N. J. Eco Build Pvt. Ltd., Surat V. Pr. CIT, Surat-1, Surat

ITA 1/SRT/2021

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 2509 (ITAT-SURAT)
• Duration Of Justice: 1 year(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-01-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 22-12-2021
• Assessment Year: 2015-2016
• Appeal Filed On: 03-01-2021
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: SURESH K. KABRA
• Keywords: Revision of order; Principle of natural justice; Fair market value; Valuation report; Commercial expediency; Set aside
• Section: 56; 263; 143(3); 142(1); 56(2); 73; 13; 22; 20

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, SURAT BENCH, SURAT BEFORE SHRI PAWAN SINGH, JM &DR. A.L.SAINI, AM आयकरअपीलसं./ITA No.01/SRT/2021 (Ǔनधा[रणवष[ / Assessment Years: (2015-16) (Physical Court Hearing) N. J. Eco-Build Pvt. Ltd., S-42, Belgium Square, Opp. Linear Bus Stop, Delhi Gate, Surat-395003. Vs. The PCIT-1, Surat. èथायीलेखासं./जीआइआरसं./PAN/GIR No.: AAECN1584H (Assessee) (Respondent) Assessee by : Shri Suresh K. Kabra, CA Revenue by :Shri Ritesh Mishra, CIT(DR) स ु नवाईकȧतारȣख/ Date of Hearing : 23/12/2021 घोषणाकȧतारȣख/Date of Pronouncement : 24/01/2022 आदेश / O R D E R PER DR. A. L. SAINI, ACCOUNTANT MEMBER: By way of this appeal, the assessee has challenged correctness of the order dated 07.12.2020, passed by the Learned Principal Commissioner of Income Tax (“ld PCIT” in short), under section 263 of the Income Tax Act 1961( for short ‘the Act’). Grievances raised by the assessee, are as follows: “1.The Ld. PCIT, has erred and was not just and proper on the facts of the case and in law in considering the assessment order passed u/s 143(3) as erroneous and prejudicial to the interest of the revenue and accordingly passing order u/s 263 of the Act to set aside the Assessment Order.” 3.The relevant material facts, as culled out from the material on record, are as follows. The assessee before us is a company engaged in the business of Trading of Art Silk Cloth. The assessee company had filed its return of income for assessment year 2015-16 on 30.09.2015 declaring total loss to the tune of Rs.4,79,20,437/-. The assessment order, under section 143(3) of the Income Tax Act, was framed by the Assessing Officer on 06.12.2017 by accepting loss declared in the return of income. Page | 2 ITA No.01/SRT/2021 Assessment Year. 2015-16 N. J. Eco-build Pvt. Ltd. 4.Later on, ld. PCIT has exercised his jurisdiction under section 263 of the Income Tax Act 1961. The ld PCIT observed that assessee company had allotted 9,96,000 equity shares at face value of Rs. 10 per share and at a premium of Rs.40/- per share to various parties. The assessee company received a total premium of Rs.3,98,40,000/- out of this allotment. The assessee had allotted shares based on the valuation done on DCF (Discounted Cash Flow) method. As per Rule 11UA, assessee can determine Fair Market Value of shares based on book value method or DCF (Discounted Cash Flow) method. For DCF method, certificate of a chartered accountant is required. In the instant case, assessee has determined fair market value (FMV) of shares, based on DCF method and accordingly relied on the valuation certificate issued by Chartered Accountant, (CA) dated 30.04.2013. However, the shares have been allotted on 04.07.2014, 30.07.2014 and 26.03.2015, which is substantially later than the valuation date. As per valuation certificate, the valuation is based on audited balance sheet as on 31.03.2013 whereas latest audited balance sheet as on 31.03.2014 was already available at the time of issue of shares. However the latest audited Balance Sheet has not been considered in determining valuation of shares. Valuation certificate pertains to assessment year 2014-15, whereas, the assessment year under consideration is assessment year 2015-16. Therefore, ld PCIT noted that assessee has used invalid valuation certificate for determination ‘fair market value’ of its shares. Hence, ld PCIT observed that assessing officer had clearly erred in accepting the invalid share valuation certificate. 5.The ld PCIT noted that DCF method requires future projection of financial parameters in order to determine fair market value. These figures include parameters such as total sales, profit after tax etc. The Assessee has made projections for 7 years from assessment year 2014-15 to assessment year 2020-21. No justification of these projection have been furnished by assessee during assessment proceedings. During the course of assessment proceedings, the assessing officer had not called for any explanation from the assessee, regarding the basis, on these projections were made by the assessee. Furthermore, substantial period had lapsed, since the date of valuation certificate. Therefore the projected Page | 3 ITA No.01/SRT/2021 Assessment Year. 2015-16 N. J. Eco-build Pvt. Ltd. figure in the certificate can be compared with the actual figures available from the audited financial statements of the assessee. Upon making this comparison, ld PCIT noted that assessee has highly inflated the financial parameters, in order to get higher valuation. The Assessee has painted a rosy picture to inflate the fair market value of its shares. This can be seen while comparing actual vs. projected figures of profit after tax and free cash flow from operation. If the projected figures were factually sound, it would converge with actual figures. However, it can be seen that projected figures are consistently and substantially higher than actual ones. Thus, it is clear that there was no factual basis for determination of projected figures and the same were highly inflated. Therefore, not only assessee has relied upon older share valuation certificate but even otherwise the valuation certificate does not reflect fair market value (FMV) of the shares. 6. The ld PCIT observed that assessee-company had issued shares at a premium of Rs.40 per share and face value of Rs.10 per share, thus at a total consideration of Rs.50 per share. As per latest audited balance sheet for the year under consideration, i.e. Balance Sheet as on 31.03.2014, the book value of shares comes to about Rs.22 per share. Considering this as fair market value (FMV) of shares, the amount of Rs.28 (Rs.50 minus Rs.22) per share requires to be taxed under section 56(2)(viib) of the Act. Hence, ld PCIT was of the view that provision of section 56(2)(viib) of the Income Tax Act is applicable in the assessee`s case under consideration and difference amount Rs. 28 per share, as worked out above, is required to be taxed under the head “income from other sources”. The same was neither verified by the assessing officer nor added to the total income hence rendering the assessment order passed to be erroneous and prejudicial to the interest of Revenue. Therefore, Ld. PCIT has issued a show cause notice under section 263 of the Act, to the assessee, to explain the difference of Rs.28 per share in Fair Market Value (FMV) of shares. The show cause notice issued by ld PCIT is reproduced in para no.3 of his revision order. Page | 4 ITA No.01/SRT/2021 Assessment Year. 2015-16 N. J. Eco-build Pvt. Ltd. 7. In response to the notice under section 263 of the Act, the assessee filed written submissions before the ld. PCIT. The sum and substance of assessee`s written submissions are that the report of valuation under DCF method was obtained for the assessment year 2014-15 as well as assessment year 2015-16. The DCF valuation report with reference to AY 2015-16 and including the data of latest audited balance sheet of 2013-14, were also submitted before ld PCIT. It was pointed out that report of assessment year 2014-15 was more relevant because the assessee company while obtaining loan facility in the financial years 2012-13 and 2013-14 had committed for Equity Share Capital of Rs. 13.51 Croresto be infused as part of sanctioned conditions of the Loan. The Sanction Letter issued by the Bankers was also submitted before ld PCIT. It was argued before ld PCIT that Shareholders had infused Rs.8.52 crores as Share Capital and Share Premium during the financial year 2013-14 and Rs.4.98 crore during financial 2014-15, making the total of Rs.13.50 crores (Rs.8.52 +Rs.4.98). The funds in fact had been committed at the commencement of the financial year,2013-14 but received in staggered manner as and when required. The pricing was based on the value as determined at the time when commitment was made. The Shareholders are from the promoter group and none is stranger. The sources of the investment were well explained with proper sources. The assessee also submitted list of the Shareholders before ld PCIT. It was contended before ld PCIT that projections were based on the installed capacity of the plant and the percentage output expected achievement year after year. The projections had been made on proper appraisal of the capacity of the plant and the selling prospects of the production. The Banker (State Bank), while sanctioning the loan had obtained Techno-Economic Valuation, a copy of the same was also submitted before ld PCIT. The DCF report is prepared by a qualified C.A as per the guidelines of ICAI. It was further contended before the ld PCIT that whatever documents and evidences asked by the assessing officer by issuing notice under section 142(1) of the Act, during assessment proceedings, were furnished before the assessing officer, therefore, order passed by the assessing officer should not be erroneous and prejudicial to the interest of revenue. Page | 5 ITA No.01/SRT/2021 Assessment Year. 2015-16 N. J. Eco-build Pvt. Ltd. 8. However, ld PCIT rejected the contention of the assessee and observed that assessee company had allotted 9,96,000 shares at face value of Rs.10 per share and at a premium of Rs.40 per share to various parties. The assessee received a total premium of Rs.3,98,40,000/- out of this allotment. Assessee had allotted shares based on the valuation done on DCF method. The assessee has relied on the valuation certificate of C.A, dated 30.04.2013. The ld PCIT noticed that shares have been allotted on 04.07.2014, 30.07.2014 and 26.03.2015, which is substantially later than the valuation date. As per valuation certificate, the valuation is based on audited balance sheet as on 31.03.2013 whereas latest audited balance sheet as on 31.03.2014 was already available at the time of issue of shares. However, the latest audited balance sheet has not been considered in determining valuation of shares. Valuation certificate pertains to assessment year 2014-15, whereas, the assessment year under consideration is, assessment year 2015-16. The ld PCIT also referred Rule 11UA of the Income Tax Rules in his revision order under section 263 of the Act and was of the view that Fair Market Value (FMV) has to be determined on the valuation date which will be either the date on which the money is received but more correctly in this case, the date of allotment i.e. the date on which the premium is actually taken by the company. Therefore, the relevant valuation date is the date of allotment of shares which undoubtedly falls within the assessment year 2014-15. The ld PCIT pointed out that if the shares were allotted in financial year 2014-15, and the Balance Sheet were not drawn on the date of the allotment, the relevant Balance sheet on the basis of which the fair market value could have been determined would be the balance sheet as on 31.03.2014. There would be no relevance of the Balance Sheet drawn on 31.03.2013. Therefore, ld PCIT noted that Assessing Officer erred in law in considering the valuation of shares on the basis of the balance sheet as on 31.03.2013. Therefore, ld PCIT held that assessment order under section 143(3) of the Act, passed on 06.12.2017 (for A.Y.2015-16) is erroneous in so far as it is prejudicial to the interest of Revenue. 9.Aggrieved by the order of the ld. PCIT, the assessee is in appeal before us. Page | 6 ITA No.01/SRT/2021 Assessment Year. 2015-16 N. J. Eco-build Pvt. Ltd. 10. Shri Suresh K. Kabra, Learned Counsel for the assessee pleads that in the previous assessment year 2014-15, ld. PCIT has exercised his jurisdiction under section 263 of the Act on the similar issue and the order of the ld. PCIT was quashed by the Tribunal. (vide order of Tribunal in ITA No.221/SRT/2019, dated 13.12.2019, in assessee`s own case).A copy of the said order under section 263 of the Act, in assessee`s case, was placed before the Bench and it was contended by ld Counsel that issue raised by ld PCIT in his revision order under section 263 of the Act for assessment year 2015-16 is covered by the aforesaid order of Tribunal for assessment year 2014-15, therefore, the jurisdiction exercised by ld PCIT under section 263 of the Act for assessment year 2015-16, may be quashed. 11. Shri Kabra, further argues that shares were issued to the same shareholders to whom the shares were issued during the previous assessment year 2014-15, therefore he contended that no fresh shareholders were introduced in the current assessment year 2015-16 and hence there were same set of shareholders, therefore Assessing Officer took the possible view that shareholders were same and shares capital / premium are to be introduced, as per the past projection, therefore there is no any mistake so far the fair market value (FMV) of shares are concerned. Considering these facts, the Assessing Officer did not examine the issue. However, the Assessing Officer has called the relevant documents/evidences by issue of notice under section 142(1) of the Act, dated 10.07.2017. In response to the said notice, the assessee submitted the required details and documents before the Assessing Officer which is placed at paper book page nos.1 to 3. Therefore, Assessing Officer taking into account the same set of circumstances and facts did not discuss the issue in the assessment order and hence the Assessing Officer after verifying all the information has chosen, not to make addition on account of share capital / share premium, therefore order passed by the Assessing Officer, under section 143(3) of the Income Tax Act, dated 06.12.2017, is neither erroneous nor prejudicial to the interest of Revenue. This way, Ld. Counsel prays the Bench that order passed by ld. PCIT under section 263 of the Act, may be quashed. Page | 7 ITA No.01/SRT/2021 Assessment Year. 2015-16 N. J. Eco-build Pvt. Ltd. 12. On the other hand, Shri Ritesh Mishra, Learned Departmental Representative (ld. DR) for the Revenue vehemently submitted that assessee- company, under consideration, had issued shares at a premium of Rs.40 per share and face value of Rs.10 per share, thus at a total consideration of Rs.50 per share. As per the latest audited balance sheet for the assessment year under consideration, that is, balance sheet as on 31.03.2014, the book value of the shares comes to about Rs.22 per share. However, the assessee company issued shares at the rate of Rs.50 per share including premium. Therefore, considering this Fair Market Value (FMV) of shares, the amount of Rs.28 (Rs.50 – Rs.22) as per share ought to be taxed by Assessing Officer under section 50(2)(vii)(b) of the Income Tax Act. Therefore, Ld. DR contended that provisions of section 56(2)(viib) of the Income Tax Act is applicable in the assessee’s case and the balance amount at the rate of Rs.28 per share should be treated under the head income from other sources. Besides, the assessee company has determined the “fair market value of shares”, based on the Balance Sheet as on 31.03.2013, whereas the fair market value could have been determined by assessee based on the Balance sheet as on 31.03.2014, this is the patent error committed by the assessing officer. This fact was not verified by the Assessing Officer, therefore the assessment order passed by the Assessing Officer is erroneous and prejudicial to the interest of Revenue and hence the ld. PCIT has correctly exercised his jurisdiction under section 263 of the Act. Therefore, Ld. DR contended that order passed by the ld. PCIT under section 263 of the Act should be upheld. 13.We have heard the rival contentions, perused the relevant findings given in the impugned orders as well as material referred to before us at the time of hearing. In various grounds of appeal, the sole issue raised by the ld PCIT is that Fair Market Value of shares (FMV) has to be determined on the valuation date which will be either the date on which the money is received or the date of allotment i.e. the date on which the premium is actually taken by the company, the assessing officer failed to examine this point therefore order passed by the assessing officer under section 143(3) of the Income Tax Act, dated 06.12.2017, is erroneous and prejudicial to the interest of Revenue. Though facts have been discussed in detail in the foregoing Page | 8 ITA No.01/SRT/2021 Assessment Year. 2015-16 N. J. Eco-build Pvt. Ltd. paragraphs, however in the succinct manner, the relevant facts and background are reiterated in order to appreciate the controversy and the issue for adjudication. During the year under consideration, assessee company had allotted total of 9,96,000 shares at face value of Rs.10 per share and at a premium of Rs.40 per share to various parties. The assessee received a total premium of Rs.3,98,40,000/- out of this allotment. Assessee had allotted shares based on the valuation done on DCF (Discounted Cash Flow) method. As per rule 11UA assessee can determine FMV of shares based on book value method or DCF method. For DCF method certificate of a CA is required. The assessee has determined FMV of shares based on DCF method and accordingly relied on the valuation certificate issued by C.A, dated 30.04.2013. However, the shares have been allotted on 04.07.2014, 30.07.2014 and 26.03.2015, which is substantially later than the valuation date. As per valuation certificate, the valuation is based on audited balance sheet as on 31.03.2013 whereas latest audited balance sheet as on 31.03.2014 was already available at the time of issue of shares. However, the latest audited balance sheet has not been considered in determining valuation of shares. Valuation certificate pertains to assessment year 2014-15, whereas, the assessment year under consideration is assessment year 2015-16. Thus, ld PCIT was of the view that assesses has used invalid valuation certificate for determination of fair market value of its shares. Therefore, assessing officer has clearly erred in accepting the invalid share valuation certificate. The ld PCIT observed that DCF method requires future projection of financial parameters in order to determine fair market value. These figures include parameters such as total sales, profit after tax etc. Assessee has made projections for seven years from assessment year 2014-15 to assessment year 2020-21. The ld PCIT observed that no justification of these projections have been furnished by assessee during assessment proceedings. During the course of assessment proceedings, assessing officer has not called for any explanation from the assessee regarding the basis on which these projections were made by the assessee. The ld PCIT noted that substantial period has lapsed since the date of valuation certificate. Therefore, the projected figure in the certificate can be compared with the actual figures available from the audited financial statements of the assessee. Upon making this comparison, ld PCIT noted that assessee has highly Page | 9 ITA No.01/SRT/2021 Assessment Year. 2015-16 N. J. Eco-build Pvt. Ltd. inflated the financial parameters in order to get higher valuation. This can be seen while comparing actual vs. projected figures of profit after tax and free cash flow from operation. If the projected figures were factually sound, it would converge with actual figures. However, it can be seen that projected figures are consistently and substantially higher than actual ones. Thus, it is clear that there was no factual basis for determination of projected figures and the same were highly inflated. Therefore, not only assessee has relied upon older share valuation certificate but even otherwise the valuation certificate does not reflect FMV of the shares. Assessee had issued shares at a premium of Rs.40 per share and face value of Rs. 10 per share thus at a total consideration of Rs.50 per share. As per latest audited balance sheet for the year under consideration, i.e. balance sheet as on 31.03.2014, the book value of shares comes to about Rs.22 per share. Considering this as FMV of shares, the amount of Rs. 28 (Rs. 50 minus Rs. 22) per share requires to be taxed u/s 56(2)(viib) of the Act. Therefore, ld PCIT held that above irregularities make the assessment order passed u/s 143(3) of the I.T. Act, 1961 dated 06.12.2017 erroneous and prejudicial to the interest of Revenue. 14. The ld Counsel claimed that various issues raised by ld PCIT in assessment year 2015-16, is covered by the Tribunal order in ITA No.221/SRT/2019, for assessment year 2014-15, therefore, order passed by ld PCIT in assessment year 2015-16 may be quashed. Therefore, taking into account the above noted facts, we shall examine, whether issue raised by ld PCIT in his revision order under section 263 of the Act is covered by the order of Tribunal in ITA No.221/SRT/2019, for assessment year 2014-15, dated 13.12.2019,in assessee`s own case. We note that Tribunal has quashed the order of ld. PCIT under section 263 for assessment year 2014-15, observing as follows: “10. As far as second reason for invoking the provision section 263 by ld.Pr.CIT is concern, it was noticed by ld.Pr.CIT that shares of the company were issued at Rs.50 per share. On the basis of valuation report obtained from the CA. However, in the valuation report the various data taken as projected financial result of the assessee company were not as per the real trend of business, but it was taken without any basis as per the need of management of the assessee company and also no supporting details for the projected data used in the valuation certificate was filed during the course of assessment proceedings. In this respect, we notice that the premium was accepted by the assessee as per the valuation of shares as per DCF Method it is widely followed method for valuation Page | 10 ITA No.01/SRT/2021 Assessment Year. 2015-16 N. J. Eco-build Pvt. Ltd. of unquoted equity shares. This method involves projection of future cash flows. Techno, economic viability statement report was also obtained based on the said projection and conserving the profitability of the project. Thus, the projection was drawn as per the assessee after stating various aspects of the whole nature and other factors related to project. The actual figures may differ from the projections due to various factors and circumstances of the market in real time. On the entirety of the aspects, we rely upon the decision of the Co-ordinate Bench of ITAT in the case of Shree Salasar Overseas Pvt. Ltd., Vs. CIT [2012] 27 taxmann.com 129 (Jaipur Trib.) it was held as “that details were filed before the Assessing Officer vide a letter in which, it was mentioned that such expenses were being allowed in earlier year. Hence, this was not a case where there was no enquiry. Action under section 263 cannot be taken on account of inadequate enquiry. Hence, the Commissioner was not justified in setting aside the order under section 263. In the case of Kamal Kumar Gupta Vs. CIT [2012] 23 taxmann.com 280 (Jaipur – Trib.) it was held: “that the assessee asked by the Assessing Officer to file the details of trade creditors which were shown in the names of agriculturists. The assessee was also asked to give the complete names and addresses of these persons. Accordingly, the assessee had enclosed the list of sundry creditors – agriculturists. After receipt of those details, the Assessing Officer had not made any further enquiry. Thus, the Assessing officer made the enquiry and it was not a case of lack of enquiry but could be a case of insufficient enquiry. On facts, the Commissioner was not justified in passing the order under section 263.” 11. The cumulative reading of all the above judgments reflects that while making assessment, if the AO had made inadequate enquiry, that would not by itself give occasion to the Commissioner amount to categorical to pass order u/s.263 of the Act, merely because he has different opinion in matter. It is only in cases of lack of enquiry that such a course of action would be open. Moreover, in the instant case the AO had called for explanation on both the ground by issuance of notice and subsequently, the assessee had also submitted all the details in order to satisfy the queries raised during the investigations done by the AO which clearly shows that the AO had undertaken the exercise of examining of both the above issues. It appears that since the AO was satisfied with the assessee’s explanation, he accepted the same. Even the commissioner conceded the position that AO made the enquiries, but the grievances of the commissioner was that the AO should have made further enquiries rather accepting the assessee’s explanation, therefore it could not be said that it was a case of lack of enquiry.” 15. Having gone through the order of the Coordinate Bench in assessee`s own case in ITA No.221/SRT/2019, for assessment year 2014-15, dated 13.12.2019 (supra), we noticed that issue raised by the ld PCIT in assessment year 2015-16 is not fully covered. Only passing reference of certain facts were given by the Coordinate Bench in assessment year 2014-15. In assessment year 2015-16, ld PCIT has raised the main issue relating to valuation date of shares. That is, as per valuation certificate, the valuation is based on audited balance sheet as on 31.03.2013 whereas latest audited balance sheet as on 31.03.2014 was already available at the time of issue of shares, therefore, assessing officer ought to have asked the assessee Page | 11 ITA No.01/SRT/2021 Assessment Year. 2015-16 N. J. Eco-build Pvt. Ltd. to submit valuation certificate of shares based on the balance sheet as on 31.03.2014 and assessing officer ought to have examined the fair market value of shares taking the base of assessee`s balance sheet as on 31.03.2014. We note that above aspect has not been adjudicated by the Coordinate Bench in assessee`s own case in ITA No.221/SRT/2019 (supra), therefore, assessee cannot claim that his case is fully covered by the decision of the Coordinate Bench(supra), hence, we do not agree with the ld Counsel to the effect that assessee`s case is fully covered by the order of the Coordinate Bench in assessee`s own case in ITA No.221/SRT/2019 (supra). 16. Coming to the merits of the assessee`s case under consideration, we note that the query raised by Assessing Officer, during the assessment stage, by way of issue of notice under section 142(1) of the Act, dated 10.07.2017, is placed at Paper book page nos. 4 to 5, wherein the Assessing Officer has raised the query (vide point no.2 of the said notice), in respect of share capital and /premium, which is reproduced below: “2. Large share premium received during the year (verify applicability of Sec 56(2)(viib). (i) A chart showing the names, present addresses and PAN of the investors, opening balance, receipts during the year, and refunds during the year and closing balance of share premium receipts. S. No. Name & Address PAN Opening Balance Receipts during the year Refund Closing Balance Copies of relevant ledger accounts of the investors who have paid share premium to the company during the year as appearing in the books of the company duly confirmed by the investors. (ii) Copies of relevant pages of bank statements of the said investors highlighting the payment of share premium by them to the company during the year and in case of immediate prior deposits in the bank accounts without which the said payments would not have been possible, the source of the deposits may be explained if the investors are related persons. (iii) Details of relationship if any between the investors and the assessee company. (iv) Certified Statement showing calculation of the value per share in respect of shares for which premium has been received.” Page | 12 ITA No.01/SRT/2021 Assessment Year. 2015-16 N. J. Eco-build Pvt. Ltd. 17. In response to above notice under section 142(1) of the Act, the assessee submitted its reply, vide letter dated 25.07.2017, which is placed at paper book page no. 1 to 3, which is reproduced below (to the extent relevant for our analysis): “6. (i) Share prices were determined at discount free cash flows method and on the basis of projection which is in accordance to the valuation as prescribed in Rule 11UA of the Income Tax Rules for the purpose of Section 56(2)(viib). (ii) The loan is squared up during the year out of sale receipts and loan taken during the year. Also the confirmation, bank statement and other documents of the squared up loan have been enclosed above. (iii) The audit report asks for details of those payments that are made to related parties whereas ITR form asks for those payments to related which are disallowed. Both the requirement are different in itself and hence the date filled in shall differ. Hence, there is no mismatch as such the requirement in itself is different.” 18. From the above it is abundantly clear that during the assessment stage, the assessing officer had raised relevant query (about valuation of shares) and assessee has replied the query so raised by the assessing officer. 19. Apart from this, Ld. Counsel submitted copy of the show cause notice under 263 of the Act dated 27.03.2017, which is placed at paper book page no.6. During the revision proceedings under section 263 of the Act, the assessee has submitted written submissions before the ld. PCIT, which is placed at paper book page no.9 to 15. Copy of bank book of various individuals are placed at paper book page nos. 18 to 77. Copy of certificate and report of DCF Valuation dated 30.04.2013, is placed at paper book page nos. 78 to 88. Copy of certificate and report of DCF Valuation dated 30.06.2014, is placed at paper book page nos. 110 to 114. Copy of sanction letter of credit facilities, by SBI Bank, dated 25.05.2013 is attached at paper book page nos. 115 to 125. Copy of Techno Economic Viability study Report submitted to SBI Bank is placed at page nos. 127 to 224 of assessee`s paper book. The ld Counsel submitted a chart showing allotment of shares, for financial year 2013-14 and 2014-15, which is placed at paper book page no. 126, and the same is reproduced below: Page | 13 ITA No.01/SRT/2021 Assessment Year. 2015-16 N. J. Eco-build Pvt. Ltd. 20. From the above facts it is vivid that shares were issued to the old shareholders as part of project report and valuation of shares has been done by the assessee-company on the date of making the projection. There were no fresh shareholders, that is, shares were allotted to the old shareholders only. The main issue raised by ld PCIT in his revision order is the valuation date of shares. The ld PCIT observed that valuation certificate of shares issued by Chartered Accountant should be based on the Balance Sheet as on 31.03.2014, however, assessee`s valuation is based on audited balance sheet as on 31.03.2013, therefore, ld PCIT Page | 14 ITA No.01/SRT/2021 Assessment Year. 2015-16 N. J. Eco-build Pvt. Ltd. held that order passed by the assessing officer is erroneous and prejudicial to the interest of Revenue. At this juncture, ld Counsel submits before us that report of valuation under DCF method was obtained for the assessment year 2014-15 as well as for assessment year 2015-16. The DCF valuation report with reference to assessment year 2015-16 and including the data of audited balance sheet of 2013- 14, is submitted by assessee before the assessing officer.The ld Counsel submits that valuation report of assessment year 2014-15 was more relevant because the assessee Company while obtaining Loan facility in the financial year 2012-13 and 2013-14 had committed for Equity Share Capital of Rs. 13.51 Crores,to be infused as part of sanctioned conditions of the Loan.The Sanction Letter issued by the Bankers is also submitted before the assessing officer. The Shareholders had infused Rs.8.52 crores as Share Capital and Share premium during the financial year 2013-14 and Rs.4.98 crore during financial year 2014-15, making the total of Rs.13.50 crores. Therefore, the funds, in fact, had been committed at the commencement of financial year2013-14 but received in staggered manner as and when required. The pricing was based on the value as determined at the time when commitment was made. The Shareholders are from the promoter group and none is stranger. The sources of the investment are well explained with proper sources. The list of the Shareholders was also submitted before the assessing officer.Thus, ld Counsel contends that DCF valuation report dated 30/04/2013 is not invalid but relevant. The DCF valuation report including the latest audited balance sheet, as on, 31/03/2014 with reference to assessment year 2015-16, also does not give a different valuation. The data used in the report of 2014 is supported by the techno- economic valuation done by independent expert (consultant) for State Bank of India(The Lender Bank), with suitable modification to the projections for the reason of delay and change in the market conditions at that point of time. All these facts and relevant documents were before the assessing officer during the assessment stage, hence assessing officer having examined these valuation reports, took a possible view, therefore, we are of the view that order passed by the assessing officer under section 143(3) should not be erroneous. Page | 15 ITA No.01/SRT/2021 Assessment Year. 2015-16 N. J. Eco-build Pvt. Ltd. 21. The ld PCIT also raised the issue that projections made by the assessee is not valid. In this respect, ld Counsel submits that projections are based on the installed capacity of the plant and the percentage output expected achievement year after year. The projections had been made on proper appraisal of the capacity of the plant and the selling prospects of the production. The Bankers (STATE BANK), while sanctioning the LOAN had obtained Techno-Economic Valuation, and a copy of the said valuation was submitted before the assessing officer. The data in the report are the basis for the DCF valuation report dated 30/06/2014. The DCF report is prepared by a qualified Chartered Accountant as per the guidelines of ICAI. We note that while following DCF method, assessee had considered plant capacity, industry and market conditions, sanctioning of loan by bank and that valuation reports were prepared as per guidelines given by Institute of Chartered Accountants of India and Assessing Officer had not found any fault in said report and after examining the said report, the assessing officer accepted the valuation made by Chartered Accountant, hence the view taken by the assessing officer is possible view which is sustainable in law, hence order passed by the assessing officer is not erroneous. For that reliance can be placed on the judgment of the Coordinate Bench of ITAT Jaipur in the case Rameshwaram Strong Glass Pvt. Ltd vs. Income Tax Officer reported at 172 ITD 571, wherein it was held as follows: “4.5.3 Coming to the basis of the projections, it is submitted that the plant capacity was taken as a basis to make projections of the production. It is further submitted that at the assessee is dealing in toughened glass which is related to real estate (construction) industry and at the relevant point of time, the real estate sector was in boom and there existed favourable conditions in the industry. The Directors of the assessee company were having experience and knowledge of the field. The other three companies to whom shares were allotted were also in the real estate sector, as their name suggest. The Board of Directors were expecting good results in the future. Except the initial years where the production could not be commenced because of the circumstances beyond the control but as per the actual figures available now for the previous year ended on 31.03.2017, the value per share comes to Rs. 84.67 based on the audited accounts which is almost in accordance with the value of Rs. 95.90 estimated by the C.A. Moreover, such report was also submitted to the bank as per a notes at Page 46 of the assessee's paperbook, for obtaining hypothecation limit of Rs. 4 crores which was sanctioned based on such valuation report along with the hypothecation of the properties of the directors. Hence, it cannot be said that the projections made by the C.A. in the valuation report were imaginary figures, completely without any basis. We find substance in the contentions. It is not the case of the ld. CIT (A) that the projection made in the C.A.'s report are in contradiction of the figures of the installed production capacity which being lesser yet the production was shown disproportionately higher. Also there is no whisper in the orders of the CIT (A) as to which figure was found incorrect and what should be the correct figures. Except making comparison with the actuals there is nothing on record to doubt the veracity of the C.A.'s report or to support the observations of the ld. CIT (A).He further doubts that the figures of the sale shown Page | 16 ITA No.01/SRT/2021 Assessment Year. 2015-16 N. J. Eco-build Pvt. Ltd. in the valuation report and those shown the in the Balance Sheet of F.Y.2014-15 and F.Y.2015-16. However such an objection cannot be given weightage for the reason that firstly no explanation was called for by the ld. CIT (A) on this aspect but he assumed on his own and there apart the assessee has already stated that due to the non-availability of the power connection, it could not commence the production in the initial years therefore, there was no production, which fact is admitted by the AO also and hence, comparison of the projected sales figure with the actuals was not justified. As already stated that the figures given by the C.A. were mere projection/estimations depending upon various factors which nobody could have anticipated or foreseen on the day when such valuation were made. Therefore, there was no justification yet to make a comparison of the estimations with the actuals. Such a comparison is otherwise principally against the contemplation of Rule 11 UA(2)(b) which required the C.A. to prepare a report on DCF Method only i.e. based on mere projections and not actuals as against the NAV Method prescribed u/r 11UA(2)(a). For these reason we find no justifications behind the objection of the ld. CIT (A) that the valuation done by the C.A. was based absolutely imaginary and incorrect figures or without any basis. The C.A. has considered the plant capacity, industry and market conditions as prevailed in the state, the sanctioning of the loan by the bank are the factors which formed a reasonable basis of projections. Moreover it is not denied that the valuation reports were prepared by the C.A. as per the guidelines given by the Institute of Chartered Accountants of India and the AO has not found any fault. We thus, find no rational or sound basis in the order of the authorities below to reject the valuation report submitted by the assessee based on DCF Method. 4.5.4 In any case, it is also noticed that even as per the valuation got done by the CIT (A) based on the actuals, the FMV came to Rs. 65.31 per share as against which, the assessee had charged a premium of Rs. 60 only per share. Therefore even assuming that the valuation reports submitted by the assessee are not reliable for any reason than too there was no justification to rely upon the valuation of the shares done by the AO based on book value at Rs. 32.76 per share or premium at Rs. 27.76 per share. Reducing the face value of Rs. 10 from the FMV of Rs. 65.31, the amount of premium comes to Rs. 55.31 per share as against the premium claimed by the assessee at Rs. 60. Thus there is a small difference of around Rs. 5 which was less even than 10% of the premium claimed by the assessee @ Rs. 60 per share. The variation to this extent is possible in the matters of estimations. 4.5.5 We find that a similar controversy came up before a co-ordinate bench of ITAI in the case ITO v. Universal Polysack (India) (P.) Ltd. [IT Appeal No. 609 (JP) of 2017, dated 31-1-2018] (Assessee's PB Pages 38-55). The facts noted by the Hon'ble Co-ordinate Bench in that case are identical with the facts of the present case wherein the Hon'ble Bench held as under: '14 We have heard the rival contentions and pursued the material available on record. In the instant case, it is not in dispute that the assessee company is a company in which the public are not substantially interested and the shares of the assessee company are not listed or traded on any recognized stock exchange. It is also not in dispute that during the previous year. the assessee company has issued 11,500 shares of face value of Rs. 100 at a premium of Rs. 900 per share to M/s. Terry Towel Industries Ltd and has thus received total consideration of Rs. 1,03,50,000. The limited issue under consideration is whether the consideration so received for such shares exceeds the fair market value of the shares. Where the answer to the same is in affirmative, the excess so determined over the fair market will be brought to tax as income from other sources as per the provisions of section 56(2)(viib) of the act which reads as under: ''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 issue of shares that exceeds the face value of such shares, the segregate consideration received for such shares exceeds the fair market value of the shares.'' 15. The explanation to section 56(2)(viib) provides that the fair market value of such shares means the value determined in accordance with the method as may be prescribed. The method of valuation has been prescribed in rule 11UA which reads as under: Page | 17 ITA No.01/SRT/2021 Assessment Year. 2015-16 N. J. Eco-build Pvt. Ltd. ** ** ** 16. As it is clear from the above, sub-rule 2 of rule 11UA talks about method of valuation of unquoted equity shares of the assessee company specifically for the purposes of section 56(2)(viib) of the act and the same overrides the general provisions of sub-rule 1 of rule 11UA. In the instant case, the context in which the valuation of the shares have to be determined is in the context of the section 56(2)(viib) of the Act as invoked by the AO and therefore, both the assessee and the revenue are equally guided by the said provisions and there is no discretion with either of the parties in terms of non-applicability of Sub-rule 2 of Rule 11UA. Therefore, we are unable to accede to the contention so raised by the Id DR4 that sub-rule 1 of rule 11UA which provides for determination of fair market value4 of unquoted equity shares as per book value as per formula so specified is applicable in the instant case. Rather, Sub-Rule 2 of Rule 11UA is more specific for the purposes of determination of fair market value of unquoted equity shares under section 56(viib) and shall be applicable in the instant case. The latter provides an option to the assessee to determine the fair market value of the shares either as per the book Value or Discounted Free Cash Flow Method. The exercise of such an option by the assessee is not subject to fulfillment of any specified conditions and it is left to the sole discretion of the assessee as it deems fit to apply. In the instant case, the assessee company has exercised its option to value its shares as per DCF method and we find that the objection of the AO is primarily directed at not adopting the book value of determination of value of shares as against DCF adopted by the assessee company. The exercise of such an option cannot therefore be challenged by the revenue once the same has been exercised at first place by the assessee. 17. Further, where the assessing officer is of the opinion that the methodology so adopted by the assessee and/or the underlying assumption while determining the share valuation as per DCF is not acceptable to him, there is no discretion with the AO to discard the DCF method of valuation and adopt book value method. At the same time, in our view the AO is well within his rights to examine the methodology so adopted by the assessee and/or the underlying assumption and where he is not satisfied with the same, he can challenge the same and suggest necessary modification/alterations provided the same are based on sound reasoning and rational basis. In the instant case, we find that certain basis objections have been raised by the Assessing Officer in terms of applying the estimated turnover numbers instead of actual numbers and discounting factor, etc which, in our view, has been satisfactorily explained by the assessee company during the appellate proceedings and nothing has been brought on record which can substantially challenge the methodology or the underlying assumption while determining the value of the shares. Further, the fact that the said valuation and the projected financials have been found acceptable by the Bank while sanctioning the term loan and working capital limits, it cannot be said that the same are purely hypothetical and not based on sound financial understanding and market dynamics of the industry in which the assessee operates. 18. ** ** ** 19. In light of above discussions and in the entirety of facts and circumstances of the case, the order of the Id CIT (A) is confirmed and the ground taken by the Revenue is dismissed.' 4.5.6 We also find that in the case of Vodafone M-Pesa Ltd. v. Pr. CIT [2018] 92 taxmann.com 73 (Bom.) (DPB 79-83), the Hon'ble Mumbai High Court in para 9 has observed that "9. ....Therefore, the Assessing Officer is undoubtedly entitled to scrutinise the valuation report and determine a fresh valuation either by himself or by calling for a final determination from an independent valuer to confront the petitioner. However, the basis has to be the DCF Method and it is not open to him to change the method of valuation which has been opted for by the Assessee." Page | 18 ITA No.01/SRT/2021 Assessment Year. 2015-16 N. J. Eco-build Pvt. Ltd. The AO though observed that the assessee raised loans from the above associate concerns and has converted them into shares application/premium money. However, it has not shown how it will affect the correctness of the valuation claimed. It is not the case of the AO that the shares were allotted to the outsiders non-related persons but the existing amount of the loans from the related persons were converted into shares. Hence there cannot be any scope of introduction of assessee's unaccounted income through allotment of shares at unreasonably high priced shares. Therefore, such observations is not relevant and a mere suspicion. 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.” 22. We note that Bankers have also allowed Term loan and other Loan facilities based on the very same projections which were made by assessee based on the balance sheet as on 31.03. 2013. The Bankers have judged the veracity of the projections independently and sanctioned the Loan. The Sanctioned Letter and Techno-Economic Viability Report were submitted before the assessing officer. The projections when made are definitely estimates based on future prospects of the industry, on the date of the projections. It is but natural that Actuals may or may not differ from the projections. At a later date comparing the Actuals with the projections made and rejecting the projections stating that the same are invalid and does not match to the actuals, is not prudent and wise. If this would be the case, none of the project would fail. On the similar facts the Coordinate Bench of ITAT Delhi in the case of Cinestaan Entertainment Pvt Ltd vs. Income Tax Officer (177 ITD 809) held as follows: “25. The assessee before issuing the shares had got the share valued by Chartered Accountant, i.e., 'Accountant' as provided under Rule 11UA(2) by using the 'DCF Method' which is one of the prescribed method in Rule 11UA(2)(b) r.w.s. 56(2)(viib). Based on the said valuation report dated 15.12.2014, the assessee company had issued the shares to the aforesaid equity partners on premium. The ld. Assessing Officer has discarded the valuation report of the CA mainly on the ground that valuation of the equity shares carried out by the assessee was based on projection of revenue which did not match with the actual revenues of the subsequent years. He further held that no efforts have been made by the assessee to substantiate the figures of projected revenue in the Page | 19 ITA No.01/SRT/2021 Assessment Year. 2015-16 N. J. Eco-build Pvt. Ltd. valuation report and has also failed to submit any basis for projection. Instead, AO held that assessee should have invested the share premium amount to earn some income, whereas assessee has made investment in debentures of its associate company and hence the basic substance of receiving the high premium was not justified. After invoking the provision of Section 56(2)(viib), AO took fair market value of premium at Nil and face value of Rs. 10/- per share. 26. From the perusal of the records and the impugned orders, it transpires that Assessing Officer had also issued notices u/s.133(6) to all the 3 investors to seek confirmation, information and documents pertaining to transaction of issuance of shares. In response to the said notices, Assessing Officer has received all the details and replies directly from these investors confirming the transaction. The venture agreement between the assessee and the investors were also filed before the Assessing Officer and in this regard, our attention was also drawn by the ld. counsel that the investment was to be made by these investors in various phases and transactions and it was only after they have gone by the projection and satisfied with the potentials and credentials of future growth, they were willing to make such huge investment in the 'start-up company' like assessee. Thus, neither the identity nor the creditworthiness of the investors nor the genuineness of the transaction can be doubted and in fact the same stands fully established to which Assessing Officer has also not raised any doubt or disputed this fact. Thus, under the deeming provisions of section 68, the test of proving the nature and source of the credit received stood accepted. 27. Now what we are required to examine whether under these facts and circumstances Assessing Officer after invoking the deeming provision of Section 56(2)(vii) could have determined the fair market value of the premium on shares issued at Nil after rejecting the valuation report given by the Chartered Accountant on one of the prescribed methods under the rules adopted by the Valuer. Before us, learned counsel, Mr. Dinodia, first of all had harped upon the spirit and intention of the Legislature in introducing such a deeming provision and submitted that such a provision cannot be invoked on a normal business transaction of issuance of shares unless it has been demonstrated by the Revenue authorities that the entire motive for such issuance of shares on higher premium was for the tax abuse with the objective of tax evasion by laundering its own unaccounted money. His main contention was that, being a deeming fiction, it has to be strictly interpreted and there is no mandate to the Assessing Officer to arbitrarily reject the valuation done by the assessee on his own surmises and whims. We are in tandem with such a reasoning of the ld. Counsel, because the deeming fiction not only has to be applied strictly but also have to be seen in the context in which such deeming provisions are triggered. It is a trite law well settled by the Constitutional Bench of Supreme Court, in the case of Dilip Kumar & Sons (supra) that in the matter of charging section of a taxing statute, strict rule of interpretation is mandatory, and if there are two views possible in the matter of interpretation, then the construction most beneficial to the assessee should be adopted. Viewed from such principle, here is a case where the shares have been subscribed by unrelated independent parties, who are one of the leading industrialists and businessman of the country, after considering the valuation report and future prospect of the company, have chosen to make investment as an equity partners in a 'start-up company' like assessee, then can it be said that there is any kind of tax abuse tactics or laundering of any unaccounted money. It cannot be the unaccounted or black money of investors as it is their tax paid money invested, duly disclosed and confirmed by them; and nothing has been brought on record that it is unaccounted money of assessee company routed through circuitous channel or any other dubious manner through these accredited investors. If such a strict view is adopted on such investment as have been done by the Assessing Officer and by ld. CIT(A), then no investor in the country will invest in a 'start-up company', because investment can only be lured with the future prospects and projection of these companies. 28. Now, whether under the deeming provision such an investment received by the assessee company be brought to tax. The relevant provision of Section 56 for the sake of ready reference is reproduced hereunder: "Income from other sources. Page | 20 ITA No.01/SRT/2021 Assessment Year. 2015-16 N. J. Eco-build Pvt. Ltd. 56. (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head "Income from other sources", if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E. (2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head "Income from other sources", namely :— (i)** ** ** (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 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;" Further, as per clause (i) of the Explanation as reproduced above, the FMV is to be determined in accordance with such method as may be prescribed. Clause (ii) admittedly is not applicable on the facts of the assessee's case. The method to determine the FMV is further provided in Rule 11UA(2). The relevant extract of the applicable rules is reproduced below: "11UA. [(1)] For the purposes of section 56 of the Act, the fair market value of a property, other than immovable property, shall be determined in the following manner, namely,— (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:— (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." 29. Ergo, the assessee has an option to do the valuation and determine the fair market value either on DCF Method or NAV Method. The assessee being a 'start-up company' having lot of projects in Page | 21 ITA No.01/SRT/2021 Assessment Year. 2015-16 N. J. Eco-build Pvt. Ltd. hand had adopted DCF method to value its shares. Under the DCF Method, the fair market value of the share is required to be determined either by the Merchant Banker or by the Chartered Accountant. The valuation of shares based on DCF is basically to see the future year's revenue and profits projected and then discount the same to arrive at the present value of the business. Before us, the ld. counsel from the facts and material placed on record had pointed out that the basis of projection adopted by the valuer was based on very scientific analysis and method, like number of movies to be released in the upcoming years and such movies were further segregated into big, medium, small and micro films with reasonable number of movies in hand, like one big film, two medium films and one or two small or micro film a year. Further, the estimate of projected revenue was also kept on a conservative side keeping in mind of the following: — Engagement of successful directors like Rakesh Om Prakash Mehra who has given block buster films like Bhaag Milkha Bhaag which made a box office collection of INR 164 Crores, and Rang De Basanti which made a box office collection of INR 97 Crores etc. In support Ld. Counsel had referred to Annexure-III, giving details of Track records v. Projections for movies signed with Rakesh Mehra. Engagement of veteran writers and music directors-Like Gulzar and Shankar Ehsaan Roy. Interesting start cast, including the launch of Anil Kapoor's son- Harshvardhan Kapoor and Shabana Azmi's niece Saiyami Kher; along with veteran actors like Om Puri, Anu Malik etc. Keeping in view of engagement of renowned star cast and previous success of directors, the appellant has projected revenue for only Rs. 55 Crores for 1 Big Film in first year which went till Rs. 93.10 Crores in 5th Year. While for other movies, the projections ranged between 22 lacs to 50 Crores. Further the projected revenues were discounted in later years to account for fluctuations in economic cycles. The number of movies and total revenue and average revenue for such movies are as projected under: Particulars Year 1 (2016) Year 2 (2017) Year 3 (2018) Year 4 (2019) Year 5 (2020) Number of movies 1 Big, 2 Medium, 1 small, 1 Micro 1 Big, 2 Medium, 1 small, 1 Micro 1 big, 2 Medium, 2 small, 1 Micro 1 Big, 2 Medium, 3 small, 1 Micro 1 Big, 2 Medium, 3 small, 2 Micro Total revenue projected (Rs. Crores) 121.62 142.50 197.68 238.16 274.76 Average revenue per movie (Rs. crores) 24.32 28.5 32.95 34.02 34.35 30. It has been submitted that the assessee had made all the efforts to achieve these projects and in fact had received 100 films scripts out of which it had short listed its initial stage of movies. The ld. counsel has also drawn our attention on various agreements for production of these films. He also pointed out that the assessee was projected to make five movies which it had actually commenced and released and has also pointed out that assessee has worked upon with 25 movies inception. Not only that, assessee had also taken into account the cost incurred in production of various movies and also the comparison of projected revenue and cost of three movies which were actually released by the assessee with actual revenue and cost, for which separate annexure were filed before us. Nowhere the Assessing Officer and ld. CIT (A) has either disputed the details of projects, revenues, cost incurred and the manner in which it was substantiated by the actual Page | 22 ITA No.01/SRT/2021 Assessment Year. 2015-16 N. J. Eco-build Pvt. Ltd. revenue. In fact, the projected revenue really commensurate with the actual state of affairs based on subsequent year financials. It has been pointed out that assessee had incurred huge cost which were precisely as per the estimates as projected. However, the revenue could not be generated as much expected, because the film did not do well in the box office. Ld. Counsel has also highlighted various reasons as to why assessee could not achieve the projected revenue from various documentary evidences. None of these averments and the and the manner in which the valuation of the shares has been adopted in the valuation report has been disputed by the Assessing Officer or by the ld. CIT(A) or any material facts have been brought on record to show that either the methodology or the contents of the report are not correct. 31. What is seen here is that, both the authorities have questioned the assessee's commercial wisdom for making the investment of funds raised in 0% compulsorily convertible debentures of group companies. They are trying to suggest that assessee should have made investment in some instrument which could have yielded return/ profit in the revenue projection made at the time of issuance of shares, without understanding that strategic investments and risks are undertaken for appreciation of capital and larger returns and not simply dividend and interest. Any businessman or entrepreneur, visualise the business based on certain future projection and undertakes all kind of risks. It is the risk factor alone which gives a higher return to a businessman and the income tax department or revenue official cannot guide a businessman in which manner risk has to be undertaken. Such an approach of the revenue has been judicially frowned by the Hon'ble Apex Court on several occasions, for instance in the case of SA Builders (supra) and Panipat Woollen and General Mills Co. Ltd (supra). The Courts have held that Income Tax Department cannot sit in the armchair of businessman to decide what is profitable and how the business should be carried out. Commercial expediency has to be seen from the point of view of businessman. Here in this case if the investment has made keeping assessee's own business objective of projection of films and media entertainment, then such commercial wisdom cannot be questioned. Even the prescribed Rule 11UA (2) does not give any power to the Assessing Officer to examine or substitute his own value in place of the value determined or requires any satisfaction on the part of the Assessing Officer to tinker with such valuation. Here, in this case, Assessing Officer has not substituted any of his own method or valuation albeit has simply rejected the valuation of the assessee. 32. Section 56(2) (viib) is a deeming provision and one cannot expand the meaning of scope of any word while interpreting such deeming provision. If the statute provides that the valuation has to be done as per the prescribed method and if one of the prescribed methods has been adopted by the assessee, then Assessing Officer has to accept the same and in case he is not satisfied, then we do not we find any express provision under the Act or rules, where Assessing Officer can adopt his own valuation in DCF method or get it valued by some different Valuer. There has to be some enabling provision under the Rule or the Act where Assessing Officer has been given a power to tinker with the valuation report obtained by an independent valuer as per the qualification given in the Rule 11U. Here, in this case, Assessing Officer has tinkered with DCF methodology and rejected by comparing the projections with actual figures. The Rules provide for two valuation methodologies, one is assets based NAV method which is based on actual numbers as per latest audited financials of the assessee company. Whereas in a DCF method, the value is based on estimated future projection. These projections are based on various factors and projections made by the management and the Valuer, like growth of the company, economic/market conditions, business conditions, expected demand and supply, cost of capital and host of other factors. These factors are considered based on some reasonable approach and they cannot be evaluated purely based on arithmetical precision as value is always worked out based on approximation and catena of underline facts and assumptions. Nevertheless, at the time when valuation is made, it is based on reflections of the potential value of business at that particular time and also keeping in mind underline factors that may change over the period of time and thus, the value which is relevant today may not be relevant after certain period of time. Precisely, these factors have been judicially appreciated in various judgments some of which have been relied upon by the ld. Counsel, for instance: — Page | 23 ITA No.01/SRT/2021 Assessment Year. 2015-16 N. J. Eco-build Pvt. Ltd. (i) Securities & Exchange Board of India (supra) - (Bombay HC)] "48.6 Thirdly, it is a well settled position of law with regard to the valuation. that valuation is not an exact science and can never be done with arithmetic precision. The attempt on the part of SEBI to challenge the valuation which is bu its very nature based on projections by applying what is essentially a hindsight view that the performance did not match the projection is unknown to the law on valuations. Valuation being an exercise required to be conducted at a particular point of time has of necessity to be carried out on the basis of whatever information is available on the date of the valuation and a projection of future revenue that valuer may fairly make on the basis of such information." (ii) Rameshwaram Strong Glass (P.) Ltd. (supra) "4.5.2. Before examining the fairness or reasonableness of valuation report submitted by the assessee we have to bear in mind the DCF Method and is essentially based on the projections (estimates) only and hence these projections 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 figure 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 start-up is a good example and as submitted the income-tax Act also recognized and encouraging the start- ups." (iii) DQ (International) Ltd. (supra) "10........... In our considered view, for valuation of an intangible asset, only the future projections along can be adopted and such valuation cannot be reviewed with actuals after 3 or 4 years down the line. Accordingly, the grounds raised by the assessee are allowed". The aforesaid ratios clearly endorsed our view as above. 33. In any case, if law provides the assessee to get the valuation done from a prescribed expert as per the prescribed method, then the same cannot be rejected because neither the Assessing Officer nor the assessee have been recognized as expert under the law. 34. There is another very important angle to view such cases, is that, here the shares have not been subscribed by any sister concern or closely related person, but by an outside investors like, Anand Mahindra, Rakesh Jhunjhunwala, and Radhakishan Damania, who are one of the top investors and businessman of the country and if they have seen certain potential and accepted this valuation, then how AO or Ld. CIT(A) can question their wisdom. It is only when they have seen future potentials that they have invested around Rs.91 crore in the current year and also huge sums in the subsequent years as informed by the ld. counsel. The investors like these persons will not make any investment merely to give dole or carry out any charity to a start-up company, albeit their decision is guided by business and commercial prudence to evaluate a start-up company like assessee, what they can achieve in future. It has been informed that these investors are now the major shareholder of the assessee company and they cannot become such a huge equity stock holder if they do not foresee any future in the assessee company. In a way Revenue is trying to question even the commercial prudence of such big investors like. According to the Assessing Officer either these investors should not have made investments because the fair market value of the share is Nil or assessee should have further invested in securities earning interest or dividend. Thus, under these facts and circumstances of the case, we do not approve the approach and the finding of the ld. Assessing Officer or ld. CIT(A) so to take the fair market value of the share at 'Nil' under the provision of Section 56(2)(viib) and thereby making the addition of Rs.90.95 crores. Page | 24 ITA No.01/SRT/2021 Assessment Year. 2015-16 N. J. Eco-build Pvt. Ltd. The other points and various other arguments raised by the ld. counsel which kept open as same has been rendered purely academic in view of finding given above.” 23.We note that projections are based on the businessman's consideration of the business prospects and his own surrounding circumstances. Such projections cannot be equated by projections of any other comparable. The report of the Chartered Accountant in the matter of DCF, we note that the same is in accordance with the pronouncements of ICAI and only for mismatch with actual at later date, the same cannot be rejected, unless a patent defect in the method adopted is pointed out by the Revenue Authorities. As per Rule 11UA(2), the option of choosing the method is upon assessee and the assessing officer has no authority to charge the method to impose his opinion / view in the matter. The assessing officer may examine the method adopted by the assessee and if he does not find any error in the method so adopted then order passed by him should not be treated erroneous. We note that ld PCIT in his revision order observed that clause 11(U) Sub-clause (b) of Rules 11UA defines the word Balance Sheet. This clause again referred to the Balance Sheet as drawn on the valuation date and where such Balance Sheet is not drawn on the valuation date it will be of the date immediately preceding the valuation date. Therefore, if the share was allotted in financial year 2014-15, and the Balance Sheet were not drawn on the date of the allotment, the relevant Balance sheet on the basis of which the fair market value could have been determined would be the Balance sheet as on 31.03.2014. As per ld PCIT, there would be no relevance of the Balance Sheet drawn on 31.03.2013. We do not agree with ld PCIT that fair market value of the shares should be determined based on Balance sheet as on 31.03.2014. The assessee made long term projections based on Balance Sheet drawn on 31.03.2013, and loan was sanctioned by the bank based on said projection. As per said projection, the shares were partly issued in previous year and partly in current assessment year. Moreover, the assessee had submitted before assessing officer, fair market value of shares based on the Balance sheet as on 31.03.2014, and there was no significant difference noticed by the assessing officer. The Income-tax Officer is not only an adjudicator but also an investigator. As an adjudicator and investigator, the assessing officer Page | 25 ITA No.01/SRT/2021 Assessment Year. 2015-16 N. J. Eco-build Pvt. Ltd. conducted further inquiry in assessee`s case and framed the assessment order under section 143(3) of the Act. We note that there is difference between ‘Lack of enquiry’ and ‘inadequate enquiry’. It is for the AO to decide the extent of enquiry to be made as it is his satisfaction as what is required under law. Reliance is placed on the decision of CIT v. Sunbeam Auto Ltd. [(2010) 332 ITR 167], wherein Hon’ble Delhi High Court has held that if there was any inquiry, even inadequate, that would not by itself, give occasion to the Commissioner to pass order u/s 263 of the Act, merely because the Commissioner has a different opinion in the matter and that only in cases where there is no enquiry, the power u/s 263 of the Act can be exercised. The ld. PCIT cannot pass the order u/s 263 of the Act on the ground that further/thorough enquiry should have been made by AO. 24. We note that Hon’ble Apex Court in Malabar Industries Ltd. vs. CIT [2000] 243 ITR 83(SC) held that twin conditions needs to be satisfied before exercising revisional jurisdiction u/s 263 of the Act by the CIT. The twin conditions are that the order of the Assessing Officer must be erroneous and so far as prejudicial to the interest of the Revenue. In the following circumstances, the order of the AO can be held to be erroneous order, that is (i) if the Assessing Officer’s order was passed on incorrect assumption of fact; or (ii) incorrect application of law; or (iii)Assessing Officer’s order is in violation of the principle of natural justice; or (iv) if the order is passed by the Assessing Officer without application of mind; (v) if the AO has not investigated the issue before him; then the order passed by the Assessing Officer can be termed as erroneous order. Coming next to the second limb, which is required to be examined as to whether the actions of the AO can be termed as prejudicial to the interest of Revenue. When this aspect is examined one has to understand what is prejudicial to the interest of the revenue. The Hon’ble Supreme Court in the case of Malabar Industries (supra) held that this phrase i.e. “prejudicial to the interest of the revenue’’ has to be read in conjunction with an erroneous order passed by the Assessing Officer. Their Lordship held that it has to be remembered that every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interest of the revenue. When the Page | 26 ITA No.01/SRT/2021 Assessment Year. 2015-16 N. J. Eco-build Pvt. Ltd. Assessing Officer adopted one of the courses permissible in law and it has resulted in loss to the revenue, or where two views are possible and the Assessing Officer has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue “unless the view taken by the Assessing Officer is unsustainable in law”. 25. We note that order passed by the assessing officer is sustainable in law as the assessing officer, during the assessment stage examined the DCF valuation report including the latest audited balance sheet, as on, 31/03/2014 with reference to assessment year 2015-16,whichdoes not give a different valuation. The data used in the report of 2014 is supported by the techno-economic valuation done by independent expert for State Bank of India(The Lender Bank), with suitable modification to the projections for the reason of delay and change in the market conditions at that point of time. Hence assessing officer having examined these valuation reports, took a possible view, therefore, we are of the view that such order passed by the assessing officer under section 143(3), dated 06.12.2017, is neither erroneous not prejudicial to the interest of revenue. In the conclusion we are of the view that none of the reasons set out by ld. PCIT for invoking the jurisdiction u/s 263 of the Act are sustainable. The impugned order of ld. PCIT has to be quashed for the reason that order of the assessing officer sought to be revised in the impugned order was neither erroneous nor prejudicial to the interest of the revenue for the reason of any lack of inquiry that the assessing officer ought to have made in the given facts and circumstances of the case. We accordingly quash the order under section 263 of the Act and allow the appeal of the assessee. 26. In the result, appeal filed by the assessee is allowed. Order is pronounced on 24/01/2022 by placing result on notice board. Sd/- Sd/- (PAWAN SINGH) (Dr. A.L. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER lwjr /Surat/ Ǒदनांक/ Date: 24/01/2022 SAMANTA Page | 27 ITA No.01/SRT/2021 Assessment Year. 2015-16 N. J. Eco-build Pvt. Ltd. Copy of the Order forwarded to: 1. The Assessee 2. The Respondent 3. The CIT(A) 4. Pr.CIT 5. DR/AR, ITAT, Surat 6. Guard File By Order // TRUE COPY // Assistant Registrar/Sr. PS/PS ITAT, Surat