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Income Tax Appellate Tribunal, DELHI BENCH ‘B’: NEW DELHI
per equity share adopting Discounted Cash Flow (DCF) method in terms of Rule 11U and 11UA of the Income Tax Rules. The Ld. AO observed that the valuation report stated that the same is based on information, explanation and projected financial figures provided by C.O. No.06/Del/2023 DCIT vs. Firki Wholesale Pvt. Ltd. the management of the assessee company. Accordingly, he concluded that the validity of the valuation on the basis of DCF method becomes questionable. The Ld. AO also observed that the valuation reports for both the years were compared and projected cash flow discounting factor had changed arbitrarily for the year under consideration. Accordingly, show cause notice was issued to the assessee as to why the said valuation of based on DCF method should not be rejected and valuation be substituted based on Net Asset Value (NAV) method. The assessee vide letter dated 28/11/2018 replied by stating that the Daily detailed business deck was presented before the investor as well as the Chartered Accountant; Daily objects designing approach was presented before the investor as well as the Chartered Accountant; Addressable market size of the assessee company and its projections estimated by the company were presented before the Chartered Accountant; International companies operating on the same business model and generating revenues; Detailed Business Plan for future projections of the revenue as estimated by the management were presented before the Chartered Accountant. The assessee also C.O. No.06/Del/2023 DCIT vs. Firki Wholesale Pvt. Ltd. stated that the valuation undertaken in earlier year was for preference shares and the valuation undertaken during the year under consideration was for equity shares. The assessee further stated that the first valuation was carried out on 10/06/2014 and the second valuation was carried out after a gap of one year and seven months on 05/01/2016. The first valuation was done based on audited financials as on 31/03/2014 and second valuation was based on audited financials as on 31/03/2015 and projects estimated till 05/01/2016. It was pointed out by the assessee that it had expanded it business verticals and business scope substantially from the time of first valuation to the second valuation. The net investment of the company as on 31/03/2014 was Rs.2,11,01,050/-. The assessee company was supported by the investor to explain its business during the Financial Year 2014-15 to the extent of Rs.2,99,99,512/- by way of share investment including share premium. The assessee company also entered into a shareholder’s agreement dated 24/12/2015 with the proposed investors wherein assurance was provided by the investors for further investment. The assessee company was again funded by the C.O. No.06/Del/2023 DCIT vs. Firki Wholesale Pvt. Ltd. investor to the extent of Rs.4,50,04,643/- at the time of 2nd valuation. Hence, the total fund received by the company in between these two valuation dates was to the tune of Rs.7,50,04,155/- which was substantially higher than the opening capital of the assessee company as on 31/03/2014. Further the assessee company was also assured of further substantial funding by the investor on subsequent dates in the company. It was also pointed out that the turnover of the company has been increased substantially from Rs.2.45 crores in F.Y.2013-14 to Rs.6.69 crores in F.Y.2014-15.
The assessee company, being a start-up company, at the time of receipt of funds, the main factor contributing to the growth in revenue, profits and cash flows, were the capital invested in the company as giving necessary financial support to the company to expand the operations via improvements in terms of infrastructures, quality, reach to customers etc. Further, the assessee company was engaged in trading of mobile covers/accessories till the F.Y.2014-15 and it had plan for expanding its business in designer leather accessories and lifestyle C.O. No.06/Del/2023 DCIT vs. Firki Wholesale Pvt. Ltd. fashion designer accessories, which the company was managed to start in F.Y.2016-17. Further the assessee company had also planned to start its own e-commerce portals as part of its diversification plan and has taken into consideration this expansion, while estimating the future cash flows. The company has started its e-commerce operations during the F.Y.2017-18 onwards. It was also pointed out that assessee company had planned to expand its business with big corporates by having partnership with them such as Uber, Zomato, Bira, Beercafe, etc.
The Company had also associated itself with the NAMO merchandise and they are exclusive partner with them to sale merchandise products with it. All these factors collectively contributed for increased projections in cash flows and projected revenues resulting in higher valuation. Further, the assessee company under the brand of “Daily Objects” offer the best designs and quality of lifestyle products at accessible price. It has been able to create a niche & standout amongst competitors with its 5 Brand Pillars i.e. Exceptional Quality Product, Innovation, Best Designs and best customers experience. It has exclusive licensed artworks C.O. No.06/Del/2023 DCIT vs. Firki Wholesale Pvt. Ltd. from reputed International Artists that allows it to offer products that look unlike any other in India. It has been able to create an impact with no real marketing & brand spend in relation to competitors who have spent millions. Its five years of extensive research in printing technologies make it capable of printing on any surface/material enabling it to expand into lot of mass market categories. The assessee also submitted that the detailed business deck, designing approach, addressable market size etc. vide letter dated 28/11/2018 before the Ld. AO. The assessee also clarified that the so far as discounting factor used in the year under consideration, the discount rate is typical a firm’s Average Cost of Capital. During the F.Y.2015-16, the assessee company had arranged a short term working capital loan from Capital Float (Digital SME Finance) at an interest rate of 18.96% p.a.
Accordingly, the assessee company had taken the discounting factor at a reasonably higher costs in the present valuation as compared to earlier year in the first valuation. Hence, it was pointed out that there was no arbitrary change in the method of the valuation of shares adopted by the assessee in the valuation report.
C.O. No.06/Del/2023 DCIT vs. Firki Wholesale Pvt. Ltd. It was also pointed out further that one of the Investor to whom shares were allowed at premium was Seed Fund 2 International, Mauritius to whom the provisions of section 56(2)(viib) of the Act cannot be made applicable at all since, the shares were issued to non-resident. It was also pointed out that the assessee company had received investment from Seed Fund 2 India, which is a registered Venture Capital Fund. Accordingly, the same would also be outside the ambit of applicability of provisions of section 56(2)(viib) of the Act.
The Ld. AO did not heed to the aforesaid contentions of the assessee and observed that the assessee company had not filed any documentary evidences to prove that it qualifies to fall under the category of “Startup” as per the Government Notification. Further as
per the notification issued by the Ministry of Commerce and Industries, Department of Industrial Policy & Promotion (DIPP) dated 17/02/2016, ‘Startup’ must be engaged in developing a new project or service or improvement of existing project or service. It also mentions that it would not be considered as ‘Startup’ if the act or process carried out by the ‘Startup’ fails to create any C.O. No.06/Del/2023 DCIT vs. Firki Wholesale Pvt. Ltd. undifferentiated projects. The Ld. AO observed that in the case of the assessee company, during the year under consideration, it was engaged in trading of mobile covers/ accessories/ and the same would could in no way be considered as innovation. Further, the assessee company has submitted that in subsequent years, it has expanded its business in design leather accessories and the lifestyle fashion designer accessories. The Ld. AO concluded that none of these activities is a new or unique nature which can be termed as innovation. Accordingly, he rejected the plea of the assessee company claiming to be a ‘Startup’ company.
The Ld. AO rejected the DCF method valuation for determining the fair market value and substituted the same by NAV method and arrived at Rs.1978 per share to be the fair market value.
Considering the fair market value at Rs.1978 per share, the Ld. AO proceeded to make the addition u/s 56(2)(viib) of the Act at Rs.2,88,02,880/- as under:
C.O. No.06/Del/2023 DCIT vs. Firki Wholesale Pvt. Ltd. Party No. of FMV as Value of FMV as Differen Amount as per from equity per DCF share per ce NAV [1X5=6] whom shares [2] allotmen NAV [4] [5=3-4] share issued t [3] premium [1] received Unilazer 3,928 8696.7 8911.7 1978 6933.77 2,77,35,848.56 Alternative Ventures LLP Mr. 85 8696.7 8911.77 1978 6933.77 5,89,370.54 Phanindra Sama Mr. Peush 85 8696.7 8911.77 1978 6933.77 5,89,370.45 Bansal Mr. Amit 56 8696.7 8911.77 1978 6933.77 3,88,291.12 Mittal 2,88,02,880.58/- Total [A]
The Ld. CIT(A) deleted the addition made by the Ld. AO by observing as under:
“6.1 Ground no. 1 to :- All the grounds are directed against addition of Rs. 2,88,02,80/- u/s 56(2)(viib) an account of excess premium received on issue of shares. The AO noticed a sudden increase in share value from Rs. 83.13 in F.Y. 2014-15 to Rs. 8696.76 in F.Y. 2015-16 which was not justifiable specially when the valuer's report clearly remarked that it relied on information input by the appellant and has not carried on independent verification. In this condition the provision u/s 56(2) (viib) was invoked making the impugned addition.
6.2 During appellate proceedings, the appellant has submitted that as per proviso (ii) of s. 56(2) (viib), notified persons are not covered by the section. It filed CBDT notification no. 45/2016 dt. 14.06.2016 notifying the classes of persons u/s 56(2)(viib) as being resident who make consideration exceeding face value of shares of 'a start up' company which fulfills the Appeal No.10258 18-19 following conditions in notification no. GSR 180(E) dt. 17.02.2016 issued by Ministry of Commerce & Industry: a) Up to five years from date of incorporation b) Turnover does not exceed Rs. 25 cr in any five year. c) It is working towards innovation or commercialization of a new product process or services. Page 14 of 19 C.O. No.06/Del/2023 DCIT vs. Firki Wholesale Pvt. Ltd.
6.3 Further, it relied on CBDT F. No.173/14/2018 ITA.I dt.08.02.2018 requesting CCAs not to take coercive measures in case of addition u/s 56(2Xviib) in case of a start up and expeditiously disposal of cases by CIT(A) Appellant also filed a certificate of recognition of start-up (from 07.06.2012 to 06.06.2017). All these papers were forwarded to the AO for comments. In the report dated 25.06.2019, the AO has objected that the appellant has neither innovated nor made any new product. As such, it should not be treated as a start-up. 6.4 However, in view of the certificate of Startup issued to the appellant from the prescribed authority, notification and letter of CBDT, the ratio of Agro Portfolio P. Ltd. of ITAT Delhi relied on by the AO will not apply to the present case which is a start-up. The intent of the notification of CBDT is part of the bigger intention of 'ease of doing business' and to encourage start-up companies. In view of latest provisions, the appellant's is not hit by the provisions of 56(2)(viib). The addition is, therefore, deleted. The grounds are allowed.”
From the remand report of the Ld. AO dated 25/06/2019 stated supra, the only grievance of the Ld. AO is that the assessee company cannot be treated as ‘Startup’. In this regard, we find that the Ld. AR had drawn our attention to page 207 of the Paper Book containing the Certificate Of Recognition vide Certificate No. DIPP31681 issued by Department of Industrial Policy & Promotion, Ministry of Commerce & Industry, Govt. of India, recognizing the assessee company as ‘Startup’ with effect from 07/06/2012. The date of issue of the Certificate is 14/01/2019 which is after the date of passing the assessment order, but before the date of passing of order by Ld. CIT(A). We find that the Ld. CIT(A) had taken C.O. No.06/Del/2023 DCIT vs. Firki Wholesale Pvt. Ltd. cognizance of this Certificate while granting relief to the assessee.
Further, we find that the CBDT vide its Circular No.22/2019 dated 30/08/2019 which is a consolidated circular for treatment of ‘Startups’ categorically stated as under:
“4. Procedure of addition made u/s 56(2)(viib) in the past assessment. The clarification issued on 9 August,2019 provided that the provisions of the section 56(2)(viib) of the Act shall also not be applicable in respect of assessment made before 19 February, 2019 if a recognised Startups has filed declaration in Form No.
The following procedure is laid down with regard to addition made under section 56(2)(viib) of the Act in assessment order passed before 19th February, 2019:- i. In case the appeal against the assessment is pending before the Commissioner of Income-tax (Appeal) [CIT(A)], the appellate order should be passed by CIT(A) on or before 31 December, 2019 after taking into account the fact that the Startup has filed declaration in Form No. 2 and hence the provisions of section 56(2)(viib) of the Act are not applicable for the addition made under section 56(2)(viib) of the Act before19 February, 2019. The Department shall not file further appeal on the issue of addition made under section 56(2)(viib) of the Act; ii. In case the case is pending before the ITAT, the Department shall not press the ground relating to addition under section 56(2)(viib) of the Act in these cases.”
We also find that this issue is no longer res-integra in view of the Co-ordinate Bench decision of Chennai Tribunal in the case of DCIT Vs. Ms. Kovali Media Pvt Ltd. in 2019 dated 24/06/2019 wherein it was held as under:
C.O. No.06/Del/2023 DCIT vs. Firki Wholesale Pvt. Ltd. “The proviso provided to section 56(2(viib) has excluded certain category or class of companies from application on fulfillment of certain conditions. Further, for this purpose notified class of persons has been notified by CBDT vide its circular No.173/147/2018-ITA I dated 06.02.2018, as per which any startup company as recognized by DPIIT, Ministry of Commerce & Industry, Govt. of India is outside the scope of provisions of section 56/2(vib) of the Act. In this case, the assessee has filed necessary evidences to prove that it is a recognized startup from DPIIT. Further, the Gazette Notification No GSR 127(E) dated 19.02.2019 has exempted startup companies from application of provisions of section 56(2(vib) of the Act, provided said startup companies are satisfied conditions prescribed in para 4 of said notification. The assessee has furnished a notification issued by CBDT vide reference No 230819001348 dated 28 August, 2019 u's 56(2(vib) of the Act. as per which the assessee has satisfied conditions prescribed in para 4 of said notification and further, the assessee is exempted from application of the provisions of section 56(2(viib) of the Act, on the amount received on consideration for issue of shares. The learned CIT(A), after considering relevant facts and also by taking note of circular issued by CBDT vide notification No.45/2016/F No.173/103/2016 and also Gazette Notification No GSR 127(E) dated 19.02.2019, has categorically stated that the assessee is exempt from ambit of section 56(2(vilb) of the Act and hence, consideration received for issue of share capital and share premium is outside scope of section 56(2(viib) of the Act. He further observed that since the assessee is outside ambit of section 56(2(viib) of the Act, issue of non- applicability of Rule 11UA(2)(b) of the Income Tax Rules, 1962, therefore, become infructuous and hence, the question of substantiating value of shares does not arise. Therefore, we are of the considered view that the learned CIT(A) has rightly held that share premium collected by the assessee for issue of share capital is outside scope of the provisions of section 56(2(viib) of the Act.”
In view of the aforesaid factual observations; Circular of the CBDT and the decision of Chennai Tribunal (supra), we do not find any infirmity in the order of the Ld. CIT(A) granting relief to the C.O. No.06/Del/2023 DCIT vs. Firki Wholesale Pvt. Ltd. assessee. Accordingly, grounds raised by the Revenue are dismissed.
Grounds raised in the Cross Objection by the assessee are only supportive of the order of the Ld. CIT(A) and hence dismissed as infructuous.
In the result, appeal of the Revenue is dismissed and Cross Objection of the assessee is also dismissed.
Order pronounced in the open court on 28th June, 2023.