Appeal details
Counselvise Citation
[2025] 140 COUNSELVISE.COM (IT) 26210 (ITAT-JAIPUR)
Assessee PAN
Bench
Appeal Number
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
20-01-2025
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
SMC
Assessment Year
2014-2015
Judgement Text
" IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES,”SMC” JAIPUR BEFORE: DR. S. SEETHALAKSHMI, JM & SHRI GAGAN GOYAL, AM vk;dj vihy la-@ITA No. 67/JPR/2024 fu/kZkj.k o\"kZ@Assessment Year : 2014-15 Holiday Triangle Travel Pvt. Ltd., Plot No. 52, 3rd Floor, Batra House, Sector-32, Gurgaon. (Haryana) cuke Vs. The Income Tax Officer, Ward 7(3) Jaipur. LFkk;hys[kk la-@thvkbZvkj la-@PAN/GIR No. AACCH 7688 E vihykFkhZ@Appellant izR;FkhZ@Respondent fu/kZkfjrh dh vksj ls@Assesseeby : Shri Dilip Shivpuri, Advocate & Shri Utkarsh Shara, Advocate jktLo dh vksj ls@ Revenue by : Shri Gautam Singh Choudhary, JCIT lquokbZ dh rkjh[k@ Date of Hearing : 07/01/2025 ?kks\"k.kk dh rkjh[k@ Date of Pronouncement : 20 /01/2025 vkns'k@ ORDER PER DR. S. SEETHALAKSHMI, J.M. This is an appeal filed by the assessee against the order of ld. CIT (Appeals), National Faceless Appeal Centre (NFAC) Delhi dated 05.12.2023 passed under section 250 of the I.T. Act, 1961, for the assessment year 2014-15. The assessee has raised the following grounds of appeal :- 1. On facts and circumstances of the case, the ld. CIT (A) has erred in conferring the addition of INR 5,289.920 made by ld. AO under section 56(2)(viib) of the Act. 2 ITA NO. 67/JPR/2024 Holiday Triangle Travel Pvt. Ltd., Gurgaon. 2. On facts and circumstances of the case, the ld. CIT (A) has erred in conferring the addition of INR 5,289.920 on the basis of conjectures and surmises and without appreciating / considering the detailed factual and legal submissions filed by the Appellant and the settled legal position. 3. That on the facts and circumstances of the case and in law, the order passed by the ld. CIT (A) under section 250 of the Act is bad in law and liable to be quashed to the extent it dismisses the Appellant’s appeal filed on 20 January 2017 against the impugned order. 4. On the facts and circumstances of the case and in law, the ld. CIT (A) has grossly erred in conferring the additionof INR 5,289.920 on account of addition of share premium received on sale of shares under section 56(2)(viib) of the Act without appreciating facts and law, inter alia as under : 4.1 That section 56(2)(viib) of the Act is not applicable on genuine, bonafide and commercial transactions. 4.2 That no powers have been vested to the office of ld. AO under the Act to change the method of valuation of shares opted by the Appellant. 4.3 The ld. CIT (A) has grossly erred in accepting the fair value of the shares computed by ld. AO at INR (303.11) without appreciating that the price at which the shares were issued was based on the valuation report issued by the independent Chartered Accountant following the Discounted Cash Flow (DCF) method prescribed under section 56(2)(viib) of the Act read with Rule 11UA of the Income Tax Rules, 1962 (The Rules). 4.4 The ld. CIT (A) has grossly erred in facts and failed to appreciate that business projections for the purpose of valuation under DCF method are management’s best estimates of future business at a given point of time and cannot be compared with subsequent actual performance of the appellant’s business for purpose of section 56(2)(viib) of the Actg. 4.5 The ld. CIT (A) has grossly erred on facts and has not appreciated that the Appellant has furnished all requisite details to substantiate the fair value of the shares vide submissions filed on record. 4.6 Without prejudice to the above and even for argument’s sake, the valuation report filed by the Appellant is considered as not acceptable/reliable, the ld. CIT (A) should have directed the ld. AO to compute the fair value as per DCF method adopted by the Appellant or may have obtained the fresh valuation report from independent valuer after recording reasons instead of arbitrarily changing the method of valuation to Net Asset Value (NAV) method. 3 ITA NO. 67/JPR/2024 Holiday Triangle Travel Pvt. Ltd., Gurgaon. The above grounds of appeal are mutually exclusive and without prejudice to each other. The Appellant craves leave to alter, amend, withdraw and/or modify any of the grounds of appeal or add any further ground (s) during or before the hearing of the appeal.” 2. The brief facts of the case are that the assessee, a private limited company, running an Online Portal to help its clients to plan and customize their holiday trips, had filed return of income on 27.092014 declaring a loss of (-) Rs. 22,83,508/-. The case was selected for limited scrutiny under CASS and notice under section 143(2) of the IT Act, 1961 was issued to the assessee on 18.09.2015 fixing the case for hearing on 21.09.2015 which was duly served upon the assessee through registered post. In compliance to the said notice, the ld. A/R of the assessee company attended. Further, notice under section 142(1) was issued on 05.05.2016. In response thereto, the assessee company furnished written submission along with copy of ITR, computation, audit report, financial statements and copies of certain ledger accounts, which are placed on record. The case of the assessee company had been selected for Limited Scrutiny for the reason that “Large share premium received during the year”. During the year, the assessee company received Rs. 52,89,920/- against share premium account. From the details of equity shares issued, the AO noticed that the share of the face value of Rs. 10/- each have been issued at a hefty premium ranging from Rs. 5144/- to Rs. 5253/- 4 ITA NO. 67/JPR/2024 Holiday Triangle Travel Pvt. Ltd., Gurgaon. per share. The AO asked the assessee as to why not the provisions of section 56(2)(viib) be invoked in its case. The ld. A/R of the assessee replied that though the provisions of section 56(2)(viib) are applicable in its case, but the fair market value of the share issued is not more than the share premium received. The assessee had worked out the fair market value of the shares as per Discounted Free Cash Flow method. The AO observed that the assessee company is a loss making company. Since its very inception in 2011, there have been continuous losses, as on the opening day of the current FY (01 April, 2013) the company had accumulated losses of Rs. 31.31 lacs. No prudent person would invest in a company with poor financial results, and that too at a hefty premium. The assessee tried to justify that the issue price of share including premium is below the FMV, calculated as per DFCF method. The AO observing that assessee company doing business since its incorporation (2011), therefore, the FMV worked out on the basis of DFCF method i.e. projection basis, is not applicable in the instant case. Therefore, the valuation report furnished in support of FMV, is not tenable. The AO holding that the fair market value of the shares as per rule 11UA(2)(a) is in a negative figure, therefore, considering the facts of case, the entire share premium of Rs. 52,89,920/- has been added under section 56(2)(viib) of the Act, 1961 under the head “ Income fromother sources” and completed the assessment under section 143(3) of the IT Act, 1961 on 19.12.2016 in which the claim of the appellant under 5 ITA NO. 67/JPR/2024 Holiday Triangle Travel Pvt. Ltd., Gurgaon. section 56(2)(viib) of the Act amounting to Rs. 52,89,920/- on account of share premium received during the year was disallowed and added back. 3. Aggrieved by the said order of the AO, the assessee preferred appeal before the ld. CIT (A). The ld. CIT (A), however, confirmed the disallowance vide his order dated 05.12.2023. 4. Aggrieved by the said order of the CIT(A), the assessee preferred appeal before us. At the time of hearing before us, the ld. A/R of the assessee has submitted his written submission as under :- “ The assessee, during the year had sold 1013 equity shares of the company, and had received share premium in excess of the fair market value (face value of share = Rs. 10) totaling Rs. 52,89,920. The assessee was of the view that the value at which these shares were sold was less than the value of these shares if these shares were valued at the Discounted Free Cash Flow (DFCF) Method, which is an accepted method of valuing the shares as per their projected future value ( as against their present value). In other words, the value of the shares sold, as per DFCF method, being more than the value as per premium received, there was no question of application of the provisions of section 56(2)(viib) of the Income Tax Act. On the other hand the Assessing Officer, in his assessment order dated 19.12.2016 stated in para 2.5 that : “ It is important to mention here that the company is doing business since its corporation (2011), therefore the FMCV worked out on the basis of DFCF method, i.e. projection basis, is not applicable in the instant case. Therefore, the valuation report furnished in support of FMV is not tenable. 6 ITA NO. 67/JPR/2024 Holiday Triangle Travel Pvt. Ltd., Gurgaon. He then proceeded to calculate the value of the sold shares by FMV method and make the addition of Rs. 52,89,920/- on the grounds that FMV calculated as per FMV method given in Rule 11UA(2)(a) is less that the face value of the shares sold. The assessee than went in appeal and before the CIT (A) he make the following points : i) That section 56(2)(viib) Explanation of the Act offers two methods of valuation of shares sold – (a) FMV as may be determined in accordance with such method as may be prescribed, or (b) As may be substantiated by the company to the satisfaction of the Assessing Officer. If we exercise the first option we have to go to Rule 11U and 11UA of the Income Tax Rules. Here also two methods for calculation of the value of unquoted shares and they are : a) FMV = (A-L) x PV/PE, and b) Fair Market Value of the unquoted equity shares determined by a merchant banker or an accountant as per the Discounted Free Cash Flow (DFCF) Method. Rule 11UA(2) also says that the option to chose one of the above two methods is of the assessee. According to the assessee, he has exercised the first option, and, then coming to Rule 11U and 11UA of the Income Tax rules, it has exercised the option of computing the value of shares sold by the company on the DFCF method, hence his action is perfectly legal. As per the valuation report of an independent accountant M/s. Vikram Kapoor & Co., the value at which the shares were sold was less than the value of these shares calculated by the DFCF Method, hence addition u/s 56(2)(viib) was not justified, it needed to be deleted. 7 ITA NO. 67/JPR/2024 Holiday Triangle Travel Pvt. Ltd., Gurgaon. The CIT (A), however, confirmed the order of the Assessing Officer, vide his order dated 05.12.2023, on the basis that : “From the assessment order it is apparent that the valuation presented by the appellant was not to the satisfaction of the AO. Therefore, primary condition of satisfaction of the AO regarding valuation of shares was clearly not there.” This was a totally erroneous conclusion by the CIT (A) since the assessee never invoked sub-clause (ii) of Explanation to Section 56(2)(viib) but he chose sub-clause (i) of Section 56(2)(viib) and adopted the prescribed method of DFCF prescribed in Rule 11UA. The CIT (A) then committed a second manifest error by rejecting the valuation report of the Accountant prepared on DFCF Method by stating that : “Manifestly, it is a qualified report where the valuers themselves were not taking any responsibility. They have not even carried out “due diligence, review, technical or validation of financial and other information.” This makes the report totally baseless and indefensible. It is emphasized again that the assessee has exercised the option to value the shares sold by the DFCF method. It is not contested that the accountant has relied on the financials supplied by the assessee without doing an independent evaluation of the financials. But that does not make the financials faulty or erroneous. In fact the Accountant has very specifically mentioned in his report that : “We are not required to and have not carried out any due diligence review,…….. of such financials and other information to establish the accuracy or sufficiency of the financial statements referred to above or the information, explanations and representations provided to us.” 8 ITA NO. 67/JPR/2024 Holiday Triangle Travel Pvt. Ltd., Gurgaon. The comments of the Chartered Accountant reproduced above make it clear that he is not supposed to question the financial statements etc. provided to him before submitting his report, by law. Therefore, the observation of the CIT (A) that the report is to be rejected because of non-verification of the financial statements, reveals lack of understanding of accounting standards and procedures. He has not understood the import of what is written in the report. His conclusion that the report is not worth accepting is erroneous, both on facts and in law. The CIT(A) has NOT pointed out any specific defect in the valuation report. Without pointing out specific defect, or fraud, he has no right under law to reject the valuation report. This is the position of law as established by the decisions of the various ITATs and High Courts, which are compiled and presented for the perusal of the Hon’ble ITAT. Hence, the conclusion of the CIT (A) is contrary to facts and the express provisions of the Income Tax Act, and needs to be quashed/set-aside. A perusal of the valuation report prepared by M/s. Vikram Kapoor & Co. shows that the procedures are based on Desk-top Analysis of theFinancial projections and on Projections for 5 years period ending 31.03.2019. The report is based on sound principles of valuation as per DFCF method, and there is no reason why it should be rejected. With the written submissions I am enclosing copy of a write-up on DFCF system of valuation of unquoted equity shares which clarifies that : “ Discounted Free Cash Flow is a valuation technique that uses expected future cash flows, in conjunction with a discount rate, to estimate the present fair value of an investment. It is a calculation that is concerned with the time value of money, or TVM. TVM is the idea that money today is worth more than money tomorrow.” 9 ITA NO. 67/JPR/2024 Holiday Triangle Travel Pvt. Ltd., Gurgaon. DCF is a useful technique to evaluate any investment of present day cash outlay in exchange for future earnings.” Also enclosed with the written submissions is a copy of Notification F. No. 173/14/2018-ITA.I dated 06.02.2018 of the CBDT in which the CBDT has stated that Assessing Officers are unnecessarily rejecting valuation reports based on DFCF Method, especially in case of “Start-Ups”. The assessee is relying on the following case laws which are being submitted as a compilation for the convenience and aid of the hon’ble Tribunal. The gist of these case laws is : 1. The assessee has the right to exercise the option of either choosing the FMV Method or the DFCF Method for valuation of unquoted equity shares; 2. That once he has chosen the DFCF Method the Assessing Officer has no right to challenge, under law, the decision of the Assessee. The unquoted shares have to be valued mandatorily by the DFCF Method. 3. That the only thing the Assessing Officer can do is to examine the projections made in the report of the independent Auditor and see that they should not be arbitrary or baseless. He cannot substitute his opinion over the conclusion of the expert, i.e., the accountant. Hence, the ratio decidendi of these case laws prove that both the AO and the CIT (A) grossly erred in misinterpreting the relevant provision of the Income Tax Act and the facts of the case as well as the rationale of the DFCF Method, thereby rendering an erroneous decision. The case laws relied upon are enumerated below : i) M/s. Rameshwaram Strong Glass (P) Ltd. v. ITO, Ward 2(1), Ajmer, ITA 884/JP/2016 dated 12.07.2018. ii) CIT, Chennai v. VVA Hotels (P) Ltd., (2020) 429 ITR 69 (Madras); 10 ITA NO. 67/JPR/2024 Holiday Triangle Travel Pvt. Ltd., Gurgaon. iii) Exceed Technology Solutions (P) Ltd. v. ITO, Bengaluru (2020) 119 taxmann.com 378 (Bangalore-Trib.); iv) Valencia Nutrition Ltd. v. DCIT, Bangalore (2020) 120 taxmann.com 238 (Bangalore-Trib.); v) Cinestaan Entertainment (P) Ltd. v. ITO, New Delhi (2019) 106 taxmann.com 300 (Delhi-Trib.); vi) Vodafone M-Pesa Ltd. v. DCIT, Mumbai (2020) 114 taxmann.com 323 (Mumbai-Trib.); vii) Clearview Healthcare (P) Ltd. v. ITO, New Delhi (2020) 114 taxmann.com 167 (Delhi-Trib.); viii) LalithaaJewellery Mart (P) Ltd. v. ACIT Chennai (2019) 108 taxmann.com 490 (Chennai-Trib.); ix) SB Industrial Engineering (P) Ltd. v. ACIT (2022) 145 taxmann.com 356 (Chennai-Trib.); x) ITO,Bhubaneshwar v. Ashoka Industries Ltd. (2020) 120 taxmann.com 214 (Cuttack-Trib.) xi) ACIT v. Safe Decore (P) Ltd. (2018) 90 taxmann.com 161 (Jaipur- Trib.) On the other hand, the decision relied upon by the CIT (A), i.e., ITO, Hyderabad v. M/s. Quark Enterprises P. Ltd., ITA 1270/Hyd/2019 is based on different facts, and so, is not applicable to the facts of the present case for the following reasons : “ As per 11UA of the I.T. Rules, it gives an option to the assessee to value the shares on the valuation date either under the net asset value method or DCF method. The assessee in the instant case has valued the shares on the basis of NAVC method. However, we find the same is done on the basis of the value of shares of the subsidiary company on DCF method on certain projections…. The valuation of the company in our opinion should be done based on fundamentals and economic conditions of the assessee and must 11 ITA NO. 67/JPR/2024 Holiday Triangle Travel Pvt. Ltd., Gurgaon. be in accordance with the method prescribed for that purpose. It should be independently done as the valuation of the holding company shares done on the basis of DCF method cannot be yardstick to determine the valuation of shares of assessee company.” The distillate of this decision is that the ITAT rejected the decision of the CIT (A) on the following two main grounds: a) that the valuation of shares should be done on the basis of the method prescribed for the purpose. In the present case the assessee has opted for the DFCF Method, which is a prescribed method. And b) the valuation of shares of subsidiary company cannot be made the basis for valuation of the shares of the holding company. This is not the situation in the present case. In view of the unanimous view of all Tribunals mentioned above, the view taken by the AO and the CIT (A) is contrary to the express provisions of the Income Tax Act, and needs to be dismissed as erroneous. The addition of Rs. 52,89,920/- made by the AO on account of share premium received being in excess of the Fair Market Value (FMV) of the shares sold deserves to be deleted forthwith.” 5. On the other hand, the ld. D/R supported the orders of the lower authorities. He relied on the following case laws :- 1. Agra Portfolio Pvt. Ltd vs. PCIT-1 & Another ITA No. 1385/2018 dated April 04, 2024 (Delhi High Court) 2. TUV Rheinland NIFE Academy (P) Ltd. vs. ACIT (2022) 135 taxmann.com 127 (Bangalore Trib.) 3. Osianama Learning Experience P. Ltd. vs. DCIT (2023) 155 taxmann.com 533 (Mumbai Trib.) 4. M/s. Mobicom Technologies P. Ltd. vs. ITO ITA No. 494/Bang/2023 dated 12.09.2023. 12 ITA NO. 67/JPR/2024 Holiday Triangle Travel Pvt. Ltd., Gurgaon. 5. Agro Portfolio Pvt.Ltd. vs.ITO ITA No. 2189/Del/2018 dated 16.05.2018. 6. ITO vs. M/s. Quark Enterprises Pvt. Ltd. ITA No. 1270/Hyd/2019 dated 19.09.2022. 6. We have heard rival contentions, perused the material on record, gone through the orders of the lower authorities and the case laws cited by both the parties. We note from the submission of the Ld AR for the assessee that the assessee company had issued 1,013 equity shares of a face value of Rs. 10/- at a premium ranging between Rs. 5,144/- to Rs. 5,253/- per share. In total share premium of Rs. 52,89,920/- was received by the assessee during the year under consideration. We note that the Ld AO doubted on such premium by stating that the assessee Company was a continuous loss making company and hence no prudent person would invest in a company with poor financial results and that too at a high premium. Further we note that the report of valuer, which was prepared by following Discounted Cash Flow method was not reliable as the valuer has mentioned in the report that the management of the company had provided financial results for preparing the report which was not verified and audited by them and hence the report so submitted was not reliable. Since the assessee company is in existence since 2011 and therefore working of FMV of share based on Discounted Cash Flow method is not applicable. We note that on such basis, the 13 ITA NO. 67/JPR/2024 Holiday Triangle Travel Pvt. Ltd., Gurgaon. AO doubted the premium so received by the appellant company and he added the total sum of Rs. 52,89,920/- under section 56(2)(viib) of the Income Tax Act, 1961 as its Income from other sources. Being aggrieved by the order of the AO, the assessee preferred appeal before the ld. CIT (A). The ld.CIT (A) sustained the action of the AO by holding that (1) The Explanation (a)(ii) of sub section (viib) of section 56(2) of the Income Tax Act, 1961 says that FMV of unquoted shares has to be worked out by applying a method which may be substantiated by the assessee to the satisfaction of the AO based on the value, on the date of issue of shares, of its assets, including intangible assets including goodwill, know how, patents, copyrights, trademarks, licences, franchises or any other business of commercial rights of similar nature. Since in this case the AO has rejected the method adopted by the appellant and hence primary condition of satisfaction of the AO regarding valuation of shares was clearly not there. The valuer M/s. Vikram Kapoor and Company, Chartered Accountants have mentioned in their report that they have not carried out any due diligence, review, technical or validation of such financials and other information to establish the accuracy or sufficiency of the financial statements referred to above . As such report issued by Chartered Accountant firm is a qualified report where the valuers themselves are not taking any responsibility which makes the whole report baseless and indefensible. 14 ITA NO. 67/JPR/2024 Holiday Triangle Travel Pvt. Ltd., Gurgaon. The judgments of the ITAT, Hyderabad in the case of Quark Enterprises P Ltd. (ITA No. 1270/Hyd/2019) and of the ITAT, Bangalore in the case of Mobicom Technologies P Ltd. (ITA No. 494/Bang/2023) are clearly applicable in the instant case as in both the cited judgements the Tribunals have mentioned that in case the input data provided by the company are not reliable then the valuation based on DCF method may be rejected. With the above observations the ld. CIT (A) has sustained the action of the AO in treating the premium so collected as income of the appellant company as income from other sources u/s 56(2)(viib) of the Income Tax Act, 1961. The ld. AR of the appellant has contended following reasons for accepting the valuation done by above named valuer :- 1. As per DCF method, the value of share was even more than at which the shares were issued by the appellant company during the year under consideration and therefore there may not be a question for application of the provisions of section 56(2)(viib) of the Income Tax Act, 1961. 2. As per explanation to section 56(2)(viib) two options are available to the appellant out of which the appellant has adopted first option which says that FMV may be determined in accordance with such method as may be prescribed and this option refers to rule 11U and 11UA of the Income Tax Rules, 1962 and for calculation of FMV two options are available wherein the option (b) refers to valuation may be determined by a merchant banker or 15 ITA NO. 67/JPR/2024 Holiday Triangle Travel Pvt. Ltd., Gurgaon. an accountant as per the discounted Free Cash Flow method. Since the assessee has chosen the valuation method as permitted by law and therefore AO was not justified in rejecting the same. 3. The contention of the ld. CIT (A) that the appellant had chosen sub clause (ii) of explanation to section 56(2)(viib) of the Income Tax Act, 1961 is wrong as the appellant had chosen sub clause (i) of section 56(2)(viib) and has valued the price of share by following DFCF method. 4. The ld. CIT`s contention that the valuer has very categorically mentioned in the report that they have not verified the authenticity of the financials provided by the assessee which makes the report baseless is incorrect as the mentioning of the lines by the valuer means that he is not supposed to question the financial statements of the assessee provided to him. 5. No specific defect has been pointed out by ld. CIT (A) in the valuation report. Therefore he has no right to reject the valuation report as submitted by the appellant. 6. The valuation report shows that the procedures adopted for valuation are based on desk top Analysis of the Financial projections and on projections for 5 years period ending on 31.03.2019 and the report is based on sound principles of valuation as per DFCF method and there is no reason to reject the same. 7 As per notification no. 173/14/2018-ITA.1 dated 06.02.2018 issued by CBDT, AOs are not supposed to reject valuation reports prepared on the basis of DFCF method. 16 ITA NO. 67/JPR/2024 Holiday Triangle Travel Pvt. Ltd., Gurgaon. 8 The ld. AR has relied on various case laws as mentioned in his written submissions reproduced hereinabove. 9 The case laws cited by the ld. DR are distinguishable on facts and hence are not applicable in the instant case. We note that among various case laws cited by the ld. AR, he primarily relied on two decisions of co-ordinate bench of Tribunal Jaipur on this issue. We have gone through the observations made by the coordinate bench Jaipur in the case of Rameshwaram Strong Glass P Ltd. v/s ITO, Ward 2(1), Ajmer (ITA No. 884/JP/2016 vide order dated 12.07.2018) wherein the Bench has decided the matter in para 4.5 and 4.5.6 as made :- “4.5 We have heard the rival contentions and perused the materials available on record including the written submissions and case laws relied upon during the course of hearing. From the order of the ld. CIT(A) it emerges that the ld.AR and Smt. Dhanwanti Gupta, CA appeared and the matter was discussed with them and they were asked to furnish the actual figures in respect of F.Y. 2013-14, 2014-15 & 2015-16. In compliance of such direction, the ld. AR and the ld. CA attended before the CIT(A) on 29.08.2016 and filed another valuation report wherein the value of the share was worked out @ 65.31 per share. A copy of the said report is placed on Pages 47-50 of the assessee’s paper book. It is clear from the order of the ld. CIT(A) that he made a comparison of the last report submitted to him on 29.08.2016 based on the actual figures with the earlier reports submitted and prepared by the CA as per Rule 11UA(2)(b) on DCF method, and the ld. CIT(A) finding difference between the figure of the two, rejected the report submitted by the assessee as absolutely unreliable and without any basis. Thus, the basic dispute between the parties is whether the authorities below could have applied the Net Asset 17 ITA NO. 67/JPR/2024 Holiday Triangle Travel Pvt. Ltd., Gurgaon. Value as prescribed u/r 11UA(2)(a) or whether the assessee has got a right to opt for the method of valuation given u/r 11UA(2)(b) and secondly, if the assessee is entitled to the adopt the DCF method to estimate the fair market value, the valuation submitted by the assessee was fair and reasonable in accordance with Rule 11UA(2). Before proceeding further, we would like to reproduce the relevant Provisions contained u/s 56(2)(vii)(b) of the Act and the relevant Rules, which reads as under: - “S. 56(2) (viia) where a firm or a company not being a company in which the public are substantially interested, receives, in any previous year, from any person or persons, on or after the 1st day of June, 2010 , any property, being shares of a company not being a company in which the public are substantially interested,— (i) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property; (ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration : Provided that this clause shall not apply to any such property received by way of a transaction not regarded as transfer under clause (via) or clause (vic) or clause (vicb) or clause (vid) or clause (vii) of section 47. Explanation.—For the purposes of this clause, \"fair market value\" of a property, being shares of a company not being a company in which the public are substantially interested, shall have the meaning assigned to it in the Explanation to clause (vii); (viib) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for 18 ITA NO. 67/JPR/2024 Holiday Triangle Travel Pvt. Ltd., Gurgaon. issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares: Provided that this clause shall not apply where the consideration for issue of shares is received— (i) by a venture capital undertaking from a venture capital company or a venture capital fund; or (ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf. Explanation.—For the purposes of this clause,— (a) the fair market value of the shares shall be the value— (i) as may be determined in accordance with such method as may be prescribed ; or (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher; (b) \"venture capital company\", \"venture capital fund\" and \"venture capital undertaking\" shall have the meanings respectively assigned to them in clause (a), clause (b) and clause (c) of Explanation to clause (23FB) of section 10; “[Rule 11UA(2) Notwithstanding anything contained in sub- clause (b) of clause (c) of sub-rule (1), the fair market value of unquoted equity shares for the purposes of sub-clause (i) of clause (a) of Explanation to clause (viib) of sub-section (2) of section 56 shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner under clause (a) or clause (b), at the option of the assessee, namely:— 19 ITA NO. 67/JPR/2024 Holiday Triangle Travel Pvt. Ltd., Gurgaon. (a) the fair market value of unquoted equity shares (A-L) x (PV) (PE) where, A = book value of the assets in the balance-sheet as reduced by any amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act and any amount shown in the balance-sheet as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset; L = book value of liabilities shown in the balance- sheet, but not including the following amounts, namely:— (i) the paid-up capital in respect of equity shares; (ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company; (iii) (iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation; (iv) (iv) any amount representing provision for taxation, other than amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto; (v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities; 20 ITA NO. 67/JPR/2024 Holiday Triangle Travel Pvt. Ltd., Gurgaon. (vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares; PE = total amount of paid up equity share capital as shown in the balance sheet; PV = the paid up value of such equity shares; or (b) the fair market value of the unquoted equity shares determined by a merchant banker or an accountant as per the Discounted Free Cash Flow method.]” However, there is no dispute between the parties that Rule 11UA(1) is not applicable on the facts and circumstances of the present case which is a provision of general nature whereas Rule 11UA(2) is a specific provision providing for the valuation of the unquoted equity shares. After going through the relevant Section and the Rules, in our opinion, the matter of valuation of unquoted equity shares, has been completely left to the discretion of the assessee. It is his option whether to choose NAV Method (Book Value) under clause (a) or to choose DCF Method under clause (b) and the AO cannot adopt a method of his own choice. The authorities below cannot compel the assessee to choose NAV Method only as against DCF Method. When the legislation has conferred an option upon the assessee to choose a particular method, the valuation of the shares has to be in accordance with such method only i.e. DCF method in the present case u/r 11UA(2)(b) r/w S. 56(2)(viib). In the case of Medplus Health Services (P) Ltd vs ITO (supra), the ITAT, Hyderabad Coordinate Bench, after taking into consideration various decisions, has observed as under: 21 ITA NO. 67/JPR/2024 Holiday Triangle Travel Pvt. Ltd., Gurgaon. “11. On a careful reading of the judgments discussed above, it is seen that the Courts have held that where a method has been prescribed by the legislature, that method alone shall be followed for computation of the fair market value. The A.O. and the Ld. CIT(A) have not followed the relevant provisions for adopting or computing the fair market value of the shares, but have adopted the market value at which some of the shares have been purchased by the assessee as FMV. This, in our opinion, is not correct. As held by the Courts in the above judgments, the A.O. has to compute the fair market value in accordance with the prescribed method but cannot adopt the market value as fair market value under Section 56(2)(viia) of the Act. The legislature in its wisdom has also given a formulae for computation of the fair market value which cannot be ignored by the authorities below.” It is observed that in the instant case, the assessee company had exercised an option to value the share by DCF Method however, we find that the AO has worked out the value based on NAV Method though in the body of assessment order he has referred to Rule 11UA(2)(b) but in substance, he has valued the share based on the book value figures only by considering the value of the assets shown in the Balance Sheet as on 31.03.2013 being the land valuing Rs. 3,27,690/- and the liabilities. The ld. CIT(A) also, though considered the case in context of Rule 11UA(2)(b) yet however, his act of asking the assessee & his CA to prepare and submit a valuation report only on actual figures, is nothing but a valuation done on the basis of NAV Method u/r 11UA(2)(a) only. From the facts thus, it is clear that the authorities below wanted to impose upon the method of valuation of their own choice, completely disregarding the legislative intent which has given an option to the assessee to choose any one of the two methods of valuation of his choice. When the law has specifically provided a method of valuation and the assessee exercised an option by choosing a particular method (DCF here), changing the method or adopting a different method would be beyond the powers of the revenue 22 ITA NO. 67/JPR/2024 Holiday Triangle Travel Pvt. Ltd., Gurgaon. authorities. Permitting the revenue to do so will render the clause (b) of Rule. 11UA(2) as nugatory and purposeless. Thus, to this extent the action of the authorities below is not justified and it is held that the assessee has got all the right to choose a method which, cannot be changed by the AO. Further, though the AO can scrutinize the valuation report only if some arithmetical mistakes are found, he may make necessary adjustments. But if he finds the working of the C.A. or the assumptions made as erroneous or contradictory, he may suggest the necessary modification and alterations therein provided the same are based on sound reasoning and rational basis and for this purpose the AO may call for independent expert valuer’s report or may also invite comment on the report furnished by the assessee’s valuer as the AO is not an expert. It is not open for the AO to challenge or change the method of valuation, once opted by the assessee and to modify the figures as per his own whims and fancies. In any case, the revenue could not ask to prepare the valuation report based on actuals which is not contemplated in Rule 11UA(2)(b). 4.5.1 Now coming to the aspect where the assessee has complied with the conditions laid down under Rule 11UA(2)(b), it is clear that to comply with this rule the assessee is required to obtain a certificate of a Merchant Banker or Chartered Accountant and such a valuation must be based on Discounted Free Cash Flow (DCF) Method only. To exercise the option under this clause, the assessee is not subjected to the fulfillment of any other condition except these two. It is not denied that the assessee did file the valuation report first one dated 31.03.2013 and the revised report dated 23.08.2016 valuing the FMV of the unquoted shares at Rs. 119.93 & 95.90 per equity share respectively prepared by a C.A. only. The reason for the difference was explained that in the earlier report, the figure of change in networking capital was left out by oversight, which has now been taken care and corrected in the revised report. This contention was 23 ITA NO. 67/JPR/2024 Holiday Triangle Travel Pvt. Ltd., Gurgaon. supported by Paper Book Page No.21 of the earlier valuation report and the revised valuation report Paper Book Page No.46.We find nothing wrong if a bonafide mistake was corrected. 4.5.2 Before examining the fairness or reasonableness of valuation report submitted by the assessee, we have to bear in mind that the DCF Method, and is essentially based on the projections (estimations) only and hence these projection cannot be compared with the actuals to expect the same figures as were projected. The valuer has to make forecast on the basis of some material but to estimate the exact figures is beyond its control. At the time of making a valuation for the purpose of determination of the fair market value, the past history may or may not be available in a given case and therefore, the other relevant factors may be considered. The projections are affected by various factors hence in the case of company where, there is no commencement of production or of the business, does not mean that its share cannot command any premium. For such cases, the concept of startup is a good example and as submitted, the Income Tax Act has also recognized and is encouraging the startups for which, a separate deduction u/s 80IAC has been provided. In this context, we find a CBDT Instruction (File No. 173/14/2018-ITA.I) on dated 06.02.2018 (copy placed at paper book-84) given in the case of startup companies useful in the context of determination of fair market value of the unquoted equity shares u/s 56(2)(viib) of the Act r/w Rule 11 UA(2), which states that tough startup companies invariably submits valuation report in accordance with Rule 11UA(2)(b) but in the assessments such reports are not being accepted and rejected/modified by the AOs considering the same as based on abnormal valuations which results in additions. The CBDT has accordingly directed not to take coercive measures in such cases for recovery of demand resulting in additions and the CIT(A) have been directed to dispose such appeals expeditiously. 4.5.3. XXXXXXXX XXXXXXXXX 4.5.4. XXXXXXXX XXXXXXXXX 24 ITA NO. 67/JPR/2024 Holiday Triangle Travel Pvt. Ltd., Gurgaon. 4.5.5. XXXXXXXX XXXXXXXXX 4.5.6. …………. It appears that the authorities below have ignored Explanation (a) below S. 56(2)(viib).The said Explanation provides that the fair market value of the shares shall be the value— (i) as may be determined in accordance with such method as may be prescribed i.e. u/r 11UA; or (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher. Accordingly, the value computed under the Rule at Rs.95.90 per share is higher than Rs. 65.31 or Rs.32.76 per share and therefore, the higher valuation has to be adopted. Moreover, it is only the Explanation (a)(ii) speaks of the satisfaction of the AO but there appears no such condition in the Explanation (a)(i) which therefore AO is not permitted to interfere in the valuation, once done in accordance with the method prescribed in the Rule 11UA(2). For the reasons stated above, we find no justification behind rejecting the declared valuation of the shares and in the impugned addition made by the AO but partly sustained by the CIT(A), which is hereby deleted.” We have also gone through the order of the co-ordinate bench of ITAT Jaipur in the case of ACIT, Circle 2, Alwar v/s Safe Decore P Ltd. (ITA No. 716/JP/2017 order dated 12.01.2018) wherein following observations in para 4 and 4.1 are made :- “4. We have considered the rival contentions as well as the relevant material on record. There is no dispute that the assessee has issued the shares to M/s Jasmine Pvt. Ltd., during the year under consideration. Further, the fair market value as per the provision of section 56(2)(vii)(b) has to be determined in accordance with the method prescribed under Rule 11UA of the IT Rules and as per sub-Rule (2) of Rule 11UA, discounted cash flow method is one of the prescribed method. 25 ITA NO. 67/JPR/2024 Holiday Triangle Travel Pvt. Ltd., Gurgaon. Therefore, it is the option of the assessee to adopt any of the prescribed method under Rule 11UA(2) of the IT Rules Section 56(2)(vii)(b) read with Explanation has specifically provided that the fair market value of the unquoted shares shall be determined as per the prescribed methods and shall be taken whichever is higher fair market value by comparing the value based on the asset of the company. Therefore, the Net Asset Value method as well as any of the other methods prescribed under Rule 11UA of the IT Rules, whichever is higher shall be adopted as per the option of the assessee. 4.1 In view of the statutory provisions giving options to assessee to adopt any of the methods which can be compared with the Net Asset Value Method and the AO shall adopt the value whichever is higher. In the case of the assessee the Fair Market Value determined as per the discounted cash flow method at Rs. 54.98 per share which is higher than the valuation adopted by the AO as per the Net Asset Value at Rs. 26.69 per share. Therefore, the share allotted at Rs. 40 per share is within the fair market value as determined by adopting the discounted cash flow method. The Assessing Officer has not found any serious defect in the facts and details used in determining the fair market value under discounted cash flow method. Hence, we do not find any error or illegality in the impugned order of the Ld. CIT(A) qua this issue.” We have considered the judgments of Coordinate Bench of the Tribunal Jaipur only in view of principles of judicial discipline as per which past orders passed by co-ordinate bench deserve to be followed until and unless reasons are there to prove that the judgment of the co-ordinate bench was not in accordance with law. None of the sides have proved that the above cited judgements suffered from any error of law and therefore we decide the instant appeal by considering these two judgements. The importance of judicial principles has been upheld by the Hon`ble Supreme Court in the case of Shah Faesal v/s UOI (AIR 2020 SUPREME COURT 3601)by observing as under :- 26 ITA NO. 67/JPR/2024 Holiday Triangle Travel Pvt. Ltd., Gurgaon. “23. This brings us to the question, as to whether a ruling of a co- ordinate Bench binds subsequent coordinate Benches. It is now a settled principle of law that the decisions rendered by a coordinate Bench is binding on the subsequent Benches of equal or lesser strength. The aforesaid view is reinforced in the National Insurance Company Limited v. Pranay Sethi, (2017) 16 SCC 680.” Therefore in view of above judgment of the Hon`ble SC we are restricting ourselves to only two judgments as cited above and are not discussing other case laws relied by both the sides. Therefore, in the facts and circumstances of the case discussed above and considering the decisions of the Coordinate Bench of the Tribunal, Jaipur as referred herein above, we allow the appeal of the assessee by deleting the addition of Rs. 52,89,920/- made by the AO and sustained by the ld. CIT (A). In the result, appeal of the assessee is allowed. Order pronounced in the open court on 20/01/2025. Sd/- Sd/- ( (Gagan Goyal ) (Dr. S. Seethalakshmi) Accountant Member Judicial Member Jaipur Dated:- 20/01/2025 *Santosh 27 ITA NO. 67/JPR/2024 Holiday Triangle Travel Pvt. Ltd., Gurgaon. Copy of the order forwarded to: 1. The Appellant- Holiday Triangle Travel Pvt. Ltd., Gurgaon. 2. The Respondent- ITO, Ward-7(3), Jaipur. 3. The ld CIT 4. DR, ITAT, Jaipur 5. Guard File ITA No.67/JPR/2024) By order, Asstt. Registrar "
AI Insights
The case revolves around the valuation of shares issued by Holiday Triangle Travel Pvt. Ltd. at a premium, which was questioned by the Income Tax Officer under section 56(2)(viib) of the Income Tax Act, 1961. The AO added the share premium of INR 52,89,920 as income from other sources, citing that the company was loss-making and the valuation method used by the assessee was not acceptable. The CIT(A) upheld the AO's decision. However, the Tribunal found that the assessee had correctly applied the DCF method for valuation, which was not adequately considered by the lower authorities. The Tribunal emphasized that the assessee had the right to choose the DCF method and that the valuation report was based on sound principles and should not have been rejected without specific defects being pointed out.
