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Income Tax Appellate Tribunal, DELHI BENCH “F”, NEW DELHI
(Assessment Year : 2016-17) DCIT, Circle 13 (2), vs. M/s. JUS Scriptum Magnus Pvt. Ltd., New Delhi. B-13, Metro View Apartments, Sector 13, Dwarka, New Delhi – 110 075. (PAN : AABCV8198A) (APPELLANT) (RESPONDENT) ASSESSEE BY: Shri Pramod Jain, CA REVENUE BY : Shri Harpreet Kaur Hansra, Sr. DR Date of Hearing : 07.07.2025 Date of Order : 26.09.2025 O R D E R
PER S. RIFAUR RAHMAN, AM :
1. The assessee has filed appeal against the order of the Learned Commissioner of Income-Tax (Appeals)-5, New Delhi [“Ld. CIT(A)”, for short] dated 30.07.2019 for the Assessment Year 2016-17.
Brief facts of the case are, assessee company was incorporated on 06.10.2003 and is engaged in the business of publishing. The return of income was filed for AY 2016-17 on 17.10.2016 declaring loss of Rs.1,36,05,019/-. The case was selected for limited scrutiny under CASS for the reason “Large share premium received during the year in order to verify applicability of section 56(2)(viib) of the Income-tax Act, 1961 (for short ‘the Act’). Accordingly, notices u/s 143(2) and 142(1) were issued and served on the assessee through ITBA Portal. In response, assessee submitted that relevant information from time to time. During assessment proceedings, Assessing Officer observed that during the year assessee has allotted 8438 new shares having face value of Rs.10 and at a premium of Rs.10,655.85 per share. Therefore, assessee has raised paid up share capital and addition of Rs.8,99,14,062/- in the share premium account. The assessee was asked to furnish relevant documents on the issue of large share premium receipt. In response, assessee submitted valuation report determining the value of shares using the Discounted Cash Flow (DFCF) Method, copy of engagement letter of advisory, copy of Board Resolution and copy of share application forms etc.. The Assessing Officer after perusing the valuation report furnished by the assessee found certain discrepancies in the projection used for determining the fair market value using DFCF method. The assessee was asked to furnish further details on the abovesaid valuation report. In response, assessee has submitted the details of projections before the Assessing Officer which is produced at pages 2 to 5 of the assessment order. After comparing the table submitted by the assessee, the Assessing Officer observed that the projected growth of revenue utilised for the purpose of valuation is largely inflated as compared to actual growth seen in the preceding years. Accordingly, the Assessing Officer compared the projected figures with actual figures. He came to the conclusion that due to variables seen in the figures, revenue from sales of service was determined as a base for comparison as it is found to be reflective of the business growth pattern of the assessee and not satisfied with the explanation submitted by the assessee. In order to verify the genuineness of the transaction, notice u/s 133(6) were issued to the investors of the assessee company. However, none of the investors responded to the abovesaid notices. The Assessing Officer rejected the valuation report submitted by the assessee and proceeded to adopt the NAV method and determined the fair market value at Rs.64.3 per share. Accordingly, he proceeded to make the difference between share premium received and value determined under NAV method was added to the income of the assessee u/s 56(2)(viib) of the Act of Rs.8,94,55,878/-.
3. Aggrieved with the above order, assessee preferred an appeal before the ld. CIT (A)-5, New Delhi and also filed detailed submissions which are reproduced in the appellate order. After considering the submissions of the assessee, ld. CIT (A) allowed the grounds raised
by the assessee by observing as under :- “7.3 The appellant has preferred to adopt fair market value as per option (b) and it is nowhere prescribed that AO can object or change the valuation, against the submissions of appellant, using book value. Therefore, it is pleaded that the addition is not called for. 7.4 The appellant also preferred various judgments to its favour including the decision of Hon'ble Delhi ITAT in the case of Cinestaan Entertainment Pvt. Ltd. vs. ITO (Supra) and also a comparison has been made, distinguishing the case of Agro Portfolio Pvt. Ltd. 7.5 On going through the details provided and arguments put forward, it is observed that AO has not considered the valuation of premium as fair market value, provided by the appellant, looking to the actual performance. The FMV taken by appellant was much higher than the actual results. In this regard, it is to be mentioned that the FMV has been worked out looking to the future prospects and on various other parameters which is based on certain assumptions and it cannot be accurate. Further, the appellant has also provided reasons for not resulting to such robust projections. 7.6 With regard to the contention of appellant that in a case where appellant has shown FMV through DFCF method by a CA, the AO is not require to disregard the same, it has relied upon the decision of Hon'ble ITAT Delhi in the case of Cinestaan Entertainment Pvt. Ltd. in ITA No. 8113/Del/2018. In this recent judgment, the Hon'ble ITAT after considering the facts, which is similar to that of appellant, has very clearly held that:-
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 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, ne 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 approximations 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…..”
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” 7.7 While discussing the above mentioned order, the Hon'ble ITAT has also considered the decision of Securities and Exchange Board of India and Ors (Bombay High Court)
(Supra), Rameshwaram Strong Glass Pvt. Ltd.(Supra) and DQ International Ltd. (Supra). 7.8 Since the ratio of these decisions are duly applicable to the case of appellant therefore, respectfully following the decision by Hon'ble ITAT Delhi and other judgments, the additions made, considering fair market value on the basis of book value is directed to be deleted. Here it is pertinent to mention that the appellant has duly demonstrated that how the case of appellant is distinguishable from the case of Agro Portfolio Pvt. Ltd., on facts and not applicable here. Looking to the difference in facts, I do not have any reason to differ with the said comparison. Accordingly, the case of Cinestaan Entertainment Pvt. Ltd. is followed and the addition is deleted. These grounds of appeal are allowed.”
4. Aggrieved with the above order, Revenue is in appeal before us raising following grounds of appeal :- “1. That the order of the Ld. CIT(A) is erroneous & contrary to facts and law.
2. That the Ld. CIT(A) has erred in facts and law in deleting the addition on account of difference between actual amount paid for shares and fair market value of shares of Rs.8,94,55,878/- u/s 56(2)(viib) of the Act not following the order of the jurisdictional ITAT in the case of M/s Agro Portfolio Private ltd. Vs. ITO, Ward 1(4), New Delhi in ITA No. 2189/Del/2018.
3. That the Ld.CIT(A) has erred in facts and law in not appreciating the fact that during assessment proceedings the appointed valuer of shares couldn't provide any evidence towards the independent application of mind in carrying out the valuation even when questionnaire was issued asking for details to establish the same.
4. That the Ld.CIT(A) has erred in facts and law in not appreciating the fact that the Assessing Officer was right in rejecting the valuation report of shares after it was established that no independent application of mind was made on the part of the valuer in carrying out the valuation.”
5. At the time of hearing, ld. DR of the Revenue made the detailed submissions and also filed written submissions which are reproduced below :- “(1) Flaws In the valuation done by the valuer of the assessee. a. No Basis for projections, and estimates used in the valuation has been filed at any stage: It is trite that DFCF method allows for estimation about future growth of business, future profits and future cash flows. However, it is well settled that any estimation or projection has to have a sound factual basis and that It cannot be done in thin air or as per the dreams of the management of a company. It is the onus of the assessee to In this case the assessee has not provided the basis of such provide such basis. estimation/projections used in the valuation report. AO issued notice u/s 133(6) of the Act to the valuer seeking the basis of the projections and estimations used by him in the valuation report. The valuer provided his valuation report merely on the basis of projected financial statements provided by the management of the company. Admittedly, the valuer has himself not estimated the future/projected financials, rather has merely rubber stamped the projections desired by the management of the company. The valuer In his reply dated 13-12-2018 (para2) to the A0 has clearly admitted, "we perused the projected financial statements for next five years provided by management of assessee company'. b. The valuer has failed to provide any explanation or justification for blindly adopting the projected financials supplied to him by the management of the company. No evidence to support independent application of mind by the valuer has been submitted either by the assessee or by the valuer (Para 4 of AO's Order and Pg 43 of Paper Book dated 06.12.23). c. AO did not Intend to reject the valuation report rather AO has tried to verify the numbers/ figures used by the assessee in its valuation report to make some sense of the valuation report. d. AO issued Notice u/s 142(1) of the Act asking the reason for the contrasting growth percentage taken for projecting the revenue and expenses of future years, where revenue Is growing at percentages upto 356.6% whereas expenses grew only at maximum 108.4%. In response to which assessee has contended that it is engaged in service sector, where gross margin and net profit margin phenomena does not apply and change In expenditure Is not In proportion with the change in revenues (Point 2 on top at Page 6 of AO's Order). The contention of the assessee that expenses do not grow with Increase in revenue in service sector Is contrary to the Inherent nature of service sector where revenue is driven by the manpower and number of teams/personnel employed. It may be noted that even In case of service sector growing company, the company's variable expenses (such as variable manpower, content writer, etc. in the present case) also grow in line with the growth in revenue, though company's fixed expenses grow at slower rate. Therefore, CIT-A's reliance on the fact, assessee's projected revenue can grow at much higher rate than the growth rate of expenses, being against the commercial and economic rationale, is prayed to be reversed. Some more facts about the company: Company was Incorporated on 06.10:2003, till .FY 2015- 16 (AY2016-17), company has filed its return of income for loss of 1.36Cr.. On contrary as per company's valuation report, company is estimating to be profitable and achieve the positive Free Cash Flow from FY 2017- 18 e. On Pg O-10 of Paper Book dated 06.12.2023, which is the valuation report, there is no working provided to prove the discount factor used by the valuer to arrive at the fair market value of shares. f. The valuation report does not provide any basis for the projections/estimation of revenue and expenditures used by the valuer. In absence of any basis for the projections used in the report, it cannot be termed as reasonable estimate. g. The valuer has also failed to provide the assumptions on the future earnings, risk factors related to Assessee Company, neither in his valuation repot nor in response to Notice u/s 133(6). h. There is no application of mind or working done by the valuer himself on the data provided by the management of the assessee company and the same is also support from the fact that workings for the valuation report, as appearing from page no 6 to 10 of PB dated 6-12-2023 filed on 15-2-2024, are on the letter heads of the assessee company (and not of valuer). This in effect means that the valuer has merely substituted the estimated values provided by the management of the company in the formula and has given the valuation without applying his mind to ascertain the veracity and reasonable certainty of the projected/estimated values provided by the management. (2) No response from the Investors to notice u/s 133(6) AO, in order to understand the genuineness and fair market value of shares used by the assessee for issue of shares, issued notice u/s 133(6) to the investors of the assessee to whom the allotment of shares were made, but, no response have been received from the investors, Considering the totality of facts of this case, non response from the investors puts a serious question mark on the share premium allegedly received by the assessee company from these investors. (3) Case of Cinestaan Entertainment (P) Ltd, Vs ITO 20191 106 taxmann.com 300 (Delhi - Tribunal) is Distinguished on facts Case of Clnestaan Entertainment (P) Ltd. Vs ITO which has been relied upon by CIT-A while deleting the additions made u/s 56(2) (viib) is distinguished as follows: a. In the sold case of Cinestaan Entertainment, the Assessing Officer while making addition u/s 56(2) (viib) compared the projections with actuals (that is subsequent to the date of valuation), which is in violation of DCF Method (Para 15 of the Cinestaan Entertainment (P) Ltd. Vs ITO). However, In the present case Assessing Officer has compared the projections used by the assessee company with the actual figures of the assessee company of past financial years (that Is prior to date of valuation) (Pg 4 of AO Order). b. In the said case of Clnestaan Entertainment, the Assessing Officer while making addition u/s 56(2) (viib) rejected the valuation of the assessee on Illegal grounds but also failed to provide any alternate fair value of shares (Para 17 of the Cinestaan Entertainment (P) Ltd. Vs ITO). However, in the present case Assessing Officer while rejecting the valuation report of the shares of the assessee company als0 provided for the computation of fair market value of shares of the assessee company (Para 5 Pg 7 of AO Order). (4) In the case of DCIT Vs M/s NCL Green Habitats Private Limited (ITA No. 1790/Hyd/2019) cash flow projections forming part of the valuation report in the Discounted Free Cash Flow method (DFCF' Method) are essential for the reliability of estimates of the fair market value of shares (Para 10 of DCIT Vs M/s NCL Green Habitats Private Limited). However, in the present case cash flow projections submitted by the assessee are vague and without any basis. (5) Assessee has also not deemed appropriate to substantiate the fair market value of shares Primary onus to prove the correctness of approach and assumptions of Discounted Free Cash Flow method ('DFCF Method) İs on assessee which is not discharged.
(6) Legal View Rule 11UA İs a machinery provision which derives its power for valuation of assets from the substantive provision of Sec 56(2)(vllb) of the Act. Rule 11UA provides the DFCF method for valuation of shares. However, In case the machinery provision falls to provide the correct fair market value of shares Issued by the company, for calculation of premium received by the company In excess of the actual fair market value of shares, the A0 is bound to resort to the other suitable method, as In the present case he has resorted to Net Asset Method. AO has duly considered the valuation report submitted by the assessee. However, he was not able to substantiate the valuation of the shares in the absence of the assumptions used by the assessee. Moreover, AO In order to verify the growth rate used by the assessee for projections of Revenue, has used the actual growth rate of the revenue of past years available prior to date of valuation (available with the assessee as well as the valuer on the date of valuation). On not being satisfied with the valuation report, AO was bound to suggest the true and fair market value of shares and compare the same with the fair market value of shares used by the assessee, so as to arrive at the decision If there is requirement to make addition u/s 56(2) (viib). (7) If the assessee contends that the valuation method adopted by the assessing officer is Wrong, It is our humble request to the Hon'ble ITAT to set aside the case for the AO to get the valuation as per DFCF done by a registered valuer as required under Sec. 56(2)(viib) from the accountant or the Merchant Banker. We rely on the judgement of Principal Commissioner of Income Tax v. M/s S.G. Asia Holdings (India) Pvt. Ltd. (Civil Appeal No. 6144 of 2019), where the Apex Court has provided similar guidelines in Para 7, 8 of its order.”
On the other hand, ld. AR of the assessee submitted detailed submissions which are reproduced below :-
The appellant is the Private Limited Company, who e- filed income tax return of AY 2016-17 on 17.10.2016 declaring loss of Rs. 1,36,05,019/-.
2. The appellant had engaged government agency named “PNB Investment Services Limited” for arranging private equity and finding suitable investors for their company.
The case was selected for Limited scrutiny and notice was sent u/s 143(2) which was duly complied from time to time.
The Appellant Company has issued 8438 shares at the premium of Rs. 10655.85 per share, having Face value of Rs. 10 each during the AY 2016-17. 5. It is pertinent to note that simultaneously, Promoters of appellant company also sold 5625 shares @ premium of Rs. 10656.67 per share, and duly declared capital gain income related to sale of shares and tax paid thereof in their individual returns. 6. The Appellant has fulfilled his only responsibility is to get a valuation report from an accountant by using DCF method as prescribed in Rule 11UA(2) (b) of Income Tax Rules. 7. The Appellant has submitted the reply of Show Cause notice on 25.12.2018 as portal was closed for online submission on 24.12.2018. 8. The ld. AO rejected the valuation report and made addition u/s 56(2)(viib) of Rs. 8,94,55,878/- by calculating FMV of shares as per method of its own choice i.e. NAV vide assessment order u/s 143(3) of the Act dated 26.12.2018. 9. Rule 11UA(2) gives option to the assessee to chose at his option either of; a. FMV as per formulae b. FMV as per DFCF method.
The assessee has preferred to get fair market value as per Option (b) above as determined by a Chartered Accountant as per the Discounted Free Cash Flow Method. The Rule and Act does not prescribe that assessing officer has any right to object to the option of the assessee the appellant company.
11. Extract of section 56(2)(viib) is reproduced as under: “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;”
As per the explanation to Section 56(2)(viib) the satisfaction of the Assessing Officer is required only if the assessee opts for FMV under Explanation a(ii) of section 56(2)(viib).
Assessing officer is not required to be satisfied if the fair market value of shares is determined under Explanation a(i) of section 56(2)(viib) i.e. in accordance with such method as may be prescribed. Further, the Act gives no option to the Assessing Officer other than to accept FMV , if the fair market value of shares is determined in accordance with such method as may be prescribed 14. When the Act/ rules allows to choose one of the two methods, it was beyond the jurisdiction of the AO to insist upon a particular system and the assessee is at liberty to adopt any one of the methods and he adopted the method as per prevailing law. The ld. AO had no power as per Rule and Act to impose his own rules.
The assessee has preferred to get fair market value as per Option (b) above as determined by a Chartered Accountant as per the Discounted Free Cash Flow Method.
The Ld. Assessing Officer cannot adopt a method of his choice, especially when Rule 11UA gives an option to the appellant company to choose the method of valuation. Permitting the Revenue to do so would render clause (b) of Rule 11UA(2) nugatory and purposeless.
From above, it is clearly can be concluded that appellant company has been given in the rule given the option to choose either of the method for valuation i.e. one is book value method and other is DFCF method.
According to the Rule, once the assessee had exercise the option for valuation of shares as per Rule 11UA(2), The assessing officer had no power to change the option of the assessee for valuation of shares.
It is clearly evident from above that FMV of shares was determined as per prescribed Income Tax Rules and it was not intended to inflate the FMV of shares which is clearly evidenced from valuation certificate prepared as per rule 11UA clause 2(b) of Income Tax Rules.
Ld. CIT(A) appreciates the law of land and judicial precedent held in favor of the appellant.”
Considered the rival submissions and material placed on record. We observe that assessee has issued 8438 shares at a premium of Rs.10,655.85 per share. The assessee had issued the above shares by obtaining a valuation report from an Accountant by applying one of the approved method under Rule 11UA of the Income-tax Rules, 1962 i.e. DFCF Method. After considering the valuation report, the Assessing Officer found discrepancies like not matching the projected figures with the actual figures and he grossly rejected the valuation report and proceeded to value the shares by applying NAV method which is another approved method. It is fact on record that Rule 11UA gives option to the assessee to adopt one of the approved methods i.e. NAV or DFCF method and in this case, assessee has adopted DFCF method by adopting a valuation from a chartered accountant. That being the case, there are several decisions in favour of the assessee wherein the approved option of adopting DFCF method as given in Rule 11UA. Once the option is adopted by the assessee, the Assessing Officer has no right to change the method of valuation adopted by the assessee. In this regard, we find force from the following decisions :- (i) ACIT vs. M/s. Gamma Pizzakraft Overseas (Pvt.) Ltd. in Dated 12.05.2023 - Held that Assessee has option of DCF method and the formula given under Rule 11UA option given to the assessee cannot be read as the option given to the Assessing Officer hence, the Assessing Officer has no right to change the method of valuation AO can refuse the method of valuation. (ii) DCIT vs. Kisaandhan Agri Financial Services Provaye Limited, dated 15.03.2023 - Held that section 56(2)(viib) creates a legal fiction whereby the scope and ambit of expression 'income' has been enlarged to artificially tax a capital receipt earned by way of premium as taxable revenue receipt. Hence, such a deeming fiction ordinarily requires to be read to meet its purpose of taxing unaccounted money and thus needs to be seen in context of peculiar facts of present case. The legal fiction has been created for definite purpose and its application need not be extended beyond the purpose for which it has been created. B ringing the premium received from holding company to tax net under these deeming fictions would tantamount to stretching provision to an illogical length and will lead to some kind of absurdity in taxing own money of shareholders without any corresponding benefit. (iii) India Today Online Pvt. Ltd. vs. Ito, Dated 15.03.2019, & 6454/Del/2018 - Held that Law on how to determine the "FMV" (Fair Market Value) of shares issued by a closely held company explained. The fact that the company is loss-making does not mean that shares cannot be allotted at premium. The DCF method is a recognised method though it is not an exact science & can never be done with arithmetic precision. The fact that future projections of various factors made by applying hindsight view cannot be matched with actual performance does not mean that the DCF method is not correct. (iv) DCIT vs. M/s. Ozoneland Agro Pvt. Ltd., dated 02.05.2018 - held that Section 56 allows the assessees to adopt one of the methods of their choice. It is beyond the jurisdiction of the AO to insist upon a particular system, especially when the Act allows to choose one of the two methods. Until and unless the legislature amends the provision of the Act and prescribes only one method for valuation of the shares, the assessees are free to adopt any one of the methods. (v) Pr. CIT vs. M/s Cinestaan Entertainment Private Limited, dated 01.03.2021 - Held that valuation is not an exact science and involves imponderables that can change over time. The court emphasized that valuation is a technical and complex problem best left to experts in accounting. The appellant failed to demonstrate that the respondent's valuation method was incorrect or that any fundamental mistakes were made. Additionally, the court noted that outside investors had accepted the valuation, which further supported its validity.
Then we further observe that Assessing Officer has compared the actual figure with projected figures. In this regard, we observe that Hon’ble Delhi High Court in the case of Pr.CIT vs. M/s. Cinestaan Entertainment Pvt. Ltd. (supra) in which it was held that valuation is not an exact science and involves imponderables that can change over time. It was emphasized that valuation is a technical and complex problem best left to experts in accounting. Further they observed that the investors who had invested in the company had accepted the valuation which further supported its validity. After considering the detailed findings of the ld. CIT (A), we are in agreement with the findings of the ld. CIT (A).
We observe that ld. DR made a submission that the decision of Pr.CIT vs. M/s. Cinestaan Entertainment Pvt. Ltd. (supra) relied by ld. CIT (A) is distinguishable. In that case, the Assessing Officer had compared the projections with actual i.e. subsequent, date of valuation which is in violation of DFCF method. However, in the present case, Assessing Officer has compared the projections used by the assessee with the actual figures of the assessee of past financial years. Further he submitted that in that case, Assessing Officer while making the addition u/s 56(2)(viib) rejecting the valuation of the assessee on illegal grounds but also failed to provide any alternative fair value of shares. However, in the present case, Assessing Officer not only rejected but also provided for computation of fair market value of shares. After considering the above submissions, we are of the view that once the assessee has selected one of the approved method under Rule 56(2)(viib), the Assessing Officer cannot disturb the same and also there are other decisions of Hon’ble Delhi High Court wherein Assessing Officer also cannot compare the projections adopted by the assessee with actual. Therefore, we are not inclined to accept the above submissions.
10. After considering the overall facts and matrix, we do not see any reason to disturb the findings of ld. CIT (A) which is a speaking order in itself.
In the result, we dismiss the appeal filed by the Revenue. Order pronounced in the open court on this 26th day of September, 2024.