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Income Tax Appellate Tribunal, [ DELHI BENCH: ‘E’ NEW DELHI ]
Before: DR. B. R. R. KUMAR & SHRI YOGESH KUMAR U.S.
per share i.e. premium of Rs. 20/- per share for a share of Rs. 10/-.
Accordingly, new shares were issued and allotted to the investors during the
year under consideration.
The Section 56(2)(viib) of the Act provides that where a company
receives 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 shall be taxable as income from the
sources. Further, clause (a)(i) of Explanation provides that fair market value of
the shares shall be the value as may be determined in accordance with such
method as may be prescribed. For the purpose of section 56(2)(viib) of the Act,
the valuation of shares has to be done in accordance with the Rule 11UA of
the Income Tax Rules. For the sake of convenience, relevant provisions of Rule
11UA are extracted hereunder:
(2) Notwithstanding anything contained in sub-clause (b) of clause (c) of sub-rule (I), 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)
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(b) the fair market value of the unquoted equity shares determined by a merchant banker or an accountant (omitted by the IT (sixth amendment) Rules, 2018 w.ef24.5.2018) as per Discounted Free Cash Flow Method.
Further, we placed reliance on the Judgment of Gujrat High Court in the
case of IMC Limited and ors Vs. Union of India and ors (10/05/2019 Guj High
Court) MANU/GJ/0860 2019 wherein it is held as under:-
“Karnataka and Ors., reported in MANU/SC/0994/2013 : (2014) 2 SCC 401, reiterated the proposition of law that when the statute provides for a particular procedure, the authority has to follow the same and cannot be permitted to act in contravention of the same. In other words where a statute requires to do a certain thing in a certain way, the thing must be done in that way and not contrary to it at all. Other methods or mode of performance are impliedly and necessarily forbidden. The said settled legal proposition is based on a legal maxim expressio unis est exclusio alterius, meaning thereby, if a statute provided a thing to be done in a particular way, then it is to be done in that manner and in no other manner.”
The Coordinate bench of this Tribunal in the case of Cinestan Entertainment (P). Ltd. Vs. ITO for AY 2015-16 dated 27/05/2019, wherein it is held that the Assessing Officer cannot examined or substituted its own value in place of valuation arrived by the assessee either DCF Method or NAV Method, the commercial expediency has to be seen from the point view of businessman. Further held that if law provides the assessee to get the valuation done from a prescribed expert as per the prescribed method, then the
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same cannot be rejected because neither the Assessing Officer nor the assessee have been recognized as expert under the law. The relevant portion are hereunder:-
“32. What is seen here is that, both the authorities have questioned the assessee’s commercial wisdom for making the investment of funds raised in 0% compulsorily convertible debentures of group companies. They are trying to suggest that assessee should have made investment in some instrument which could have yielded return/ profit in the revenue projection made at the time of issuance of shares, without understanding that strategic investments and risks are undertaken for appreciation of capital and larger returns and not simply dividend and interest. Any businessman or entrepreneur, visualise the business based on certain future projection and undertakes all kind of risks. It is the risk factor alone which gives a higher return to a businessman and the income tax department or revenue official cannot guide a businessman in which manner risk has to be undertaken. Such an approach of the revenue has been judicially frowned by the Hon'ble Apex Court on several occasions, for instance in the case of SA Builders, 288 ITR 1 (SC) and CIT vs. Panipat Woollen and General Mills Company Ltd., 103 ITR 66 (SC). The Courts have held that Income Tax Department cannot sit in the armchair of businessman to decide what is profitable and how the business should be carried out. Commercial expediency has to be seen from the point of view of businessman. Here in this case if the investment has made keeping assessee’s own business objective of projection of films and media entertainment, then such commercial wisdom cannot be questioned. Even the prescribed Rule 11UA (2) does not give any power to the Assessing Officer to examine or substitute his own value in place of the value determined or requires any satisfaction on the part of the
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Assessing Officer to tinker with such valuation. Here, in this case, Assessing Officer has not substituted any of his own method or valuation albeit has simply rejected the valuation of the assessee.
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 we 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, one 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 approximation 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
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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. Precisely, these factors have been judicially appreciated in various judgments some of which have been relied upon by the ld. Counsel, for instance: -
i) Securities & Exchange Board of India &Ors [2015 ABR 291 - (Bombay HC)]
“48.6 Thirdly, it is a well settled position of law with regard to the valuation. that valuation is not an exact science and can never be done with arithmetic precision. The attempt on the part of SEBI to challenge the valuation which is by its very nature based on projections by applying what is essentially a hindsight view that the performance did not match the projection is unknown to the law on valuations. Valuation being an exercise required to be conducted at a particular point of time has of necessity to be carried out on the basis of whatever information is available on the date of the valuation and a projection of future revenue that valuer may fairly make on the basis of such information.”
ii) Rameshwaram Strong Glass Pvt. Ltd. v. ITO [2018-TIOL1358- ITAT- Jaipur]
"4.5.2. Before examining the fairness or reasonableness of valuation report submitted by the assessee we have to bear in mind the DCF Method and is essentially based on the projections (estimates) only and hence these projections cannot be compared with the actuals to expect the same figures as were projected. The valuer has to make forecast on the basis of some material but to estimate the exact figure is beyond its control. At the time of making a valuation for the
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purpose of determination of the fair market value, the past history may or may not be available in a given case and therefore, the other relevant factors may be considered. The projections are affected by various factors hence in the case of company where there is no commencement of production or of the business, does not mean that its share cannot command any premium. For such cases, the concept of start-up is a good example and as submitted the income- tax Act also recognized and encouraging the start-ups.”
iii) DQ (International) Ltd. vs. ACIT (ITA 151/Hyd/2015)
“10...... In our considered view, for valuation of an intangible asset, only the future projections along can be adopted and such valuation cannot be reviewed with actuals after 3 or 4 years down the line. Accordingly, the grounds raised by the assessee are allowed”.
The aforesaid ratios clearly endorsed our view as above.
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.”
The Coordinate Bench of the Tribunal while reiterating the above ratio
has also considered the decision of the Coordinate bench in Agro Portfolio Pvt.
Ltd. Vs. ITO which has been relied by the CIT(A). Thus, there is no dispute
that legally the assessee had option to choose the valuation of the shares as
per Rule 11UA of the IT Rules. When the statute provides for particular
procedure, authorities have to follow the same and cannot interpret or
permitted to act in contravention of the statute. The said legal principal is
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based on the legal maxim ‘Expression Unis Est Exclusion Alterius’. Thus,
we hold that the CIT(A) have committed an error in rejected the valuation done
by the assessee from prescribed expert as per the prescribed method, which
ultimately resulted in enhancement of income of the Assessee u/s 251(1) of
the Act. Accordingly, we allow Ground No. 2 of the Assessee and delete the
enhancement made by the CIT(A).
In view of deleting the addition/enhancement made by CIT(A) by
allowing Ground No. 1 & 2, the other grounds remained only as academic in
nature, thus the other Grounds requires no adjudications.
In the result, the Appeal of the Assessee is partly allowed.
Order pronounced in the open court on : 16/06/2023.
Sd/- Sd/- ( Dr. B. R. R. KUMAR ) (YOGESH KUMAR U.S.) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated : 16/06/2023
*R.N, Sr. PS*
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