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Judgment
PER MANISH AGARWAL, AM :
The present appeal is filed by Revenue against the order dated 29.08.2019 by Ld. Commissioner of Income Tax (A)-5, New Delhi [“Ld. CIT(A)”] in Appeal No. Del/CIT(A)-5/0234/2018-19 passed u/s 250 of the Income Tax Act, 1961 [“the Act”] arising out of assessment order dated 17.12.2018 passed u/s 143(3) of the Act pertaining to Assessment Year 2016-17.
Brief facts of the case are that the assessee is a company and filed its return of income on 18.10.2016, declaring NIL income and current year loss of INR 1,61,74,297/- was carried forward to next year. The case was selected under CASS and it was observed by AO that assessee has issued 1,05,10,000 equity shares to 04 parties out of which 52,60,000 shares were issued to M/s. K.V. Aromatics Pvt. Ltd. at a premium of INR 5/- each whereas in the case of other parties, no premium was charged. The AO further observed that as per NAV method, fair market value of shares of assessee company was in negative and therefore, following the NAV method, the AO made the addition of INR 2,63,00,000/- being INR 5/- per share for 52,60,000 shares issued to M/s. K.V. Aromatics Pvt. Ltd. as income of the assessee u/s 56(2)(viib) of the Act. Besides this, AO has further made addition of INR 77,20,700/- being loan received from M/s. Sharda Capital Advisors Pvt. Ltd. of which the assessee has failed to establish the creditworthiness. Accordingly, the total income of the assessee company was assed at INR 1,78,50,270/- vide assessment order dated 17.12.2018 for the year under appeal.
Against the said order, assessee filed an appeal before Ld. CIT(A) wherein the assessee during the course of assessment proceedings filed certain additional evidences and after considering the same, Ld. CIT(A) vide order dated 29.08.2019, partly allowed the appeal of the assessee and deleted both the additions made by AO.
Aggrieved by the order of Ld. CIT(A), Revenue is in appeal before the Tribunal by taking various Grounds of appeal mentioned in the appeal memo.
Ground of appeal No.1 raised by the Revenue with respect to the deletion of INR 2,63,00,000/-made u/s 56(2)(viib) of the Act on account of share premium receipt.
Before us, Ld. Sr. DR for the Revenue vehemently supported the order of AO and submits that the assessee has issued shares to 04 (Four ) parties out of which premium was charged from one party namely M/s KV Aromatics Pvt. Ltd., of INR 5/- per share without their being any positive book value of the shares. Thereafter, AO in absence of any submissions filed by the assessee has adopted NAV method and made the additions of the amount received in excess of the fair market value of per share. Ld. Sr. DR submits that AO in Remand Report has very specifically observed that the assessee has not filed any evidences before the AO and now filed Valuation Report dated 15.12.2015 as per which the fair market value (“FMV”) per share was determined at INR 15/- per share. Ld. CIT DR submits that since the assessee has not submitted this report before the AO, it cannot be said that this report was available at the time of issue of shares and is an afterthought and therefore, the AO has rightly made the addition based on NAV method which deserves to be sustained.
On the other hand, Ld. AR for the assessee submits that during the course of assessment proceedings, due to certain unavoidable circumstances, the assessee could not file the necessary details such as Valuation Report based on which the premium was charged on the issue of shares to M/s. K. V. Global Pvt. Ltd. Ld. AR submits that shares were issued to 03 parties on 10.12.2015 in the case of M/s. K. V. Global Pvt. Ltd., shares were issued on 02.01.2016 prior to that the assessee has obtained report from the approved valuer i.e. Shri Sachin Agarwal, CA and said report was signed by Shri Ghanshyam Das Gupta. As per the said report, the valuation was made as per DCF method and the fair market value of per share was valued at INR 15/-. Ld. AR submits that as per Rule 11UA, the method of valuation of shares is at the choice of the assessee whether it could be NAV method and DCF method. Since the assessee has computed fair market value of its share as per DCF method, Ld. CIT(A) has rightly deleted the addition by considering the submissions of the assessee and Remand Report of the AO. He thus, requested that the addition has rightly been deleted by Ld. CIT(A) and requested for the confirmation of the same.
Heard the contentions of both parties at length and perused the material available on record. It is observed that the assessee has failed to file any details with respect to valuation of shares as on the date of issue of shares at a premium of INR 5/- per share however, before the Ld. CIT(A), assessee has filed additional evidence in the form of Valuation Report on which the Remand Report was obtained by Ld. CIT(A) from AO and after considering the submissions of the assessee and Remand Report filed by the AO, had admitted the additional evidence so filed by the assessee. Thereafter, Ld. CIT(A) has held that Valuation Report submitted by assessee for determination of Fair Market Value of shares based on DCF method is proper and deleted the addition. The relevant observations in para 5 to 6.16 of Ld. CIT(A) are as under:-
5. Findings & determination:
5.1“I have gone through the submissions of the appellant, assessment order, evidence brought on record, report of AO, valuation report and various judgments relied upon by the appellant. The appellant is private limited company, carrying out the business of crude palm oil etc.
5.2Ground no. 1 is general in nature and subsumes with the specific grounds of addition and hence no separate findings required.
6.In ground no. 2, the appellant disputed addition of Rs. 2,63,00,000/- on account of share premium u/s 56(2)(viib) of the Act.
6.1During the year under consideration, the appellant has issued 52,60,000 equity shares to M/s K.V. Aromatics Pvt. Ltd. having face value of Rs. 10/- each with a premium of Rs. 5/- on each share, thereby a total premium has been received for Rs. 2,63,00,000/-. Other shares were also issued however, no premium has been taken. Further, the K.V. Aromatics Pvt. Ltd. is its holding company and other share holders are also the share holder of appellant company.
6.2During assessment proceedings, it was observed by the AO that this share premium is excessive considering the financials of the appellant and NAV of appellant's shares is negative therefore, share premium value of Rs. 5/- per share is not substantiated. In absence of any satisfactory reply, the entire addition has been made, invoking provisions of section 56(2)(viib) of the Act.
6.3It has been vehemently argued, as reproduced earlier that the provisions of section 56(2) (viib) are not applicable in the case of appellant. It is contended that the valuation report has been prepared by the expert valuer/auditor and in accordance with the provisions of section 56(2)(viib), where as per Rule 11UA(2), the appellant is entitled for the valuation of fare market value (FMV) as per the DCF method. It is argued that the intent of legislature is to curb the black money and there cannot be involvement of any such unaccounted money as the funds have been sourced through its holding company.
6.4It is further argued that the valuation has been done as per DCF method which is duly acceptable as per the prescribed Rules. It is further stated that as per explanation (a) (i) of the section 56(2)(viib), the fair market value of the share shall be the value, as may be determined in accordance with the prescribed method. In the present case, the appellant has gone by the prescribed method i.e. DCF method which is supported by the report of independent auditor and is in accordance with law. Therefore, it is not open to the AO to change the method, adopted by the appellant. Further, no cogent reasoning has been submitted while rejecting the valuation adopted by the appellant. The appellant provided valuation report, which is as per the DCF method.
6.5The contention of the appellant has been examined. The fair market value as given by the appellant has been rejected which was based on the DCF method of valuation without any cogent material on record except on the basis that there is a negative book value of shares.
6.6On going through the contentions of the appellant, it is seen that the working has been made by an independent valuer, submitting the valuation of share as per discount cash flow method. Further, as per the provisions of law, the appellant can take higher of the amount between the working as per Rule 11UA (DCF method) or on the basis of the value of shares considering the market value of assets, intangible assets and projected profit (NAV method).
6.7In the present case, the working given by the appellant has been based on the value of the shares, taking into account the projected business and other parameters as per auditor's report.
6.8The working provided as per Rule 11UA(2) has 2 limbs either at FMV of unquoted equity share as per formula (A-L)*(PV)/(PE) or as per the FMV worked out for the unquoted shares determined by a valuer/CA/merchant banker etc as per discount free cash flow method. It is at the option of assessee to choose between two whichever is higher. In the present case, the appellant has opted for the second option for working out the fair market value of shares duly supported by report of a Chartered Accountant.
6.9On the other hand, AO has not provided any sound reasoning or not brought on record any material to counter the argument or to negate the submissions of the appellant. He has rejected the projection with the contention that the present NAV is negative, without commenting upon the DCF method for the projections made. It is pertinent to note that Bench in the case of India Today Online Pvt. Ltd. (Supra) that DCF method is a recognized method where future projections of various factors by applying hindsight view and it cannot be matched with the actual performance.
6.10Therefore it is clear that as per the provisions of law, the appellant has worked out the FMV, taking into consideration the future projections, using DCF method and accompanied by the report of CA, which is higher than the negative NAV, worked out by the AO. Therefore, the appellant is entitled to take higher amount, as provided in the law.
6.11Section 56(2)(vii) (b) read with Explanation and applicable Rules has specifically provided that the fair market value of the unquoted shares shall be determined as per the prescribed methods and shall be taken whichever is higher.
6.12In the following case, the Hon'ble ITAT, Jaipur has held that AO cannot force the appellant to select a different method, especially when conditions are fulfilled for method of valuation.
* M/s Rameshwaram Strong Glass Pvt Ltd Vs ITO; 2018-TIOL-1358-ITAT-JAIPUR
"Whether when in terms of Rule 11UA(2)(b), if the assessee is entitled to choose a particular method of valuation of his unquoted equity shares, the AO can still force the assessee to select a different one - NO: ITAT.
6.13The appellant has heavily relied upon the case of M/s Cinestaan Entertainment Pvt. Ltd. (Supra), where the Hon'ble ITAT, Delhi in the recent judgment held that:-
31.............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...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 Assessing Officer to tinker with such valuation……
32.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. ………….. 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 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...
33.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."
It is clear from the above judgment by the Hon'ble Jurisdictional ITAT that neither AO has any power or expertise to change the method of valuation nor it can reject a valid valuation by a competent person say a CA in this case. The law has to be followed in later and spirit. The facts and ratio laid down by the Hon'ble ITAT in the above referred case are squarely applicable to the appellant and hence respectfully following the same, it is held that the addition u/s 56(2)(viib) with respect to change in the method of valuation is not in accordance with law.
6.15The appellant has elaborately disputed and distinguished the facts of the decision in the case of Agro Portfolio Pvt. Ltd. from that of the case of appellant. In the said case, the Hon'ble ITAT allowed the AO's working of NAV value on the ground that no cogent reasoning was provided in the report and the veracity of the data supplied was also not justified. In the case of appellant as well as in the case of M/s Cinestaan Entertainment Pvt. Ltd., the valuation report is duly supported by the facts and figures. It is trite law that the projections cannot be equated with 100% actual performance which is also confirmed by Hon'ble ITAT Delhi in the case of India Today Online Pvt. Ltd (Supra).
6.16Therefore, looking to the facts and circumstances of this case, considering appellant's submissions and in law, which is further supported by the judgment of Hon'ble ITAT Delhi in the case of Cinestaan Entertainment Pvt. Ltd (Supra) and other case laws and as discussed in detail in the submission of appellant, it cannot be said that the value adopted by the appellant is liable to be rejected or subjected to tax u/s 56(2)(viib) of the Act, enforcing the change of method of valuation of FMV of shares. Accordingly, the valuation done by appellant is found to be in accordance with law. Therefore in view of above discussions and considering the extant law, this addition is directed to be deleted. Thus the appellant gets a relief of Rs. 2,63,00,000/-. This ground of appeal is allowed.”
Before us, the Revenue has simply stated that since no evidence was filed before AO therefore, the Valuation Report now submitted before Ld.CIT(A) is after thought and however, no contrary evidence was filed to support the contention of the assessee therefore, we find no error in the order of Ld. CIT(A) which is based on the factual appreciation of the facts and further by placing reliance on the judgement of the Co-ordinate Bench of Jaipur Tribunal in the case of M/s. Rameshwaram Strong Glass Pvt.Ltd. vs ITO reported in 2018 -TIOL-1358-ITAT-Jaipur & judgement of Co-ordinate Bench of Delhi Tribunal in the case of Cinestaan Entertainment P. Ltd. v. ITO reported in (2019) 200 TTJ 459 (Del. Trib.) which stood confirmed by the Hon’ble Jurisdictional High Court. Accordingly, we uphold the order of ld. CIT(A) on this issue and thus, Ground of appeal No.1 raised by the Revenue is dismissed.
Ground of appeal No.2 of the Revenue is with respect to addition of INR 77,20,700/-on account of unsecured loan u/s 68 of the Act.
Heard the contentions of both parties at length and perused the material available on record. From the perusal of order of Ld. CIT(A), it is observed that Ld. CIT(A) in para 7.1, has discussed the details and evidences furnished by the assessee in respect to the unsecured loans received from M/s. Sharda Capital Advisors Pvt. Ltd. such as ITR, bank statement and confirmation etc. The Revenue grievance is that these documents were not confronted to the AO despite of the fact that the Remand Report was called for on the issue of valuation of shares. However, these evidences were not confronted nor any Remand Report was called for from the AO. Considering the overall facts and circumstances of the case, we are of the opinion that Ld. CIT(A) has made an error in not confronting the additional evidences filed by the assessee which are crucial to decide the issue in hand. Therefore, by respectfully following the judgement of Hon’ble Jurisdictional High Court in the case of Manish Buildwell (P) Ltd. Vs. CIT reported in 245 ITR 397 (2011) [Del. HC], we hold that Ld. CIT(A) has made an error in not obtaining the Remand Report from the AO in this regard. Accordingly, we set aside the order of Ld. CIT(A) on this issue and remand it back to the file of AO for verification of the documents filed by the assessee before Ld. CIT(A) and decide the issue in accordance with law.
With the above directions, Ground of appeal No.2 raised by the Revenue is allowed for statistical purposes.
In the result, appeal filed by the Revenue is partly allowed.