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Income Tax Appellate Tribunal, VISAKHAPATNAM BENCH, VISAKHAPATNAM
Before: SHRI DUVVURU RL REDDY, HON’BLE & SHRI S BALAKRISHNAN, HON’BLE
PER S. BALAKRISHNAN, Accountant Member :
The captioned appeal is filed by the Revenue against the order of the Ld. Commissioner of Income Tax (Appeals)-1, Visakhapatnam [Ld. CIT(A)] in 1/VSP/2020-21, dated 17/09/2020 arising out of the order passed U/s. 143(3) of the Act dated 20/12/2019 for the AY 2017- 18.
Brief facts of the case are that the assessee is a domestic company, engaged in rendering financial services filed its return of income admitting a total income of Rs. 2,03,15,000/- on 25/10/2017 for the AY 2017-18. Subsequently, the case was selected for scrutiny under CASS to examine (1) expenses incurred for earning exempt income and (2) share capital / capital. Subsequently, notice u/s. 143(2) was issued on 13/08/2018 and notice U/s. 142(1) was issued electronically on 31/8/2019 calling for information from the assessee. Further, the Ld. AO also issued letters on 25/11/2019, 3/12/2019 and 14/12/2019 which were served on the assessee electronically. In response, the assessee filed written submissions before the Ld. AO. The Ld. AO consequent to examination of the information
3 furnished by the assessee noticed that the assessee has issued 32,20,000 compulsory Convertible Cumulative Preference Shares (CCCPS) having face value of Rs. 10/- at a premium of Rs. 15/-
per share. The Ld. AO required the assessee to furnish the share valuation for issuing shares at a premium. The assessee’s representative furnished the report of M/s. Lily & Geetha Associates, Chartered Accountants, Chennai dated 16/10/2016 arriving at the valuation of fair market value of the unquoted equity shares of the assessee as per the Discounted Free Cash Flow method (DCF) at Rs. 25/- per share. The Ld. AO observed in page 2 of the valuation report that no broad enquiry and analysis carried out nor have independently investigated or otherwise verified the data provided by the valuers and therefore, issued a show cause notice on 3/12/2019 to the assessee as to why the valuation should not be done based on the sub-rule (1) of Rule 11UA of the Income Tax Rules, 1962 i.e., book value method.
The assessee filed its reply on 10/12/2019. Perusing the explanation furnished by the assessee, the Ld. AO has invoked the provisions of section 56(2)(viib) of the Act and recomputed the value of shares by adopting the Net Asset Value which was calculated by the Ld. AO at Rs. 15.41 per share. The Ld. AO then proceeded to add the difference of Rs. 9.59 per share for 32,20,000 CCCPS shares issued and made an addition of Rs. 3,08,79,800/- as income of the assessee U/s. 56(2)(viib) of the Act. Aggrieved by the order of the Ld. AO, the assessee filed an appeal before the Ld. CIT(A)-1, Visakhapatnam. Before the Ld. CIT(A), the assessee filed same information and submitted that reliance is place on the following case laws viz., (i) Karmic Labs Private Limited vs. ITO in dated 28/07/2020 and (ii)Vodafone M Pesa Limited Vs. DCIT [2020] 114 taxman.com (Mum. Trib.). The Ld. CIT(A) considering the submissions made by the Ld. AR and relying on the decision in the case of Karmic Labs Private Limited (supra) allowed the appeal of the assessee. Aggrieved by the order of the Ld. CIT(A), the Revenue is in appeal before the Tribunal.
The Revenue has raised the following grounds of appeal:
“1. The Ld. CIT(A) is erroneous both on facts and in law.
2. The Ld. CIT(A) erred in holding that the AO has incorrectly invoked section 56(2)(viib) of the Act without verifying the genuineness of the transaction.
3. The Ld. CIT(A) has erred in holding that the AO is not justified in changing the method of valuation from discounted cash flow method to book value method.
4. The Ld. CIT(A) erred in deleting the addition made U/s. 56(2)(viib) of the Act by the AO for excess premium at Rs. 3,08,79,800/-.
5 5. The appellant craves leave to add or delete or amend or substitute any ground of appeal before and / or at the time of hearing of appeal. For these and other grounds that may be urged at the time of appeal hearing, it is prayed that addition made by the AO be restored.”
The Ld. Departmental Representative drew our attention to Page No. 2 of the valuation report which is enclosed in page 6 of the paper book. Ld. DR invited our attention to the comments of the valuer that they have not carried out a due diligence or audit or review of its business for the purpose of this engagement nor have independently investigated or verified the data provided by the management. The Ld. DR further submitted that the Chartered Accountants (Valuers) have also expressed no opinion on the achievability of forecast relating to performance of business by the assessee. The Ld. DR therefore pleaded that under these circumstances the valuation report given by M/s.
Lily & Geetha Associates, Chartered Accountants, Chennai (Valuers) cannot be relied upon and hence the addition made by the Ld. AO be sustained. The Ld. DR also further submitted that there is a difference between the actual results and the projected results used for the purpose of valuation. The Ld. DR also further pointed out that the decision of the Ld. CIT(A) relying on the case viz., Karmic Labs Private Limited vs. ITO in ITA
6 No.3905/Mum/2018, dated 28/07/2020 (supra) is distinguishable on facts that the decision in that case is with respect to section 56(2)(viia) of the Act and not section 56(2)(viib) of the Act and hence cannot be applied to the instant case. The Ld. DR therefore pleaded that the order of the Ld. AO be upheld.
Per contra, the Ld. Authorized Representative referred to para 3.3 of the written submissions before the Ld. AO which is reproduced in the order of the Ld. AO. The Ld. AR submitted that the valuer has relied upon the company’s specific information and other information obtained from various sources submitted by the management. The Ld. AR further submitted that the valuer has examined the reasonableness of the assumptions and thereafter valued the share under DCF method. The Ld. AR relied on the following case laws:
(i) Principal Commissioner of Income Tax vs. Cinestaan Entertainment (P) Ltd reported in [2021] 199 DTR (Del) (ii) Commissioner of Income Tax vs. VVA Hotels (P) Ltd
[2020]429 ITR 69 (Madras) and 7 (iii) Decision of the ITAT, Mumbai Bench in the case of Karmic
Labs (P) Ltd in dated 28/07/2020. The Ld. AR placed heavy reliance in the case of Pr. CIT vs.
Cinestaan Entertainment (P) Ltd., (supra). The Ld. AR therefore pleaded that the order of the Ld. CIT(A) be upheld.
We have heard the rival contentions and perused the material available on record and the orders of the Authorities below. There cannot be a dispute in the method of valuation adopted by the assessee which is in conformity with the Rules specified under 11UA of the Act. The contention of the Ld. DR relying on the book value adopted by the Ld. AO cannot be accepted because as per section 56(2) of the Act, the assessee has option to use either the fair market value determined as per Net Asset Value or the value determined as per the DCF method.
It is a settled principle that the Assessing Officer has no power to change the valuation method adopted by the assessee. In the instant case, the Assessing Officer has rejected the valuation under DCF method solely on the ground that the actual performance did not match the projections. The determination of the valuation under DCF method was carried by the valuers on the basis of information or material available on the date of 8 valuation and the projections of the revenue provided by the management. The methodology adopted by the assessee applying the DCF method is a recognized and accepted method. In our opinion the valuation under DCF method is intrinsically based on the projections and based on the potential value of the future business. These assumptions can undergo changes for a period of time. The Ld. DR also has not demonstrated that the methodology adopted by the assessee is not correct but simply the Ld. AO rejected the valuation as it does not match with the actual results. Various Courts have held that the valuation of shares is not an exact science and therefore has to be done with some basic presumptions prevailing on the date of valuation.
The Hon’ble Delhi High Court in the case of Principal Commissioner of Income Tax vs. Cinestaan Entertainment (P) Ltd reported in [2021] 199 DTR (Del) 345 (supra) held as follows:
“Assessee had adopted DCF method to value its shares and the Revenue is unable to demonstrate that the methodology adopted by the assessee is not correct; AO has simply rejected the valuation of the assessee on the ground that performance did not match projections and failed to provide any alternate fair value of shares; Tribunal was therefore justified in deleting the addition made U/s. 56(2)(viib).”
Judicially following the above legal precedent, we are inclined to uphold the order of the Ld. CIT (A) and dismiss the appeal of the Revenue.
9 7. In the result, appeal filed by the Revenue is dismissed.
CO No. 39/Viz/2021 (In आयकर अपील सं./ (�नधा�रण वष� / Assessment Year : 2017-18)
The Cross Objection raised by the assessee is supportive in nature. Since we have dismissed the Revenue appeal while upholding the decision of the Ld. CIT(A), the adjudication of the assessee’s cross objection becomes infructuous. Accordingly, the CO raised by the assessee is dismissed as infructuous.
In the result, the appeal filed by the Revenue is dismissed and the Cross Objection filed by the assessee is dismissed as infructuous.
Pronounced in the open Court on the 15th December, 2022.