HRI HEALTHCARE PVT LTD., MUMBAI V. ASST. CIT CIRCLE-10(1)(1), Mumbai

ITA 2437/MUM/2019

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HRI Healthcare Pvt. Ltd. appealed against the order of the CIT(A)-17, Mumbai, which confirmed the addition of Rs. 496,08,000 to the assessee's income under section 56(2)(viib) of the Income-tax Act, 1961. This addition was based on the difference between the share premium received from its holding company and the fair market value of the shares as per Rule 11UA of the Income-tax Rules, 1962. The assessee argued that the valuation was done using the DCF method based on reasonable assumptions and that the shares were issued to restructure a loan into equity, not to introduce unaccounted money. The Tribunal, referencing decisions in similar cases, found that the valuation method adopted by the assessee was appropriate and that the assessing officer's rejection of this valuation was not substantiated.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 130172 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 2 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-07-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: H
• Next Hearing Date: 15-06-2023
• Assessment Year: 2015-2016
• Appeal Filed On: 17-04-2019
• Other Referred Cases: Cinestaan Entertainment (P) Ltd. Vs. ITO, Ward 6(2) New Delhi, M/s Impact Retails Tech Fund Pvt. Ltd. Vs. ITO 6(2)(4) ITA no. 2050/Mum/2018
• Laws Referred To: Income-tax Act, 1961, Income-tax Rules, 1962
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Fair market value; Valuation report; Bogus
• Section: 143(2); 48; 20

Judgement Text

P a g e | 1 ITA No.2437/Mum/2019 HRI Healthcare Pvt. Ltd. Vs. ACIT, Circle 10(1)(1) IN THE INCOME TAX APPELLATE TRIBUNAL “H” BENCH, MUMBAI BEFORE SHRI ABY T VARKEY, JUDICIAL MEMBER & SHRI AMARJIT SINGH, ACCOUNTANT MEMBER ITA No.2437Mum/2019 (A.Y. 2015-16) HRI Healthcare Pvt. Ltd. 602, 6 th Floor, Supreme Chambers, Off Veera Desai Road, Andheri (W) Mumbai – 400053 Vs. Asst. Commissioner of Income Tax, Circle 10(1)(1), Aaykar Bhavan, 2 nd Floor, Mumbai - 400021 स्थायी लेखा सं./जीआइआर सं./PAN/GIR No: AACCH7613M Appellant .. Respondent [ Appellant by : K. Gopal Respondent by : Soumendu Kumar Dash Date of Hearing 16.06.2023 Date of Pronouncement 11.07.2023 आदेश / O R D E R Per Amarjit Singh (AM): This appeal filed by the assesse is directed against the order passed by the CIT(A)-17, Mumbai, dated 28.01.2019 for A.Y. 2015-16. The assessee has raised the following grounds before us: “1.1 The learned assessing officer erred in making an addition of Rs.4,96,08,000 under section 56(2)(viib) of the Income-tax Act, 1961 ("the Act') being the difference between the share premium received by the appellant from its Holding Company and the fair market value of the shares there of as computed under Rule 11UA of the Income-tax Rules, 1962( the rules") and CIT(A) in confirming the same 1.2 The assessing officer erred in holding the issue price of right shares to existing shareholder of the company which were adopted on the basis of a valuation report of an independent valuer as exorbitant on reasons purely in the realm of conjectures/surmises without appreciating that the same is in accordance with provisions of the Act and CIT(A) in confirming the same. 1.3 It is submitted that valuation is an art and not a science. The valuation are based on certain assumptions and estimations especially in case of new company. The valuation has been done based on the DCF method P a g e | 2 ITA No.2437/Mum/2019 HRI Healthcare Pvt. Ltd. Vs. ACIT, Circle 10(1)(1) using reasonable assumptions. The use of such methodology is in accordance with the Rule 11UA of the Income tax rule. The Company had already launched some new products and some additional new products were to be launched in subsequent years. Based on this, the estimated sales projection product wise was already submitted. Thus the assessing officer has erred in not accepting the estimated projections. 2. The learned assessing officer failed to appreciate the fact that the loan given by the Holding Company to the appellant was converted into shares at a premium which was not for the purpose of taking any kind of tax benefit and also the loan confirmation was submitted during the assessment proceedings. 3. The learned assessing officer and CIT(A) failed to appreciate that the objective behind the introduction of section 56(2)(viib) of the Act was to prevent the introduction of black money in the system by way of acceptance of share subscriptions from unaccounted and bogus sources or sources whose identity and capacity was unsatisfactory and given that the shareholder of the Appellant was known and was reputed company, section 56(2)(viib) of the Act could not be pressed into service.” 2. Fact in brief is that return of income declaring loss of Rs.256,11,730/- was filed on 29.09.2015. The case was subject to scrutiny assessment and notice u/s 143(2) of the Act was issued on 28.09.2016. The assessee company has carried out the business of trading and marketing in dental care products like toothpaste, mouthwash etc. The assesse company has obtained unsecured loan from its holding company in the earlier years out of such loan during the financial year relevant to the year under consideration loan amount of Rs.5,20,00,000/- was payable by the assesse to its holding company Hygiene Research Institution Pvt. Ltd. During the year this outstanding loan of Rs.5,20,00,000/- which assessee could not repay to the holding company was converted into equity shares in the books of account of the assessee company. During the course of assessment the assessing officer referred the valuation report of shares as per which value of the share was completed by the DCF method (discounted cash flow method). The AO was of the view that the value of the share was estimated unrealistically at higher value by the valuer without carrying out any verification for arriving at fair market value of the equity share of the assessee company. The assessing officer of the view that fair P a g e | 3 ITA No.2437/Mum/2019 HRI Healthcare Pvt. Ltd. Vs. ACIT, Circle 10(1)(1) market value of the share should have been Rs.13/- whereas shares were issued at a premium of Rs.490/- which were more than the fair market value by Rs.477/-. Therefore, difference of Rs.496,08,000/- was added to the total income of the assesse u/s 56(2)(viib) of the Act. 3. Aggrieved the assessee filed the appeal before the ld. CIT(A). The ld. CIT(A) has dismissed the appeal of the assessee. 4. During the course of appellate proceedings before us the ld. Counsel submitted that assessing officer has incorrectly invoked provision of Sec. 56(2)(viib) of the Act. The ld. Counsel further submitted that the valuer has considered i.e cash flow provision, discount rate, and terminal value. The ld. Counsel also mentioned that during the year the assessee company has also launched new products like Bantobac, Gum paste Mouthwash Dental kit etc. and initiated marketing of the products in the other states. This growth fact were also taken into account in the provisions. The ld. Counsel further submitted that AO has obtained Beta from a website http:/damodaran.com which was an unsecured website. The ld. Counsel further submitted that assessing officer has used the data as on 05.01.2017 whereas the share value was made on 28.02.2015. The ld. Counsel further submitted that assessing officer has considered Beta on healthcare products whereas the assessee mainly was in Dental care products. The purchase estimates are prepared after taking into consideration the future balance of the business and the relevant cost of the business to be incurred under the DCF method. The majority of the shareholders of the holding company are also shareholders of the assessee company and there is no introduction of any funds by any outsiders in the company and it is only the loan payable to the holding company which was converted into the equity share capital. The ld. Counsel has placed reliance in the case of the Cinestaan Entertainment (P) Ltd. Vs. ITO, Ward 6(2) New Delhi P a g e | 4 ITA No.2437/Mum/2019 HRI Healthcare Pvt. Ltd. Vs. ACIT, Circle 10(1)(1) (2019) 106 taxman.com 300 (Delhi Trib) and in the case of M/s Impact Retails Tech Fund Pvt. Ltd. Vs. ITO 6(2)(4) ITA no. 2050/Mum/2018. On the other hand, the ld. D.R supported the order of lower authorities. 5. Heard both the sides and perused the material on record. Without reiterating the facts as elaborated above the assesse is a closely held private limited company and before issuing of right shares to the amount of Rs.496,08,000/- Hygiene Research Institution Company Pvt. Ltd. was the holding company of the assessee. As per the Loan Ledger as on 31.03.2015 placed at page no. 54 to 56 of the paper book, the assessee company has shown total outstanding loan payable to holding company to the amount of Rs.5,20,00,000/-. The entire loan was provided by the holding company Hygiene Research Pvt. Ltd. We have also perused the balance sheet of the assessee company as on 31.03.2015 placed at page no. 42 to 48 of the paper book showing that after conversion of the outstanding loan to the equity capital the entire loan borrowing was reduced to Rs.nil in the case of the assessee. These facts were not disputed by the Revenue. The assessee has also placed at page no.10 to 20 the copy of valuation of report and the valuer has determined the fair market value of the share at Rs.488/- under the discounted cash flow method. In the valuation report the valuer has mentioned mechanism of estimating the future cash flow after considering the relevant factors and circumstances based on the document and information provided by the assesse company. We have perused the ratio of decision referred by the ld. Counsel in the case of Cinestaan Entertainment Pvt. Ltd. Vs. ITO Ward 6(2). This decision of the ITAT was also uphold by the Hon’ble Delhi High Court in the case of DCIT Vs. Cinestaan Entertainment (P) Ltd. Vs. PCIT(2019) (ITA No. 1007/2019 and C.M application 54134/2019) dated 01.03.2021 P a g e | 5 ITA No.2437/Mum/2019 HRI Healthcare Pvt. Ltd. Vs. ACIT, Circle 10(1)(1) wherein held that as per Sec. 56(2)(viib) r.w. Rule 11UA assessee has an option to do value of shares and determine fair market value either on DCF method or NAB method and assessing officer cannot substitute is own value in place of value so determined. The Hon’ble High Court in the case of Pr. CIT-2 Vs. M/s Cinetaan Entertainment Pvt Ltd. is held as under: “13. From the aforesaid extract of the impugned order, it becomes clear that the learned ITAT has followed the dicta of the Hon'ble Supreme Court in matters relating to the commercial prudence of an assessee relating to valuation of an asset. The law requires determination of fair market values as per prescribed methodology. The Appellant-Revenue had the option to conduct its own valuation and determine FMV on the basis of either the DCF or NAV Method. The Respondent-Assessee being a start-up company adopted DCF method to value its shares. This was carried out on the basis of information and material available on the date of valuation and projection of future revenue. There is no dispute that methodology adopted by the Respondent-Assessee has been done applying a recognized and accepted method. Since the performance did not match the projections, Revenue sought to challenge the valuation, on that footing. This approach lacks Signature Not Verified Digitally Signed By:SAPNA SETHI Signing Date:05.03.2021 15:45 material foundation and is irrational since the valuation is intrinsically based on projections which can be affected by various factors. We cannot lose sight of the fact that the valuer makes forecast or approximation, based on potential value of business. However, the underline facts and assumptions can undergo change over a period of time. The Courts have repeatedly held that valuation is not an exact science, and therefore cannot be done with arithmetic precision. It is a technical and complex problem which can be appropriately left to the consideration and wisdom of experts in the field of accountancy, having regard to the imponderables which enter the process of valuation of shares. The Appellant-Revenue is unable to demonstrate that the methodology adopted by the Respondent-Assessee is not correct. The AO has simply rejected the valuation of the Respondent-Assessee and failed to provide any alternate fair value of shares. Furthermore, as noted in the impugned order and as also pointed out by Mr. Vohra, the shares in the present scenario have not been subscribed to by any sister concern or closely related person, but by outside investors. Indeed, if they have seen certain potential and accepted this valuation, then Appellant-Revenue cannot question their wisdom. The valuation is a question of fact which would depend upon appreciation of material or evidence. The methodology adopted by the Respondent-Assessee, accepted by the learned ITAT, is a conclusion of fact drawn on the basis of material and facts available. The test laid down by the Courts for interfering with the findings of a valuer is not satisfied in the present case, as the Respondent-Assessee adopted a recognized method of valuation and Appellant- Revenue is unable to show that the assessee adopted a demonstrably wrong approach, or that the method of valuation was made on a wholly erroneous basis, or that it committed a mistake which goes to the root of the valuation process.” P a g e | 6 ITA No.2437/Mum/2019 HRI Healthcare Pvt. Ltd. Vs. ACIT, Circle 10(1)(1) 6. After taking into consideration the facts and relevant material on record. It is undisputed fact that assessee company has merely restructured its liability without bringing any new funds in the form of share premium by which entire loan amount payable to the holding company was shifted to the shareholders funds from long term borrowings. The assessing officer has not contrary disprove these facts. The AO has also not contrary prove that assessee company has introduced any non-genuine funds and option to determine the fair market value on the basis of either the DCF or NAV method. 7. In the light of the above facts and finding the we consider that ld. CIT(A) is not justified in sustaining the addition of Rs.496,08,000/- made by the AO u/s 56(2)(viib) of the Act. Therefore, ground of appeal of the assessee from 1 to 3 are allowed. 8. In the result, the appeal of the assessee is allowed. Order pronounced in the open court on 11.07.2023 Sd/- Sd/- (Aby T Varkey) (Amarjit Singh) Judicial Member Accountant Member Place: Mumbai Date 11.07.2023 Rohit: PS P a g e | 7 ITA No.2437/Mum/2019 HRI Healthcare Pvt. Ltd. Vs. ACIT, Circle 10(1)(1) आदेश की प्रतितिति अग्रेतिि/Copy of the Order forwarded to : 1. अपीलाथी / The Appellant 2. प्रत्यथी / The Respondent. 3. आयकर आयुक्त / CIT 4. विभागीय प्रविविवि, आयकर अपीलीय अविकरण DR, ITAT, Mumbai 5. गार्ड फाईल / Guard file. सत्यावपि प्रवि //True Copy// आदेशानुसार/ BY ORDER, उि/सहायक िंजीकार (Dy./Asstt. Registrar) आयकर अिीिीय अतिकरण/ ITAT, Bench, Mumbai.