Spoors Technology Solutions India Private Limited , Hyderabad V. Dy. Commissioner of Income Tax , Circle-3(2), Hyderabad

ITA 151/Hyd/2019

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 4553 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 7 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-09-2021
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: DB-A
• Next Hearing Date: 02-09-2021
• Assessment Year: 2015-2016
• Appeal Filed On: 04-02-2019
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Tangible material; Fair market value; Valuation report
• Section: 56; 263; 143(3); 201; 13; 20

Judgement Text

N THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A , HYDERABAD BEFORE SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER AND SHRI S.S. GODARA, JUDICIAL MEMBER ITA NO .151 /HYD/ 2019 ASSESSMENT YEAR: 20 15 - 16 SPOORS TECHNOLOGY SOLUTIONS INDIA PRIVATE LIMITED, HYDERABAD. PAN: AATCS 0562 K VS. DEPU TY COMMISSIONER OF INCOME TAX, CIRCLE - 3(2), HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY: SRI S. RAMA RAO REVENUE BY: SRI M. MAHIDHAR, DR DATE OF HEARING: 02/09/2021 DATE OF PRONOUNCEMENT: 28 /09/2021 ORDER PER A. MOHAN ALANKAMONY, AM.: THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORDER OF THE LD. CIT (A) - 3, HYDERABAD IN APPEAL NO. 10162/DCIT - 3(2)/HYD/CIT(A) - 3/2017 - 18, DATED 16/11/2018 PASSED U/S. 143(3) R.W.S 250(6) OF THE ACT FOR THE AY 2015 - 16. 2. THE ASSESSEE HAS RAISED SIX GROUND S IN ITS APPEAL HOWEVER THE CRUX OF THE ISSUE IS THAT THE LD. CIT (A) HAS ERRED IN CONFIRMING THE ORDER OF THE LD. AO WHO HAD REJECTED THE DCF METHOD ADOPTED BY THE ASSESSEE FOR VALUING THE SHARES AND VALUED THE SHARES ON THE BASIS OF NET ASSET VALUE METHO D AS PER RULE 11UA OF THE RULES AND THEREBY MA DE ADDITION 2 OF RS. 38,91, 957/ - INVOKING THE PROVISIONS OF SECTION 56(2)(VIIB) OF THE ACT. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A PRIVATE LIMITED COMPANY ENGAGED IN THE BUSINESS OF SOFTWARE SOLUTIONS FILED ITS RETURN OF INCOME FOR THE RELEVANT AY 201 5 - 16 ON 30/09/2015 DECLARING LOSS OF RS. 50,15,922/ - . THE CASE WAS SELECTED FOR SCRUTINY UNDER CASS AND THE ASSESSMENT WAS COMPLETED U/S. 143(3) OF THE ACT ON 12/2/2017 WHEREIN THE LD. A O INVOKED THE PROVISIONS OF SECTION 56 (2)(VIIB) OF THE ACT AND MADE ADDITION IN THE HANDS OF THE ASSESSEE AT RS. 38,91,957/ - . 4. DURING THE COURSE OF SCRUTINY ASSESSMENT PROCEEDINGS IT WAS OBSERVED BY THE LD. AO THAT THE ASSESSEE HAD ISSUED 14,910 EQUITY SHARES AT A PREMIUM OF RS. 277.10 PER SHARE AMOUNTING TO RS. 41,31,065/ - DURING THE RELEVANT AY . TO JUSTIFY THE SHARE PREMIUM THE ASSESSEE HAD FILED VALUATION CERTIFICATE FROM ITS AUDITOR(CHARTERED ACCOUNTANT) DATED 15/2/2015 WHEREIN THE VALUE OF SHARES WA S VALUED ON THE AVERAGE OF TWO METHOD VIZ., NET ASSET VALUE AT RS. 82.62 PER SHARE AND DISCOUNTED CASH FLOW METHOD AT RS. 733 / - WHICH WORKS OUT TO RS.325.13 PER SHARE SIC RS.408 PER SHARE . HOWEVER, THE LD. AO OPINED THAT THE VALUATION OF THE SHARES COMPUTE D BY THE ASSESSEE IS EXORBITANT. THEREFORE, HE ADOPTED THE VALUATION METHOD PRESCRIBED UNDER RULE 11UA OF THE RULES WHICH WORKE D OUT TO RS. 26.07 PER EQUITY 3 SHARE THE COMPUTATION OF WHICH IS FORMING PART AND PARCEL OF THE ASSESSMENT ORDER . THE LD. AR HAD ARGUED VEHEMENTLY BEFORE THE LD. AO THAT THE ASSESSEE IS ENTITLED TO ADOPT ANY ONE OF THE TWO METHODS AND THEREFORE, THE VALUATIONS OF SHARE UNDER DCF METHOD DETERMINED IN THE VALUATION CERTIFICATE SHOULD BE ADOPTED. HOWEVER, THE LD. AO REJECTED THE CONTENTION OF THE ASSESSEE BY OBSERVING AS UNDER: - THE CONTENTION OF THE ASSESSEE IS NOT ACCEPTABLE FOR THE FOLLOWING REASONS: (I) THE AR HAS NOT OFFERED ANY SATISFACTORY EXPLANATION / BASIS FOR HUGE DIFFERENCE IN VALUATION ADOPTED UNDER DCF METHOD AND NAV METHOD EXCEPT STATING THAT IT IS AT THE OPTION OF THE ASSESSEE. (II) THE ASSESSEE HAS ALSO NOT SUBMITTED ANY BASIS FOR THE PROJECTIONS VIZ., FUTURE WORK ORDERS OR ANY OTHER TREND TO ACHIEVE SUCH HUGE TURNOVERS WHE N COMPARED TO EARLIER YEAR TURNOVERS. (III) AS PER THE TECHNICAL GUIDE ON SHARES VALUATION PUBLISHED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI), THREE KEY FACTORS VIZ., CASH FLOW PROJECTIONS, DISCOUNT RATE AND TERMINAL VALUE FOR COMPUTING DCF ARE TO BE TAKEN INTO CONSIDERATION. BUT, NONE OF THE ABOVE FACTORS AS MANDATED BY ICAI HAS BEEN CONSIDERED BY THE SAID CA ISSUING VALUATION REPORTS WHILE COMPUTING FAIR VALUE OF THE UNQUOTED SHARES OF THE ASSESSEE COMPANY WITH PROPER REASONING. IN TH E TECHNICAL GUDE ON SHARES VALUATION ISSUED BY ICAI, IT IS STATED THAT THE DCF METHOD IS AS GOOD AS INPUT ASSUMPTIONS USED FOR COMPUTING FUTURE CASH FLOWS. THE CA ISSUING VALUATION REPORT HAS MERELY ADOPTED THE VALUES PROVIDED BY THE MANAGEMENT CLEARLY IG NORING PAST PERFORMANCE WHICH IS SELF SERVING AS SEVERAL FACTORS SUCH AS PERFORMANCE, GROWTH PROSPECTS, EARNINGS CAPACITY, EXPANSION ETC., WERE NOT CONSIDERED BY THE CA ISSUING THE VALUATION REPORT. (IV) THE HONBLE ITAT, BENCH - B, MUMBAI VIDE ITS ORDER I N ITA NO. 421/MUM/2017 IN THE CASE OF M/S. MADHURIMA INTERNATIONAL PVT LTD., VS. CIT DISMISSED THE ASSESSEES APPEAL AGAINST THE ORDER OF THE PR. CIT VS. CIT DISMISSED THE ASSESSEES APPEAL AGAINST THE ORDER OF THE PR. CIT U/S. 263 AND OBSERVED THAT THE A .O. ACCEPTED THE VALUATION REPORT GIVEN BY THE CA BUT THE A.O. HAS NOT GONE IN DETAILS TO PROBE ABOUT THE SUDDEN HUGE SPIKE IN PROJECTED FREE CASH FLOW FROM RS. 5.30 CRS IN FINANCIAL YEAR 2012 - 13 TO RS. 43.01 CR FOR FINANCIAL YEAR 2013 - 14 AND ALSO FURTHER PROJECTED FREE CASH FLOW INCREASED TO RS. 223.46 CRS IN FINANCIAL YEAR 2016 - 17 FROM MERELY RS. 9.41 CRS IN FINANCIAL 2015 - 16, WHICH WERE ADOPTED BY THE SAID VALUATION M/S. V R JAIN & CO., IN HIS REPORT DATED 15/10/2012. THE A.O. HAS ALSO NOT PROBED ON THE DISCLAIMER ISSUED BY THE SAID CA WHILE ISSUING VALUATION REPORT THAT HE HAS NOT MADE ANY INDEPENDENT VERIFICATION OF THE PROJECTIONS MADE BY THE 4 MANAGEMENT..THE SAID VALUER HAS GIVEN A DISCLAIMER IN HIS VALUATION REPORT DATED 15 - 10 - 2012 THAT HE HAS NOT MADE ANY INDEPENDENT INVESTIGATIONS / VERIFICATION AS TO THE MANAGEMENT CERTIFIED PROJECTIONS WHICH WERE MERELY ADOPTED BY THE SAID VALUER, WHICH ALSO SHOULD HAVE TRIGGERED A FURTHER PROBE BY THE A.O. AS TO THE RELIABILITY AND AUTHENTICITY OF THE SAID VALU ATION REPORT MORE SO NEWLY INSERTED SECTION 56(2)(VIIB) OF 1961 ACT WAS APPLICABLE FOR THE IMPUGNED ASSESSMENT YEAR THE A.O. DID NOT MADE ANY EFFORTS TO ENQUIRE, INVESTIGATE OR VERIFY THE AFORESAID CRUCIAL ASPECTS IN THE VALUATION REPORT DATED 15/10/20 12 ISSUED BY M/S. V R JAIN AND CO., CA AND MERELY ACCEPTED THE SAID VALUATION REPORT, WHICH IN OUR CONSIDERED VIEW HAS MADE AN ASSESSMENT ORDER DATED 26/03/2016 PASSED BY THE A.O. U/S. 143(3) OF THE ACT, AN ORDER WHICH IS ERRONEOUS IN SO FAR S IT IS PREJUD ICIAL TO THE INTEREST OF REVENUE, KEEPING IN VIEW PROVISIONS OF SECTION 56(2)(VIIB) OF THE 1961 ACT. MOREOVER, THE ASSESSEE HAS FAILED TO ESTABLISH ANY REASONABLE BASIS FOR SUCH HIGH PROJECTIONS THEREBY PUTTING SERIOUS QUESTION ON RELIABILITY AND AUTHENT ICITY OF THE VALUATION REPORT. 5. THE LD. AO FURTHER OBSERVED IN HIS ORDER THAT THE ASSESSEE FAILED TO JUSTIFY THE BASIS FOR SUCH HIGH PROJECTION OF SHARE VALUE AND HENCE THE COMPUTATION MADE BY THE ASSESSEE IS NOT RELIABLE AND DOES NOT HAVE ANY AUTHENTI CITY. 6. FINALLY, THE LD. AO MADE ADDITION OF RS. 38,91,957/ - IN THE HANDS OF THE ASSESSEE BY OBSERVING AS FOLLOWS: 2.7. FROM THE ABOVE, IT IS CLEAR THAT THE REASONABILITY OF THE REVENUE PROJECTIONS IS IN QUESTION; HENCE, THE FREE CASH FLOW AS PR9JECTED IN THE CERTIFICATE ALSO BECOMES QUESTIONABLE. SUCH EXORBITANT ESTIMATED REVENUE PROJECTIONS WERE USED IN VALUING SHARES BY DCF METHOD. THEREFORE, IT IS CLEAR THT VALUATION MADE ON THE BASIS OF UNVERIFIED EXORBITANT DCF GIVEN BY THE MANAGEMENT HAS PRESENTED HIGHLY INFLATED VALUE OF SHARES @ 732.87/ - FOR THE FINANCIAL YEAR 2014 - 15. FURTHER, THE VALUE OF THE SHARE IS CALCULATED UNDER NET ASSET VALUE METHOD AND IS ARRIVED AT A NEGATIVE FIGURE OF RS. 82.62/ - IN ONE CALCULATION AND IN ANOTHER C ALCULATION THE SHARE IS VALUED AT NEGATIVE FIGURE OF RS. 203.48. HENCE, THE SHARE VALUATION IS NOT CORRECTLY VALUED UNDER NAV METHOD IN BOT H THE CALCULATIONS. 2.8. THUS, FROM THE ABOVE ANALYSIS, IT IS EVIDENT THAT THE VALUATION UNDER DCF METHOD WAS NOT BASED ON ANY REALISTIC DATA WHICH IS ACHIEVABLE IN FUTURE, BUT AS PER WHIMS & FANCIES OF THE MANAGEMENT TO ARRIVE AT HIGHER VALUE TO ISSUE SHA RES AT HUGE PREMIUM THEREBY TAKING THE HUGE AMOUNT OF THE PURVIEW OF TAXATION. CONSIDERING THIS, THE VALUATION 5 OF SHARES DONE BY CA AS PER DCF METHOD IS UNREALISTIC AND NOT RELIABLE. THEREFORE, THE DCF METHOD ADOPTED BY THE ASSESSEE COMPANY FOR FINANCIAL YEAR 2014 - 15 IS REJECTED AND THE VALUE ADOPTED UNDER NET ASSET VALUE METHOD AS PRESCRIBED IN RULE 11UA OF THE INCOME TAX RULES AT RS. 26.07/ - IS TAKEN INTO CONSIDERATION. 2.8. CONSIDERING THE ABOVE FACTS AND CIRCUMSTANCES, IT IS CONSTRUCTED THAT THE MANAGEMENT OF THE ASSESSEE COMPANY HAS PROVIDED THE EXORBITANT AND UNREALISTIC REVENUE PROJECTIONS TO GET THE CERTIFICATE FROM THE CHARTERED ACCOUNTANT VALUING THE SHARE AT A HIGH RATE. THUS, THE CONSIDERATION RECEIVED BY THE ASSESSEE IS MORE BY RS. 261.0 3 PER SHARE (RS. 287.10 RS.26.07) THAN THE FMV AND THE EXCESS AGGREGATE CONSIDERATION IS RS. 38,91,957/ - (14,910 ASSESSEE 261.03) WHICH IS BROUGHT TO TAX AS INCOME FROM OTHER SOURCES U/S. 56(2)(VIIB) OF THE INCOME TAX ACT, 1961. 7. ON APPEAL, THE LD. C IT (A) RELYING IN THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE MADHURIMA INTERNATIONAL PRIVATE LIMITED VS. DCIT IN ITA NO. 421/MUM/2017 ORDER DATED 28/4/2017 HELD THAT THE APPELLANT COMPANY HAS NOT EXPLAINED SATISFACTORILY THAT THE VALUATIO N UNDER DCF METHOD MADE BY THE CHARTERED ACCOUNTANT ( WHO IS ALSO THE STATUTORY AUDITOR OF THE APPELLANT COMPANY ) WAS NOT BASED ON INDEPENDENT & FACTUAL ENQUIRIES AND TANGIBLE MATERIALS. ACCORDINGLY, THE LD. CIT (A) CONFIRMED THE ORDER OF THE LD. AO AGGRIEVED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE US. 8. BEFORE US, THE LD. AR VEHEMENTLY REITERATED THE ARGUMENTS MADE BEFO RE THE LD. REVENUE AUTHORITIES BY STATING THAT THE VALUE DETERMINED BY THE ASSESSEE MAY BE ADOPTED BECAUSE IT WAS BASED ON ACTUAL STATE OF AFFAIRS OF THE COMPANY WHICH WAS FURTHER VERIFIED AND CERTIFIED BY THE STATUTORY AUDITOR OF THE ASSESSEE COMPANY. HE NCE IT WAS PLEADED , THAT THE ADDITION MADE BY THE LD. AO MAY BE DELETED. THE LD. DR ON THE 6 OTHER HAND RELIED ON THE ORDERS OF THE LD. REVENUE AUTHORITIES AND PRAYED FOR CONFIRMING THE SAME. 9. WE HAVE HEARD RIVAL SUBMISSION S AND CAREFULLY PERUSED THE MATERIALS ON RECORD. FROM THE ORDER OF THE L D. AO IT IS APPARENT THAT THE LD. AO HAS SERIOUSLY CHALLENGED THE VALUATION MADE BY THE STATUTORY AUDITOR OF THE ASSESSEE - COMPANY. IN FACT , HE HAS NOT ACCEPTED THE DISCOUNTED CASH FLOW METHOD WORKED OUT BY THE ASSESSEES CHARTERED ACCOUNTED WHICH WAS BASED ON FUTURE UNREALISTIC PROJECTIONS. THEREFORE T HE LD. AO WAS OF THE VIEW THAT THE FUTURE PROJECTIONS MADE BY THE AUDITOR OF THE APPELLANT COMPANY IS NOT RELIABLE. THE ASSESSEE HAS ALSO NOT JUSTIFIED ITS FUTURE PROJECTIONS WITH COGENT EVIDENCE NEITHER BEFORE THE LD. AO NOR BEFORE THE LD. CIT (A). EVEN NOW BEFORE US THE ASSESSEE HAS NOT PRODUCED ANY EVIDENCE TO JUSTIFY THE VALUATION REPORT CERTIFIED BY THE AUDITOR OF THE COMPANY. AT THE TIME OF HEARING BEFORE US, ASSESSEE COULD HAVE PRODUCED THE STATEMENT OF AFFAIRS OF THE COMPANY FOR THE PRECEDING SEVERAL ASSESSMENT YEARS TO JUSTIFY ITS STAND HOWEVER, THEY H AVE FAILED TO DO SO. THEREFORE, WE ARE INCLINED TO ACCEPT THE VIEW ADOPTED BY THE LD. REVENUE AUTHORITIES WHO HAS A GENUINE REASON TO VALUE THE SHARES IN ACCORDANCE WITH RULE 11UA OF THE RULES BECAUSE THE ASSESSEE HAS FAILED TO JUSTIFY THE VALUATION OF SHA RE S DETERMINED BY ITS AUDITOR AND THUS THE OPTION TO VALUE THE SHARES IN ACCORDANCE WITH EXPLANATION (A)(II) TO SECTION 56(2)(VIIB) OF THE ACT IS LOST . IT IS ALSO PERTINENT TO MENTION THAT THE COMPUTATION OF THE VALUATION OF SHARES BY 7 THE LD. AO WHICH IS FORMIN G PART OF THE ORDER OF THE LD. AO COULD NOT BE NEGATED BY THE LD. AR BEFORE US. THEREFORE, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDERS OF THE LEARNED REVENUE AUTHORITIES. 10. IN THE RESULT, APPEAL OF THE ASSESSEE IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON THE 28 TH SEPTEMBER, 2021 . SD/ - SD/ - ( S.S. GODARA ) ( A. MOHAN ALANKAMONY ) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED: 28 TH SEPTEMBER , 2021 OKK COPY TO: - 1) SPOORS TECHNOLOGY SOLUTIONS INDIA PRIVATE LIMITED, 2 - 52/2, 4 TH FLOOR, SAI PRITHVI CYBER ARCADE, ABOVE BATA SHOW ROOM, MADHAPUR, HYDERABAD 500 033. 2) DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE - 3(2), SIGNATURE TOWERS, KONDAPUR, HYDERABAD 500 084. 3) THE CIT(A) - 3, HYDERABAD. 4) THE PR. CIT - 3, HYDERABAD . 5) THE DR, ITAT, HYDERABAD 6) GUARD FILE