted that the statutory auditor was appointed by the assessee and therefore, there was disability for the statutory auditor to be appointed by the assessee within the meaning of definition of Rule 11U(a) of the Income Tax Rules, 1962 which provides as under :

It was submitted that Mr. S. Samba Siva Rao and Associates were the statutory auditors of the assessee and they only provided the valuation report on 31.03.2016. Therefore, the valuation report cannot be relied upon for the purpose of coming to the conclusion and determining the Fair Market Value of the shares. The ld.DR has further drawn our attention to para 9 at page 14 of the assessment order which is to the following effect :

The assessee has not furnished the basis with appropriate documentation for the projections taken in DCF method of valuation of shares.

No supporting documents were furnished in respect of estimation of future cash flows such as business contract agreements, work orders, future business achievements based on the historical data, etc. 3. There is no match of the projections with actuals. The Company had accumulated losses amounting to Rs. 2,48,28,055/- as on March 31, 2016. However, in the discounted free cash flow method of valuation of Equity shares, the Company has estimated profits of Rs.5.60 Crore in F Y 19-20, Rs.7.20 Crore in F Y 20-21, Rs.9.60 Crore in F Y 21-22, Rs.11.20 Crore in F Y 22-23 and Rs.12.80 Crore in F Y 23-24. The Share Valuation Reports have not justified how the loss making Company can have such huge profits in the future years when the financial results does not reflect any substantial growth. In this context, it is pertinent to mention here that for the A.Y. 2019-20, the assessee has declared book loss of Rs.1,13,55,978/-. It is also important to note that during the previous year relevant to Asst. Year 2019-20, the assessee company has not even declared any sales during the year. When a company which has come into existence w.e.f. 8th October, 2009 has not even risen to the stage of making any impact of sales and grow in the market would all of a sudden make an impact in the market and derive substantial profits is another question which arises to accept the substantial premium on shares declared by the assessee company.

In the Share Valuation Report the basis for arriving at Terminal Value was also not properly shown.

Even though the assessee has submitted projections, there is no clarity from which year it was projected. For the reasons mentioned above, the valuation report as per DCF method cannot be considered. In view of this, both the Share Valuation Certificates submitted by the assessee are not acceptable and the actual share value is computed as under in accordance with the provisions of Rule 11UA of income tax rules, the book value has to be taken as FMV. The Book Value of share has been worked out based on the last audited balance sheet.”

Further, the ld.DR submitted that the very basis of determining the DCF method is not correct and therefore, the Assessing Officer is right in making the addition. Furthermore, it was submitted that while determining the valuation of shares, the assessee has relied upon the letter issued by National Institute of Nutrition dated 05.10.2016. During the course of assessment proceedings, the said report cannot be relied upon as the foundation of balance sheet as per section 11U(b) which provides as under :

It is submitted that the balance sheet which is required to be seen is whether the date is 26.05.2016 or not, therefore, the same is not relied upon for the purpose of making the valuation. The ld.DR has submitted that the LD.CIT(A) has rightly dismissed the appeal of assessee.

We have heard the ld.DR and perused the material available on record. The perusal of the orders of Assessing Officer and LD.CIT(A) clearly show that finding was given by them after due consideration of the rules framed for the purposes of determining the Fair Market Value of the shares. In the present case, further, the assessee has relied upon the report of the statutory auditor appointed by the assessee company. In our view, the same is not permitted as the law contemplates at the relevant time for the purpose of valuation, the report is to be prepared by the independent accountant (Chartered Accountant). Since the mandatory provision has not been availed by the assessee and therefore, the Assessing Officer and LD.CIT(A) were right in rejecting the valuation report of the assessee. Having done so, the Assessing Officer and LD.CIT(A) has also examined the case of the assessee on merits and as such, we do not find any reason to interfere with the findings of the Assessing Officer and LD.CIT(A). In view of the above, no interference is called upon on the order of LD.CIT(A). Accordingly, the appeal of the assessee is dismissed.

In the result, the appeal of the assessee is dismissed.