IN THE INCOME TAX APPELLATE TRIBUNAL
\nDELHI BENCH \u201cB\u201d NEW DELHI
\nBEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER
\n&
\nSHRI L.P. SAHU, ACCOUNTANT MEMBER
\nI.T.A. No.8113\/DEL\/2018
\nAssessment Year: 2015-16
\nCinestaan Entertainment P.
\nLtd.,
\n203 Siddharth Chambers, Near
\nIIT, Hauz Khas,
\nNew Delhi.
\nv. ITO, Ward-6(2),
\nNew Delhi.
\nTAN\/PAN: AAFCC 4067R
\n(Appellant) (Respondent)
\nAppellant by: Shri Pradeep Dinodia, CA & Shri Ravi
\nKumar, CA
\nRespondent by: Ms. Nidhi Srivastava, CIT-DR
\nDate of hearing: 18 03 2019
\nDate of pronouncement: 27 05 2019
\nO R D E R
\nPER AMIT SHUKLA, JM:
\nThe aforesaid appeal has been filed by the assessee against
\norder, dated 24.09.2018, passed by Ld. CIT (Appeals)-2 for the
\nquantum of assessment u\/s 143(3) for the assessment year
\n2015-16. Following grounds have been raised to challenge the
\nimpugned order:
\n1. That the order dated 24.09.2018 passed by Ld.
\nCommissioner of income-tax Appeals (\u2018CIT (A)\u2019) u\/s 250 of the
\nAct is bad in law and void ab-initio.
\nAddition in respect of share premium received
\nI.T.A. No.8113\/DEL\/2018 2
\n2. That Ld. CIT(A) has erred in law and on facts and
\ncircumstances of the case in upholding the addition of Rs.
\n90,95,46,200\/- made by the Ld. AO to the assessee\u2019s
\nreturned income u\/s 56(2)(viib) read with rule 11UA(2)(b) in
\nrespect of share premium received on issue of equity shares
\nduring the year on wholly erroneous, illegal and untenable
\ngrounds:
\na. That Ld. CIT(A) has erred in law and on facts and
\ncircumstances of the case in upholding the aforesaid
\naddition made by Ld. AO by treating the amount of share
\npremium ought to be received by the assessee as NIL
\nwithout affording any cogent reasons.
\nb. That Ld. CIT(A) has erred in law and on facts and
\ncircumstances of the case in holding that value of entire
\nshare premium received of represents the income of the
\nassessee.
\nRejection of valuation report
\n3. That Ld. CIT(A) has erred in law and on facts and
\ncircumstances of the case by upholding the aforesaid
\naddition made by the Ld. AO by disregarding the valuation
\nreport submitted by assessee on completely whimsical and
\nsuperficial grounds:
\na. That Ld. AO and subsequently Ld. CIT(A) have erred in law
\nand on facts and circumstances of the case in taking a
\nhindsight by comparing the projections made at the time of
\nissuance of shares with the subsequent events and actual
\nfinancial results despite the settled legal proposition that
\nvaluation cannot be judged in light of subsequent events or
\nhindsight.
\nb. That Ld. AO and subsequently Ld. CIT (A) have erred in not
\nappreciating the role and responsibilities of valuer in the
\nright perspective.
\nc. That Ld. CIT (A) has erred in law and on facts and
\ncircumstances of the case in making several factually
\nI.T.A. No.8113\/DEL\/2018 3
\nincorrect statements\/ baseless assertions without affording
\nany supporting evidence.
\nd. That, without prejudice, Ld. AO and consequently Ld. CIT (A)
\nhave erred in law and on facts and circumstances of the
\ncase in not computing alternate fair market value relying on
\nany of the prescribed methods [under Sec 56(2)(viib) read
\nwith Rule 11 UA(2) of Income Tax Rules] which amounts to
\ndereliction of their statutory duty under the Income Tax Act.
\nRejection of valuation methodology
\n4. That Ld. AO and subsequently Ld. CIT (A) have erred in law
\nand on facts and circumstances of the case in not
\nappreciating the fact that the valuation of the shares of the
\nassessee is based on the prescribed method (DCF Method)
\nunder Rule 11UA (2)(b) by a prescribed expert, i.e., Chartered
\nAccountant, and the same can neither be varied nor
\ndisregarded by the Ld.AO for determination of fair market
\nvalue for the purposes of section 56(2)(viib).
\nQuestioning the commercial wisdom
\n5. That Ld. CIT(A) has grossly erred in law and on facts and
\ncircumstances of the case by upholding the action of Ld. AO
\nof making the aforesaid addition by challenging the
\nassessee\u2019s commercial wisdom and questioning the
\ninvestment made by the assessee in compulsorily convertible
\ndebentures.
\nPenalty & Interest
\n6. The Ld. AO has grossly erred in initiating penalty proceedings
\nunder section 271(1)(c) of the Act mechanically and without
\nrecording any satisfaction for its initiation.
\n7. That the Ld. A.O has erred in law in charging interest u\/s
\n234B of the Act on wholly illegal and untenable grounds.
\n2. Ground no. 1 being general in nature does not require any
\nspecific adjudication. Main issue has been raised vide ground
\nI.T.A. No.8113\/DEL\/2018 4
\nnos. 2 to 5, pertaining to addition of share premium received by
\ninvoking section 56(2)(viib) of the Act.
\n3. Briefly stated the facts of the case are that The assessee
\ncompany was incorporated on 19th September 2013 with the
\nobjective of carrying on all kinds of business of production and
\ndistribution of feature film, television film, video films, magazine
\ntapes and video cassettes and documentary films etc., production
\nand distribution of contents for TV and Internet and other
\nactivities thereto. During the year the assessee was in the initial
\nphase of setting-up of the above business, therefore, there was no
\nbusiness of film production. For assessment year 2015-16, the
\nassessee filed return of income on 28.09.2015 declaring NIL
\nincome. The case was selected for scrutiny and order of
\nassessment was passed u\/s 143(3) of the Income-tax Act, 1961
\n(\u2018the Act\u2019) vide order dated 31.12.2017 determining the income of
\nthe assessee at Rs.90,95,46,200\/-. The only addition \/
\ndisallowance made by the assessing officer is the addition of
\nentire share premium amounting to Rs. 90,95,46,201\/- received
\nduring the year by the assesse u\/s 56(2)(viib) of the Act r.w.r.
\n11UA of the Income-tax Rules, 1962 (\u2018the Rules\u2019).
\n4. The assessee has received share premium of Rs.
\n90,95,46,201\/- from various subscribers\/equity partners as
\nstated before the authorities below:-
\nS.
\nNo
\nName of
\nequity partner
\nDate of Issue No. of
\nShares
\nPremium
\n(Rs.) per
\nAmount of
\npremium (Rs.)
\nI.T.A. No.8113\/DEL\/2018 5
\nshare
\n1. Shri Anand
\nMahindra
\n06.01.2015;
\n23.02.2015
\n4,15,385 1949* 80,95,85,365\/-
\n2. Shri Rakesh
\nJhunjhunwala
\n24.03.2015 19,207 2602 4,99,80,793\/-
\n3. Shri
\nRadhakishan
\nDamani
\n24.03.2015 19,207 2602 4,99,80,793\/-
\nTotal 4,53,799 90,95,46,200\/-
\n*The shares issued to Sh. Anand Mahindra at discount of 25% of valuation,
\nin view of he being an Anchor and early strategic investor and he has also
\nprovided comfort letter to assessee\u2019s banker.
\n5. The above funds were required by the assessee for film
\nproduction and were raised by way of issue of equity shares to
\naforesaid equity investors. The shares were issued based on the
\nvaluation from the prescribed expert i.e. Chartered Accountant
\nusing the DCF method which is a prescribed method under
\nsection 56(2)(viib) read with Rule 11UA(2)(b). Based on the said
\nvaluation report dt.15.12.2014, the assessee issued the shares to
\naforesaid equity investors at premium as shown in the table
\nabove. During the course of assessment, the assessing officer
\ndisregarded the valuation report of the assessee. The main reason
\nfor disregarding the valuation of equity shares carried out by the
\nassessee is that projections of revenue as considered for the
\npurpose of valuation do not match with the actual revenues of
\nsubsequent years. The AO has alleged that no efforts have been
\nmade by the assessee to achieve the projections as made out in
\nthe valuation report and hence in his view, the share premium
\nI.T.A. No.8113\/DEL\/2018 6
\nreceived by the assessee is without any basis and contrary to the
\nprovisions of section 56(2)(viib) r.w.s. 2(24)(xvi) of the Act. The AO
\nhas further alleged that assessee has also failed to submit any
\nbasis of projections. He is also of the view that in order to achieve
\nthe said projections, assessee should have invested the share
\npremium amount to earn some income\/return, whereas the
\nassessee has made investment in zero percent debentures of its
\nassociate company and hence basic substance of receiving high
\npremium is not justified in the view of AO.
\n6. Aggrieved by the above assessment order, the assessee filed
\nan appeal before CIT (A)-2. The CIT (A) vide its order dated
\n24.09.2018 confirmed the action of AO of making addition of
\nentire share premium received. In addition to confirming the
\naddition in assessment order, the CIT (A) has made certain
\nobservations in his order alleging that projections were mere
\npaper plans. He also observed that figures in the valuation report
\nhave been cooked up without providing any reliable basis as to
\nhow the assumptions took place. Further, he observed that under
\nDCF method, it is always possible for the company to decide the
\nproposed value of the share and then travelling back to tailor the
\nfigures with the reverse engineering process, to suit its
\nconvenience.
\n7. Before us, Ld. Counsel for the assessee Shri Pradeep Dinodia
\nafter narrating the entire facts and issues involved and giving the
\nvarious chronology of events as to when the shares were issued,
\nI.T.A. No.8113\/DEL\/2018 7
\nthe number of shares issued and the amount of premium
\nreceived from each equity partners, submitted that the entire
\nshare premium amounting to Rs.90.95 Crores received by the
\nassessee during the year in respect of issue of shares has been
\ntreated as income by the AO and CIT(A) u\/s 56(2)(viib) of the
\nActon the reasons which are extraneous, arbitrary and
\nunjustifiable. The Ld. Counsel further contended that it is the
\nprerogative of assessee as to how much capital is to be raised
\nbased on its long term and short term funding requirements for
\nthe purpose of running its business. The capital has been raised
\nby issuing certain number of shares at certain price, which is
\nagain within the domain of assessee to decide. The assessee in
\ncaptioned case issued shares at premium based on the value
\narrived at by an independent valuer prescribed under the law (i.e.
\nChartered Accountant) using the prescribed methodology (DCF
\nMethodology). He further stated that it is a well settled legal
\nposition that I.T. authorities cannot dictate the terms as to how a
\nbusinessman\/assessee should have conducted its business. I.T.
\nauthorities cannot decide whether assessee should have collected
\npremium on its shares or not. It is completely the businessman\u2019s
\ndiscretion, business requirement and investor\u2019s willingness which
\ndetermines the premium that should be collected on issue of
\nshares. He submitted that the provisions of section 56(2)(viib)
\naimed to check the menace of unaccounted money and are antiabuse
\nprovisions. These provisions have no applicability to
\ngenuine business transactions. The genuineness and
\ncreditworthiness of the strategic investors is not even doubted
\nI.T.A. No.8113\/DEL\/2018 8
\neither by AO or by CIT (A). The provisions of section 56(2)(viib)
\nrequire that in case of closely held company, the shares should
\nbe issued at its fair market value to resident investors based on
\nnotified valuation formula by a notified expert.
\n8. It has been submitted that the provisions of section 56(2)
\nand section 68 are in the nature of anti-abuse measures aimed at
\npreventing the malafide transactions intended to avoid tax
\nliability and to tackle the problem of black money and were never
\nintended to be made applicable on genuine, bonafide and purely
\ncommercial transactions. To substantiate the same the counsel of
\nthe assessee relied on the following board circulars and judicial
\nprecedents:
\n\u2022 Para 13.2 and 13.4 of CBDT Circular no. 1\/2011 dated 6th
\nApril, 2011: stating that the provisions of 56(2)(vii) are antiabuse
\nprovisions which were applicable only if an individual
\nor an HUF is the recipient. These provisions were
\nintroduced as a counter evasion mechanism to prevent
\nlaundering of unaccounted income. The provisions were
\nintended to extend the tax net to such transactions in kind.
\nThe intent is not to tax the transactions entered into in the
\nnormal course of business or trade, the profits of which are
\ntaxable under specific head of income.
\n\u2022 Paragraph no. 155 of Finance Minister\u2019s Budget 2012-13
\nSpeech clarifying scope of provisions of section 56(2)(viib).
\nThe finance minister clarified in his speech above provisions
\nwere introduced as a series of measures to deter the
\ngeneration and use of unaccounted money by increasing the
\nI.T.A. No.8113\/DEL\/2018 9
\nonus of proof on closely held companies for funds received
\nfrom shareholders as well as taxing share premium in
\nexcess of fair market value. Continuing with the above
\nargument the assessee\u2019s counsel stated that in order to find
\nout the legislative intent or to ascertain the object or
\npurpose behind the legislation, the speech made by the
\nMinister or the mover of the Bill can be taken into
\nconsideration by quoting these judicial precedents: CIT v.
\nAchaldas 217 ITR 799 (SC); Allied Motors (P.) Ltd. v. CIT
\n[1997] 91 Taxman 205\/224 ITR 677 (SC); Kerala SIDC v
\nCIT 259 ITR 51 (SC); Soorjmull Nagarmull v CIT 190 ITR
\n418 (Cal HC); CIT v Vaidya 224 ITR 186 (SC); Loka
\nShikshana Trust v CIT 101 ITR 234 (SC). The counsel
\nfurther highlighted the subsequent statement of Hon\u2019ble
\nFinance Minister made on 12.02.2019 wherein it was said
\nthat \u201cno action of any kind was taken against honest
\ncompanies that had brought genuine money at premium; we
\nwill protect honest people\u201d. Thus, emphasizing that said
\nprovisions were never meant to be applied on genuine
\ntransactions.
\n\u2022 The ld counsel then referred CBDT circular no.10\/2018
\ndated 31.12.2018 and CBDT Circular no.03\/2019 dated
\n21.01.2019 wherein the position of department on
\ninterpretation of provisions of section 56(2)(viia) dealing with
\nthe transfer of shares was clarified. The CBDT while
\nexplaining the legislative intent behind introduction of
\nprovisions of section 56(2)(viia), inter-alia, stated that said
\nI.T.A. No.8113\/DEL\/2018 10
\nprovisions are anti-abuse provisions to prevent the practices
\nof transferring shares of specified company for no or
\ninadequate consideration. The CBDT while interpreting the
\naforesaid provision followed the settled law that tax statute
\nshould be interpreted strictly. The relevant extract of the
\nlatter circular were also reproduced as \u201cKeeping in view the
\nplain reading as well the legislative intent of the section
\n56(2)(viia) and similar provisions contained in section 56(2) of
\nthe Act, being anti-abuse in nature\u2026.\u201d. It was further
\nsubmitted that although the said circular dated 31.12.2018
\nwas withdrawn due to perhaps certain political reasons yet
\nthe board had affirmed its view which always stood since
\nintroduction of these provisions.
\n\u2022 The AR further relied on various judicial precedents wherein
\nthe assessee highlighted that the bonafide business
\ntransactions cannot be taxed under 56(2)(vii) and that the
\nprovisions of section 56(2) were to strike at the generation
\nand use of unaccounted money and was never intended the
\nhonest and bonafide transactions where consideration for
\ntransfer was correctly disclosed by the assessee. Reliance
\nwas placed on various case laws some of which are:
\ni) ITO v.K.P. Varghese (131 ITR 597);
\n\u201cThe object and purpose of sub-section (2), as explicated
\nfrom the speech of the Finance Minister, was not to strike at
\nhonest and bona fide transactions where the consideration
\nfor the transfer was correctly disclosed by the assessee but
\nto bring within the net of taxation those transactions where
\nthe consideration in respect of the transfer was shown at a
\nI.T.A. No.8113\/DEL\/2018 11
\nlesser figure than that actually received by the assessee, so
\nthat they do not escape the charge of tax on capital gains by
\nunderstatement of the consideration. This was real object
\nand purpose of the enactment of sub-section (2) and the
\ninterpretation of this sub-section must fall in line with the
\nadvancement of that object and purpose. We must,
\ntherefore, accept as the underlying assumption of subsection
\n(2) that there is understatement of consideration in
\nrespect of the transfer and sub-section (2) applies only
\nwhere the actual consideration received by the assessee is
\nnot disclosed and the consideration declared in respect of
\nthe transfer is shown at a lesser figure than that actually
\nreceived\u201d
\nii) Subhodh Menon (ITA 676\/Mum\/2015); Hon\u2019ble ITAT in
\nthis case has observed that a bonafide business
\ntransactions cannot be taxed u\/s 56(2)(vii), especially when
\nthere is no whisper of money laundering by the Ld. AO and
\nthe consideration for shares have been received through
\nbanking channels.
\niii) Vaani Estates (P). Ltd v. ITO 172 ITD 629
\n\u201cPara 7.2\u2026\u2026..In the absence of the provisions of Section
\n56(2)(viia) & Section 56(2)(viib) of the Act it was possible for
\nany company either closely held or otherwise to introduce
\nunaccounted money as investment in equity share of the
\ncompany with inflated share premium through a deploy as
\ninvestor. However in the case of the assessee company, the
\ninvestors source of investment is genuine and not in dispute.
\nThe only other lone shareholder of the assessee company is
\nthe daughter of late Mr. B.G. Raghupathy and Mrs. Sasikala
\nRaghupathy who is the new entrant in the business of her
\nparents with no scope of possessing undisclosed cash. From
\nthese facts, it is evident that in the case of the assessee
\ncompany, there is no possibility of generation and use of
\nI.T.A. No.8113\/DEL\/2018 12
\nunaccounted money resulting from the transaction of
\ninfusing cash by Mrs. Sasikala Raghupathy into the
\nassessee company in the form of equity share premium.\u201d
\n\u2022 The Ld. Counsel also highlighted that pre-requisite of
\ndischarging onus under section 68 on the part of assessee is
\nto establish identity, credit worthiness and genuineness of
\nthe transaction. The assessee in the present case has
\nsubmitted the details such as PAN, address, Board
\nResolutions, PAS-3 (return of allotment) etc. to discharge
\nthe initial onus. The Ld. AO himself went ahead and issued
\nnotices u\/s 133(6) to confirm the identities, credit
\nworthiness and genuineness of the investment transaction.
\nFurther the equity partners of the assessee company who
\nmade investment of the said sum with premium are
\nseasoned investors of international repute and their
\ninvestment wisdom, capacity and prudence cannot be
\nchallenged or put to question. It is prominent that investors
\nof assessee who have subscribed the shares of assessee at
\npremium are Sh. Anand Gopal Mahindra, Sh. Radha kishan
\nDamani, Sh, Rakesh Jhunjunwala. The investment prowess
\nof these renowned celebrity investors cannot even be
\ndoubted, was submitted by assessee\u2019s counsel.
\n9. The Ld. Counsel further submitted that there is no doubt
\nthat share premium receipt is always a capital receipt (CIT v
\nStellar 251 ITR 263 (SC); Lowry v. Consolidated African
\nSelection Trust 8 ITR Suppl 88). However, it is only because of
\nI.T.A. No.8113\/DEL\/2018 13
\nthe deeming fiction provided in such sections i.e. section 68 or
\n56(2)(viib) that in certain circumstances the amount received as
\ncapital can be deemed to be income. However, section 68 and
\n56(2)(viib) being the deeming provisions were created to achieve a
\nparticular objective as per the legislature intent of introducing
\nsuch provisions, which was only to be applied to check and
\ntackle the circulation of unaccounted money. He further referred
\nthe provisions of section 56(2)(viib) of I.T. Act and Rule 11UA of
\nI.T. rules and submitted that it is important to refer such
\nprovisions in order grasp the real intention of such provisions
\nand scope and power of assessing authorities and drew our
\nattention to the relevant provisions.
\n10. The ld. Counsel submitted that sub clause (ii) of
\nexplanation to section 56(2)(viib) is not applicable to the
\nassessee\u2019s case and assessee was not required to satisfy the AO
\nabout the valuation done. In accordance with sub clause (i) of
\nexplanation, the assessee had an option to carry out a valuation
\nand determine the FMV only on the discounted cash flow method
\n(DCF), which was appropriately followed by the assessee. It was
\nsubmitted that in any case the assessee has the option to issue
\nshares at a price which is higher of clause (i) or clause (ii) of
\nexplanation reproduced above. The AR argued that law leaves no
\ndiscretion, option or mandate with the AO under explanation (i)
\nto section 56(2)(viib) to interfere or vary the option exercised by
\nthe assessee as well as the valuation done by the prescribed
\nexpert following the prescribed valuation methodology.
\nI.T.A. No.8113\/DEL\/2018 14
\n11. He further submitted that cardinal principle of
\ninterpretation of fiscal statute is that they should be construed
\nstrictly and so long as the provision is free from ambiguity, there
\nshould be no need to draw any analogy. In support of his
\nsubmission he relied upon the judgments in the case of CIT v
\nKasturi237 ITR 24 (SC); Fed of APCCI v State of AP 247 ITR 36
\n(SC); CIT v Trivedi 183 ITR 420; Greatway v CIT 199 ITR 391; BM
\nParmar v CIT 235 ITR 679; Modipon v CIT 247 ITR 40;CWT v
\nTulsiDass 256 ITR 73; Vivek Jain v ACIT 337 ITR 74 ; Rajasthan
\nSEB v DCIT 200 ITR 434).(CIT v Surat Cotton 202 ITR 932;
\nCaltex Oil Refining India Ltd. v CIT 202 ITR 375; CIT v Khimji
\nMenshi 194 ITR 192;CITvsKaimal 123 ITR 755; Malik v CIT 124
\nITR 522;).
\n12. The counsel further to substantiate his submission about
\nthe strict interpretation of the statute, strongly relied upon the
\nfollowing judgments and circulars:
\ni. Dilip Kumar & Co. &Ors.(Civil Appeal No. 3327 of 2007).
\nThe relevant extract of the judgment is reproduced under:
\n\u201c12. We may, here itself notice that the distinction in
\ninterpreting a taxing provision (charging provision) and in
\nthe matter of interpretation of exemption notification is too
\nobvious to require any elaboration. Nonetheless, in a
\nnutshell, we may mention that, as observed in Surendra
\nCotton Oil Mills Case (supra), in the matter of interpretation
\nof charging section of a taxation statute, strict rule of
\ninterpretation is mandatory and if there are two views
\npossible in the matter of interpretation of a charging
\nI.T.A. No.8113\/DEL\/2018 15
\nsection, the one favourable to the assessee need to be
\napplied. There is, however, confusion in the matter of
\ninterpretation of exemption notification published under
\ntaxation statutes and in this area also, the decisions are
\ngalore.\u201d
\nii. Lakshadweep Development Corporation Ltd [(2019) 411 ITR
\n213 (Kerela HC)]
\niii. M\/s Microfirm Capital Pvt. Ltd. v. DCIT (ITA
\nno.513\/Kol\/2017)
\niv. Vaani Estates (P). Ltd v. ITO 172 ITD 629
\nv. CBDT circular no.10\/2018 dated 31.12.2018 and CBDT
\nCircular no.03\/2019 dated 21.01.2019
\nThe ld Counsel emphasizing the aforesaid rule of strict
\ninterpretation submitted that sub clause (ii) of explanation to
\nsection 56(2)(viib) is not applicable and assessee was not required
\nto satisfy the ld. AO about the valuation done. In accordance with
\nsub clause (i) of explanation, the appellant had an option to carry
\nout the valuation and determine the FMV of shares only on the
\ndiscounted cash flow method, which was appropriately done by
\nthe assessee and as such AO had not discretion, option or
\nmandate under explanation (i) to section 56(2)(viib) to interfere or
\nvary the option exercised by the assessee as well as the valuation
\ndone by the prescribed expert following the prescribed valuation
\nmethodology.
\n13. The Learned Counsel further submitted in support of his
\nground on rejection of valuation report that the main reason for
\nI.T.A. No.8113\/DEL\/2018 16
\nrejecting the valuation report of the assessee as also observed by
\nAO and subsequently by CIT(A) is that the projections of revenue
\nas per the valuation do not match with the actual revenues of the
\nassessee of subsequent years which is totally unwarranted and
\nbeyond the powers provided under statute. The provisions of
\nsection 56(2)(viib) read with Rule 11UA(2) nowhere give the right
\nto assessing officer to examine the valuation report submitted by
\nthe assessee. The provisions only require the assessee to get the
\nvaluation of shares done by an expert (Chartered Accountant)
\nusing the prescribed methodology. In the present case, the
\nassessee has obtained a valuation report from a Chartered
\nAccountant which is based on DCF methodology. The very
\npurpose of getting the valuation done by a Chartered Accountant
\nis to ensure that the valuation is fair and reasonable. Such
\nvaluation is to be done by an expert of the subject matter only,
\nwhich an assessing officer is not expected to be. The Rule
\nnowhere permits the AO tinker with the valuation or methodology
\napplied, assumptions used or to make any adjustment
\nwhatsoever. It is submitted that FMV determined in such a
\nmanner as prescribed by law is binding upon the revenue
\n14. On a query being put by the bench as to whether AO had
\ndone any of his own valuation, the Ld. Counsel clarified that no
\nsuch attempt has been made and whole of the premium received
\nby the assessee has been treated as taxable income u\/s
\n56(2)(viib) of the I-T Act.
\nI.T.A. No.8113\/DEL\/2018 17
\n15. He submitted that law provides two valuation methodologies
\nfor valuation. The first method is assets based NAV method and
\nother is DCF Method. NAV method is based on actual numbers
\nas per latest audited financials of the assessee. While on the
\nother hand, DCF is not based on actual, but based on estimated
\nfuture projections. Therefore, the AO\/CIT (A) action of comparing
\nthe actual with projections is in violation of DCF valuation
\nprinciples. The AO\/CIT(A) have thus, in a way attempted to test
\nthe future NAV with DCF, which is not allowable under law. In
\nsupport of the arguments that revenue authorities cannot
\ndisregard or modify the valuation, ld counsel relied upon the
\nfollowing judgements:
\ni. Securities & Exchange Board of India &Ors [2015 ABR
\n291 -(Bombay HC)]
\nii. Rameshwaram Strong Glass Pvt Ltd v. ITO [2018-TIOL-
\n1358-ITAT-Jaipur]
\niii. DQ (International) Ltd. vs. ACIT (ITA 151\/Hyd\/2015)
\nBesides it was further contended that neither assessing officer
\nnor assessee are expert in the subject of valuation which is why
\nthe law has provided that assessee is required to get the
\nvaluation done from an prescribed outside expert (Chartered
\nAccountant or Merchant Banker). Therefore, once the assessee
\nhas obtained the valuation in accordance with the prescription of
\nlaw, it is not open for revenue authorities to comment upon. In
\nthe support of his contention the assessee relied on the following
\njudgements:-
\nI.T.A. No.8113\/DEL\/2018 18
\ni. Miheer H. Mafatlal v. Mafatlal Industries Ltd (AIR 1997
\nSC 506)
\n\u201cthis court sounded a note of caution observing that valuation
\nof shares is a technical and complex problem which can be
\nappropriately left to the consideration of experts in the field of
\naccountancy.\u201d
\nii. Rameshwaram Strong Glass Pvt Ltd v. ITO [2018-TIOL-
\n1358-ITAT-Jaipur]
\niii. G.L. Sultania and Anr. Vs. SEBI (AIR 2007 SC 2172)
\n\u201cIf the valuer adopts the method of valuation prescribed, or in
\nthe absence of any prescribed method, adopts any
\nrecognized method of valuation, his valuation cannot be
\nassailed unless it is shown that the valuation was made on a
\nfundamentally erroneous basis, or that a patent mistake had
\nbeen committed, or the valuer adopted a demonstrably wrong
\napproach or a fundamental error going to the root of the
\nmatter.\u201d
\niv. ITO v. SBS Properties &FinvestPvt. Ltd. (ITA 278 and
\n2164\/Del\/2008)
\nv. Dr.RenukaDatla (Mrs.) v. Solvay Pharmaceuticals B.V.
\nand Ors. [2004] 265 ITR 435 (SC)
\n\u201cIf the valuer applied the standard methods of valuation,
\nconsidered the matter from all appropriate angles without
\ntaking into account any irrelevant material or eschewing from
\nconsideration any relevant material, his valuation could not
\nbe challenged on the ground of its being vitiated by
\nfundamental error.\u201d
\nI.T.A. No.8113\/DEL\/2018 19
\nvi. Duncans Industries Ltd. v. State of U.P. and Ors. 2000
\nECR 19 (SC)
\n\u201cThe question of valuation is basically a question of fact and
\nthis court is normally reluctant to interfere with the finding on
\nsuch a question of fact if it is based on relevant material on
\nrecord.\u201d
\n16. The Ld. Counsel submitted that CIT(A) has made
\nunwarranted and serious allegations on the assessee without
\npointing any fundamental fallacy in the projections or
\nmethodology used by the assessee. These are mere bald
\nallegations without any evidence. Further, he submitted that all
\nthese accusations by CIT(A) indicate that CIT(A)has beenof the
\nview that statute books should not have the DCF as prescribed
\nmethodology as this method is always susceptible to reverse
\nengineering process.
\n17. The counsel further strongly stated without prejudice to the
\nfact that assessing officer cannot examine the valuation carried
\nout in the manner laid down under, in the instant case, the
\nAO\/CIT(A) not only rejected the valuation of the assessee on
\nillegal grounds, but also failed to provide any alternate fair value
\nof shares. It is quite surprising that on the one hand the AO
\nrejects the valuation report of the assessee on whimsical grounds
\nand on the other hand failed to provide any alternate fair value of
\nshares. What law requires is the determination of fair market
\nvalue as per the prescribed methodology. The ld. AO cannot
\nI.T.A. No.8113\/DEL\/2018 20
\nescape the statutory requirement of determination of FMV by
\nsimply rejecting the valuation report. In this case the ld. AO
\nrejected the valuation report wherein DCF method was applied
\nand then determined value of premium at Nil. The ld AO did not
\neven see any need of following any prescribed method. In its
\nsupport the counsel relied on the following judicial
\npronouncements: Bharat HariSinghania and Ors v. CWT [1994]
\n207 ITR 1 (SC);Vodafone M-Pesa Ltd [2018-TIOL-419-HC-Mum-
\nIT]; Ozoneland Agro Pvt. Ltd. [2013-TIOL-117-ITAT-Mum];
\nInnoviti Payment Solutions Pvt. Ltd. [ITA no.1278\/Bang\/2018];
\nChandra Kishore Jha v. Mahavir Prasad &Ors. (1999) 8 SCC 266
\n(SC); State of Uttar Pradesh v. Singhara Singh and Ors. [1963
\nAIR 358 (SC)]; Medplus Health Services P. Ltd. v. The Income Tax
\nOfficer [2016 (48) ITR (Trib)396(Hyderabad)]; Social Media India
\nLtd. v. ACIT 2013 (28) ITR (Trib) 212 (Hyderabad).
\n18. Mr. Pradeep Dinodia, highlighted that the allegations of AO
\nand CIT(A) wherein they contended that the assessee has failed to
\nsubmit and substantiate the basis for projections are erroneous.
\nThe counsel in response submitted that the said allegation is
\nfactually incorrect since the assessee has furnished the detailed
\nbasis of projections before ld AO vide its submission dated
\n22.12.2017 and again before ld CIT (A) vide its submission dated
\n04.06.2018. The detailed working included the year wise and
\nmovie wise projected revenue, operating expenses, balance sheet
\nand profit & loss etc. of future 5 years till 2020 in accordance
\nwith the DCF valuation methodology. It was submitted that basis
\nI.T.A. No.8113\/DEL\/2018 21
\nof projections were very scientific based on the number of movies
\nto be released in upcoming years. Such movies were segregated
\nin Big, Medium, Small and Micro Films, with reasonable number
\nof movies each year viz., 1 Big Film, 2 Medium Film, and 1 or 2
\nsmall or micro film a year. Further, the estimates of projected
\nrevenue were also very reasonable and conservative keeping in
\nview the engagement of highly successful directors like Rakesh
\nOm Prakash Mehra (ROPM) who has given block bluster films like
\n\u2018Bhaag Milkha Bhaag\u2019 which made a box office collection of INR
\n164 Crores, \u2018Rang De Basanti\u2019 which made a box office collection
\nof INR 97 Crores etc and also super hit like \u2018Delhi-6\u2019. The ld
\ncounsel took us through the comparative chart of Track records
\nof above movies as also the projections for movies signed with
\nROPM to demonstrate that projections were quite reasonable and
\nconservative. Engagement of veteran writers and music directors-
\nLike Gulzar and Shankar Ehsaan Loy, interesting start cast,
\nincluding the launch of -Anil Kapoor’s son- Harshvardhan Kapoor
\nand Shabana Azmi’s niece SaiyamiKher; along with veteran
\nactors like Om Puri, Art Malik etc. Keeping in view of engagement
\nof renowned star cast and previous success of directors, the
\nassessee has projected only Rs.55 Crores for 1 Big Film in first
\nyear. While for other movies, the projections ranged between Rs.
\n22 lacs to 50 Crores. Further the projected revenues were
\ndiscounted in later years to account for fluctuations in economic
\ncycles.It was submitted that by no standards such estimates
\nmade in arriving at the valuations could be termed as unrealistic.
\nI.T.A. No.8113\/DEL\/2018 22
\nHe further submitted it is not the case that assessee has not
\nmade efforts to achieve these projections. The assessee has been
\nresilient and has made its best efforts to achieve the aforesaid
\nprojections. The assessee had received hundreds of film scripts
\nout of which it shortlisted its initial set of movies. It may be noted
\nthat assessee has hired best directors and star cast, entered into
\nvarious agreements and incurred costs as estimated. The first big
\nfilm \u2018Mirzya\u2019 while on the initial stage generated a huge amount of
\npress inprint media, online media, social media and other
\nplatforms with over 100 stories.
\n19. Then the counsel pointed out to the cost projections made
\nin the DCF method and cost actually incurred on production of
\nabove movies by highlighting the comparison of cost of movies
\nactually released with their actual cost, submitted that the
\nassessee has incurred costs as projected. However it is
\nimpossible to determine the exact cost or revenue of films at the
\ntime of signing them. Moreover, on revenue front, in some case
\n(Satellite and digital revenue), the assessee has exceeded the
\nprojected estimates. Therefore, he submitted that projections
\nwere not mere paperwork as alleged by CIT(A). The assessee has
\nactually made its best efforts and incurred substantial cost to
\nachieve the projected revenue by incurring the costs. He further
\npointed out the reasons why assessee could not achieve the
\nprojected revenues. The reason explained was that first big movie
\n\u2018Mirzya\u2019 flopped on box office and consequently the assessee\u2019s
\nrelation with renowned director also soured and agreement got
\nI.T.A. No.8113\/DEL\/2018 23
\nterminated for the other two major movies \u2018 Fannney Khan\u2019,
\n\u2018Guitar Guru\u2019 which resulted in substantial losses. In addition
\nanother movie \u2018Kaalakaandi\u2019 got adversely affected due to actor
\nSaif Ali Khan\u2019s earlier back to back flop films \u2018Rangoon\u2019 and
\n\u2018Chef\u2019.
\n20. The counsel then summarized his argument related to the
\nabove ground by stating that nature of film industry is such that
\nnobody can predict the success or failure of the film and how
\nmuch business a film would do. Sometimes big fat movies with
\nsuper star casts flop, while budget movies with no budgets and
\nnot so popular casts do wonders. The nature of business of the
\nassessee was stated to be highly risky, full of promises and
\npitfalls. The nature of the risk of film business is that of either
\nfeast or famine. Neither the AO nor CIT(A) were correct in
\nquestioning of commercial wisdom\/ expediency wherein the
\nassessee\u2019s commercial wisdom of making investment of funds
\nraised in zero percent compulsorily convertible debentures
\n(CCDs) of group companies was questioned by stating that that
\nassessee should have investment in some instruments which
\nwould have yield the return\/profits\/revenue in accordance with
\nthe projections made at time of issue of shares. The counsel
\nargued that the AO and consequently CIT (A) failed to appreciate
\nthat these are strategic investments which are made to foray in
\ncertain business and not to earn the dividend\/interest. Further,
\ninvestments were made in the group entities to advance the
\nassessee\u2019s own business objective of production of films and
\nI.T.A. No.8113\/DEL\/2018 24
\nmedia entertainment. The AO\/CIT(A) went beyond their
\njurisdiction by charting out how the assessee should have
\nconducted its business. In support of the above submission the
\ncounsel relied upon the judgments of S.A. Builders (288 ITR
\n1)(SC)and CIT v. Panipat Woollen & General Mills Co. Ltd (103
\nITR 66)(SC). He further cited the Hon\u2019ble Jurisdictional High
\nCourt judgement in case of EKL Appliances Ltd. (ITA no.1068
\n&1070 of 2011) wherein it was held:
\n\u201cThere is no reason why the OECD guidelines should not be
\ntaken as a valid input in the present case in judging the action
\nof the TPO. In fact, the CIT (Appeals) has referred to and
\napplied them and his decision has been affirmed by the
\nTribunal. These guidelines, in a different form, have been
\nrecognized in the tax jurisprudence of our country earlier. It
\nhas been held by our courts that it is not for the revenue
\nauthorities to dictate to the assessee as to how he should
\nconduct his business and it is not for them to tell the assessee
\nas to what expenditure the assessee can incur. We may refer
\nto a few of these authorities to elucidate the point. In Eastern
\nInvestment Ltd. v. CIT [1951] 20 ITR 1 (SC), it was held by
\nthe Supreme Court that “there are usually many ways in
\nwhich a given thing can be brought about in business circles
\nbut it is not for the Court to decide which of them should have
\nbeen employed when the Court is deciding a question under
\nSection 12(2) of the Income Tax Act”. It was further held in this
\ncase that “it is not necessary to show that the expenditure was
\na profitable one or that in fact any profit was earned”. In CIT
\nI.T.A. No.8113\/DEL\/2018 25
\nv. Walchand& Co. (P.) Ltd. [1967] 65 ITR 381 (SC), it was
\nheld by the Supreme Court that in applying the test of
\ncommercial expediency for determining whether the
\nexpenditure was wholly and exclusively laid out for the
\npurpose of business, reasonableness of the expenditure has to
\nbe judged from the point of view of the businessman and not
\nof the Revenue.\u201d
\n21. On the other hand, Ld. DR submitted that the assessee has
\nnot provided the basis and parameters of valuation while
\napplying DCF method of valuation and has not produced any
\nevidence to substantiate the basis of projections. In support of
\nher arguments the DR strongly relied upon the judgement of
\nHon\u2019ble Delhi ITAT in the case of Agro Portfolio Private Limited
\n[(2018) 94 taxmann.com 112 (Delhi-Trib.)] wherein it was
\npointed out that the merchant banker who was appointed by the
\nassessee to carry out the valuation, conducted no independent
\nenquiry to verify the truth or otherwise the figures furnished by
\nthe assessee.\u201cThe merchant bankers solely relied upon an
\nassumed without independent verification the truthfulness
\naccuracy and completeness of the information and the financial
\ndata provided by the company. A perusal of this long disclaimer
\nclearly shows that the merchant banker did not do anything
\nreflecting their expertise, except mere applying the formula to the
\ndata provided by the assessee.\u201d
\nI.T.A. No.8113\/DEL\/2018 26
\n22. The DR further highlighted the clause of the valuation
\nreport which contained a disclosure of limitation by the valuer
\nwherein the valuer has stated that: \u201cThe Valuation report has
\nbeen prepared on the basis of the Certified Projected Financials
\nand information provided by the management of the company.
\nAlthough we have reviewed such data for consistency and
\nreasonableness, we have not….\u201d. She submitted that the valuer
\nhas not independently applied his mind and accepted the
\nfinancial projections made by the assessee. She strongly
\nsupported the reasons advanced by AO and CIT(A) in their order
\nand submitted that view taken by the authorities below is the
\ncorrect view and provisions of section 56(2)(viib) are attracted on
\nthe facts of this case.
\n23. Mr. Pradeep Dinodia, the ld. Counsel of the assessee in
\nrejoinder took us through the valuation report wherein he invited
\nour attention to one of the clause of the valuation Report where
\nthe purpose of valuation was clearly stated to be the fulfilment of
\nrequirement of section 56 of the Income Tax Act, 1961 for the
\npurpose of issuance of Equity Shares of assessee i.e. Cinestaan
\nEntertainment Private Limited. He further distinguished the
\nruling of Agro Portfolio Private Limited from the present case of
\nthe assessee under various headings as presented in the table
\nbelow:
\nS.No. AGRO PORTFOLIO PVT. LTD.
\n( Sector \u2013 Financial Services)
\nASSESSEE (CINESTAAN
\nENTERTAINMENT PVT. LTD).
\n( Sector \u2013 Media\/ Film)
\nI.T.A. No.8113\/DEL\/2018 27
\nS.No. AGRO PORTFOLIO PVT. LTD.
\n( Sector \u2013 Financial Services)
\nASSESSEE (CINESTAAN
\nENTERTAINMENT PVT. LTD).
\n( Sector \u2013 Media\/ Film)
\n1. AO has questioned Financial
\nParameters of Valuation Report
\nFrom the ITAT Order, it appears
\nthat the assessee (Agro Portfolio)
\nfailed to justify any of the
\nfinancial parameters questioned
\nby the AO in relation to the
\nvaluation report (para 5);
\nwhichinclude:
\n(1) Beta
\n(2) Market Rate of return
\n(3) Risk free rate of return
\nITAT has observed that despite
\nAO\u2019s questioning the above, no
\nresponses at all came from
\nassessee. The AO therefore
\nproceeded on best judgment
\nassessment to determine FMV
\nrelying on NAV Method.
\nIn case of assessee (FY 2014-
\n15), neither the Assessing
\nOfficer nor CIT (Appeal) has
\nquestioned any of the
\ntechnical \/ financial
\nparameters for valuation report
\n(such as beta, risk free rate of
\nreturn etc.).
\nAO\/ CIT (A) hasdisregardedthe
\nvaluation report solely on
\naccount of comparison of future
\nactual performance with
\nprojections [Note: hindsight is
\nnot a criteria to reject valuation
\nas held by numerous Court
\nRulings].Moreso, when reasons
\nfor deviation of actual
\nperformance from projected
\nrevenues have been submitted
\nin detail before both AO and
\nCIT (A) none of them have
\ncontroverted or even discussed
\nthe same in their orders.
\n2. Procedural non-compliance and
\nbest judgement order.
\nITAT order (para 13) notes that
\nassessee (Agro Portfolio) did not
\nrespond to multiple notices
\nissued by the Assessing Officer
\nand therefore AO proceeded to
\napply NAV method under best
\njudgement assessment.
\nITAT order notes (Para 14) that no
\nevidence to justify projections was
\nproduced even before the CIT(A).
\nAssessee only argued that a
\nvaluation report could not be
\ndisturbed by AO.
\nAssessee has complied with
\neach and every notice of the
\nAO providing detailed
\nexplanation on each aspect.
\nDetailed submission was filed
\nwith AO explaining the basis of
\nprojections with reference to
\ntrack record of the crew, caste
\netc. Even reasons for deviation
\nfrom actual projections were
\nexplained. All backups for
\nprojections were placed on
\nrecord (both before AO and
\nCIT(A))
\nWhile there has been no noncompliance
\nby Assessee, it is
\nI.T.A. No.8113\/DEL\/2018 28
\nS.No. AGRO PORTFOLIO PVT. LTD.
\n( Sector \u2013 Financial Services)
\nASSESSEE (CINESTAAN
\nENTERTAINMENT PVT. LTD).
\n( Sector \u2013 Media\/ Film)
\nthe AO\/ CIT(A) who have
\ncursorily brushed aside the
\nvoluminous defence put
\nforward by assessee.
\n3. Past Performance of Assessee
\nFrom the limited description of
\nthe facts in ITAT Order it appears
\nthat the assessee already had
\nhistory of poor performance or
\ntrack record as AO has noted
\nthat it was carrying forward
\nlosses (para 5 of the ITAT
\nOrder). Therefore, on the facts of
\nthe case, this raises a question
\nmark that how positive cash flow
\nprojections could have been
\ntaken.
\nFor assessee, valuation report
\nis dated (December, 2014) to a
\ntime when all film production
\noperations were yet to
\ncommence.
\nThere was no adverse history or
\nperformance or track record
\n(post production) available for
\nassessee as that would caste a
\ndoubt on projections.
\n4. NAV applied by AO as
\nalternative method
\nAO has applied Alternative
\nMethod (NAV Applied) and
\ndetermined the value of share at
\n9.46.
\nIn assessee\u2019s case, no
\nalternative method has been
\napplied by AO\/ CIT (A) for
\ncomputation of FMV. AO\/
\nCIT(A) have arbitrarily assumed
\nthe premium to be NIL.
\n5. Case of Best Judgement
\nAssessment
\nThis was a case under best
\njudgement assessment as
\nassessee failed to cooperate\/
\nrespond to any notices issued by
\nAO.
\nAO has not resorted to best
\njudgment assessment as all
\nnotices issued were duly
\ncomplied with.
\n6. Reliance on Valuer\u2019s Disclaimer
\nITAT noted that while valuer has
\ngiven a disclaimer (\u201cthat valuer
\ndid not verify the truth of the
\nprojections\u201d), the assessee (Agro
\nPortfolio) has also completely
\nfailed to justify the
\nFor assessee (FY 2014-15), the
\nvaluer has stated that the
\nprojections were examined
\nfor reasonableness and
\nconsistency. That apart,
\nassessee has also explained
\nthe basis for projections in
\nI.T.A. No.8113\/DEL\/2018 29
\nS.No. AGRO PORTFOLIO PVT. LTD.
\n( Sector \u2013 Financial Services)
\nASSESSEE (CINESTAAN
\nENTERTAINMENT PVT. LTD).
\n( Sector \u2013 Media\/ Film)
\nprojections.There was no
\nresponse whatsoever by assessee
\nto justify the projections or
\nrespond to queries of AO on
\nfinancial parameters.
\ndetail in its submissions
\nbefore AO\/ CIT (A) which have
\nnot been controverted by the
\ntax authorities.
\nDECISION
\n25. We have heard the rival contentions, perused the relevant
\nfindings given in the impugned orders as well as material referred
\nto before us at the time of hearing. In various grounds of appeal,
\nthe sole issue raised by the appellant assessee relates to the
\naddition of Rs.90,95,46,200\/- made by the AO, by invoking the
\ndeeming provisions of Section 56(2)(viib) by adopting fair market
\nvalue of the share premium received by the Assessee Company
\nfrom the investors at Nil. What has been sought to be taxed is
\nmainly the share premium issued on equity shares which
\naccording to the AO far exceeded the FMV of the shares. Though
\nfacts have been discussed in detail in the foregoing paragraphs,
\nhowever in the succinct manner, the relevant facts and
\nbackground are reiterated in order to appreciate the controversy
\nand the issue for adjudication. The assessee company was
\nincorporated on 19th September, 2013, i.e., in the Assessment
\nYear 2014-15, with the objective of carrying of business of
\nproduction and distribution of feature film, tele films, video films,
\ndocumentary films etc. During the year under consideration
\nassessee company was in the initial phase of the setting up of the
\nI.T.A. No.8113\/DEL\/2018 30
\nbusiness, therefore, there was no business of film production as
\nsuch. The assessee company to start its venture of its film
\nproduction approached accredited ace investors of India to join in
\nas equity partners, namely, Shri Rakesh Jhunjhunwala, Shri
\nAnand Gopal Mahindra & Shri Radhakishan Damani. The funds
\nwere raised by way of issue of equity shares to the aforesaid
\nequity partners and by raising premium on such shares over and
\nabove the face value of Rs.10\/- per share. The details and
\nquantum of premium received from each of the equity partners
\nare as under:
\nS.No. Name of equity
\npartner
\nDate of
\nIssue
\nNo. Of
\nshares
\nPremium
\n(Rs.) per
\nshare
\nAmount of
\npremium (Rs.)
\n1. Shri Anand
\nMahindra
\n06.01.2015;
\n2302.2015
\n4,15,385 1949 80,95,85,365\/-
\n2. Shri Rakesh
\nJhunjhunwala
\n24.03.2015 19,207 2602 4,99,80,793\/-
\n3. Shri
\nRadhakishan
\nDamani
\n24.03.2015 19,207 2602 4,99,80,793\/-
\nTotal 4,53,799 90,95,46,200\/-
\n26. The assessee before issuing the shares had got the share
\nvalued by Chartered Accountant, i.e., \u2018Accountant\u2019 as provided
\nunder Rule 11UA(2) by using the \u2018DCF Method\u2019 which is one of
\nthe prescribed method in Rule 11UA(2)(b) r.w.s. 56(2)(viib). Based
\non the said valuation report dated 15.12.2014, the assessee
\ncompany had issued the shares to the aforesaid equity partners
\non premium. The ld. Assessing Officer has discarded the
\nI.T.A. No.8113\/DEL\/2018 31
\nvaluation report of the CA mainly on the ground that valuation of
\nthe equity shares carried out by the assessee was based on
\nprojection of revenue which did not match with the actual
\nrevenues of the subsequent years. He further held that no efforts
\nhave been made by the assessee to substantiate the figures of
\nprojected revenue in the valuation report and has also failed to
\nsubmit any basis for projection. Instead, AO held that assessee
\nshould have invested the share premium amount to earn some
\nincome, whereas assessee has made investment in debentures of
\nits associate company and hence the basic substance of receiving
\nthe high premium was not justified. After invoking the provision
\nof Section 56(2)(viib), AO took fair market value of premium at Nil
\nand face value of Rs. 10\/- per share.
\n27. From the perusal of the records and the impugned orders,
\nit transpires that Assessing Officer had also issued notices
\nu\/s.133(6) to all the 3 investors to seek confirmation, information
\nand documents pertaining to transaction of issuance of shares.
\nIn response to the said notices, Assessing Officer has received all
\nthe details and replies directly from these investors confirming
\nthe transaction. The venture agreement between the assessee
\nand the investors were also filed before the Assessing Officer and
\nin this regard, our attention was also drawn by the ld. counsel
\nthat the investment was to be made by these investors in various
\nphases and transactions and it was only after they have gone by
\nthe projection and satisfied with the potentials and credentials of
\nfuture growth, they were willing to make such huge investment in
\nthe \u2018start-up company\u2019 like assessee. Thus, neither the identity
\nI.T.A. No.8113\/DEL\/2018 32
\nnor the creditworthiness of the investors nor the genuineness of
\nthe transaction can be doubted and in fact the same stands fully
\nestablished to which Assessing Officer has also not raised any
\ndoubt or disputed this fact. Thus, under the deeming provisions
\nof section 68, the test of proving the nature and source of the
\ncredit received stood accepted.
\n28. Now what we are required to examine whether under
\nthese facts and circumstances Assessing Officer after invoking
\nthe deeming provision of Section 56(2)(vii) could have determined
\nthe fair market value of the premium on shares issued at Nil after
\nrejecting the valuation report given by the Chartered Accountant
\non one of the prescribed methods under the rules adopted by the
\nValuer. Before us, learned counsel, Mr. Dinodia, first of all had
\nharped upon the spirit and intention of the Legislature in
\nintroducing such a deeming provision and submitted that such a
\nprovision cannot be invoked on a normal business transaction of
\nissuance of shares unless it has been demonstrated by the
\nRevenue authorities that the entire motive for such issuance of
\nshares on higher premium was for the tax abuse with the
\nobjective of tax evasion by laundering its own unaccounted
\nmoney. His main contention was that, being a deeming fiction, it
\nhas to be strictly interpreted and there is no mandate to the
\nAssessing Officer to arbitrarily reject the valuation done by the
\nassessee on his own surmises and whims. We are in tandem with
\nsuch a reasoning of the ld. Counsel, because the deeming fiction
\nnot only has to be applied strictly but also have to be seen in the
\ncontext in which such deeming provisions are triggered. It is a
\nI.T.A. No.8113\/DEL\/2018 33
\ntrite law well settled by the Constitutional Bench of Supreme
\nCourt, in the case of Dilip Kumar & Sons (supra) that in the
\nmatter of charging section of a taxing statute, strict rule of
\ninterpretation is mandatory, and if there are two views possible in
\nthe matter of interpretation, then the construction most
\nbeneficial to the assessee should be adopted. Viewed from such
\nprinciple, here is a case where the shares have been subscribed
\nby unrelated independent parties, who are one of the leading
\nindustrialists and businessman of the country, after considering
\nthe valuation report and future prospect of the company, have
\nchosen to make investment as an equity partners in a \u2018start-up
\ncompany\u2019 like assessee, then can it be said that there is any kind
\nof tax abuse tactics or laundering of any unaccounted money. It
\ncannot be the unaccounted or black money of investors as it is
\ntheir tax paid money invested, duly disclosed and confirmed by
\nthem; and nothing has been brought on record that it is
\nunaccounted money of assessee company routed through
\ncircuitous channel or any other dubious manner through these
\naccredited investors. If such a strict view is adopted on such
\ninvestment as have been done by the Assessing Officer and by ld.
\nCIT(A), then no investor in the country will invest in a \u2018start-up
\ncompany\u2019, because investment can only be lured with the future
\nprospects and projection of these companies.
\n29. Now, whether under the deeming provision such an
\ninvestment received by the assessee company be brought to tax.
\nThe relevant provision of Section 56 for the sake of ready
\nreference is reproduced hereunder:
\nI.T.A. No.8113\/DEL\/2018 34
\n\u201cIncome from other sources.
\n56. (1) Income of every kind which is not to be excluded from the total
\nincome under this Act shall be chargeable to income-tax under the head
\n“Income from other sources”, if it is not chargeable to income-tax under
\nany of the heads specified in section 14, items A to E.
\n(2) In particular, and without prejudice to the generality of the
\nprovisions of sub-section (1), the following incomes, shall be chargeable
\nto income-tax under the head “Income from other sources”, namely :\u2014
\n(i)…….
\n(viib) \u201cwhere a company, not being a company in which the public
\nare substantially interested, receives, in any previous year, from
\nany person being a resident, any consideration for issue of
\nshares that exceeds the face value of such shares, the aggregate
\nconsideration received for such shares as exceeds the fair
\nmarket value of the shares:
\nProvided that this clause shall not apply where the consideration for
\nissue of shares is received\u2014
\n(i) by a venture capital undertaking from a venture capital company or a
\nventure capital fund; or
\n(ii) by a company from a class or classes of persons as may be notified
\nby the Central Government in this behalf
\nExplanation\u2014For the purposes of this clause, \u2014
\n(a) the fair market value of the shares shall be the value –
\n(i) as may be determined in accordance with such method as
\nmay be prescribed: or
\nii) as may be substantiated by the company to the satisfaction of the
\nAssessing Officer, based on the value, on the date of issue of shares, of
\nits assets, including intangible assets being goodwill, know-how,
\npatents, copyrights, trademarks, licences, franchises or any other
\nbusiness or commercial rights of similar nature,
\nwhichever is higher;\u201d
\nFurther, as per clause (i) of the Explanation as reproduced above,
\nthe FMV is to be determined in accordance with such method as
\nI.T.A. No.8113\/DEL\/2018 35
\nmay be prescribed. Clause (ii) admittedly is not applicable on the
\nfacts of the assessee\u2019s case.
\nThe method to determine the FMV is further provided in
\nRule 11UA(2). The relevant extract of the applicable rules is
\nreproduced below:
\n\u201c11UA. [(1)] For the purposes of section 56 of the Act, the fair market
\nvalue of a property, other than immovable property, shall be determined
\nin the following manner, namely,\u2014
\n(2) Notwithstanding anything contained in sub-clause (b) of clause (c) of
\nsub-rule (1), the fair market value of unquoted equity shares for the
\npurposes of sub-clause (i) of clause (a) of Explanation to clause (viib) of
\nsub-section (2) of section 56 shall be the value, on the valuation date. of
\nsuch unquoted equity shares as determined in the following manner
\nunder clause (a) or clause (b), at the option of the assessee, namely:\u2014
\n(b) the fair market value of the unquoted equity shares determined by a
\nmerchant banker or an accountant as per the Discounted Free Cash
\nFlow method.\u201d
\n30. Ergo, the assessee has an option to do the valuation and
\ndetermine the fair market value either on DCF Method or NAV
\nMethod. The assessee being a \u2018start-up company\u2019 having lot of
\nprojects in hand had adopted DCF method to value its shares.
\nUnder the DCF Method, the fair market value of the share is
\nrequired to be determined either by the Merchant Banker or by
\nthe Chartered Accountant. The valuation of shares based on DCF
\nis basically to see the future year\u2019s revenue and profits projected
\nand then discount the same to arrive at the present value of the
\nbusiness. Before us, the ld. counsel from the facts and material
\nplaced on record had pointed out that the basis of projection
\nadopted by the valuer was based on very scientific analysis and
\nmethod, like number of movies to be released in the upcoming
\nI.T.A. No.8113\/DEL\/2018 36
\nyears and such movies were further segregated into big, medium,
\nsmall and micro films with reasonable number of movies in hand,
\nlike one big film, two medium films and one or two small or micro
\nfilm a year. Further, the estimate of projected revenue was also
\nkept on a conservative side keeping in mind of the following: –
\n\uf0d8 Engagement of successful directors like Rakesh Om Prakash
\nMehra who has given block buster films like Bhaag Milkha
\nBhaag which made a box office collection of INR 164 Crores,
\nand Rang De Basanti which made a box office collection of INR
\n97 Crores etc. In support Ld. Counsel had referred to
\nAnnexure-III, giving details of Track records v. Projections for
\nmovies signed with Rakesh Mehra.
\n\uf0d8 Engagement of veteran writers and music directors-Like
\nGulzar and Shankar Ehsaan Roy.
\n\uf0d8 Interesting start cast, including the launch of Anil Kapoor\u2019s
\nson- Harshvardhan Kapoor and Shabana Azmi\u2019s niece Saiyami
\nKher; along with veteran actors like Om Puri, Anu Malik etc.
\n\uf0d8 Keeping in view of engagement of renowned star cast and
\nprevious success of directors, the appellant has projected
\nrevenue for only Rs. 55 Crores for 1 Big Film in first year
\nwhich went till Rs. 93.10 Crores in 5th Year. While for other
\nmovies, the projections ranged between 22 lacs to 50 Crores.
\nFurther the projected revenues were discounted in later years
\nto account for fluctuations in economic cycles.
\n\uf0d8 The number of movies and total revenue and average revenue
\nfor such movies are as projected under:
\nI.T.A. No.8113\/DEL\/2018 37
\nParticulars Year 1
\n(2016
\nYear 2
\n(2017)
\nYear 3
\n(2018)
\nYear 4
\n(2019)
\nYear 5 (2020)
\nNumber of
\nmovies
\n1 Big, 2
\nMedium, 1
\nsmall, 1
\nMicro
\n1 Big, 2
\nMedium, 1
\nsmall, 1
\nMicro
\n1 big, 2
\nMedium, 2
\nsmall, 1
\nMicro
\n1 Big, 2
\nMedium, 3
\nsmall, 1
\nMicro
\n1 Big, 2
\nMedium, 3
\nsmall, 2
\nMicro
\nTotal
\nrevenue
\nprojected
\n(Rs.
\nCrores)
\n121.62 142.50 197.68 238.16 274.76
\nAverage
\nrevenue
\nper movie
\n(Rs. crores)
\n24.32 28.5 32.95 34.02 34.35
\n31. It has been submitted that the assessee had made all the
\nefforts to achieve these projects and in fact had received 100
\nfilms scripts out of which it had short listed its initial stage of
\nmovies. The ld. counsel has also drawn our attention on various
\nagreements for production of these films. He also pointed out that
\nthe assessee was projected to make five movies which it had
\nactually commenced and released and has also pointed out that
\nassessee has worked upon with 25 movies inception. Not only
\nthat, assessee had also taken into account the cost incurred in
\nproduction of various movies and also the comparison of
\nprojected revenue and cost of three movies which were actually
\nreleased by the assessee with actual revenue and cost, for which
\nseparate annexure were filed before us. Nowhere the Assessing
\nOfficer and ld. CIT (A) has either disputed the details of projects,
\nrevenues, cost incurred and the manner in which it was
\nsubstantiated by the actual revenue. In fact, the projected
\nrevenue really commensurate with the actual state of affairs
\nbased on subsequent year financials. It has been pointed out that
\nI.T.A. No.8113\/DEL\/2018 38
\nassessee had incurred huge cost which were precisely as per the
\nestimates as projected. However, the revenue could not be
\ngenerated as much expected, because the film did not do well in
\nthe box office. Ld. Counsel has also highlighted various reasons
\nas to why assessee could not achieve the projected revenue from
\nvarious documentary evidences. None of these averments and the
\nand the manner in which the valuation of the shares has been
\nadopted in the valuation report has been disputed by the
\nAssessing Officer or by the ld. CIT(A) or any material facts have
\nbeen brought on record to show that either the methodology or
\nthe contents of the report are not correct.
\n32. What is seen here is that, both the authorities have
\nquestioned the assessee\u2019s commercial wisdom for making the
\ninvestment of funds raised in 0% compulsorily convertible
\ndebentures of group companies. They are trying to suggest that
\nassessee should have made investment in some instrument
\nwhich could have yielded return\/ profit in the revenue projection
\nmade at the time of issuance of shares, without understanding
\nthat strategic investments and risks are undertaken for
\nappreciation of capital and larger returns and not simply
\ndividend and interest. Any businessman or entrepreneur,
\nvisualise the business based on certain future projection and
\nundertakes all kind of risks. It is the risk factor alone which gives
\na higher return to a businessman and the income tax department
\nor revenue official cannot guide a businessman in which manner
\nrisk has to be undertaken. Such an approach of the revenue has
\nbeen judicially frowned by the Hon’ble Apex Court on several
\nI.T.A. No.8113\/DEL\/2018 39
\noccasions, for instance in the case of SA Builders, 288 ITR 1 (SC)
\nand CIT vs. Panipat Woollen and General Mills Company Ltd.,
\n103 ITR 66 (SC). The Courts have held that Income Tax
\nDepartment cannot sit in the armchair of businessman to decide
\nwhat is profitable and how the business should be carried out.
\nCommercial expediency has to be seen from the point of view of
\nbusinessman. Here in this case if the investment has made
\nkeeping assessee\u2019s own business objective of projection of films
\nand media entertainment, then such commercial wisdom cannot
\nbe questioned. Even the prescribed Rule 11UA (2) does not give
\nany power to the Assessing Officer to examine or substitute his
\nown value in place of the value determined or requires any
\nsatisfaction on the part of the Assessing Officer to tinker with
\nsuch valuation. Here, in this case, Assessing Officer has not
\nsubstituted any of his own method or valuation albeit has simply
\nrejected the valuation of the assessee.
\n33. Section 56(2) (viib) is a deeming provision and one cannot
\nexpand the meaning of scope of any word while interpreting such
\ndeeming provision. If the statute provides that the valuation has
\nto be done as per the prescribed method and if one of the
\nprescribed methods has been adopted by the assessee, then
\nAssessing Officer has to accept the same and in case he is not
\nsatisfied, then we do not we find any express provision under the
\nAct or rules, where Assessing Officer can adopt his own valuation
\nin DCF method or get it valued by some different Valuer. There
\nhas to be some enabling provision under the Rule or the Act
\nwhere Assessing Officer has been given a power to tinker with the
\nI.T.A. No.8113\/DEL\/2018 40
\nvaluation report obtained by an independent valuer as per the
\nqualification given in the Rule 11U. Here, in this case, Assessing
\nOfficer has tinkered with DCF methodology and rejected by
\ncomparing the projections with actual figures. The Rules provide
\nfor two valuation methodologies, one is assets based NAV method
\nwhich is based on actual numbers as per latest audited financials
\nof the assessee company. Whereas in a DCF method, the value is
\nbased on estimated future projection. These projections are based
\non various factors and projections made by the management and
\nthe Valuer, like growth of the company, economic\/market
\nconditions, business conditions, expected demand and supply,
\ncost of capital and host of other factors. These factors are
\nconsidered based on some reasonable approach and they cannot
\nbe evaluated purely based on arithmetical precision as value is
\nalways worked out based on approximation and catena of
\nunderline facts and assumptions. Nevertheless, at the time when
\nvaluation is made, it is based on reflections of the potential value
\nof business at that particular time and also keeping in mind
\nunderline factors that may change over the period of time and
\nthus, the value which is relevant today may not be relevant after
\ncertain period of time. Precisely, these factors have been judicially
\nappreciated in various judgments some of which have been relied
\nupon by the ld. Counsel, for instance: –
\ni) Securities & Exchange Board of India &Ors [2015 ABR 291
\n– (Bombay HC)]
\n\u201c48.6 Thirdly, it is a well settled position of law with regard to the
\nvaluation. that valuation is not an exact science and can never be
\ndone with arithmetic precision. The attempt on the part of SEBI to
\nI.T.A. No.8113\/DEL\/2018 41
\nchallenge the valuation which is bu its very nature based on
\nprojections by applying what is essentially a hindsight view that the
\nperformance did not match the projection is unknown to the law on
\nvaluations. Valuation being an exercise required to be conducted at
\na particular point of time has of necessity to be carried out on the
\nbasis of whatever information is available on the date of the
\nvaluation and a projection of future revenue that valuer may fairly
\nmake on the basis of such information.\u201d
\nii) Rameshwaram Strong Glass Pvt. Ltd. v. ITO [2018-TIOL-
\n1358-ITAT- Jaipur]
\n“4.5.2. Before examining the fairness or reasonableness of valuation
\nreport submitted by the assessee we have to bear in mind the DCF
\nMethod and is essentially based on the projections (estimates) only
\nand hence these projections cannot be compared with the actuals to
\nexpect the same figures as were projected. The valuer has to make
\nforecast on the basis of some material but to estimate the exact
\nfigure is beyond its control. At the time of making a valuation for the
\npurpose of determination of the fair market value, the past history
\nmay or may not be available in a given case and therefore, the other
\nrelevant factors may be considered. The projections are affected by
\nvarious factors hence in the case of company where there is no
\ncommencement of production or of the business, does not mean that
\nits share cannot command any premium. For such cases, the concept
\nof start-up is a good example and as submitted the income-tax Act
\nalso recognized and encouraging the start-ups.\u201d
\niii) DQ (International) Ltd. vs. ACIT (ITA 151\/Hyd\/2015)
\n\u201c10…… In our considered view, for valuation of an intangible asset,
\nonly the future projections along can be adopted and such valuation
\nI.T.A. No.8113\/DEL\/2018 42
\ncannot be reviewed with actuals after 3 or 4 years down the line.
\nAccordingly, the grounds raised by the assessee are allowed\u201d.
\nThe aforesaid ratios clearly endorsed our view as above.
\n34. In any case, if law provides the assessee to get the
\nvaluation done from a prescribed expert as per the prescribed
\nmethod, then the same cannot be rejected because neither the
\nAssessing Officer nor the assessee have been recognized as expert
\nunder the law.
\n35. There is another very important angle to view such cases,
\nis that, here the shares have not been subscribed by any sister
\nconcern or closely related person, but by an outside investors
\nlike, Anand Mahindra, Rakesh Jhunjhunwala, and Radhakishan
\nDamania, who are one of the top investors and businessman of
\nthe country and if they have seen certain potential and accepted
\nthis valuation, then how AO or Ld. CIT(A) can question their
\nwisdom. It is only when they have seen future potentials that
\nthey have invested around Rs.91 crore in the current year and
\nalso huge sums in the subsequent years as informed by the ld.
\ncounsel. The investors like these persons will not make any
\ninvestment merely to give dole or carry out any charity to a startup
\ncompany, albeit their decision is guided by business and
\ncommercial prudence to evaluate a start-up company like
\nassessee, what they can achieve in future. It has been informed
\nthat these investors are now the major shareholder of the
\nassessee company and they cannot become such a huge equity
\nstock holder if they do not foresee any future in the assessee
\ncompany. In a way Revenue is trying to question even the
\nI.T.A. No.8113\/DEL\/2018 43
\ncommercial prudence of such big investors like. According to the
\nAssessing Officer either these investors should not have made
\ninvestments because the fair market value of the share is Nil or
\nassessee should have further invested in securities earning
\ninterest or dividend. Thus, under these facts and circumstances
\nof the case, we do not approve the approach and the finding of
\nthe ld. Assessing Officer or ld. CIT(A) so to take the fair market
\nvalue of the share at \u2018Nil\u2019 under the provision of Section
\n56(2)(viib) and thereby making the addition of Rs.90.95 crores.
\nThe other points and various other arguments raised by the ld.
\ncounsel which kept open as same has been rendered purely
\nacademic in view of finding given above.
\n36. Other grounds are either consequential or have become
\nacademic, hence same are treated as infructuous. In the result
\nappeal of the appellant assessee is allowed.
\nOrder pronounced in the open Court on 27th May, 2019.
\nSd\/- Sd\/-
\n[L.P. SAHU] [AMIT SHUKLA]
\nACCOUNTANT MEMBER JUDICIAL MEMBER
\nDATED: 27th May, 2019
\nPKK:<\/p>\n","protected":false},"excerpt":{"rendered":"
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<\/p>\n