DY. COMMISSIONER OF INCOME TAX, AAYAKAR BHAVAN , MUMBAI V. PLEXUS CAPITAL VENTURES PVT LTD, MUMBAI

ITA 3524/MUM/2024

AI Insights

The case involves an appeal by the Deputy Commissioner of Income Tax against Plexus Capital Ventures Pvt. Ltd., concerning the deletion of an addition of Rs.2,61,59,250 made under Section 56(2)(viib) of the Income Tax Act, 1961, related to share premium received. The CIT(A) had earlier deleted this addition, which the Revenue challenged, arguing that the valuation report was based on unsubstantiated future profit projections. The Tribunal examined the methods of valuation used and the applicability of Section 56(2)(viib) to the transactions in question, ultimately agreeing with the CIT(A) and dismissing the Revenue's appeal.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 33183 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-03-2025
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2013-2014
• Other Referred Cases: Vodafone M-Pesa Ltd. Vs. DCIT-8(3)(2), Mumbai
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: ASSESSEE
• Keywords: Condonation of delay; Reassessment proceedings; Fair market value; Valuation report
• Section: 147; 144; 250; 143(1); 56

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, MUMBAI SHRI AMARJIT SINGH, ACCOUNTANT MEMBER SHRI RAHUL CHAUDHARY, JUDICIAL MEMBER ITA No.3524/MUM/2024 (Assessment Year: 2013-2014) Deputy Commissioner of Income Tax 13(1)(2), Mumbai Room No.215, 2nd Floor, Aayakar Bhavan, M. K. Road, Mumbai – 400020, Maharashtra. …………. Appellant Plexus Capital Ventures Pvt. Ltd. 1204, Oberoi Woods, Tower A, Off Western Express Highway, Goregaon East, Mumbai-400063 Maharashtra. [PAN:AACCK5972C] Vs …………. Respondent Appearance For the Appellant /Department For the Respondent /Assessee : : Shri Mahesh Pamnani Shri Devendra Jain Date Conclusion of hearing Pronouncement of order : : 29.01.2025 19.03.2025 O R D E R [ Per Rahul Chaudhary, Judicial Member: 1. The present appeal preferred by the Revenue is directed against the order, dated 27/06/2022, passed by the National Faceless Appeal Centre (NFAC), Delhi, [hereinafter referred to as ‘the CIT(A)’] under Section 250 of the Income Tax Act, 1961 [hereinafter referred to as ‘the Act’] whereby the Ld. CIT(A) had partly allowed the appeal against the Assessment Order, dated 18/12/2019, passed under Section 144 read with Section 147 of the Act for the Assessment Year 2012-2013. 2. The Revenue has raised following grounds of appeal : “1. Whether on the facts and the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs.2,61,59,250/- made u/s.56(2)(viib) of the Act in respect of share premium ITA No.3524/Mum/2024 Assessment Year 2013-2014 2 received from HB Esmech P Ltd. ignoring that the valuation report submitted by the assessee under rule 11UA(2) of the I T Rules in support of shares premium charged is merely based on projections of future profits given by the management which are in stark contrast to the actual financials of the assessee company shown over the years? 2. Whether on the facts and the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs.2,61,59,250/- u/s.56(2)(viib) of the Act made in respect of share premium received from HB Esmech P. Ltd. ignoring that the Discounted Cash Flow method (DCF) stated to be employed by the assessee for valuation of shares is as good as its input assumptions and that in the assessee‟s case the assumptions/ projections of future earnings claimed by the assessee had not been backed by any concrete ground to substantiate huge probability of future profits shown in the valuation report? 3. Whether on the facts and the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs.2,61,59,250/- u/s.56(2)(viib) of the Act made in respect of share premium received from HB Esmech P Ltd. without appreciating that while submitted the valuation report, the valuer had not made any independent verification of the financial projections of the future profits made by the management?. 4. Whether on the facts and the circumstances of the case, the Ld. CIT(A) had erred in deleting the addition of Rs.2,61,59,250/- u/s.56(2)(viib) of the Act made in respect of share premium received from HB Esmech P Ltd. relying on the decision of the ITAT Mumbai in the case of Vodafone M-Pesa Ltd. Vs. DCIT- 8(3)(2), Mumbai [ITA No.1073/Mum/2019 & 2032/Mum/2019, order dated 13.12.2019] without appreciating that this decision was not accepted by the department and the appeal before the Hon‟ble High Court had been filed against it?” 3. We note that there is delay of 684 days in filing the present appeal. The Revenue has filed application seeking for condonation of delay in filing the appeal wherein it has been stated as under: “2. In this case, the assessee filed appeal before the CIT(A) against the assessment order dated 18.12.2019 under section 144 r.w.s. 147 of the Income Tax Act, 1961. The CIT(A), NFAC, Delhi has passed order u/s.250 of the Act on 27.06.2022. However, the order dated 27.06.2022 under section 250 of the Act passed by the CIT(A), NFAC was not reflecting in the ITBA Systems of the Department neither the order has been received physically. After the above ITA No.3524/Mum/2024 Assessment Year 2013-2014 3 mentioned order of the CIT(A), NFAC reflected in the ITBA Systems, the appeal against the said order is being filed by the Department. In view of the above facts and circumstances the delay in filing appeal before the ITAT in the above mentioned case is requested to be condoned. 3. In the online Appeal Registration Form under the Appeal Details, the date of communication of the order appealed against has been furnished as 27.06.2022, which is the date of the order of the CIT(A), NFAC. However, the order of the CIT(A), NFAC had not been reflected on 27.06.2022 in the ITBA Systems and it is not ascertainable from the ITBA Systems as to from when the said order has been uploaded/reflected in the ITBA. Therefore, the date of communication of the order has been mentioned as 27.06.2022 in the online Appeal Form. 4. It is further submitted that, the delay in filing of appeal before the Hon'ble ITAT is neither intentional nor deliberate and the delay has happened due to some technical glitch in ITBA Systems. Further, it is submitted that the delay is caused inadvertently due to bonafide and genuine reasons” 4. There is no reason to disbelieve the facts as stated in the above application filed by the Revenue. In the case of Collector of Land Acquisition Vs. Mst. Katiji & others AIR 1987 1353 (SC) the Hon’ble Supreme Court has, while dealing with the issue of condonation of delay, emphasized that substantial justice should prevail over technical considerations. Every day’s delay must be explained does not mean that a pedantic approach should be adopted; and that the aforesaid doctrine must be applied in a rational common sense and pragmatic manner, more so, in circumstances where a litigant does not stand to benefit by lodging the appeal late (as is the case in appeal before us). Refusing to condone delay can result in a meritorious matter being thrown out at the very threshold. As against this, when delay is condoned, the highest that can happen is that a cause would be decided on merits after hearing the parties. After considering the rival submission on application seeking ITA No.3524/Mum/2024 Assessment Year 2013-2014 4 condonation of delay, we condoned the delay in filing the present appeal taking note of the reasons stated in the said application and proceed to examine the issue on merits. Since all the grounds raised by the Revenue are connected the same are taken up together hereinafter. 5. The relevant facts in brief are that the Assessee, a company initially engaged in investment banking and fund management activity, filed return of income for the Assessment Year 2013-2014 on 27/09/2013 which was processed under Section 143(1) of the Act. Subsequently, re-assessment proceedings were initiated in the case of the Assessee on the ground that the financials of the Appellant-company do not justify the issue of share capital at a premium of INR.1,950 per share. The aforesaid reassessment proceedings culminated into passing of Assessment Order, dated 27/12/2019, under Section 143(3) of the Act whereby an addition of INR 38,82,50,000/- was made under Section 56(2)(viib) of the Act consisting of the following (a) addition of INR.2,61,59,250/- made in respect of preference share allotted to Mr. Naresh Nagpal and (b) Addition of INR.2,61,59,250/- made in respect of preference share allotted to HB Esmech Pvt. Ltd. The appeal preferred by the Assessee against the aforesaid addition(s) was allowed by the CIT(A), vide order dated 18/07/2024. Being aggrieved the Revenue has preferred the present appeal on the grounds reproduced in paragraph 2 above. 6. We have head both the sides and have perused the material on record. The Learned Departmental Representative placed reliance upon the order passed by the Assessing Officer while the Learned Authorised Representative for the Assessee supported the order passed by the CIT(A). 7. On perusal record we find that during the relevant previous year the Assessee had allotted 26,830 non-cumulative participatory ITA No.3524/Mum/2024 Assessment Year 2013-2014 5 compulsory convertible preference shares (hereinafter referred to as ‘the Shares’) having face value INR.100 at a premium of INR.1,950/- per share to (a) Mr. Naresh Nagpal [for short ‘Individual Investor’] and (b) HB Esmech P Ltd. [for short ‘Investor Company’’] Before the authorities below it was contended on behalf of the Assessee that Individual Investor was a non-resident and the provisions of Section 56(2)(viib) of the Act would be attracted only in case of consideration for issue of shares received from a person resident in India. The Assessing Officer, despite recording in Paragraph 4.12 of the Assessment Order that provisions of Section 56(2)(viib) of the Act are applicable only to shares issued by a closely held company to a resident shareholder and not to the non-residents, proceeded to make addition of under Section 56(2)(viib) of the Act in respect of share premium received by the Assessee from Individual Investor who was non-resident shareholder. However, the CIT(A) granted relief to the Assessee observing as under: “7.3.a). In the assessee's case 26,830 shares of INR.100 each at the premium of INR.1,950 each were allotted during the said AY. Following is the shareholding pattern: Name of Shareholder Resident/ Non-Resident Total no. of Shares Allotted Face value Premium Mr.Naresh Nagpal Non-Resident 13,415 13,41,500 2,61,59,250 HB Esmech P Ltd. Resident 13,415 13,41,500 2,61,59,250 Total Amount 26,830 26,83,000 5,23,18,500 The above table shows that 13415 shares for a Share premium of Rs.2,61,59,250/- were issued to Shr. Naresh Nagpal who is a Non Resident. The appellant had filed a copy of Form FCGPR issued by RBI specifying the status of Sh. Naresh Nagpal as Non Resident before the Assessing Officer vide submission dated 14.11.2019.” 8. We note that in the grounds raised by the Revenue in the present appeal, the Revenue has restricted the challenge to the order passed ITA No.3524/Mum/2024 Assessment Year 2013-2014 6 by the CIT(A) deleting the addition of INR.2,61,59,250/- made under Section 56(2)(viib) of the Act in respect of the Shares issued to the Investor Company. 9. As regards, the addition of INR.2,61,59,250/- made in respect of share premium paid by Investor Company is concerned, the Learned Departmental Representative had placed strong reliance upon the Assessment Order during the course of hearing. It was contended that the valuation of the Shares using Discounted Cash Flow (DCF) Method was not correct since the valuation was based upon management projections and the same did not take into consideration the fact that the Assessee company had suffered losses in the immediately preceding financial years. In this regard, reliance was placed by the Learned Departmental Representative upon Paragraph 4.10 to 4.18 of the Assessment Order. 10. On the other hand, the Learned Authorised Representative for the Assessee invited our attention to submission dated 19/06/2022 filed before the CIT(A) [placed at pages 54 to 68 of the Paper Book]. It was contended that the Investor Company had made payment for subscription of preference share capital of the Assessee-Company in January 2012. Therefore, the Assessee-Company had not received the said consideration towards allotment of the Shares during the relevant previous year. Further, the provisions of Section 56(2)(viiib) of the Act was introduced by Finance Act, 2012 with effect from 01/04/2013 and the same were, therefore, not applicable to the consideration received in Financial Year 2011-2012 (Assessment Year 2012-2013). It was also contended on behalf of the Assessee that the CIT(A) was also correct in holding that the Assessing officer could not have disregard the valuation done by an independent valuer using DCF Method solely on the grounds that a different conclusion would have reached if a different method would have been followed. Reliance was placed on behalf of the Assessee on judicial precedents ITA No.3524/Mum/2024 Assessment Year 2013-2014 7 cited in paragraph 7.5 of the order passed by the CIT(A). It was submitted that DCF Method was one of the methods prescribed under Rule 11UA of the Income Tax Rules, 1962 [for short ‘IT Rules’] for valuation of shares. 11. We have given thoughtful consideration to the rival submissions. 12. Firstly, on perusal of the Bank Statements of the Assessee [placed at page 67 – 68 of the paper-book] we find that amount of INR.2,50,00,000/- remitted from Investor Company is reflected as being credited to the bank account of the Assessee on 24/01/2012 (falling within the Financial Year 2011-2012). Therefore, we find the averment made on behalf of the Assessee that consideration of INR.2,50,00,000/- was not received by the Assessee during the relevant previous year to be factually correct. Thus, the applicability of provisions of Section 56(2)(viia) of the Act gets restricted to the consideration for the Shares received during the relevant previous year. 13. Secondly, we note that as per Section 56(2)(viib) of the Act the difference between the aggregate consideration received on issue of shares and the fair market value of such shares is treated as income in the hands of the recipient of consideration. Admittedly, the Fair Market Value is required to be determined as per Rule 11UA of IT Rules, 1962 [for short ‘IT Rules’]. During the year under consideration, the Assessee had appointed an Independent Chartered Accountant who ascertained the fair market value using the DCF Method. The stand taken by the Revenue is that the future cash projections were not in line with the actual financial results and that the valuer had merely relied upon the future projections given by the management. Therefore, the valuation done using DCF Method should be rejected and Net Asset Method should be adopted. Per contra, according to the Assessee the Assessing Officer could not ITA No.3524/Mum/2024 Assessment Year 2013-2014 8 have substituted the DCF Method with Net Asset Method to determine the fair market value. Further, the valuation report prepared by the Chartered Accountant was based on the audited financial statements, future financial projections, discussions with management, and other factors reviewed and the same cannot be rejected. Having considered the rival submission, we do not find merit in the aforesaid contention advanced on behalf of the Revenue. We find that in this regard the CIT(A) has, in paragraph 7.5 f) to 7.5 j) recorded as under: 7.5. f) In the present case the Appellant appointed an lndependent CA for preparation of Valuation Report using DCF method which is a recognized method inside the ambit of Section 56 if the Act. Thus, the AO cannot reject the Valuation Report on the Ground that a different valuation method should have been followed. Reliance is placed on judgment of Hon'ble Jurisdictional ITAT Mumbai in case of DCIT vs MIS Ozone Land Agro Pvt. Ltd., wherein it was held as under:- \"Section 56 allows the assessee to adopt one of the methods of their choice. It is beyond the jurisdiction of the AO to insist upon a particular system, especially when the Act allows choosing one of the two methods. Until and unless the legislature amends the provision of the Act and prescribes only one method for valuation of the shares, the assessee are free to adopt any one of the methods.” 7.5. g) In the present case, the AO has solely relied on the fact that Appellant had shown losses in the I-TR1s filed in the last 5 AY's. On the other hand, the Valuation Report is based on many factors like market trends, future growth and prospects, expansion etc. Thus, the action of AO in relying solely on the actual results and ignoring the expected results is not correct. It may not be out of place that in AY. 2014-15 the Appellant had shown profit of Rs.1,88,56,650/- on Turnover of Rs.3,59,34,629/-. Reliance is placed on judgment of Hon'ble Jurisdictional ITAT Mumbai in case of Vodafone M-Pesa Ltd. vs DClT Mumbai wherein it was held as under:- \"Whether valuation of shares is itself is a projection of ITA No.3524/Mum/2024 Assessment Year 2013-2014 9 future events or activities and no doubt it has to be done with some accuracy, however, no person at time of projecting events or result can project with 100 per cent of accuracy. Assessee company had issued shares of face value of Rs.10/- each at a premium of Rs. 14.70 per share and, accordingly, received share premium. Shares were issued after duly valuing shares based on Discount Cash Flow (DCF) method and valuation was done by a merchant banker - Assessing Officer was of view that valuer had not independently valued prospects of assessee company and merely relied on information supplied by assessee and; accordingly, he proceeded to value fair market value of shares based on Net assets value added method. CIT(A) accepted DCF method adopted by assesse. Whether Assessing Officer and Commissioner (Appeals) were trying to evaluate accuracy of valuation at time of assessment, and this was not proper and also factual results of company were based on so many factors subsequent to adoption of projection and valuation and, thus, finding of Assessing Officer and Commissioner (Appeals) could not be upheld - Held, yes.\" 14. We concur with the above finding returned by the CIT(A) to the extent the CIT(A) has held that once the Independent Chartered Accountant has taken a holistic approach to value the Shares using DCF Method, the aforesaid method of valuation adopted cannot substituted by the Net Asset Method by solely relying upon the past performance of the Assessee-company. We note that the CIT(A) has supported its reasoning by placing reliance upon binding decision of the Co-ordinate Benches of the Tribunal including in the case of Vodafone M-Pesa Ltd. Vs. DCIT-8(3)(2), Mumbai [ITA No.1073/Mum/2019 & 2032/Mum/2019, order dated 13.12.2019]. 15. Thirdly, we note that the finding returned by the CIT(A) in Paragraph 7.5 i) of order impugned to the effect that the „future projections made by the Expert were on the right line‟ has not been controverted by the Revenue during the appellate proceedings before the Tribunal. The Revenue has also failed to point out any perversity in the order ITA No.3524/Mum/2024 Assessment Year 2013-2014 10 passed by the CIT(A). 16. Therefore, in view of above, we decline to interfere with the order passed by the CIT(A). Ground No. 1 to 4 raised by the Revenue are dismissed. 17. In result, the present appeal preferred by the Revenue is dismissed. Order pronounced on 19.03.2025. Sd/- Sd/- (Amarjit Singh) Accountant Member (Rahul Chaudhary) Judicial Member म ुंबई Mumbai; दिन ुंक Dated :19.03.2025 Milan,LDC ITA No.3524/Mum/2024 Assessment Year 2013-2014 11 आदेश की प्रतितिति अग्रेतिि/Copy of the Order forwarded to : 1. अपील र्थी / The Appellant 2. प्रत्यर्थी / The Respondent. 3. आयकर आय क्त/ The CIT 4. प्रध न आयकर आय क्त / Pr.CIT 5. दिभ गीय प्रदिदनदध ,आयकर अपीलीय अदधकरण ,म ुंबई / DR, ITAT, Mumbai 6. ग र्ड फ ईल / Guard file. आिेश न स र/ BY ORDER, सत्य दपि प्रदि //True Copy// उप/सह यक पुंजीक र /(Dy./Asstt. Registrar) आयकर अपीलीय अदधकरण, म ुंबई / ITAT, Mumbai "