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Income Tax Appellate Tribunal, DELHI BENCH ‘A’, NEW DELHI
Before: Sh. Saktijit DeyDr. B. R. R. Kumar
ORDER
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeals have been filed by the assessees against the orders of ld. CIT(A), Faridabad dated 29.03.2019.
Delay condoned.
The assessee has raised six grounds of appeal. The ld. AR has not pressed ground nos. 1, 4, 5 & 6.
5. Ground No. 3 relates to enhancement of income by Rs.70,50,000/- u/s 56(2)(viib).
Heard the arguments of both the parties and perused the material available on record.
The AO made addition of the entire share application money of Rs.94,00,000/- u/s 68 of the Income Tax Act, 1961 based on the bank statements and lack of creditworthiness of the applicant parties. The AO treated entire receipt as bogus transaction and unexplained credit. The ld. CIT(A) held that the assessee has received Rs.85,00,000/- in the earlier years and held that no addition u/s 68 called for in the current year. At the same time, the ld. CIT(A) held that an amount of Rs.70,50,000/- be treated u/s 56(2)(viib).
Arguments of the ld. AR against the issue of Section 56(2)(viib):
The assessee justified the value of the shares based on the report of the valuer. It was argued that the report for the DCF has considered the cash flow from the equity for Rs. 90,00,000/-. On this basis, value of each shares has been determined @ Rs.40/- per share. The assessee has submitted the valuation report and argued that no mistake in the valuation report has been found by the revenue. It was argued that the revenue cannot change the method of valuation and also cannot Arguments of the ld. DR in support of the issue of Section 56(2)(viib):
It was argued that no corroborative details have been furnished to substantiate the cash flow of Rs.90,00,000/- from the equity. The assessee has no business worth and no tangible business activity was carried out by the assessee since incorporation. Further, there were no fixed asset or any intangible asset in position of the company to justify such kind of cash flow in the future years. In the absence of any business worth of the assessee, the reliance of the appellant on the valuation report for the premium charged of Rs.30/- on each share under Rule 11UA(2) does not carry any force. Such valuation report has been found without any basis and thus needs to be rejected. Reliance was placed upon the decision of ITAT Delhi in the case of Agro Portfolio Pvt. Ltd. vs. ITO 2018, 171/ITD/74 (Del).
We have gone through the facts on record and the judgment quoted by the revenue. The order in the case of Agro Portfolio Pvt. Ltd. vs. ITO (supra) is not applicable to the facts of this case. In the similar issue stands adjudicated by the order of the Tribunal in the case of ACIT Vs. M/s Gamma Pizzakraft (Overseas) Pvt. Ltd. in vide order dated 12.05.2023. The relevant part is as under:
“20. Whether the AO can change the method of valuation of unquoted shares under Rule 11UA of I.T. Rules 1962?
“Income from other sources.
(1) 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) dividends; (ia) income referred to in sub-clause (viii) of clause (24) of section 2; ib)………… (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 5 & 6177/Del/2019 Balgopal Publication & Broom Publications Pvt. Ltd. (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; (b) "venture capital company", "venture capital fund” and "venture capital undertaking" shall have the meanings respectively assigned to them in clause (a), clause (b) and clause (c) of Explanation to clause (23FB) of section 10;”
From the above, it is evident that the FMV of the unquoted share be the value as determined by the prescribed method or as substantiated by the assessee whichever is higher. The appellant has chosen to the first option i.e. value as per the prescribed method. The method of determining the FMV is given in Rule 11UA(2) of IT Rules 1962 which are reproduced below:
“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:— (a) the fair market value of unquoted equity shares =(A-L)x (PV)/(PE) where, A = book value of the assets in the balance-sheet as reduced by any amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act and any amount shown in the balance- sheet as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset; L = book value of liabilities shown in the balance-sheet, but not including the following amounts, namely:— (i) the paid-up capital in respect of equity shares;
6 & 6177/Del/2019 Balgopal Publication & Broom Publications Pvt. Ltd. (ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company; (iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation; (iv) any amount representing provision for taxation, other than amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto; (v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities; (vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares; PE ~ total amount of paid up equity share capital as shown in the balance-sheet; PV = the paid up value of such equity shares; or (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. ’’ 23. From the above, it is evident that Rule 11UA(2) prescribes two methods - Book Value method and DCF method. However, the said rule also provides that the method to be adopted is left to the choice of the assessee.
Thus, the option to choose the method to be adopted to determine the FMV of unquoted shares is not with the AO but with the assessee. In the instant case the assessee opted for the DCF method.
7 & 6177/Del/2019 Balgopal Publication & Broom Publications Pvt. Ltd.
Whether the AO erred in rejecting the DCF method because the Valuer failed to furnish the documents called for by him? 26. The AO has rejected the DCF method by observing that the Valuer did not have proper understanding of the methodology and intricacies of the DCF method and that the Valuation report is just of 4 pages. The AO required the Valuer to appear before him along with his working papers which he failed to carry on the date when his statement was recorded. The AO asked him to produce the same on 26.11.2018 which he failed to do. On the other hand the Valuer has submitted in the Affidavit that he had visited the AO’s office on the appointed date but could not meet the AO as he was busy with some other matter and that the he (valuer) could not wait longer as he had other appointments. Further, the appellant has provided answers to the queries raised by the AO to the Valuer and also supplied the documents /projection estimates given to the Valuer. The AO has not accepted this. It is noted here that there is merit in the AO’s observation that the valuation report is very brief. However, in the absence of any prescribed format or size, one cannot reject the valuation merely on that ground. Further, the AO has not pointed out any specific deficiency in the Valuation Report itself Hence, it would be incorrect to reject the DCF method solely on that ground. Issue no. 4: 27. Whether DCF is the most appropriate method in the instant case as espoused by the appellant?
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The appellant besides explaining DCF in detail has also submitted that DCF method is a scientific method of valuation of share duly recognized by professional and accounting bodies worldwide and also the ICAI. DCF method is often used for valuation of unquoted equity shares of a going concern as it is based on present value of projected future cash flow of the business, which are dependent on various variable factors.
The provisions of Rule 11UA shows that the legislature has not made any distinction as going concern or otherwise in valuation of unquoted equity shares. The Rules give option to choose between the two methods and the only criteria to choose is the option to be exercised by the assessee. In the absence of any such prescription under the law, one cannot read into the statute anything without showing that the Legislature intended it. Hence, the AO has erred in not accepting DCF as the most appropriate and scientific method for valuing shares of the appellant. Issue no. 5: 30. Whether AO can reject the DCF method when this method has been duly prescribed under the Law itself? 31. The DCF method is one of the duly prescribed methods for valuing unquoted shares of a company. Rule 11UA gives option to the assessee to choose between the two methods. The said rule nowhere fixes any hierarchy between the two methods. Once the option has been exercised by the assessee, AO has no right to reject the method. However, the rejection of method is not appropriate not because it is a prescribed method but because the AO has no role in selection or rejection of the 9 & 6177/Del/2019 Balgopal Publication & Broom Publications Pvt. Ltd. method under Rule 11UA. Hence, the AO has erred in rejecting the DCF method especially when it is one of the duly prescribed methods under the IT Rules.”
In the instant case also, the ld. CIT(A) has not brought out any defect in the methodology and summarily rejected the valuation made under the prescribed rules. Hence, we cannot support the decision of the ld. CIT(A) on this issue. The appeal of the assessee on this ground is allowed.
With regard to Rs.9,00,000/- received on 04.09.2014 by the assessee during the year which has been confirmed by the ld. CIT(A) u/s 68, we find that the assessee has discharged his onus before the revenue authorities. The AO and the ld. CIT(A) rejected the explanation of the assessee solely based on the limited issue of low profit of Rs.1,47,875/- as on 31.03.2015 and Rs.3,05,745/- as on 31.03.2014. There were no enquiries made nor any evidence to reject the documents/evidences filed by the assessee. Hence, we hold that no addition u/s 68 is called for in this case.
: A.Y. 2015-16 Balgopal Cold Storage Pvt. Ltd.
The ld. CIT(A) enhanced and considered the income of the assessee u/s 56(ii)(viib) at Rs.69,60,000/- intra-polating Section 68. Since, the issue is similar to the one discussed above, the same ratio applies. In the result, the appeal of the assessee on this ground is allowed.
10 & 6177/Del/2019 Balgopal Publication & Broom Publications Pvt. Ltd. 14. In the result, both the appeals of the assessees are allowed. Order Pronounced in the Open Court on 27/06/2023.