INCOME TAX ACT, 1961

Section 56(2)(viib) Rule 11UA(2)

Income from other sources - Fair market value of premium on share - Report of valuer under DCF method - Valuation done by valuer as per mandate of statute

Assessee company was carrying on all kinds of business of production and distribution of feature film, television film. Funds were required by the assessee for film production and were raised by way of issue of equity shares to 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 the assessee issued the shares to equity investors at premium. AO disregarded the valuation report of the assessee. The main reason for disregarding the valuation of equity shares carried out by the assessee was that projections of revenue as considered for the purpose of valuation do not match with the actual revenues of subsequent years. Hence in his view, the share premium received by the assessee was without any basis and contrary to the provisions of section 56(2)(viib) read with section 2(24)(xvi). CIT(A) vide its Order, dated 24-9-2018 confirmed the action of AO. Held: Assessee being a 'start-up company' having lot of projects in hand had adopted DCF method to value its shares. 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 AO to examine or substitute his own value in place of the value determined or requires any satisfaction on the part of the AO to tinker with such valuation. AO had not substituted any of his own method or valuation albeit had simply rejected the valuation of the assessee. AO had tinkered with DCF methodology and rejected by comparing the projections with actual figures. In DCF method, the value is based on estimated future projection. In fact, the projected revenue really commensurate with the actual state of affairs based on subsequent year financials. It has been pointed out that assessee had incurred huge cost which were precisely as per the estimates as projected. None of averments and the manner in which the valuation of the shares had been adopted in the valuation report had been disputed by the AO or by the CIT(A) or any material facts have been brought on record to show that either the methodology or the contents of the report were not correct. Thus, under these facts and circumstances of the case, this Tribunal does not approve the approach and the finding of the AO or 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.

Relied:S.A. Builders (2007) 288 ITR 1 (SC) : 2007 TaxPub(DT) 833 (SC), CIT v. Panipat Woollen & General Mills Co. Ltd. 103 ITR 66 (SC) : 1976 TaxPub(DT) 652 (SC), Securities & Exchange Board of India & Ors. 2015 ABR 291 (Bom HC), Rameshwaram Strong Glass Pvt. Ltd. v. ITO 2018-TIOL-1358-ITAT-Jaipur and DQ (International) Ltd. v. Asstt. CIT [ITA No. 151/Hyd/2015].

REFERRED : ITO v. K.P. Varghese (1981) 131 ITR 597 (SC) : 1981 TaxPub(DT) 972 (SC), Subhodh Menon [ITA No. 676/Mum/2015], Vaani Estates (P). Ltd. v. ITO (2018) 172 ITD 629 (Chen) : 2018 TaxPub(DT) 6719 (Chen-Trib), CIT v Stellar (2001) 251 ITR 263 (SC) : 2001 TaxPub(DT) 507 (SC), Lowry v. Consolidated African Selection Trust 8 ITR Suppl 88 : 1940 TaxPub(DT) 4098 (HL), 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 & Ors. 1963 AIR 358 SC, Medplus Health Services (P) Ltd. v. ITO (2016) 48 ITR(Trib) 396 (Hyd) : 2016 TaxPub(DT) 1326 (Hyd-Trib), Social Media India Ltd. v. Asstt. CIT (2013) 28 ITR(Trib) 212 (Hyd) : 2014 TaxPub(DT) 17 (Hyd-Trib) and EKL Appliances Ltd. [ITA No. 1068 & 1070 of 2011] and Agro Portfolio Private Limited (2018) 94 Taxmann.com 112 (Del-Trib.) : 2018 TaxPub(DT) 2615 (Del-Trib).

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