M/s. Innaccel Technologies Private Limited, Bangalore V. Assistant Commissioner Of Income Tax, Circle- 3(1)(1), Bangalore

ITA 146/BANG/2020

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 1185 (ITAT-BANGALORE)
• Duration Of Justice: 10 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-12-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 16-12-2020
• Assessment Year: 2016-2017
• Appeal Filed On: 30-01-2020
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R. PREMI
• Assessee Lawyers: SIDDANA BIRADAR
• Keywords: Depreciation; Fair market value; Valuation report; Onus to prove; Set aside
• Section: 56; 13

Judgement Text

ITA NO.146/BANG/2020 M/S. INNACCEL TECHNOLOGIES PVT. LTD., BENGALURU IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH: BANGALORE BEFORE SHRI GEORGE GEORGE K., JUDICIAL MEMBER AND SHRI B.R. BASKARAN, ACCOUNTANT MEMBER ITA NO.146/BANG/2020 ASSESSMENT YEAR: 2016-17 M/S. INNACCEL TECHNOLOGIES PRIVATE LTD. 5 TH FLOOR, MUNICIPAL NO.4, ANAND TOWERS, RAJA RAM MOHAN ROY ROAD, WARD NO.77, SAMPANGIRAMNAGAR, BENGALURU, KARANATAKA 560 025 PAN NO : AADCI0623H VS. ACIT CIRCLE-3(1)(1) BENGALURU APPELLANT RESPONDENT APPELLANT BY : SHRI SIDDANA BIRADAR, A.R. RESPONDENT BY : SMT. R.PREMI, D.R. DATE OF HEARING : 16.12.2020 DATE OF PRONOUNCEMENT : 16.12.2020 O R D E R PER B.R. BASKARAN, ACCOUNTANT MEMBER: THE ASSESSEE HAS FILED THIS APPEAL CHALLENGING THE ORDER DATED 03-12-2019 PASSED BY LD CIT(A)-3, BENGALURU AND IT RELATES TO THE ASSESSMENT YEAR 2016-17. THE ASSESSEE IS AGGRIEVED BY THE DECISION OF LD CIT(A) IN CONFIRMING THE ADDITION OF SHARE PR EMIUM AMOUNT OF RS.3,74,90,118/- MADE BY THE AO U/S 56(2)(VIIB) OF THE INCOME-TAX ACT,1961 ['THE ACT' FOR SHORT]. 2. THE FACTS RELATING TO THE CASE ARE STATED IN BRIEF. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF DESIGNING, MA NUFACTURING, ITA NO.146/BANG/2020 M/S. INNACCEL TECHNOLOGIES PVT. LTD., BENGALURU PAGE 2 OF 13 DEVELOPING, EXPORTING AND SUPPLYING CUTTING EDGE ME DICAL DEVICES TO ADDRESS CRITICAL UNMET HEALTHCARE NEEDS. DURING TH E YEAR UNDER CONSIDERATION, IT HAS ISSUED 20,304 EQUITY SHARES H AVING FACE VALUE OF RS.10/- EACH AT PRICE OF RS.2,100.10/- PER SHARE TO RESIDENT INVESTORS. THE ASSESSEE THUS COLLECTED SHARE PREMI UM OF RS.4.24 CRORES. THE ASSESSEE FURNISHED A VALUATION REPORT IN SUPPORT OF THE SHARE PREMIUM AMOUNT COLLECTED BY IT, WHEREIN SHARE S HAD BEEN VALUED UNDER DISCOUNTED CASH FLOW METHOD (DCF METHO D). 3. THE A.O. WAS OF THE VIEW THAT THE SHARES OF THE COMPANY HAVE BEEN OVER VALUED AND ACCORDINGLY ASKED THE ASSESSEE TO JUSTIFY THE VALUATION. AFTER CONSIDERING THE EXPLANATIONS OF T HE ASSESSEE, THE A.O. TOOK THE VIEW THAT THE VALUATION REPORT HAS BE EN PREPARED ON THE BASIS OF PROJECTED FINANCIAL STATEMENTS, WHICH DEVI ATE WIDELY VIS-A- VIS ACTUAL FINANCIALS. ACCORDINGLY, THE A.O. REJECT ED THE VALUATION REPORT OF THE ASSESSEE. THEN THE A.O. PROCEEDED TO DETERMINE THE VALUATION OF THE SHARES UNDER NET ASSET VALUE/BOOK VALUE METHOD PRESCRIBED UNDER RULE 11UA OF THE I.T. RULES. THE A.O. CALCULATED THE VALUE OF SHARES AT RS.253.56 PER SHARE. ACCORD INGLY, HE TOOK THE VIEW THAT THE SHARE PREMIUM AMOUNT SHOULD HAVE BEEN RS.243.56 PER SHARE. ACCORDINGLY, THE AO DETERMINED EXCESS S HARE PREMIUM COLLECTED BY THE ASSESSEE AT RS.3,74,90,118/- AND A SSESSED THE SAME AS INCOME OF THE ASSESSEE U/S 56(2)(VIIB) OF THE AC T. 4. THE LD. CIT(A) ALSO CONFIRMED THE SAME AND HE NCE THE ASSESSEE HAS FILED THIS APPEAL BEFORE US. 5. WE HEARD THE PARTIES ON THIS ISSUE AND PERUSE D THE RECORD. WE NOTICE THAT AN IDENTICAL ISSUE WAS EXAMINED BY THE CO-ORDINATE BENCH IN THE CASE OF M/S. VALENCIA NUTRITION LIMITED (ITA NO. 473 & 474/BANG/2020 DATED 09-10-2020) AND THE MATTER WAS RESTORED TO THE FILE OF AO. FOR THE SAKE OF CONVENIENCE, WE EX TRACT BELOW THE ITA NO.146/BANG/2020 M/S. INNACCEL TECHNOLOGIES PVT. LTD., BENGALURU PAGE 3 OF 13 RELEVANT OBSERVATIONS MADE AND DECISION TAKEN BY TH E CO-ORDINATE BENCH IN THE ABOVE SAID CASE. 9 THE LD. A.R. SUBMITTED THAT THE A.O. DID NOT EX AMINE THE WORKINGS GIVEN IN THE VALUATION REPORT PREPARED U/S DCF METHOD. HE SUBMITTED THAT THE DCF METHOD IS ONE OF THE RECOGNIZED METHODS UNDER RULE 11UA OF I T RULES. A CCORDINGLY, HE SUBMITTED THAT THE A.O. WAS NOT JUSTIFIED IN REJ ECTING THE DCF METHOD WITHOUT EXAMINING THE VALUATION REPORT FURNI SHED BY THE ASSESSEE. HE SUBMITTED THAT AN IDENTICAL ISSUE WAS CONSIDERED BY THE COORDINATE BENCH IN THE CASE OF M/S. INNOVIT I PAYMENT SALES PVT. LTD. VS. ITO (ITA NO.1278/BANG/2018 DATE D 9.1.2019) AND THE COORDINATE BENCH HAS RESTORED THE ISSUE TO THE FILE OF THE A.O. WITH CERTAIN DIRECTIONS. ACCORDIN GLY, THE LD. A.R. PRAYED THAT THIS ISSUE URGED IN BOTH THE YEARS MAY ALSO BE RESTORED TO THE FILE OF THE A.O. WITH A SIMILAR DIR ECTIONS FOR EXAMINING THE VALUATION REPORT FURNISHED BY THE ASS ESSEE UNDER DCF METHOD. 10. THE LD. D.R., ON THE CONTRARY, SUPPORTED ORDE RS PASSED BY LD. CIT(A). HOWEVER, HE DID NOT OBJECT TO THE PROP OSAL THAT THE ASSESSEE TO RESTORE THE MATTER TO THE FILE OF THE A .O. FOLLOWING THE DECISION RENDERED BY COORDINATE BENCH OF THE TRIBUN AL. 11. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. WE NOTICE THAT THE CO-ORDINATE BENCH HAS E XAMINED THE ISSUE OF VALUATION OF SHARES UNDER DCF METHOD IN TH E CASE OF INNOVITI PAYMENT SOLUTIONS P LTD (SUPRA) AND HAS FO LLOWED THE DECISION RENDERED BY HON'BLE BOMBAY HIGH COURT IN T HE CASE OF VODAFONE M PESA LTD VS. PCIT (164 DTR 257). ACCORD INGLY, IT WAS HELD THAT THE AO SHOULD SCRUTINIZE THE VALUATIO N REPORT PREPARED UNDER DCF METHOD AND IF NECESSARY, HE CAN CARRY OUT FRESH VALUATION EITHER BY HIMSELF OR BY CALLING A F INAL ITA NO.146/BANG/2020 M/S. INNACCEL TECHNOLOGIES PVT. LTD., BENGALURU PAGE 4 OF 13 DETERMINATION FROM AN INDEPENDENT VALUER TO CONFRON T THE ASSESSEE. THE AO CANNOT CHANGE THE METHOD OF VALUA TION AND HE HAS FOLLOW DCF METHOD ONLY. THE DECISION RENDER ED IN THE CASE OF INNOVITI PAYMENT SOLUTIONS P LTD (SUPRA) WA S FOLLOWED BY ANOTHER CO-ORDINATE BENCH IN THE CASE OF FUTURA BUSINESS SOLUTIONS P LTD (ITA NO.3404 (BANG) 2018. FOR THE SAKE OF CONVENIENCE, WE EXTRACT BELOW THE OBSERVATIONS MADE BY THE CO- ORDINATE BENCH IN THE CASE OF FUTURE BUSINESS SOLUT IONS P LTD (SUPRA):- 17. WITH REGARD TO THE CORRECTNESS OF DCF METHOD A DOPTED BY THE ASSESSEE FOR VALUING SHARES AND THE PROCEDURE TO BE FOLLOWED WHEN SUCH METHOD OF VALUATION IS NOT ACCEPTED BY THE AO, THE LD. COUNSEL FOR THE ASSESSEE HAS DRAWN OUR ATTENTION OF THE ITA T, BANGALORE BENCH IN THE CASE OF VBHC VALUE HOMES IN ITA NO.254 1/BANG/2019 ORDER DATED 12-06-2020. THE TRIBUNAL, AFTER RELYING ON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF VODAFO NE M-PESA LTD VS PR.CIT 164 DTR 257 AND DECISION OF THE ITAT, BAN GALORE BENCH IN THE CASE OF INNOVIT PAYMENT SOLUTIONS PVT.LTD., VS ITO(2019) 102 TAXMANN.COM 59. HELD AS FOLLOWS: 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. FIRST OF ALL, WE REPRODUCE PARAS 11 TO 14 FROM THE TRIBUNAL ORDER CI TED BY LEARNED AR OF THE ASSESSEE HAVING BEEN RENDERED IN THE CASE OF INNOVITI PAYMENT SOLUTIONS PVT. LTD., VS. ITO (SUPRA). THESE PARAS A RE AS FOLLOWS: '11. AS PER VARIOUS TRIBUNAL ORDERS CITED BY THE LE ARNED AR OF THE ASSESSEE, IT WAS HELD THAT AS PER RULE 11UA (2) , THE ASSESSEE CAN OPT FOR DCF METHOD AND IF THE ASSESSEE HAS SO OPTED FOR DCF METHOD, THE AO CANNOT DISCARD THE SAM E AND ADOPT OTHER METHOD I.E. NAV METHOD OF VALUING SHARE S. IN THE CASE OF M/S. RAMESHWARAM STRONG GLASS (P) LTD. VS. THE ITO (SUPRA), THE TRIBUNAL HAS REPRODUCED RELEVANT PORTI ON OF ANOTHER TRIBUNAL ORDER RENDERED IN THE CASE OF ITO VS. M/S UNIVERSAL POLYPACK (INDIA) PVT. LTD. IN ITA NO. 609 /JP/2017 DATED 31.01.2018. IN THIS CASE, THE TRIBUNAL HELD T HAT IF THE ASSESSEE HAS OPTED FOR DCF METHOD, THE AO CANNOT CH ALLENGE THE SAME BUT THE AO IS WELL WITHIN HIS RIGHTS TO EX AMINE THE METHODOLOGY ADOPTED BY THE ASSESSEE AND/OR UNDERLYI NG ITA NO.146/BANG/2020 M/S. INNACCEL TECHNOLOGIES PVT. LTD., BENGALURU PAGE 5 OF 13 ASSUMPTIONS AND IF HE IS NOT SATISFIED, HE CAN CHAL LENGE THE SAME AND SUGGEST NECESSARY MODIFICATIONS/ALTERATION S PROVIDED THE SAME ARE BASED ON SOUND REASONING AND RATIONALE BASIS. IN THE SAME TRIBUNAL ORDER, A JUDG MENT OF HON'BLE BOMBAY HIGH COURT IS ALSO TAKEN NOTE OF HAV ING BEEN RENDERED IN THE CASE OF VODAFONE M-PESA LTD. VS. PC IT AS REPORTED IN 164 DTR 257. THE TRIBUNAL HAS REPRODUCE D PART OF PARA 9 OF THIS JUDGMENT BUT WE REPRODUCE HEREIN BEL OW FULL PARA 9 OF THIS JUDGMENT. '9. WE NOTE THAT, THE COMMISSIONER OF INCOME-TAX IN THE IMPUGNED ORDER DATED 23RD FEBRUARY, 2018 DOES N OT DEAL WITH THE PRIMARY GRIEVANCE OF THE PETITIONER. THIS, EVEN AFTER HE CONCEDES WITH THE METHOD OF VALUATION NAMELY, NAV METHOD OR THE DCF METHOD TO DETERMINE THE FAIR MARKET VALUE OF SHARES HAS TO BE DONE/ADOP TED AT THE ASSESSEE'S OPTION. NEVERTHELESS, HE DOES NOT DEAL WITH THE CHANGE IN THE METHOD OF VALUATION BY THE ASSESSING OFFICER WHICH HAS RESULTED IN THE DEMAND. THERE IS CERTAINLY NO IMMUNITY FROM SCRUTINY OF THE VALUATION REPORT SUBMITTED BY THE ASSESSEE. THEREFO RE, THE ASSESSING OFFICER IS UNDOUBTEDLY ENTITLED TO SCRUTINISE THE VALUATION REPORT AND DETERMINE A FRE SH VALUATION EITHER BY HIMSELF OR BY CALLING FOR A FIN AL DETERMINATION FROM AN INDEPENDENT VALUER TO CONFRON T THE PETITIONER. HOWEVER, THE BASIS HAS TO BE THE DC F METHOD AND IT IS NOT OPEN TO HIM TO CHANGE THE METH OD OF VALUATION WHICH HAS BEEN OPTED FOR BY THE ASSESS EE. IF MR. MOHANTY IS CORRECT IN HIS SUBMISSION THAT A PART OF DEMAND ARISING OUT OF THE ASSESSMENT ORDER DATED 21 ST DECEMBER, 2017 WOULD ON ADOPTION OF DCF METHOD WILL BE SUSTAINED IN PART, THE SAME IS WITHOUT WORKING O UT THE FIGURES. THIS WAS AN EXERCISE WHICH OUGHT TO HAVE B EEN DONE BY THE ASSESSING OFFICER AND THAT HAS NOT BEEN DONE BY HIM. IN FACT, HE HAS COMPLETELY DISREGARDED THE DCF METHOD FOR ARRIVING AT THE FAIR MARKET VALUE. THEREFORE, THE DEMAND IN THE FACTS NEED TO BE STAYE D.' 12. AS PER ABOVE PARA OF THIS JUDGMENT OF HON'BLE B OMBAY HIGH COURT, IT WAS HELD THAT THE AO CAN SCRUTINIZE THE VALUATION REPORT AND HE CAN DETERMINE A FRESH VALUATION EITHE R BY HIMSELF OR BY CALLING A FINAL DETERMINATION FROM AN INDEPEN DENT VALUER TO CONFRONT THE ASSESSEE. BUT THE BASIS HAS TO BE D CF METHOD AND HE CANNOT CHANGE THE METHOD OF VALUATION WHICH HAS BEEN OPTED BY THE ASSESSEE. HENCE, IN OUR CONSIDERED OPI NION, IN THE PRESENT CASE, WHEN THE GUIDANCE OF HON'BLE BOMB AY HIGH COURT IS AVAILABLE, WE SHOULD FOLLOW THIS JUDGMENT OF HON'BLE BOMBAY HIGH COURT IN PREFERENCE TO VARIOUS TRIBUNAL ORDERS CITED BY BOTH SIDES AND THEREFORE, WE ARE NOT REQUI RED TO ITA NO.146/BANG/2020 M/S. INNACCEL TECHNOLOGIES PVT. LTD., BENGALURU PAGE 6 OF 13 EXAMINE AND CONSIDER THESE TRIBUNAL ORDERS. RESPECT FULLY FOLLOWING THIS JUDGMENT OF HON'BLE BOMBAY HIGH COUR T, WE SET ASIDE THE ORDER OF CIT (A) AND RESTORE THE MATTER T O AO FOR A FRESH DECISION IN THE LIGHT OF THIS JUDGMENT OF HON 'BLE BOMBAY HIGH COURT. THE AO SHOULD SCRUTINIZE THE VALUATION REPORT AND HE SHOULD DETERMINE A FRESH VALUATION EITHER BY HIM SELF OR BY CALLING A FINAL DETERMINATION FROM AN INDEPENDENT V ALUER AND CONFRONT THE SAME TO THE ASSESSEE. BUT THE BASIS HA S TO BE DCF METHOD AND HE CANNOT CHANGE THE METHOD OF VALUA TION WHICH HAS BEEN OPTED BY THE ASSESSEE. IN OUR CONSID ERED OPINION AND AS PER REPORT OF RESEARCH COMMITTEE OF (ICAI) AS REPRODUCED ABOVE, MOST CRITICAL INPUT OF DCF MODEL IS THE CASH FLOW PROJECTIONS. HENCE, THE ASSESSEE SHOULD BE ASK ED TO ESTABLISH THAT SUCH PROJECTIONS BY THE ASSESSEE BAS ED ON WHICH, THE VALUATION REPORT IS PREPARED BY THE CHAR TERED ACCOUNTANT IS ESTIMATED WITH REASONABLE CERTAINTY B Y SHOWING THAT THIS IS A RELIABLE ESTIMATE ACHIEVABLE WITH RE ASONABLE CERTAINTY ON THE BASIS OF FACTS AVAILABLE ON THE DA TE OF VALUATION AND ACTUAL RESULT OF FUTURE CANNOT BE A BASIS OF SA YING THAT THE ESTIMATES OF THE MANAGEMENT ARE NOT REASONABLE AND RELIABLE. 13. BEFORE PARTING, WE WANT TO OBSERVE THAT IN THE PRESENT CASE, PAST DATA ARE AVAILABLE AND HENCE, THE SAME CAN BE USED TO MAKE A RELIABLE FUTURE ESTIMATE BUT IN CASE OF A ST ART UP WHERE NO PAST DATA IS AVAILABLE, THIS VIEW OF US THAT THE PROJECTION SHOULD BE ON THE BASIS OF RELIABLE FUTURE ESTIMATE SHOULD NOT BE INSISTED UPON BECAUSE IN THOSE CASES, THE PROJECTIO NS MAY BE ON THE BASIS OF EXPECTATIONS AND IN SUCH CASES, IT SHOULD BE SHOWN THAT SUCH EXPECTATIONS ARE REASONABLE AFTER C ONSIDERING VARIOUS MACRO AND MICRO ECONOMIC FACTORS AFFECTING THE BUSINESS. 14. IN NUTSHELL, OUR CONCLUSIONS ARE AS UNDER:- (1) THE AO CAN SCRUTINIZE THE VALUATION REPORT AND THE IF THE AO IS NOT SATISFIED WITH THE EXPLANATION OF THE ASSESSEE, HE HAS TO RECORD THE REASONS AND BASIS FO R NOT ACCEPTING THE VALUATION REPORT SUBMITTED BY THE ASS ESSEE AND ONLY THEREAFTER, HE CAN GO FOR OWN VALUATION OR TO OBTAIN THE FRESH VALUATION REPORT FROM AN INDEPENDE NT VALUER AND CONFRONT THE SAME TO THE ASSESSEE. BUT T HE BASIS HAS TO BE DCF METHOD AND HE CANNOT CHANGE THE METHOD OF VALUATION WHICH HAS BEEN OPTED BY THE ASSESSEE. (2) FOR SCRUTINIZING THE VALUATION REPORT, THE FACT S AND DATA AVAILABLE ON THE DATE OF VALUATION ONLY HAS TO BE CONSIDERED AND ACTUAL RESULT OF FUTURE CANNOT BE A BASIS TO DECIDE ABOUT RELIABILITY OF THE PROJECTIONS. ITA NO.146/BANG/2020 M/S. INNACCEL TECHNOLOGIES PVT. LTD., BENGALURU PAGE 7 OF 13 (3) THE PRIMARY ONUS TO PROVE THE CORRECTNESS OF TH E VALUATION REPORT IS ON THE ASSESSEE AS HE HAS SPECI AL KNOWLEDGE AND HE IS PRIVY TO THE FACTS OF THE COMPA NY AND ONLY HE HAS OPTED FOR THIS METHOD. HENCE, HE HAS TO SATISFY ABOUT THE CORRECTNESS OF THE PROJECTIONS, DISCOUNTI NG FACTOR AND TERMINAL VALUE ETC. WITH THE HELP OF EMP IRICAL DATA OR INDUSTRY NORM IF ANY AND/OR SCIENTIFIC DATA , SCIENTIFIC METHOD, SCIENTIFIC STUDY AND APPLICABLE GUIDELINES REGARDING DCF METHOD OF VALUATION.' 10. FROM THE PARAS REPRODUCED ABOVE, IT IS SEEN THA T IN THIS CASE, THE TRIBUNAL HAS FOLLOWED THE JUDGMENT OF HON'BLE BOMBA Y HIGH COURT RENDERED IN THE CASE OF VODAFONE M-PESA LTD., VS. P R. CIT (SUPRA). THE TRIBUNAL HAS NOTED THAT AS PER THE JUDGMENT OF HON'BLE BOMBAY HIGH COURT, IT WAS HELD THAT AO CAN SCRUTINIZE THE VALUATION REPORT AND HE CAN DETERMINE A FRESH VALUATION EITHER BY HIMSEL F OR BY CALLING A DETERMINATION FROM AN INDEPENDENT VALUER TO CONFRON T THE ASSESSEE BUT THE BASIS HAS TO BE DCF METHOD AND HE CANNOT CH ANGE THE METHOD OF VALUATION WHICH HAS BEEN OPTED BY THE ASS ESSEE. THE TRIBUNAL HAS FOLLOWED THE JUDGMENT OF HON'BLE BOMBA Y HIGH COURT AND DISREGARDED VARIOUS OTHER TRIBUNAL ORDERS AGAIN ST THE ASSESSEE WHICH WERE AVAILABLE AT THAT POINT OF TIME. IN THE PRESENT CASE ALSO, WE PREFER TO FOLLOW THE JUDGMENT OF HON'BLE BOMBAY HIGH COURT RENDERED IN THE CASE OF VODAFONE M-PESA LTD., VS. P R. CIT (SUPRA) IN PREFERENCE TO THE JUDGMENT OF THE HON'BLE KERALA HI GH COURT CITED BY DR OF THE REVENUE RENDERED IN THE CASE OF SUNRISE A CADEMY OF MEDICAL SPECIALITIES (INDIA) (P.) LTD. VS. ITO (SUP RA) BECAUSE THIS IS SETTLED POSITION OF LAW BY NOW THAT IF TWO VIEWS AR E POSSIBLE THEN THE VIEW FAVOURABLE TO THE ASSESSEE SHOULD BE ADOPTED A ND WITH REGARD TO VARIOUS TRIBUNAL ORDERS CITED BY LEARNED DR OF T HE REVENUE WHICH ARE AGAINST THE ASSESSEE WE HOLD THAT BECAUSE WE AR E FOLLOWING A JUDGMENT OF HON'BLE BOMBAY HIGH COURT RENDERED IN T HE CASE OF VODAFONE M-PESA LTD., VS. PR. CIT (SUPRA), THESE TR IBUNAL ORDERS ARE NOT RELEVANT. IN THE CASE OF INNOVITI PAYMENT SOLUT IONS PVT. LTD., VS. ITO (SUPRA), THIS JUDGMENT OF HON'BLE BOMBAY HIGH C OURT WAS FOLLOWED AND THE MATTER WAS RESTORED BACK TO THE FI LE OF AO FOR A FRESH DECISION WITH A DIRECTION THAT AO SHOULD FOLLOW DCF METHOD ONLY AND HE CANNOT CHANGE THE METHOD OPTED BY THE ASSESSEE A S HAS BEEN HELD BY THE HON'BLE BOMBAY HIGH COURT. THE RELEVANT PARAS OF THIS TRIBUNAL ORDER ARE ALREADY REPRODUCED ABOVE WHICH C ONTAIN THE DIRECTIONS GIVEN BY THE TRIBUNAL TO THE AO IN THAT CASE. IN THE PRESENT CASE ALSO, WE DECIDE THIS ISSUE ON SIMILAR LINE AND RESTORE THE MATTER BACK TO THE FILE OF AO FOR A FRESH DECISION WITH SI MILAR DIRECTIONS. ACCORDINGLY, GROUND NO.3 OF THE ASSESSEE'S APPEAL I S ALLOWED FOR STATISTICAL PURPOSES. ITA NO.146/BANG/2020 M/S. INNACCEL TECHNOLOGIES PVT. LTD., BENGALURU PAGE 8 OF 13 18. THE GIST OF THE CONCLUSION IS THAT THE LAW CONT EMPLATES INVOKING PROVISIONS OF SECTION 56(2)(VIIB) OF THE ACT ONLY I N SITUATIONS WHERE THE SHARES ARE ISSUED AT A PREMIUM AND AT A VALUE HIGHE R THAN THE FAIR MARKET VALUE. THE FAIR MARKET VALUE CONTEMPLATED IN THE PROVISIONS ABOVE IS AS UNDER: - (A) THE FAIR MARKET VALUE OF T HE SHARES SHALL BE THE VALUE (I) AS MAY BE DETERMINED IN ACCORDANCE WITH SUCH ME THOD AS MAY BE PRESCRIBED; OR (II) ANY OTHER VALUE TO THE SATISFACTION OF THE ASS ESSING OFFICER.. THE LAW PROVIDES THAT, THE FAIR MARKET VALUE MAY BE DETERMINED WITH SUCH METHOD AS MAY BE PRESCRIBED OR THE FAIR MARKET VALUE CAN BE DETERMINED TO THE SATISFACTION OF THE ASSESSING OFF ICER. THE PROVISION PROVIDES AN ASSESSEE TWO CHOICES OF ADOPTING EITHER NAV METHOD OR DCF METHOD. IF THE ASSESSEE DETERMINES THE FAIR MAR KET VALUE IN A METHOD AS PRESCRIBED, THE ASSESSING OFFICER DOES NO T HAVE A CHOICE TO DISPUTE THE JUSTIFICATION. THE METHODS OF VALUAT ION ARE PRESCRIBED IN RULE 11UA(2) OF THE RULES. THE PROVISIONS OF RULE 1 1UA(2) READS AS UNDER:- (2) NOTWITHSTANDING ANYTHING CONTAINED IN SUB-CLAU SE (B) OF CLAUSE (C) OF SUB-RULE (1), THE FAIR MARKET VALUE OF UNQUO TED EQUITY SHARES FOR THE PURPOSES OF SUB-CLAUSE (I) OF CLAUSE (A) OF EXP LANATION TO CLAUSE (VIIB) OF SUB-SECTION (2) OF SECTION 56 SHALL BE TH E VALUE, ON THE VALUATION DATE, OF SUCH UNQUOTED EQUITY SHARES AS D ETERMINED IN THE FOLLOWING MANNER UNDER CLAUSE (A) OR CLAUSE (B), AT THE OPTION OF THE ASSESSEE, NAMELY: (A) THE FAIR MARKET VALUE OF UNQUOTED EQUITY SHARES = WHERE, (AL) (PV), (PE) A = BOOK VALUE OF THE ASSETS IN THE BALANCE-SHEET A S REDUCED BY ANY AMOUNT OF TAX PAID AS DEDUCTION OR COLLECTION AT SO URCE 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 BALA NCE-SHEET AS ITA NO.146/BANG/2020 M/S. INNACCEL TECHNOLOGIES PVT. LTD., BENGALURU PAGE 9 OF 13 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 BALANCES HEET, 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 DIVI DENDS HAVE NOT BEEN DECLARED BEFORE THE DATE OF TRANSFER AT A GENERAL BODY MEETING OF THE COMPANY; (III) RESERVES AND SURPLUS, BY WHATEVER NAME CALLED , EVEN IF THE RESULTING FIGURE IS NEGATIVE, OTHER THAN THOSE SET APART TOWARDS DEPRECIATION; (IV) ANY AMOUNT REPRESENTING PROVISION FOR TAXATION , OTHER THAN AMOUNT OF TAX PAID AS DEDUCTION OR COLLECTION AT SO URCE OR AS ADVANCE TAX PAYMENT AS REDUCED BY THE AMOUNT OF TAX CLAIMED AS REFUND UNDER THE INCOME-TAX ACT, TO THE EXTENT O F THE EXCESS OVER THE TAX PAYABLE WITH REFERENCE TO THE BOOK PRO FITS IN ACCORDANCE WITH THE LAW APPLICABLE THERETO; (V) ANY AMOUNT REPRESENTING PROVISIONS MADE FOR MEE TING LIABILITIES, OTHER THAN ASCERTAINED LIABILITIES; (VI) ANY AMOUNT REPRESENTING CONTINGENT LIABILITIES OTHER THAN ARREARS OF DIVIDENDS PAYABLE IN RESPECT OF CUMULATI VE PREFERENCE SHARES; P E = TOTAL AMOUNT OF PAID UP EQUITY SHARE CAPITAL AS SHOWN IN THE BALANCE-SHEET; P V = THE PAID UP VALUE OF SUCH EQUITY SHARES; OR (B) THE FAIR MARKET VALUE OF THE UNQUOTED EQUITY SH ARES DETERMINED BY A MERCHANT BANKER OR AN ACCOUNTANT AS PER THE DISCOUNTED FREE CASH FLOW METHOD. 19. THE PROVISIONS OF RULE 11UA(2)(B) OF THE RULES PROVIDES THAT, THE ASSESSEE CAN ADOPT THE FAIR MARKET VALUE AS PER THE ABOVE TWO METHODS AND THE CHOICE OF METHOD IS THAT OF THE ASS ESSEE. THE ITA NO.146/BANG/2020 M/S. INNACCEL TECHNOLOGIES PVT. LTD., BENGALURU PAGE 10 OF 13 TRIBUNAL HAS FOLLOWED THE JUDGMENT OF HON'BLE BOMBA Y HIGH COURT RENDERED IN THE CASE OF VODAFONE M-PESA LTD., VS. P R. CIT (SUPRA) AND HAS TAKEN THE VIEW THAT THE AO CAN SCRUTINIZE T HE VALUATION REPORT AND HE CAN DETERMINE A FRESH VALUATION EITHER BY HI MSELF OR BY CALLING A DETERMINATION FROM AN INDEPENDENT VALUER TO CONFR ONT THE ASSESSEE BUT THE BASIS HAS TO BE DCF METHOD AND HE CANNOT CH ANGE THE METHOD OF VALUATION WHICH HAS BEEN OPTED BY THE ASS ESSEE. THE DECISION OF ITAT, DELHI IN THE CASE OF AGRO PORTFOL IO LTD. 171 ITD 74 HAS ALSO BEEN CONSIDERED BY THE ITAT, BANGALORE IN THE CASE OF VBHC VALUE HOMES PVT.LTD.(SUPRA). 20. THE GIST OF THE FINDINGS OF THE ASSESSING OFFIC ER AND THE LD. CIT(A) ON THE ALLEGED DISCREPANCIES IN THE VALUATION REPOR T IS AS UNDER: 1. GROWTH RATE IS TAKEN AT 12% YEAR AFTER YEAR 2. WACC HAS BEEN FORECASTED AT 30% 3. THE SALES HAVE BEEN PROJECTED AT RS.2,36,54,400/ - FOR THE F.Y.2012-13, RS.7,88,74,080/- FOR THE F.Y.2013-14 A ND RS.14,00,00,000/- FOR THE F.Y.2014-15, WHEREAS THE ACTUALS AS PER THE RETURNS FILED ARE RS.17,67,146/-, RS.4,50,06,47 7/- AND RS.4,26,45,399/- ONLY. IN VIEW OF THIS, THE GROWTH RATE OF 12% IS STATED TO BE NOT ACCEPTABLE. 4. THE NET PROFIT HAS BEEN PROJECTED AT RS.30,94,76 9/- FOR THE F.Y.2012-13, RS.1,29,86,330/- FOR THE F.Y.2013-14 A ND RS.2,16,06,523/- FOR THE F.Y.2014-15, WHEREAS THE A CTUALS AS PER THE RETURNS FILED ARE (-) RS.5,40,078/-, (-) RS.1,25,58 ,421/- AND (-) RS.2,70,00,184/- ONLY. 21. WE ARE OF THE VIEW THAT, THE ASSESSING OFFICER HAS ERRED IN CONSIDERING THE ACTUALS OF REVENUE AND PROFITS DECL ARED IN THE FUTURE YEARS AS A BASIS TO DISPUTE THE PROJECTIONS. AT THE TIME OF VALUING THE SHARES AS ON 16.04.2012, THE ACTUAL RESULTS OF THE LATER YEARS WOULD NOT BE AVAILABLE. WHAT IS REQUIRED FOR ARRIVING AT THE FAIR MARKET VALUE BY FOLLOWING THE DCF METHOD ARE THE EXPECTED AND PR OJECTED REVENUES. ACCORDINGLY THE VALUATION IS ON THE BASIS OF ESTIMATES OF FUTURE INCOME CONTEMPLATED AT THE POINT OF TIME WHE N THE VALUATION ITA NO.146/BANG/2020 M/S. INNACCEL TECHNOLOGIES PVT. LTD., BENGALURU PAGE 11 OF 13 WAS MADE. IT HAS BEEN CLARIFIED BY THE ASSESSEE THA T THE PRODUCT WHICH WAS BEING DEVELOPED BY THE ASSESSEE HAS SUBST ANTIAL VALUE AND THE ASSESSEE WAS ABLE TO RAISE FUNDS TO THE TUN E OF RS.50.13 CRORES FROM INTERNATIONAL MARKET 22. IN VIEW OF THE ABOVE LEGAL POSITION, WE ARE OF VIEW THAT THE ISSUE WITH REGARD TO VALUATION HAS TO BE DECIDED AFRESH B Y THE AO ON THE LINES INDICATED IN THE DECISION OF ITAT, BANGALORE IN THE CASE OF VBHC VALUE HOMES PVT.LTD., VS ITO (SUPRA) I.E., (I) THE AO CAN SCRUTINIZE THE VALUATION REPORT AND HE CAN DETERMINE A FRESH VALUATION EITHER BY HIMSELF OR BY CALLING A D ETERMINATION FROM AN INDEPENDENT VALUER TO CONFRONT THE ASSESSEE BUT THE BASIS HAS TO BE DCF METHOD AND HE CANNOT CHANGE THE METHOD OF VALUA TION WHICH HAS BEEN OPTED BY THE ASSESSEE. (II) FOR SCRUTINIZING THE VALUATION REPORT, THE FAC TS AND DATA AVAILABLE ON THE DATE OF VALUATION ONLY HAS TO BE CONSIDERED AND ACTUAL RESULT OF FUTURE CANNOT BE A BASIS TO DECIDE ABOUT RELIABILIT Y OF THE PROJECTIONS. THE PRIMARY ONUS TO PROVE THE CORRECTNESS OF THE VA LUATION REPORT IS ON THE ASSESSEE AS HE HAS SPECIAL KNOWLEDGE AND HE IS PRIVY TO THE FACTS OF THE COMPANY AND ONLY HE HAS OPTED FOR THIS METHOD. HENCE, HE HAS TO SATISFY ABOUT THE CORRECTNESS OF THE PROJ ECTIONS, DISCOUNTING FACTOR AND TERMINAL VALUE ETC. WITH THE HELP OF EMP IRICAL DATA OR INDUSTRY NORM IF ANY AND/OR SCIENTIFIC DATA, SCIENT IFIC METHOD, SCIENTIFIC STUDY AND APPLICABLE GUIDELINES REGARDIN G DCF METHOD OF VALUATION. THE ORDER OF LD.CIT(A) IS ACCORDINGLY SET ASIDE FOR DECIDING THE ISSUE AFRESH AFTER DUE OPPORTUNITY OF HEARING TO THE ASSE SSEE. 23. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATIS TICAL PURPOSE. 12. THE FACTS ARE IDENTICAL IN THE INSTANT CASES , I.E., THE AO HAS PROCEEDED TO DETERMINE THE VALUE OF SHARES IN BOTH THE YEARS BY ADOPTING DIFFERENT METHOD WITHOUT SCRUTINIZING THE VALUATION REPORT FURNISHED BY THE ASSESSEE UNDER DCF METHOD. ACCORDINGLY, FOLLOWING THE DECISIONS RENDERED BY TH E CO-ORDINATE ITA NO.146/BANG/2020 M/S. INNACCEL TECHNOLOGIES PVT. LTD., BENGALURU PAGE 12 OF 13 BENCHES, WE SET ASIDE THE ORDERS PASSED BY LD CIT(A ) IN BOTH THE YEARS AND RESTORE THE IMPUGNED ISSUE IN BOTH TH E YEARS TO THE FILE OF THE AO WITH THE DIRECTION TO EXAMINE TH IS AFRESH AS PER THE DIRECTIONS GIVEN BY THE CO-ORDINATE BENCH IN TH E CASE OF INNOVITI PAYMENT SOLUTIONS P LTD (SUPRA). 6. IN THE INSTANT CASE ALSO, THE FACTS ARE IDENT ICAL, I.E., THE AO HAS PROCEEDED TO DETERMINE THE VALUE OF SHARES BY ADOPT ING DIFFERENT METHOD WITHOUT SCRUTINIZING THE VALUATION REPORT FU RNISHED BY THE ASSESSEE UNDER DCF METHOD. ACCORDINGLY, FOLLOWING THE DECISIONS RENDERED BY THE CO-ORDINATE BENCHES, WE SET ASIDE T HE ORDERS PASSED BY LD CIT(A) AND RESTORE THE IMPUGNED ISSUE TO THE FILE OF THE AO WITH THE DIRECTION TO EXAMINE THIS AFRESH AS PER THE DIR ECTIONS GIVEN BY THE CO-ORDINATE BENCH IN THE CASE OF INNOVITI PAYMENT S OLUTIONS P LTD (SUPRA). 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS TREATED AS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 16 TH DEC, 2020 SD/- (GEORGE GEORGE K. ) JUDICIAL MEMBER SD/- (B.R. BASKARAN) ACCOUNTANT MEMBER BANGALORE, DATED 16 TH DEC, 2020. VG/SPS ITA NO.146/BANG/2020 M/S. INNACCEL TECHNOLOGIES PVT. LTD., BENGALURU PAGE 13 OF 13 COPY TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.