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Cinestaan Entertainment P. Ltd vs. ITO (ITAT Delhi)

COURT:
CORAM: ,
SECTION(S): ,
GENRE:
CATCH WORDS: ,
COUNSEL:
DATE: May 27, 2019 (Date of pronouncement)
DATE: June 27, 2019 (Date of publication)
AY: 2015-16
FILE: Click here to download the file in pdf format
CITATION:
S. 56(2)(viib): The assessee has the option under Rule 11UA(2) to determine the FMV by either the ‘DCF Method’ or the 'NAV Method'. The AO has no jurisdiction to tinker with the valuation and to substitute his own value or to reject the valuation. He also cannot question the commercial wisdom of the assessee and its investors. The ‘DCF Method’ is based on projections. The AO cannot fault the valuation on the basis that the real figures don't support the projections. Also, the fact that independent investors have invested in the start-up proves that the FMV as determined by the assessee is proper

IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH “B” NEW DELHI
BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER
&
SHRI L.P. SAHU, ACCOUNTANT MEMBER
I.T.A. No.8113/DEL/2018
Assessment Year: 2015-16
Cinestaan Entertainment P.
Ltd.,
203 Siddharth Chambers, Near
IIT, Hauz Khas,
New Delhi.
v. ITO, Ward-6(2),
New Delhi.
TAN/PAN: AAFCC 4067R
(Appellant) (Respondent)
Appellant by: Shri Pradeep Dinodia, CA & Shri Ravi
Kumar, CA
Respondent by: Ms. Nidhi Srivastava, CIT-DR
Date of hearing: 18 03 2019
Date of pronouncement: 27 05 2019
O R D E R
PER AMIT SHUKLA, JM:
The aforesaid appeal has been filed by the assessee against
order, dated 24.09.2018, passed by Ld. CIT (Appeals)-2 for the
quantum of assessment u/s 143(3) for the assessment year
2015-16. Following grounds have been raised to challenge the
impugned order:
1. That the order dated 24.09.2018 passed by Ld.
Commissioner of income-tax Appeals (‘CIT (A)’) u/s 250 of the
Act is bad in law and void ab-initio.
Addition in respect of share premium received
I.T.A. No.8113/DEL/2018 2
2. That Ld. CIT(A) has erred in law and on facts and
circumstances of the case in upholding the addition of Rs.
90,95,46,200/- made by the Ld. AO to the assessee’s
returned income u/s 56(2)(viib) read with rule 11UA(2)(b) in
respect of share premium received on issue of equity shares
during the year on wholly erroneous, illegal and untenable
grounds:
a. That Ld. CIT(A) has erred in law and on facts and
circumstances of the case in upholding the aforesaid
addition made by Ld. AO by treating the amount of share
premium ought to be received by the assessee as NIL
without affording any cogent reasons.
b. That Ld. CIT(A) has erred in law and on facts and
circumstances of the case in holding that value of entire
share premium received of represents the income of the
assessee.
Rejection of valuation report
3. That Ld. CIT(A) has erred in law and on facts and
circumstances of the case by upholding the aforesaid
addition made by the Ld. AO by disregarding the valuation
report submitted by assessee on completely whimsical and
superficial grounds:
a. That Ld. AO and subsequently Ld. CIT(A) have erred in law
and on facts and circumstances of the case in taking a
hindsight by comparing the projections made at the time of
issuance of shares with the subsequent events and actual
financial results despite the settled legal proposition that
valuation cannot be judged in light of subsequent events or
hindsight.
b. That Ld. AO and subsequently Ld. CIT (A) have erred in not
appreciating the role and responsibilities of valuer in the
right perspective.
c. That Ld. CIT (A) has erred in law and on facts and
circumstances of the case in making several factually
I.T.A. No.8113/DEL/2018 3
incorrect statements/ baseless assertions without affording
any supporting evidence.
d. That, without prejudice, Ld. AO and consequently Ld. CIT (A)
have erred in law and on facts and circumstances of the
case in not computing alternate fair market value relying on
any of the prescribed methods [under Sec 56(2)(viib) read
with Rule 11 UA(2) of Income Tax Rules] which amounts to
dereliction of their statutory duty under the Income Tax Act.
Rejection of valuation methodology
4. That Ld. AO and subsequently Ld. CIT (A) have erred in law
and on facts and circumstances of the case in not
appreciating the fact that the valuation of the shares of the
assessee is based on the prescribed method (DCF Method)
under Rule 11UA (2)(b) by a prescribed expert, i.e., Chartered
Accountant, and the same can neither be varied nor
disregarded by the Ld.AO for determination of fair market
value for the purposes of section 56(2)(viib).
Questioning the commercial wisdom
5. That Ld. CIT(A) has grossly erred in law and on facts and
circumstances of the case by upholding the action of Ld. AO
of making the aforesaid addition by challenging the
assessee’s commercial wisdom and questioning the
investment made by the assessee in compulsorily convertible
debentures.
Penalty & Interest
6. The Ld. AO has grossly erred in initiating penalty proceedings
under section 271(1)(c) of the Act mechanically and without
recording any satisfaction for its initiation.
7. That the Ld. A.O has erred in law in charging interest u/s
234B of the Act on wholly illegal and untenable grounds.
2. Ground no. 1 being general in nature does not require any
specific adjudication. Main issue has been raised vide ground
I.T.A. No.8113/DEL/2018 4
nos. 2 to 5, pertaining to addition of share premium received by
invoking section 56(2)(viib) of the Act.
3. Briefly stated the facts of the case are that The assessee
company was incorporated on 19th September 2013 with the
objective of carrying on all kinds of business of production and
distribution of feature film, television film, video films, magazine
tapes and video cassettes and documentary films etc., production
and distribution of contents for TV and Internet and other
activities thereto. During the year the assessee was in the initial
phase of setting-up of the above business, therefore, there was no
business of film production. For assessment year 2015-16, the
assessee filed return of income on 28.09.2015 declaring NIL
income. The case was selected for scrutiny and order of
assessment was passed u/s 143(3) of the Income-tax Act, 1961
(‘the Act’) vide order dated 31.12.2017 determining the income of
the assessee at Rs.90,95,46,200/-. The only addition /
disallowance made by the assessing officer is the addition of
entire share premium amounting to Rs. 90,95,46,201/- received
during the year by the assesse u/s 56(2)(viib) of the Act r.w.r.
11UA of the Income-tax Rules, 1962 (‘the Rules’).
4. The assessee has received share premium of Rs.
90,95,46,201/- from various subscribers/equity partners as
stated before the authorities below:-
S.
No
Name of
equity partner
Date of Issue No. of
Shares
Premium
(Rs.) per
Amount of
premium (Rs.)
I.T.A. No.8113/DEL/2018 5
share
1. Shri Anand
Mahindra
06.01.2015;
23.02.2015
4,15,385 1949* 80,95,85,365/-
2. Shri Rakesh
Jhunjhunwala
24.03.2015 19,207 2602 4,99,80,793/-
3. Shri
Radhakishan
Damani
24.03.2015 19,207 2602 4,99,80,793/-
Total 4,53,799 90,95,46,200/-
*The shares issued to Sh. Anand Mahindra at discount of 25% of valuation,
in view of he being an Anchor and early strategic investor and he has also
provided comfort letter to assessee’s banker.
5. The above funds were required by the assessee for film
production and were raised by way of issue of equity shares to
aforesaid equity investors. The shares were issued based on the
valuation from the prescribed expert i.e. Chartered Accountant
using the DCF method which is a prescribed method under
section 56(2)(viib) read with Rule 11UA(2)(b). Based on the said
valuation report dt.15.12.2014, the assessee issued the shares to
aforesaid equity investors at premium as shown in the table
above. During the course of assessment, the assessing officer
disregarded the valuation report of the assessee. The main reason
for disregarding the valuation of equity shares carried out by the
assessee is that projections of revenue as considered for the
purpose of valuation do not match with the actual revenues of
subsequent years. The AO has alleged that no efforts have been
made by the assessee to achieve the projections as made out in
the valuation report and hence in his view, the share premium
I.T.A. No.8113/DEL/2018 6
received by the assessee is without any basis and contrary to the
provisions of section 56(2)(viib) r.w.s. 2(24)(xvi) of the Act. The AO
has further alleged that assessee has also failed to submit any
basis of projections. He is also of the view that in order to achieve
the said projections, assessee should have invested the share
premium amount to earn some income/return, whereas the
assessee has made investment in zero percent debentures of its
associate company and hence basic substance of receiving high
premium is not justified in the view of AO.
6. Aggrieved by the above assessment order, the assessee filed
an appeal before CIT (A)-2. The CIT (A) vide its order dated
24.09.2018 confirmed the action of AO of making addition of
entire share premium received. In addition to confirming the
addition in assessment order, the CIT (A) has made certain
observations in his order alleging that projections were mere
paper plans. He also observed that figures in the valuation report
have been cooked up without providing any reliable basis as to
how the assumptions took place. Further, he observed that under
DCF method, it is always possible for the company to decide the
proposed value of the share and then travelling back to tailor the
figures with the reverse engineering process, to suit its
convenience.
7. Before us, Ld. Counsel for the assessee Shri Pradeep Dinodia
after narrating the entire facts and issues involved and giving the
various chronology of events as to when the shares were issued,
I.T.A. No.8113/DEL/2018 7
the number of shares issued and the amount of premium
received from each equity partners, submitted that the entire
share premium amounting to Rs.90.95 Crores received by the
assessee during the year in respect of issue of shares has been
treated as income by the AO and CIT(A) u/s 56(2)(viib) of the
Acton the reasons which are extraneous, arbitrary and
unjustifiable. The Ld. Counsel further contended that it is the
prerogative of assessee as to how much capital is to be raised
based on its long term and short term funding requirements for
the purpose of running its business. The capital has been raised
by issuing certain number of shares at certain price, which is
again within the domain of assessee to decide. The assessee in
captioned case issued shares at premium based on the value
arrived at by an independent valuer prescribed under the law (i.e.
Chartered Accountant) using the prescribed methodology (DCF
Methodology). He further stated that it is a well settled legal
position that I.T. authorities cannot dictate the terms as to how a
businessman/assessee should have conducted its business. I.T.
authorities cannot decide whether assessee should have collected
premium on its shares or not. It is completely the businessman’s
discretion, business requirement and investor’s willingness which
determines the premium that should be collected on issue of
shares. He submitted that the provisions of section 56(2)(viib)
aimed to check the menace of unaccounted money and are antiabuse
provisions. These provisions have no applicability to
genuine business transactions. The genuineness and
creditworthiness of the strategic investors is not even doubted
I.T.A. No.8113/DEL/2018 8
either by AO or by CIT (A). The provisions of section 56(2)(viib)
require that in case of closely held company, the shares should
be issued at its fair market value to resident investors based on
notified valuation formula by a notified expert.
8. It has been submitted that the provisions of section 56(2)
and section 68 are in the nature of anti-abuse measures aimed at
preventing the malafide transactions intended to avoid tax
liability and to tackle the problem of black money and were never
intended to be made applicable on genuine, bonafide and purely
commercial transactions. To substantiate the same the counsel of
the assessee relied on the following board circulars and judicial
precedents:
• Para 13.2 and 13.4 of CBDT Circular no. 1/2011 dated 6th
April, 2011: stating that the provisions of 56(2)(vii) are antiabuse
provisions which were applicable only if an individual
or an HUF is the recipient. These provisions were
introduced as a counter evasion mechanism to prevent
laundering of unaccounted income. The provisions were
intended to extend the tax net to such transactions in kind.
The intent is not to tax the transactions entered into in the
normal course of business or trade, the profits of which are
taxable under specific head of income.
• Paragraph no. 155 of Finance Minister’s Budget 2012-13
Speech clarifying scope of provisions of section 56(2)(viib).
The finance minister clarified in his speech above provisions
were introduced as a series of measures to deter the
generation and use of unaccounted money by increasing the
I.T.A. No.8113/DEL/2018 9
onus of proof on closely held companies for funds received
from shareholders as well as taxing share premium in
excess of fair market value. Continuing with the above
argument the assessee’s counsel stated that in order to find
out the legislative intent or to ascertain the object or
purpose behind the legislation, the speech made by the
Minister or the mover of the Bill can be taken into
consideration by quoting these judicial precedents: CIT v.
Achaldas 217 ITR 799 (SC); Allied Motors (P.) Ltd. v. CIT
[1997] 91 Taxman 205/224 ITR 677 (SC); Kerala SIDC v
CIT 259 ITR 51 (SC); Soorjmull Nagarmull v CIT 190 ITR
418 (Cal HC); CIT v Vaidya 224 ITR 186 (SC); Loka
Shikshana Trust v CIT 101 ITR 234 (SC). The counsel
further highlighted the subsequent statement of Hon’ble
Finance Minister made on 12.02.2019 wherein it was said
that “no action of any kind was taken against honest
companies that had brought genuine money at premium; we
will protect honest people”. Thus, emphasizing that said
provisions were never meant to be applied on genuine
transactions.
• The ld counsel then referred CBDT circular no.10/2018
dated 31.12.2018 and CBDT Circular no.03/2019 dated
21.01.2019 wherein the position of department on
interpretation of provisions of section 56(2)(viia) dealing with
the transfer of shares was clarified. The CBDT while
explaining the legislative intent behind introduction of
provisions of section 56(2)(viia), inter-alia, stated that said
I.T.A. No.8113/DEL/2018 10
provisions are anti-abuse provisions to prevent the practices
of transferring shares of specified company for no or
inadequate consideration. The CBDT while interpreting the
aforesaid provision followed the settled law that tax statute
should be interpreted strictly. The relevant extract of the
latter circular were also reproduced as “Keeping in view the
plain reading as well the legislative intent of the section
56(2)(viia) and similar provisions contained in section 56(2) of
the Act, being anti-abuse in nature….”. It was further
submitted that although the said circular dated 31.12.2018
was withdrawn due to perhaps certain political reasons yet
the board had affirmed its view which always stood since
introduction of these provisions.
• The AR further relied on various judicial precedents wherein
the assessee highlighted that the bonafide business
transactions cannot be taxed under 56(2)(vii) and that the
provisions of section 56(2) were to strike at the generation
and use of unaccounted money and was never intended the
honest and bonafide transactions where consideration for
transfer was correctly disclosed by the assessee. Reliance
was placed on various case laws some of which are:
i) ITO v.K.P. Varghese (131 ITR 597);
“The object and purpose of sub-section (2), as explicated
from the speech of the Finance Minister, was not to strike at
honest and bona fide transactions where the consideration
for the transfer was correctly disclosed by the assessee but
to bring within the net of taxation those transactions where
the consideration in respect of the transfer was shown at a
I.T.A. No.8113/DEL/2018 11
lesser figure than that actually received by the assessee, so
that they do not escape the charge of tax on capital gains by
understatement of the consideration. This was real object
and purpose of the enactment of sub-section (2) and the
interpretation of this sub-section must fall in line with the
advancement of that object and purpose. We must,
therefore, accept as the underlying assumption of subsection
(2) that there is understatement of consideration in
respect of the transfer and sub-section (2) applies only
where the actual consideration received by the assessee is
not disclosed and the consideration declared in respect of
the transfer is shown at a lesser figure than that actually
received”
ii) Subhodh Menon (ITA 676/Mum/2015); Hon’ble ITAT in
this case has observed that a bonafide business
transactions cannot be taxed u/s 56(2)(vii), especially when
there is no whisper of money laundering by the Ld. AO and
the consideration for shares have been received through
banking channels.
iii) Vaani Estates (P). Ltd v. ITO 172 ITD 629
“Para 7.2……..In the absence of the provisions of Section
56(2)(viia) & Section 56(2)(viib) of the Act it was possible for
any company either closely held or otherwise to introduce
unaccounted money as investment in equity share of the
company with inflated share premium through a deploy as
investor. However in the case of the assessee company, the
investors source of investment is genuine and not in dispute.
The only other lone shareholder of the assessee company is
the daughter of late Mr. B.G. Raghupathy and Mrs. Sasikala
Raghupathy who is the new entrant in the business of her
parents with no scope of possessing undisclosed cash. From
these facts, it is evident that in the case of the assessee
company, there is no possibility of generation and use of
I.T.A. No.8113/DEL/2018 12
unaccounted money resulting from the transaction of
infusing cash by Mrs. Sasikala Raghupathy into the
assessee company in the form of equity share premium.”
• The Ld. Counsel also highlighted that pre-requisite of
discharging onus under section 68 on the part of assessee is
to establish identity, credit worthiness and genuineness of
the transaction. The assessee in the present case has
submitted the details such as PAN, address, Board
Resolutions, PAS-3 (return of allotment) etc. to discharge
the initial onus. The Ld. AO himself went ahead and issued
notices u/s 133(6) to confirm the identities, credit
worthiness and genuineness of the investment transaction.
Further the equity partners of the assessee company who
made investment of the said sum with premium are
seasoned investors of international repute and their
investment wisdom, capacity and prudence cannot be
challenged or put to question. It is prominent that investors
of assessee who have subscribed the shares of assessee at
premium are Sh. Anand Gopal Mahindra, Sh. Radha kishan
Damani, Sh, Rakesh Jhunjunwala. The investment prowess
of these renowned celebrity investors cannot even be
doubted, was submitted by assessee’s counsel.
9. The Ld. Counsel further submitted that there is no doubt
that share premium receipt is always a capital receipt (CIT v
Stellar 251 ITR 263 (SC); Lowry v. Consolidated African
Selection Trust 8 ITR Suppl 88). However, it is only because of
I.T.A. No.8113/DEL/2018 13
the deeming fiction provided in such sections i.e. section 68 or
56(2)(viib) that in certain circumstances the amount received as
capital can be deemed to be income. However, section 68 and
56(2)(viib) being the deeming provisions were created to achieve a
particular objective as per the legislature intent of introducing
such provisions, which was only to be applied to check and
tackle the circulation of unaccounted money. He further referred
the provisions of section 56(2)(viib) of I.T. Act and Rule 11UA of
I.T. rules and submitted that it is important to refer such
provisions in order grasp the real intention of such provisions
and scope and power of assessing authorities and drew our
attention to the relevant provisions.
10. The ld. Counsel submitted that sub clause (ii) of
explanation to section 56(2)(viib) is not applicable to the
assessee’s case and assessee was not required to satisfy the AO
about the valuation done. In accordance with sub clause (i) of
explanation, the assessee had an option to carry out a valuation
and determine the FMV only on the discounted cash flow method
(DCF), which was appropriately followed by the assessee. It was
submitted that in any case the assessee has the option to issue
shares at a price which is higher of clause (i) or clause (ii) of
explanation reproduced above. The AR argued that law leaves no
discretion, option or mandate with the AO under explanation (i)
to section 56(2)(viib) to interfere or vary the option exercised by
the assessee as well as the valuation done by the prescribed
expert following the prescribed valuation methodology.
I.T.A. No.8113/DEL/2018 14
11. He further submitted that cardinal principle of
interpretation of fiscal statute is that they should be construed
strictly and so long as the provision is free from ambiguity, there
should be no need to draw any analogy. In support of his
submission he relied upon the judgments in the case of CIT v
Kasturi237 ITR 24 (SC); Fed of APCCI v State of AP 247 ITR 36
(SC); CIT v Trivedi 183 ITR 420; Greatway v CIT 199 ITR 391; BM
Parmar v CIT 235 ITR 679; Modipon v CIT 247 ITR 40;CWT v
TulsiDass 256 ITR 73; Vivek Jain v ACIT 337 ITR 74 ; Rajasthan
SEB v DCIT 200 ITR 434).(CIT v Surat Cotton 202 ITR 932;
Caltex Oil Refining India Ltd. v CIT 202 ITR 375; CIT v Khimji
Menshi 194 ITR 192;CITvsKaimal 123 ITR 755; Malik v CIT 124
ITR 522;).
12. The counsel further to substantiate his submission about
the strict interpretation of the statute, strongly relied upon the
following judgments and circulars:
i. Dilip Kumar & Co. &Ors.(Civil Appeal No. 3327 of 2007).
The relevant extract of the judgment is reproduced under:
“12. We may, here itself notice that the distinction in
interpreting a taxing provision (charging provision) and in
the matter of interpretation of exemption notification is too
obvious to require any elaboration. Nonetheless, in a
nutshell, we may mention that, as observed in Surendra
Cotton Oil Mills Case (supra), in the matter of interpretation
of charging section of a taxation statute, strict rule of
interpretation is mandatory and if there are two views
possible in the matter of interpretation of a charging
I.T.A. No.8113/DEL/2018 15
section, the one favourable to the assessee need to be
applied. There is, however, confusion in the matter of
interpretation of exemption notification published under
taxation statutes and in this area also, the decisions are
galore.”
ii. Lakshadweep Development Corporation Ltd [(2019) 411 ITR
213 (Kerela HC)]
iii. M/s Microfirm Capital Pvt. Ltd. v. DCIT (ITA
no.513/Kol/2017)
iv. Vaani Estates (P). Ltd v. ITO 172 ITD 629
v. CBDT circular no.10/2018 dated 31.12.2018 and CBDT
Circular no.03/2019 dated 21.01.2019
The ld Counsel emphasizing the aforesaid rule of strict
interpretation submitted that sub clause (ii) of explanation to
section 56(2)(viib) is not applicable and assessee was not required
to satisfy the ld. AO about the valuation done. In accordance with
sub clause (i) of explanation, the appellant had an option to carry
out the valuation and determine the FMV of shares only on the
discounted cash flow method, which was appropriately done by
the assessee and as such AO had not discretion, option or
mandate under explanation (i) to section 56(2)(viib) to interfere or
vary the option exercised by the assessee as well as the valuation
done by the prescribed expert following the prescribed valuation
methodology.
13. The Learned Counsel further submitted in support of his
ground on rejection of valuation report that the main reason for
I.T.A. No.8113/DEL/2018 16
rejecting the valuation report of the assessee as also observed by
AO and subsequently by CIT(A) is that the projections of revenue
as per the valuation do not match with the actual revenues of the
assessee of subsequent years which is totally unwarranted and
beyond the powers provided under statute. The provisions of
section 56(2)(viib) read with Rule 11UA(2) nowhere give the right
to assessing officer to examine the valuation report submitted by
the assessee. The provisions only require the assessee to get the
valuation of shares done by an expert (Chartered Accountant)
using the prescribed methodology. In the present case, the
assessee has obtained a valuation report from a Chartered
Accountant which is based on DCF methodology. The very
purpose of getting the valuation done by a Chartered Accountant
is to ensure that the valuation is fair and reasonable. Such
valuation is to be done by an expert of the subject matter only,
which an assessing officer is not expected to be. The Rule
nowhere permits the AO tinker with the valuation or methodology
applied, assumptions used or to make any adjustment
whatsoever. It is submitted that FMV determined in such a
manner as prescribed by law is binding upon the revenue
14. On a query being put by the bench as to whether AO had
done any of his own valuation, the Ld. Counsel clarified that no
such attempt has been made and whole of the premium received
by the assessee has been treated as taxable income u/s
56(2)(viib) of the I-T Act.
I.T.A. No.8113/DEL/2018 17
15. He submitted that law provides two valuation methodologies
for valuation. The first method is assets based NAV method and
other is DCF Method. NAV method is based on actual numbers
as per latest audited financials of the assessee. While on the
other hand, DCF is not based on actual, but based on estimated
future projections. Therefore, the AO/CIT (A) action of comparing
the actual with projections is in violation of DCF valuation
principles. The AO/CIT(A) have thus, in a way attempted to test
the future NAV with DCF, which is not allowable under law. In
support of the arguments that revenue authorities cannot
disregard or modify the valuation, ld counsel relied upon the
following judgements:
i. Securities & Exchange Board of India &Ors [2015 ABR
291 -(Bombay HC)]
ii. Rameshwaram Strong Glass Pvt Ltd v. ITO [2018-TIOL-
1358-ITAT-Jaipur]
iii. DQ (International) Ltd. vs. ACIT (ITA 151/Hyd/2015)
Besides it was further contended that neither assessing officer
nor assessee are expert in the subject of valuation which is why
the law has provided that assessee is required to get the
valuation done from an prescribed outside expert (Chartered
Accountant or Merchant Banker). Therefore, once the assessee
has obtained the valuation in accordance with the prescription of
law, it is not open for revenue authorities to comment upon. In
the support of his contention the assessee relied on the following
judgements:-
I.T.A. No.8113/DEL/2018 18
i. Miheer H. Mafatlal v. Mafatlal Industries Ltd (AIR 1997
SC 506)
“this court sounded a note of caution observing that valuation
of shares is a technical and complex problem which can be
appropriately left to the consideration of experts in the field of
accountancy.”
ii. Rameshwaram Strong Glass Pvt Ltd v. ITO [2018-TIOL-
1358-ITAT-Jaipur]
iii. G.L. Sultania and Anr. Vs. SEBI (AIR 2007 SC 2172)
“If the valuer adopts the method of valuation prescribed, or in
the absence of any prescribed method, adopts any
recognized method of valuation, his valuation cannot be
assailed unless it is shown that the valuation was made on a
fundamentally erroneous basis, or that a patent mistake had
been committed, or the valuer adopted a demonstrably wrong
approach or a fundamental error going to the root of the
matter.”
iv. ITO v. SBS Properties &FinvestPvt. Ltd. (ITA 278 and
2164/Del/2008)
v. Dr.RenukaDatla (Mrs.) v. Solvay Pharmaceuticals B.V.
and Ors. [2004] 265 ITR 435 (SC)
“If the valuer applied the standard methods of valuation,
considered the matter from all appropriate angles without
taking into account any irrelevant material or eschewing from
consideration any relevant material, his valuation could not
be challenged on the ground of its being vitiated by
fundamental error.”
I.T.A. No.8113/DEL/2018 19
vi. Duncans Industries Ltd. v. State of U.P. and Ors. 2000
ECR 19 (SC)
“The question of valuation is basically a question of fact and
this court is normally reluctant to interfere with the finding on
such a question of fact if it is based on relevant material on
record.”
16. The Ld. Counsel submitted that CIT(A) has made
unwarranted and serious allegations on the assessee without
pointing any fundamental fallacy in the projections or
methodology used by the assessee. These are mere bald
allegations without any evidence. Further, he submitted that all
these accusations by CIT(A) indicate that CIT(A)has beenof the
view that statute books should not have the DCF as prescribed
methodology as this method is always susceptible to reverse
engineering process.
17. The counsel further strongly stated without prejudice to the
fact that assessing officer cannot examine the valuation carried
out in the manner laid down under, in the instant case, the
AO/CIT(A) not only rejected the valuation of the assessee on
illegal grounds, but also failed to provide any alternate fair value
of shares. It is quite surprising that on the one hand the AO
rejects the valuation report of the assessee on whimsical grounds
and on the other hand failed to provide any alternate fair value of
shares. What law requires is the determination of fair market
value as per the prescribed methodology. The ld. AO cannot
I.T.A. No.8113/DEL/2018 20
escape the statutory requirement of determination of FMV by
simply rejecting the valuation report. In this case the ld. AO
rejected the valuation report wherein DCF method was applied
and then determined value of premium at Nil. The ld AO did not
even see any need of following any prescribed method. In its
support the counsel relied on the following judicial
pronouncements: Bharat HariSinghania and Ors v. CWT [1994]
207 ITR 1 (SC);Vodafone M-Pesa Ltd [2018-TIOL-419-HC-Mum-
IT]; Ozoneland Agro Pvt. Ltd. [2013-TIOL-117-ITAT-Mum];
Innoviti Payment Solutions Pvt. Ltd. [ITA no.1278/Bang/2018];
Chandra Kishore Jha v. Mahavir Prasad &Ors. (1999) 8 SCC 266
(SC); State of Uttar Pradesh v. Singhara Singh and Ors. [1963
AIR 358 (SC)]; Medplus Health Services P. Ltd. v. The Income Tax
Officer [2016 (48) ITR (Trib)396(Hyderabad)]; Social Media India
Ltd. v. ACIT 2013 (28) ITR (Trib) 212 (Hyderabad).
18. Mr. Pradeep Dinodia, highlighted that the allegations of AO
and CIT(A) wherein they contended that the assessee has failed to
submit and substantiate the basis for projections are erroneous.
The counsel in response submitted that the said allegation is
factually incorrect since the assessee has furnished the detailed
basis of projections before ld AO vide its submission dated
22.12.2017 and again before ld CIT (A) vide its submission dated
04.06.2018. The detailed working included the year wise and
movie wise projected revenue, operating expenses, balance sheet
and profit & loss etc. of future 5 years till 2020 in accordance
with the DCF valuation methodology. It was submitted that basis
I.T.A. No.8113/DEL/2018 21
of projections were very scientific based on the number of movies
to be released in upcoming years. Such movies were segregated
in Big, Medium, Small and Micro Films, with reasonable number
of movies each year viz., 1 Big Film, 2 Medium Film, and 1 or 2
small or micro film a year. Further, the estimates of projected
revenue were also very reasonable and conservative keeping in
view the engagement of highly successful directors like Rakesh
Om Prakash Mehra (ROPM) who has given block bluster films like
‘Bhaag Milkha Bhaag’ which made a box office collection of INR
164 Crores, ‘Rang De Basanti’ which made a box office collection
of INR 97 Crores etc and also super hit like ‘Delhi-6’. The ld
counsel took us through the comparative chart of Track records
of above movies as also the projections for movies signed with
ROPM to demonstrate that projections were quite reasonable and
conservative. Engagement of veteran writers and music directors-
Like Gulzar and Shankar Ehsaan Loy, interesting start cast,
including the launch of -Anil Kapoor’s son- Harshvardhan Kapoor
and Shabana Azmi’s niece SaiyamiKher; along with veteran
actors like Om Puri, Art Malik etc. Keeping in view of engagement
of renowned star cast and previous success of directors, the
assessee has projected only Rs.55 Crores for 1 Big Film in first
year. While for other movies, the projections ranged between Rs.
22 lacs to 50 Crores. Further the projected revenues were
discounted in later years to account for fluctuations in economic
cycles.It was submitted that by no standards such estimates
made in arriving at the valuations could be termed as unrealistic.
I.T.A. No.8113/DEL/2018 22
He further submitted it is not the case that assessee has not
made efforts to achieve these projections. The assessee has been
resilient and has made its best efforts to achieve the aforesaid
projections. The assessee had received hundreds of film scripts
out of which it shortlisted its initial set of movies. It may be noted
that assessee has hired best directors and star cast, entered into
various agreements and incurred costs as estimated. The first big
film ‘Mirzya’ while on the initial stage generated a huge amount of
press inprint media, online media, social media and other
platforms with over 100 stories.
19. Then the counsel pointed out to the cost projections made
in the DCF method and cost actually incurred on production of
above movies by highlighting the comparison of cost of movies
actually released with their actual cost, submitted that the
assessee has incurred costs as projected. However it is
impossible to determine the exact cost or revenue of films at the
time of signing them. Moreover, on revenue front, in some case
(Satellite and digital revenue), the assessee has exceeded the
projected estimates. Therefore, he submitted that projections
were not mere paperwork as alleged by CIT(A). The assessee has
actually made its best efforts and incurred substantial cost to
achieve the projected revenue by incurring the costs. He further
pointed out the reasons why assessee could not achieve the
projected revenues. The reason explained was that first big movie
‘Mirzya’ flopped on box office and consequently the assessee’s
relation with renowned director also soured and agreement got
I.T.A. No.8113/DEL/2018 23
terminated for the other two major movies ‘ Fannney Khan’,
‘Guitar Guru’ which resulted in substantial losses. In addition
another movie ‘Kaalakaandi’ got adversely affected due to actor
Saif Ali Khan’s earlier back to back flop films ‘Rangoon’ and
‘Chef’.
20. The counsel then summarized his argument related to the
above ground by stating that nature of film industry is such that
nobody can predict the success or failure of the film and how
much business a film would do. Sometimes big fat movies with
super star casts flop, while budget movies with no budgets and
not so popular casts do wonders. The nature of business of the
assessee was stated to be highly risky, full of promises and
pitfalls. The nature of the risk of film business is that of either
feast or famine. Neither the AO nor CIT(A) were correct in
questioning of commercial wisdom/ expediency wherein the
assessee’s commercial wisdom of making investment of funds
raised in zero percent compulsorily convertible debentures
(CCDs) of group companies was questioned by stating that that
assessee should have investment in some instruments which
would have yield the return/profits/revenue in accordance with
the projections made at time of issue of shares. The counsel
argued that the AO and consequently CIT (A) failed to appreciate
that these are strategic investments which are made to foray in
certain business and not to earn the dividend/interest. Further,
investments were made in the group entities to advance the
assessee’s own business objective of production of films and
I.T.A. No.8113/DEL/2018 24
media entertainment. The AO/CIT(A) went beyond their
jurisdiction by charting out how the assessee should have
conducted its business. In support of the above submission the
counsel relied upon the judgments of S.A. Builders (288 ITR
1)(SC)and CIT v. Panipat Woollen & General Mills Co. Ltd (103
ITR 66)(SC). He further cited the Hon’ble Jurisdictional High
Court judgement in case of EKL Appliances Ltd. (ITA no.1068
&1070 of 2011) wherein it was held:
“There is no reason why the OECD guidelines should not be
taken as a valid input in the present case in judging the action
of the TPO. In fact, the CIT (Appeals) has referred to and
applied them and his decision has been affirmed by the
Tribunal. These guidelines, in a different form, have been
recognized in the tax jurisprudence of our country earlier. It
has been held by our courts that it is not for the revenue
authorities to dictate to the assessee as to how he should
conduct his business and it is not for them to tell the assessee
as to what expenditure the assessee can incur. We may refer
to a few of these authorities to elucidate the point. In Eastern
Investment Ltd. v. CIT [1951] 20 ITR 1 (SC), it was held by
the Supreme Court that “there are usually many ways in
which a given thing can be brought about in business circles
but it is not for the Court to decide which of them should have
been employed when the Court is deciding a question under
Section 12(2) of the Income Tax Act”. It was further held in this
case that “it is not necessary to show that the expenditure was
a profitable one or that in fact any profit was earned”. In CIT
I.T.A. No.8113/DEL/2018 25
v. Walchand& Co. (P.) Ltd. [1967] 65 ITR 381 (SC), it was
held by the Supreme Court that in applying the test of
commercial expediency for determining whether the
expenditure was wholly and exclusively laid out for the
purpose of business, reasonableness of the expenditure has to
be judged from the point of view of the businessman and not
of the Revenue.”
21. On the other hand, Ld. DR submitted that the assessee has
not provided the basis and parameters of valuation while
applying DCF method of valuation and has not produced any
evidence to substantiate the basis of projections. In support of
her arguments the DR strongly relied upon the judgement of
Hon’ble Delhi ITAT in the case of Agro Portfolio Private Limited
[(2018) 94 taxmann.com 112 (Delhi-Trib.)] wherein it was
pointed out that the merchant banker who was appointed by the
assessee to carry out the valuation, conducted no independent
enquiry to verify the truth or otherwise the figures furnished by
the assessee.“The merchant bankers solely relied upon an
assumed without independent verification the truthfulness
accuracy and completeness of the information and the financial
data provided by the company. A perusal of this long disclaimer
clearly shows that the merchant banker did not do anything
reflecting their expertise, except mere applying the formula to the
data provided by the assessee.”
I.T.A. No.8113/DEL/2018 26
22. The DR further highlighted the clause of the valuation
report which contained a disclosure of limitation by the valuer
wherein the valuer has stated that: “The Valuation report has
been prepared on the basis of the Certified Projected Financials
and information provided by the management of the company.
Although we have reviewed such data for consistency and
reasonableness, we have not….”. She submitted that the valuer
has not independently applied his mind and accepted the
financial projections made by the assessee. She strongly
supported the reasons advanced by AO and CIT(A) in their order
and submitted that view taken by the authorities below is the
correct view and provisions of section 56(2)(viib) are attracted on
the facts of this case.
23. Mr. Pradeep Dinodia, the ld. Counsel of the assessee in
rejoinder took us through the valuation report wherein he invited
our attention to one of the clause of the valuation Report where
the purpose of valuation was clearly stated to be the fulfilment of
requirement of section 56 of the Income Tax Act, 1961 for the
purpose of issuance of Equity Shares of assessee i.e. Cinestaan
Entertainment Private Limited. He further distinguished the
ruling of Agro Portfolio Private Limited from the present case of
the assessee under various headings as presented in the table
below:
S.No. AGRO PORTFOLIO PVT. LTD.
( Sector – Financial Services)
ASSESSEE (CINESTAAN
ENTERTAINMENT PVT. LTD).
( Sector – Media/ Film)
I.T.A. No.8113/DEL/2018 27
S.No. AGRO PORTFOLIO PVT. LTD.
( Sector – Financial Services)
ASSESSEE (CINESTAAN
ENTERTAINMENT PVT. LTD).
( Sector – Media/ Film)
1. AO has questioned Financial
Parameters of Valuation Report
From the ITAT Order, it appears
that the assessee (Agro Portfolio)
failed to justify any of the
financial parameters questioned
by the AO in relation to the
valuation report (para 5);
whichinclude:
(1) Beta
(2) Market Rate of return
(3) Risk free rate of return
ITAT has observed that despite
AO’s questioning the above, no
responses at all came from
assessee. The AO therefore
proceeded on best judgment
assessment to determine FMV
relying on NAV Method.
In case of assessee (FY 2014-
15), neither the Assessing
Officer nor CIT (Appeal) has
questioned any of the
technical / financial
parameters for valuation report
(such as beta, risk free rate of
return etc.).
AO/ CIT (A) hasdisregardedthe
valuation report solely on
account of comparison of future
actual performance with
projections [Note: hindsight is
not a criteria to reject valuation
as held by numerous Court
Rulings].Moreso, when reasons
for deviation of actual
performance from projected
revenues have been submitted
in detail before both AO and
CIT (A) none of them have
controverted or even discussed
the same in their orders.
2. Procedural non-compliance and
best judgement order.
ITAT order (para 13) notes that
assessee (Agro Portfolio) did not
respond to multiple notices
issued by the Assessing Officer
and therefore AO proceeded to
apply NAV method under best
judgement assessment.
ITAT order notes (Para 14) that no
evidence to justify projections was
produced even before the CIT(A).
Assessee only argued that a
valuation report could not be
disturbed by AO.
Assessee has complied with
each and every notice of the
AO providing detailed
explanation on each aspect.
Detailed submission was filed
with AO explaining the basis of
projections with reference to
track record of the crew, caste
etc. Even reasons for deviation
from actual projections were
explained. All backups for
projections were placed on
record (both before AO and
CIT(A))
While there has been no noncompliance
by Assessee, it is
I.T.A. No.8113/DEL/2018 28
S.No. AGRO PORTFOLIO PVT. LTD.
( Sector – Financial Services)
ASSESSEE (CINESTAAN
ENTERTAINMENT PVT. LTD).
( Sector – Media/ Film)
the AO/ CIT(A) who have
cursorily brushed aside the
voluminous defence put
forward by assessee.
3. Past Performance of Assessee
From the limited description of
the facts in ITAT Order it appears
that the assessee already had
history of poor performance or
track record as AO has noted
that it was carrying forward
losses (para 5 of the ITAT
Order). Therefore, on the facts of
the case, this raises a question
mark that how positive cash flow
projections could have been
taken.
For assessee, valuation report
is dated (December, 2014) to a
time when all film production
operations were yet to
commence.
There was no adverse history or
performance or track record
(post production) available for
assessee as that would caste a
doubt on projections.
4. NAV applied by AO as
alternative method
AO has applied Alternative
Method (NAV Applied) and
determined the value of share at
9.46.
In assessee’s case, no
alternative method has been
applied by AO/ CIT (A) for
computation of FMV. AO/
CIT(A) have arbitrarily assumed
the premium to be NIL.
5. Case of Best Judgement
Assessment
This was a case under best
judgement assessment as
assessee failed to cooperate/
respond to any notices issued by
AO.
AO has not resorted to best
judgment assessment as all
notices issued were duly
complied with.
6. Reliance on Valuer’s Disclaimer
ITAT noted that while valuer has
given a disclaimer (“that valuer
did not verify the truth of the
projections”), the assessee (Agro
Portfolio) has also completely
failed to justify the
For assessee (FY 2014-15), the
valuer has stated that the
projections were examined
for reasonableness and
consistency. That apart,
assessee has also explained
the basis for projections in
I.T.A. No.8113/DEL/2018 29
S.No. AGRO PORTFOLIO PVT. LTD.
( Sector – Financial Services)
ASSESSEE (CINESTAAN
ENTERTAINMENT PVT. LTD).
( Sector – Media/ Film)
projections.There was no
response whatsoever by assessee
to justify the projections or
respond to queries of AO on
financial parameters.
detail in its submissions
before AO/ CIT (A) which have
not been controverted by the
tax authorities.
DECISION
25. We have heard the rival contentions, perused the relevant
findings given in the impugned orders as well as material referred
to before us at the time of hearing. In various grounds of appeal,
the sole issue raised by the appellant assessee relates to the
addition of Rs.90,95,46,200/- made by the AO, by invoking the
deeming provisions of Section 56(2)(viib) by adopting fair market
value of the share premium received by the Assessee Company
from the investors at Nil. What has been sought to be taxed is
mainly the share premium issued on equity shares which
according to the AO far exceeded the FMV of the shares. Though
facts have been discussed in detail in the foregoing paragraphs,
however in the succinct manner, the relevant facts and
background are reiterated in order to appreciate the controversy
and the issue for adjudication. The assessee company was
incorporated on 19th September, 2013, i.e., in the Assessment
Year 2014-15, with the objective of carrying of business of
production and distribution of feature film, tele films, video films,
documentary films etc. During the year under consideration
assessee company was in the initial phase of the setting up of the
I.T.A. No.8113/DEL/2018 30
business, therefore, there was no business of film production as
such. The assessee company to start its venture of its film
production approached accredited ace investors of India to join in
as equity partners, namely, Shri Rakesh Jhunjhunwala, Shri
Anand Gopal Mahindra & Shri Radhakishan Damani. The funds
were raised by way of issue of equity shares to the aforesaid
equity partners and by raising premium on such shares over and
above the face value of Rs.10/- per share. The details and
quantum of premium received from each of the equity partners
are as under:
S.No. Name of equity
partner
Date of
Issue
No. Of
shares
Premium
(Rs.) per
share
Amount of
premium (Rs.)
1. Shri Anand
Mahindra
06.01.2015;
2302.2015
4,15,385 1949 80,95,85,365/-
2. Shri Rakesh
Jhunjhunwala
24.03.2015 19,207 2602 4,99,80,793/-
3. Shri
Radhakishan
Damani
24.03.2015 19,207 2602 4,99,80,793/-
Total 4,53,799 90,95,46,200/-
26. The assessee before issuing the shares had got the share
valued by Chartered Accountant, i.e., ‘Accountant’ as provided
under Rule 11UA(2) by using the ‘DCF Method’ which is one of
the prescribed method in Rule 11UA(2)(b) r.w.s. 56(2)(viib). Based
on the said valuation report dated 15.12.2014, the assessee
company had issued the shares to the aforesaid equity partners
on premium. The ld. Assessing Officer has discarded the
I.T.A. No.8113/DEL/2018 31
valuation report of the CA mainly on the ground that valuation of
the equity shares carried out by the assessee was based on
projection of revenue which did not match with the actual
revenues of the subsequent years. He further held that no efforts
have been made by the assessee to substantiate the figures of
projected revenue in the valuation report and has also failed to
submit any basis for projection. Instead, AO held that assessee
should have invested the share premium amount to earn some
income, whereas assessee has made investment in debentures of
its associate company and hence the basic substance of receiving
the high premium was not justified. After invoking the provision
of Section 56(2)(viib), AO took fair market value of premium at Nil
and face value of Rs. 10/- per share.
27. From the perusal of the records and the impugned orders,
it transpires that Assessing Officer had also issued notices
u/s.133(6) to all the 3 investors to seek confirmation, information
and documents pertaining to transaction of issuance of shares.
In response to the said notices, Assessing Officer has received all
the details and replies directly from these investors confirming
the transaction. The venture agreement between the assessee
and the investors were also filed before the Assessing Officer and
in this regard, our attention was also drawn by the ld. counsel
that the investment was to be made by these investors in various
phases and transactions and it was only after they have gone by
the projection and satisfied with the potentials and credentials of
future growth, they were willing to make such huge investment in
the ‘start-up company’ like assessee. Thus, neither the identity
I.T.A. No.8113/DEL/2018 32
nor the creditworthiness of the investors nor the genuineness of
the transaction can be doubted and in fact the same stands fully
established to which Assessing Officer has also not raised any
doubt or disputed this fact. Thus, under the deeming provisions
of section 68, the test of proving the nature and source of the
credit received stood accepted.
28. Now what we are required to examine whether under
these facts and circumstances Assessing Officer after invoking
the deeming provision of Section 56(2)(vii) could have determined
the fair market value of the premium on shares issued at Nil after
rejecting the valuation report given by the Chartered Accountant
on one of the prescribed methods under the rules adopted by the
Valuer. Before us, learned counsel, Mr. Dinodia, first of all had
harped upon the spirit and intention of the Legislature in
introducing such a deeming provision and submitted that such a
provision cannot be invoked on a normal business transaction of
issuance of shares unless it has been demonstrated by the
Revenue authorities that the entire motive for such issuance of
shares on higher premium was for the tax abuse with the
objective of tax evasion by laundering its own unaccounted
money. His main contention was that, being a deeming fiction, it
has to be strictly interpreted and there is no mandate to the
Assessing Officer to arbitrarily reject the valuation done by the
assessee on his own surmises and whims. We are in tandem with
such a reasoning of the ld. Counsel, because the deeming fiction
not only has to be applied strictly but also have to be seen in the
context in which such deeming provisions are triggered. It is a
I.T.A. No.8113/DEL/2018 33
trite law well settled by the Constitutional Bench of Supreme
Court, in the case of Dilip Kumar & Sons (supra) that in the
matter of charging section of a taxing statute, strict rule of
interpretation is mandatory, and if there are two views possible in
the matter of interpretation, then the construction most
beneficial to the assessee should be adopted. Viewed from such
principle, here is a case where the shares have been subscribed
by unrelated independent parties, who are one of the leading
industrialists and businessman of the country, after considering
the valuation report and future prospect of the company, have
chosen to make investment as an equity partners in a ‘start-up
company’ like assessee, then can it be said that there is any kind
of tax abuse tactics or laundering of any unaccounted money. It
cannot be the unaccounted or black money of investors as it is
their tax paid money invested, duly disclosed and confirmed by
them; and nothing has been brought on record that it is
unaccounted money of assessee company routed through
circuitous channel or any other dubious manner through these
accredited investors. If such a strict view is adopted on such
investment as have been done by the Assessing Officer and by ld.
CIT(A), then no investor in the country will invest in a ‘start-up
company’, because investment can only be lured with the future
prospects and projection of these companies.
29. Now, whether under the deeming provision such an
investment received by the assessee company be brought to tax.
The relevant provision of Section 56 for the sake of ready
reference is reproduced hereunder:
I.T.A. No.8113/DEL/2018 34
“Income from other sources.
56. (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)…….
(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
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;”
Further, as per clause (i) of the Explanation as reproduced above,
the FMV is to be determined in accordance with such method as
I.T.A. No.8113/DEL/2018 35
may be prescribed. Clause (ii) admittedly is not applicable on the
facts of the assessee’s case.
The method to determine the FMV is further provided in
Rule 11UA(2). The relevant extract of the applicable rules is
reproduced below:
“11UA. [(1)] For the purposes of section 56 of the Act, the fair market
value of a property, other than immovable property, shall be determined
in the following manner, namely,—
(2) 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:—
(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.”
30. Ergo, the assessee has an option to do the valuation and
determine the fair market value either on DCF Method or NAV
Method. The assessee being a ‘start-up company’ having lot of
projects in hand had adopted DCF method to value its shares.
Under the DCF Method, the fair market value of the share is
required to be determined either by the Merchant Banker or by
the Chartered Accountant. The valuation of shares based on DCF
is basically to see the future year’s revenue and profits projected
and then discount the same to arrive at the present value of the
business. Before us, the ld. counsel from the facts and material
placed on record had pointed out that the basis of projection
adopted by the valuer was based on very scientific analysis and
method, like number of movies to be released in the upcoming
I.T.A. No.8113/DEL/2018 36
years and such movies were further segregated into big, medium,
small and micro films with reasonable number of movies in hand,
like one big film, two medium films and one or two small or micro
film a year. Further, the estimate of projected revenue was also
kept on a conservative side keeping in mind of the following: –
 Engagement of successful directors like Rakesh Om Prakash
Mehra who has given block buster films like Bhaag Milkha
Bhaag which made a box office collection of INR 164 Crores,
and Rang De Basanti which made a box office collection of INR
97 Crores etc. In support Ld. Counsel had referred to
Annexure-III, giving details of Track records v. Projections for
movies signed with Rakesh Mehra.
 Engagement of veteran writers and music directors-Like
Gulzar and Shankar Ehsaan Roy.
 Interesting start cast, including the launch of Anil Kapoor’s
son- Harshvardhan Kapoor and Shabana Azmi’s niece Saiyami
Kher; along with veteran actors like Om Puri, Anu Malik etc.
 Keeping in view of engagement of renowned star cast and
previous success of directors, the appellant has projected
revenue for only Rs. 55 Crores for 1 Big Film in first year
which went till Rs. 93.10 Crores in 5th Year. While for other
movies, the projections ranged between 22 lacs to 50 Crores.
Further the projected revenues were discounted in later years
to account for fluctuations in economic cycles.
 The number of movies and total revenue and average revenue
for such movies are as projected under:
I.T.A. No.8113/DEL/2018 37
Particulars Year 1
(2016
Year 2
(2017)
Year 3
(2018)
Year 4
(2019)
Year 5 (2020)
Number of
movies
1 Big, 2
Medium, 1
small, 1
Micro
1 Big, 2
Medium, 1
small, 1
Micro
1 big, 2
Medium, 2
small, 1
Micro
1 Big, 2
Medium, 3
small, 1
Micro
1 Big, 2
Medium, 3
small, 2
Micro
Total
revenue
projected
(Rs.
Crores)
121.62 142.50 197.68 238.16 274.76
Average
revenue
per movie
(Rs. crores)
24.32 28.5 32.95 34.02 34.35
31. It has been submitted that the assessee had made all the
efforts to achieve these projects and in fact had received 100
films scripts out of which it had short listed its initial stage of
movies. The ld. counsel has also drawn our attention on various
agreements for production of these films. He also pointed out that
the assessee was projected to make five movies which it had
actually commenced and released and has also pointed out that
assessee has worked upon with 25 movies inception. Not only
that, assessee had also taken into account the cost incurred in
production of various movies and also the comparison of
projected revenue and cost of three movies which were actually
released by the assessee with actual revenue and cost, for which
separate annexure were filed before us. Nowhere the Assessing
Officer and ld. CIT (A) has either disputed the details of projects,
revenues, cost incurred and the manner in which it was
substantiated by the actual revenue. In fact, the projected
revenue really commensurate with the actual state of affairs
based on subsequent year financials. It has been pointed out that
I.T.A. No.8113/DEL/2018 38
assessee had incurred huge cost which were precisely as per the
estimates as projected. However, the revenue could not be
generated as much expected, because the film did not do well in
the box office. Ld. Counsel has also highlighted various reasons
as to why assessee could not achieve the projected revenue from
various documentary evidences. None of these averments and the
and the manner in which the valuation of the shares has been
adopted in the valuation report has been disputed by the
Assessing Officer or by the ld. CIT(A) or any material facts have
been brought on record to show that either the methodology or
the contents of the report are not correct.
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
I.T.A. No.8113/DEL/2018 39
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 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.
33. 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
I.T.A. No.8113/DEL/2018 40
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 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
I.T.A. No.8113/DEL/2018 41
challenge the valuation which is bu 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-TIOL-
1358-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
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
I.T.A. No.8113/DEL/2018 42
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.
34. 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.
35. There is another very important angle to view such cases,
is that, here the shares have not been subscribed by any sister
concern or closely related person, but by an outside investors
like, Anand Mahindra, Rakesh Jhunjhunwala, and Radhakishan
Damania, who are one of the top investors and businessman of
the country and if they have seen certain potential and accepted
this valuation, then how AO or Ld. CIT(A) can question their
wisdom. It is only when they have seen future potentials that
they have invested around Rs.91 crore in the current year and
also huge sums in the subsequent years as informed by the ld.
counsel. The investors like these persons will not make any
investment merely to give dole or carry out any charity to a startup
company, albeit their decision is guided by business and
commercial prudence to evaluate a start-up company like
assessee, what they can achieve in future. It has been informed
that these investors are now the major shareholder of the
assessee company and they cannot become such a huge equity
stock holder if they do not foresee any future in the assessee
company. In a way Revenue is trying to question even the
I.T.A. No.8113/DEL/2018 43
commercial prudence of such big investors like. According to the
Assessing Officer either these investors should not have made
investments because the fair market value of the share is Nil or
assessee should have further invested in securities earning
interest or dividend. Thus, under these facts and circumstances
of the case, we do not approve the approach and the finding of
the ld. Assessing Officer or ld. CIT(A) so to take the fair market
value of the share at ‘Nil’ under the provision of Section
56(2)(viib) and thereby making the addition of Rs.90.95 crores.
The other points and various other arguments raised by the ld.
counsel which kept open as same has been rendered purely
academic in view of finding given above.
36. Other grounds are either consequential or have become
academic, hence same are treated as infructuous. In the result
appeal of the appellant assessee is allowed.
Order pronounced in the open Court on 27th May, 2019.
Sd/- Sd/-
[L.P. SAHU] [AMIT SHUKLA]
ACCOUNTANT MEMBER JUDICIAL MEMBER
DATED: 27th May, 2019
PKK:

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