ACIT-2(1)(1), MUMBAI V. AIRPAY PAYMENT SERVICES PVT. LTD., MUMBAI

ITA 4362/MUM/2024

AI Insights

The case involves the Income Tax Department (Revenue) appealing against the decision of the CIT(A), which partially relieved Airpay Payment Services Pvt. Ltd. (the assessee) from the addition made under section 56(2)(viib) of the Income Tax Act concerning share premiums. The AO had initially rejected the assessee's valuation report under the DCF method and adopted the Net Asset Value (NAV) method, leading to a lower valuation and tax on the excess share premium. The CIT(A) accepted the DCF method for the non-resident subscriber's shares but upheld the addition for resident subscribers. The Tribunal found that the AO could not change the valuation method and directed a re-examination of the DCF method by the AO.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 32138 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-01-2025
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2017-2018
• Other Referred Cases: Agro Portfolio P Ltd vs. PCIT, Vodafone M-Pesa Ltd. vs. PCIT, Sodexo Facilities Management Services India (P.) Ltd. vs. Dy. CIT, MLR. Auto Ltd. vs. Jt. CIT(OSD), Credtalpha Alternative Investment Advisors (P.) Ltd. vs. Dy. CIT, Taaq Music (P.) Ltd. vs. ITO
• Laws Referred To: Income Tax Act
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: K.R. SUBHASH
• Assessee Lawyers: S. C. TIWARI; ADOPTING DISCOUNTED CASH FLOW METHOD. THEREFORE; SUCH
• Keywords: Set aside; Opportunity of being heard; Additional evidence; Fair market value; Cost of acquisition; Onus to prove; Valuation report
• Section: 56; 43; 13

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI “A” BENCH : MUMBAI BEFORE SHRI B.R. BASKARAN, ACCOUNTANT MEMBER AND SHRI ANIKESH BANERJEE, JUDICIAL MEMBER ITA No. 4362/Mum/2024 Assessment Year : 2017-18 ACIT, Circle-2(1)(1), 5th Floor, Aayakar Bhavan, M.K. Road, Mumbai. vs. Airpay Payment Services Pvt. Ltd., 104, Sir Vithaldas Chambers, 16, Mumbai Samachar Marg, Fort, Mumbai PAN : AAKCA4619A (Appellant) (Respondent) For Assessee : Shri S.C.Tiwari For Revenue : Dr. K.R. Subhash CIT-DR Date of Hearing : 18-12-2024 Date of Pronouncement : 03-01-2025 O R D E R PER B.R. BASKARAN, A.M : The Revenue has filed this appeal challenging the order dated 26-06-2024 passed by Ld CIT(A), NFAC, Delhi and it relates to the Assessment Year (AY.) 2017-18. The Revenue is assailing the decision of Ld CIT(A) in granting partial relief granted to the assessee in respect of addition made u/s 56(2)(viib) of the Act. The Revenue is also contending that the Ld CIT(A) has violated the provisions of Rule 46A by admitting additional evidences without confronting them with the AO. 2 ITA No. 4362/Mum/2024 2. The facts relating to the above said issue are set out in brief. The assessee company is stated to be engaged in the development of software which enables transaction processing using debit/ credit cards and net banking. During the year under consideration, the assessee had issued equity shares and Cumulative Convertible Preference shares (CCPS) to certain resident individuals and also to a non-resident at a premium. The assessee had charged share premium of Rs.210/- per share to 11363 equity shares issued to a resident subscriber and Rs.756.37 per share in respect of both equity shares and preference shares issued to other resident and non-resident subscribers. The aggregate amount of share premium collected from resident and non-resident subscribers is detailed below:- Share premium collected from Residents - 3,64,36,494 Share premium collected from a non-resident - 19,73,90,635 ------------------- - Total 23,38,27,129 ============= The AO noticed that the assessee had obtained valuation certificate from a Chartered Accountant, who had valued the shares under DCF method at Rs.532/- per share. The AO further noticed that the CA had valued the shares on the basis of projected cash inflows, but the data relating thereto had been provided by the assessee only. The AO further noticed that the actual financial results achieved by the assessee in the subsequent years did not match with the projected figures given in the valuation report. Hence, the AO rejected the valuation report furnished by the assessee. Accordingly, the AO proceeded to value the shares under NAV method, which worked out to Rs.1.21 per share only. Accordingly, the AO took the view that the entire amount of share premium collected by the assessee has exceeded the fair market value (FMV) of shares and therefore, it is 3 ITA No. 4362/Mum/2024 liable to tax u/s 56(2)(viib) of the Act. Accordingly, the AO assessed the entire share premium of Rs.23.38 crores as income of the assessee u/s 56(2)(viib) of the Act. 3. In the appellate proceedings before the Ld CIT(A), the assessee made a new submission, i.e., the share premium received from a non-resident subscriber is not taxable u/s 56(2)(viib) of the Act. The assessee had received share premium of Rs.19.74 crores from a non-resident named Kalaari Capital Partners III, LLC. In order to substantiate its claim that the above said subscriber is a non-resident, the assessee furnished following documents before Ld CIT(A):- a) Copy of the special resolution passed at the extra-ordinary general meeting for issuance and allotment of shares. b) Copy of the board resolution passed at the meeting of the Board of Directors for issuance and allotment of shares c) Investors bank statement evidencing investment amount . d) FIRC and FCGPR with respect to investment amount received from Kalaari Capital Partners III, LLC. e) Tax Residency Certificate issued by Mauritius Revenue Authority to Kalaari Capital Partners III, LLC. f) Copy of ledger accounts of the non-resident and all the resident investors in the Appellant’s books of account. The Ld CIT(A) noticed that the provisions of sec.56(2)(viib) are applicable only to the share premium collected from the resident shareholders and it does not apply to the share premium collected from non-resident shareholders. Accordingly, he directed the assessing officer to delete the 4 ITA No. 4362/Mum/2024 addition of share premium of Rs.19.74 crores collected from the non- resident subscriber mentioned above. The contention of the revenue is that the Ld CIT(A) had admitted and considered the above said documents without confronting them with the assessing officer and the same results in violation of Rule 46A of IT Rules. 4. We noticed earlier that the valuation report furnished by the assessee disclosed the share price at Rs.532/- per share, while the assessee had collected share premium of Rs.756.37 per share. Before Ld CIT(A), the assessee agreed that the value of share may be adopted at Rs.532/- per share and accordingly, the share premium collected from the resident subscribers over and above the value shown in valuation report may be assessed u/s 56(2)(viib) of the Act. Accepting the said contentions, the ld CIT(A) decided this issue as under:- “6(e). Addition of share premium made u/s. 56(2)(viib) to this extent of Rs. 1,00,99,791/- is hereby confirmed. Thus, after excluding share premium received from non-resident share holders, dispute remains to the amount of Rs. 3,64,36,494/-, in which the assessee agreed for Rs. 1,00,99,794/- and the same is hereby confirmed. After considering this, balance amount of Rs. 2,63,63,700/- is hereby deleted. Accordingly, this ground is hereby partly allowed.” The Revenue is aggrieved by the relief granted by the Ld CIT(A). 5. We heard the parties and perused the record. With regard to the relief granted in respect of share premium collected from the non-resident subscriber, there should not be any dispute that the same will not fall within the ambit of sec.56(2)(viib) of the Act, since the provisions of Sec. 56(2)(viib) would apply only to the share premium collected from the resident shareholders. It is the submission of the assessee that the share premium of Rs.19.74 crores has been collected from a non-resident named Kalaari Capital Partners III, LLC. Admittedly, this fact was not brought to the notice of the AO during the course of assessment proceedings. When 5 ITA No. 4362/Mum/2024 this fact was brought to the notice of the Ld CIT(A) along the with the documents supporting the said claim, the Ld CIT(A) proceeded to consider those documents and accordingly granted relief to the assessee. 6. Hence, the revenue is contending that there is violation of provisions of Rs.46A, since the Ld CIT(A) did not confront those documents with the AO. There cannot be any dispute that the share premium collected from a non-resident subscribers will fall outside the purview of sec. 56(2)(viib) of the Act. Hence, the decision rendered by Ld CIT(A) on this point needs to be affirmed. However, since the AO did not have opportunity of the examining those documents, we restore this issue to the file of the assessing officer for the limited purpose of examining those documents. The assessee is directed to furnish all the relevant documents relating to M/s Kalaari Capital Partners III, LLC to show that the share subscriber is a non-resident. The AO may examine those documents and follow the order passed by Ld CIT(A), if they show that the above said subscriber is a non-resident. The AO may seek clarifications from the assessee in this regard, if required in order to satisfy himself in this regard. 7. With regard to the addition of share premium collected from resident shareholders, we notice that the AO simply rejected the valuation report furnished by the assessee citing some reasons. He has proceeded to compute the value of share under Net asset value method and accordingly concluded that the entire share premium collected from the share holders is taxable u/s 56(2)(viib) of the Act. It is a well settled principle now that the AO is not entitled to change the method of determining the fair market value of shares that was followed by the assessee in terms of Rule 11UA of the I.T. Rules. In this regard, we may gainfully refer to the decision rendered by Hon’ble Delhi High Court in the case of Agro Porfolio P Ltd vs. PCIT [2024] 161 taxmann.com 303 (Delhi), wherein it was held as under:- 6 ITA No. 4362/Mum/2024 “15. A perusal of Rule 11UA(2) would indicate that the assessee is enabled to determine the FMV of the unquoted equity shares either in accordance with the formula prescribed in clause (a) or on the basis of a report drawn by a merchant banker who may have determined the FMV as per the DCF Method. 16. In our considered opinion, the language of Rule 11UA(2) indubitably places a choice upon the assessee to either follow the route as prescribed in clause (a) or in the alternative to place for the consideration of the AO a Valuation Report drawn by a merchant banker as per the DCF method. However, and as is manifest from a conjoint reading of Section 56(2)(viib) read along with Rule 11UA(2), the option and the choice stands vested solely in the hands of the assessee. 17. While it would be open for the AO, for reasons so recorded, to doubt or reject a valuation that may be submitted for its consideration, the statute clearly does not appear to empower it to independently evaluate the face value of the unquoted equity shares by adopting a valuation method other than the one chosen by the assessee. It is this aspect which was duly acknowledged by the Bombay High Court in Vodafone M-Pesa. Ltd. (supra) 18. We note that the view as taken by the Bombay High Court in the aforenoted judgment appears to have been consistently followed by Tribunals of different regions as would be evident from the discussion which ensues. We, in this regard, firstly take into consideration the judgment rendered by the Mumbai Bench of the ITAT in Dy. CIT v. Sodexo Facilities Management Services India (P.) Ltd. [IT Appeal No. 2945 (Mum.) of 2022, dated 25-5-2023] where it was held as under:- \"18. On the other hand, Ld. Counsel for the assessee submitted that the AO has not accepted the method of valuation which was furnished by the assessee. The valuer computed the FMV by averaging the valuation as per PECV method as well as net asset value method. He submitted that when the legislation has conferred an option on the assessee to choose a particular method of the valuation, the AO cannot find fault in the said recognized method and adopting the method of his own choice. In support of this, he relied on the decision of the Hon'ble Jurisdictional High Court in the case of Vodafone M-Pesa Ltd. v. PCIT [2018] 164 DTR 257[2018] 92 taxmann.com 73/256 Taxman 240 (Bombay) (HC). As far as the worth of food division is concerned, the Ld. Counsel for the assessee submitted that assessee has followed the method prescribed under section 50B(3) of the Act alongwith Explanation (2). 7 ITA No. 4362/Mum/2024 He submitted that in the net worth computed by the assessee and in the AO, there is only one difference. It was submitted that the assessee following the Explanation-2 below section 50B(3) of the Act has adopted written down value of the block asset in case of the depreciable asset as per the proviso to section 43 of the Act, which the AO has omitted. 19. We have heard rival submissions on the issue in dispute and perused the material on record. We find that computation of LTCG on the transfer of undertaking as the slump sale consists of two components. First component is sale consideration and the second component is the net worth or cost of acquisition. When the net worth of division is subtracted from the sale consideration, which results into LTCG on the slump sale. In the case of the assessee, the AO has taken FMV at Rs. 7,20,32,509/- which was worked out by the valuer following the PECV method, whereas the assessee has followed average value of PECV method as well as NAV method to justify the sale consideration actually received. We are of the opinion that ld Assessing Officer has not carried out valuation by an independent valuer and merely chosen a part of the valuation report submitted by the assessee. Therefore, we restore back the issue to the AO for referring the matter to a valuation expert by way of the issue of commission and thereafter, determining the FMV of the undertaking of the food division of the assessee.\" 19. Proceeding along similar lines, the Hyderabad Bench of the ITAT in Jt. CIT(OSD) v. MLR. Auto Ltd. [IT Appeal No. 115 (Hyd) of 2021, dated 28-12- 2023] had held as follows:- \"17.1. The conjoint reading of Section 56(2)(viib) and Rule 11U and 11UA makes it abundantly clear that in case assessee exercised his option for determination of the fair market value of the shares and exercise then such decision of the assessee shall be final and binding on the assessing officer. The option was given by the Act to the assessee either to apply the DCF method or net asset valuation method, this option is not available to the assessing officer. Rule 11UA provides the method of determining the FMV of a property other than the immovable property. Rule 11UA(2) reproduced hereinabove provides the method of providing the FMV of unquoted shares to be determined at the option of the assessee. 17.2. Once the assessee applied particular method of valuation, (in the present case DCF method), then it is the duty of the Assessing 8 ITA No. 4362/Mum/2024 Officer / ld.CIT(A) to scrutinize the valuation report within the four corners or parameters laid down while making the valuation report under DCF method only. It is not permissible for the Assessing Officer to reject the method opted by the assessee and apply a different method of valuation and the Assessing Officer can definitely reject the valuation report but not the method. In case, the AO rejected the valuation report, then the AO has to carry out a fresh valuation report by applying the same valuation method and determine the fair market value of the unquoted shares. 18 .Therefore, in our view, the Assessing Officer was incorrect in concluding that the DCF method is \"quite unrealistic and inapplicable\" to the terms of the Income Tax Act. On the contrary, the DCF method is quite applicable and was required to be applied by the Assessing Officer to determine the FMV of the unquoted shares. . . . . . . . . . . . . .\" 20. A more detailed discussion on the issue which confronts us in this appeal is found in the judgment rendered by the Mumbai Bench of the ITAT in Dy. CIT v. Credtalpha Alternative Investment Advisors (P.) Ltd. [2022] 134 taxmann.com 223/193 ITD 502/ [2022] 94 ITR (Trib) 596 and the relevant parts whereof are reproduced hereunder:- \"15. Thus, the fair market value of the share shall be higher of the value as determined in accordance with the provisions of rule 11 UA or any other method, which can be substantiated by the assessee before the Assessing Officer. For the purpose of determining \"fair market value\" of unquoted shares provisions of rule 11 UA (2) applies which gives an option to the assessee to either value the shares as per prescribed formula given in clause (a) or clause (b) which provides for the determination of the fair market value based on discounted cash flow method as valued by a merchant banker or a chartered accountant (till 24th of May 2018). In the present case the assessee has valued the shares according to one of the \"options\" available to assessee by adopting discounted cash flow method. Therefore, such an option given to the assessee cannot be withdrawn or taken away by the learned Assessing Officer by adopting different method of valuation i.e., net asset value method. The method of valuation is always the option of the assessee. The learned Assessing Officer is authorised to examine whether assessee has adopted one of the available options properly or not. In the present case, the learned Assessing Officer has thrust upon the assessee, net asset value method rejecting discounted cash flow method for only reason that 9 ITA No. 4362/Mum/2024 there is a deviation in the actual figures from the projected figures. It is an established fact that discounted cash flow method is always based on future projections adopting certain parameters such as expected generation of cash flow, the discounted rate of return and cost of capital. In hindsight, on availability of the actual figures, if the future projections are not met, it cannot be said that the projections were wrong. To prove that the projections were unreliable, the learned Assessing Officer must examine how the valuation has been done. In a case future cash flow projections do not meet the actual figures, rejection of discounted cash flow method is not proper. If projected future cash flow and actual result matches, such situation would always be rare. For projecting the future cash flow certain assumptions are required to be made, there needs to be tested and then such exemptions becomes the base of estimation of such projected future cash flows. If there are no assumptions, there cannot be an estimate of future projected cash flows and then discounted cash flow method becomes redundant. For exercise of valuation, assumption made by the valuer and information available at the time of the valuation date are relevant. As the exercise of valuation must be viewed as on the date of the valuation looking forward and cannot be reviewed in retrospect. Further, the valuation is always made based on review of historical data and projected financial information provided by the management. Further report of expert will always include limitation and responsibilities but that does not make his report incorrect. Of course, if there are errors in the working of projected cash flow, estimating the projected revenue and projected expenditure as well as in adoption of cost of equity and discount factor, the learned Assessing Officer is within his right to correct it after questioning the same to the assessee. The learned Assessing Officer can also question the basic assumptions made by the valuer. If they are unreasonable or not based on historical data coupled with the management expectation, the learned Assessing Officer has every right to question it and adjust the valuation so derived at. However, if he does not find any error in those workings, he could not have rejected the same. Further the reason given by the learned Assessing Officer that the net asset value method and the discounted cash flow method for valuation of the shares of the company gives a wide variation between them, we do not find any reason to find fault with the assessee in such cases. Both these methods have different approaches and methodologies therefore there are bound to be differences, but it does not give any authority to the learned Assessing Officer to pick and choose one of the method and make the 10 ITA No. 4362/Mum/2024 addition. It is the assessee who has to exercise one of the options available under the provisions of the law for valuing the shares. The learned Assessing Officer needs to examine that method. Naturally, if the discounted cash flow method and net asset value method gives the same result, where would have been the need to prescribe the two methods in the law. In view of above facts, we do not find any infirmity in the order of the learned Commissioner of Income-tax (Appeals) in deleting the addition of Rs. 69,000,000 made by the learned assessing officer u/s 56 (2) (viib) of the act. Accordingly, ground Nos. 3 and 4 of the appeal of the learned Assessing Officer are dismissed.\" 21. We deem it apposite to lastly take note of the following pertinent observations as appearing in a decision rendered by the ITAT Bench at Bangalore in Taaq Music (P.) Ltd. v. ITO [2020] SCC OnLine ITAT 9482 :- \"11. The law provides that, the fair market value may be determined with such method as may be prescribed or the fair market value can be determined to the satisfaction of the Assessing Officer. The provision provides an Assessee two choices of adopting either NAV method or DCF method. If the Assessee determines the fair market value in a method as prescribed the Assessing Officer does not have a choice to dispute the justification. The methods of valuation are prescribed in Rule 11UA(2) of the Rules. The provisions of Rule 11UA(2)(b) of the Rules provides that, the Assessee can adopt the fair market value as per the above two methods i.e., either DCF method or fair market value of the unquoted equity shares determined by a merchant banker. The choice of method is that of the Assessee. The Tribunal has followed the judgment of Hon'ble Bombay High Court rendered in the case of Vodafone M-Pesa Ltd. v. Pr. CIT (supra) and has taken the view that the AO can scrutinize the valuation report and he can determine a fresh valuation either by himself or by calling a determination from an independent valuer to confront the Assessee but the basis has to be DCF method and he cannot change the method of valuation which has been opted by the Assessee. The decision of ITAT, Delhi in the case of Agro Portfolio Ltd. 171 ITD 74 has also been considered by the ITAT, Bangalore in the case of VBHC Value Homes Pvt. Ltd. (supra). 12. In view of the above legal position, we are of view that the issue with regard to valuation has to be decided afresh by the AO on the lines indicated in the decision of ITAT, Bangalore in the case of VBHC 11 ITA No. 4362/Mum/2024 Value Homes Pvt. Ltd., v. ITO (supra) i.e., (i) the AO can scrutinize the valuation report and he can determine a fresh valuation either by himself or by calling a determination from an independent valuer to confront the assessee but the basis has to be DCF method and he cannot change the method of valuation which has been opted by the assessee. (ii) For scrutinizing the valuation report, the facts and data available on the date of valuation only has to be considered and actual result of future cannot be a basis to decide about reliability of the projections. The primary onus to prove the correctness of the valuation Report is on the assessee as he has special knowledge and he is privy to the facts of the company and only he has opted for this method. Hence, he has to satisfy about the correctness of the projections, Discounting factor and Terminal value etc. with the help of Empirical data or industry norm if any and/or Scientific Data, Scientific Method, scientific study and applicable Guidelines regarding DCF Method of Valuation. The order of ld. CIT(A) is accordingly set aside and this issue is remanded to the AO for decision afresh, after due opportunity of hearing to the Assessee.\" 22. Accordingly, and for all the aforesaid reasons, we allow the instant appeal and set aside the order of the ITAT dated 16 May 2018. The Questions of Law as framed, namely, Question A and C are answered in the negative and in favor of the appellant assessee. In light of the answers rendered in respect of the aforenoted two questions, the additional questions which are framed would not merit an independent examination. The matter shall in consequence stand remitted to the AO which shall undertake an exercise of valuation afresh in accordance with the DCF method. 23. We also accord liberty to the AO to determine the FMV of the shares bearing in mind the DCF Method by having the same independently determined by a Valuer appointed for the aforesaid purpose.” 8. The Hon’ble jurisdictional Bombay High Court has also taken identical view in the case of Vodafone M-pesa Ltd (supra) and in the above mentioned case, the Hon’ble Delhi High Court has agreed with the view so expressed by the Hon’ble Bombay High Court. 9. We noticed that the Ld.CIT(A) has accepted the valuation report furnished by the assessee, wherein the share value as determined at Rs.532/- per share under DCF method, but he did not examine the same. 12 ITA No. 4362/Mum/2024 The AO also did not examine the valuation done under DCF method, since he had determined the FMV of share under Net asset Value method, which is not permitted as per the decisions cited above, i.e., the AO is not entitled to change the method of valuation adopted by the assessee. Hence, the valuation report furnished by the assessee under DCF method needs to be examined by the AO, if he is not satisfied with the same. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the AO for examining the DCF method adopted by the assessee for arriving at the FMV of shares as discussed by the High Courts in the above cited cases. After affording adequate opportunity of being heard to the assessee, the AO may take appropriate decision in accordance with law. 10. In the result, the appeal filed by the Revenue is treated as allowed. Order pronounced in the open court on 03-01-2025 Sd/- Sd/- [ANIKESH BANERJEE] [B.R. BASKARAN] JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, Dated: 03-01-2025 TNMM 13 ITA No. 4362/Mum/2024 Copy to : 1) The Appellant 2) The Respondent 3) The CIT concerned 4) The D.R, “A” Bench, Mumbai 5) Guard file By Order Dy./Asst. Registrar I.T.A.T, Mumbai "