Valencia Nutrition Limited (earlier known as Valencia Nutrition Private Limited), Bangalore V. The Deputy Commissioner Of Income Tax, Circle- 7(1)(2), Bangalore

ITA 474/BANG/2020

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 5230 (ITAT-BANGALORE)
• Duration Of Justice: 4 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-10-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2016-2017
• Appeal Filed On: 05-06-2020
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Reasonable cause; Fair market value; Valuation report; Onus to prove; Set aside
• Section: 6; 56; 56(2); 13

Judgement Text

ITA NO.473&474/BANG/2020 M/S. VALENCIA NUTRITION LIMITED, BANGALORE IN THE INCOME TAX APPELLATE TRIBUNAL ABENCH: BANGALORE BEFORE SHRI GEORGE GEORGE K., JUDICIAL MEMBERAND SHRI B.R. BASKARAN, ACCOUNTANT MEMBER ITA NOS.473 & 474/BANG/2020 ASSESSMENT YEAR: 2015-16 & 2016-17 M/S. VALENCIA NUTRITION LIMITED (EARLIER KNOWN AS VALENCIA NUTRITION PVT. LTD.) D.NO.134, 6 TH MAIN 1 ST BLOCK BANASHANKARI 3 RD STAGE BANGALORE-560 085 PAN NO : AAECV3892Q VS. DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE-7(1)(2) BANGALORE APPELLANT RESPONDENT A PPELLANT BY : SHRI B.R. SUDHEENDRA, A.R. RESPONDENT BY : SHRI MANJEET SINGH, D.R. DATE OF HEARING : 06.10.2020 DATE OF PRONOUNCEMENT : 09.10.2020 O R D E R PER B.R. BASKARAN, ACCOUNTANT MEMBER: BOTH THE APPEALS FILED BY THE ASSESSEE ARE DIRECTED AGAINST SEPARATE ORDERS PASSED BY LD. CIT(A)-7, BENGALURU A ND THEY RELATE TO THE ASSESSMENT YEARS 2015-16 & 2016-17 IN BOTH THE APPEALS, THE ASSESSEE IS CHALLENGING THE DECISION OF LD. CIT (A) IN CONFIRMING THE ADDITION OF EXCESS SHARE PREMIUM MADE U/S 56(2) (VIIB) OF THE ACT. ITA NO.473&474/BANG/2020 M/S. VALENCIA NUTRITION LIMITED, BANGALORE PAGE 2 OF 14 2. THE APPEAL FILED BY THE ASSESSEE FOR ASSESSMENT YEA R 2015-16 IS BARRED BY LIMITATION BY 609 DAYS. THE ASSESSEE HAS FILED A PETITION REQUESTING THE BENCH TO CONDONE THE DELAY. 3. LD. A.R. SUBMITTED THAT THE ASSESSEE COMPANY WAS IN ITS INITIAL YEARS OF FORMATION, WHEN THE ASSESSMENT FOR ASSESSMENT YEAR 2015-16 WAS FINALISED. THE ASSESSEE HAD INCURRED L OSS IN THAT YEAR AND IT WAS ALSO HAVING BROUGHT FORWARD BUSINESS LOS SES. HENCE, THE ADDITION MADE BY THE A.O. IN RESPECT OF EXCESS SHAR E PREMIUM DID NOT GIVE RISE TO ANY TAX LIABILITY. SINCE THE ASSE SSEE COMPANY WAS NOT PROPERLY ADVISED OF FUTURE TAX IMPLICATIONS, IT DID NOT FILE AN APPEAL BEFORE TRIBUNAL CHALLENGING THE ORDER PASSED BY LD. CIT(A). 4. THE A.O. MADE AN IDENTICAL ADDITION OF EXCESS SHARE PREMIUM IN ASSESSMENT YEAR 2016-17 ALSO AND IT WAS CONFIRME D BY LD. CIT(A). WHEN THE ASSESSEE APPROACHED A NEW COUNSEL FOR FILING APPEAL AGAINST ORDER OF LD. CIT(A) PASSED FOR ASSES SMENT YEAR 2016- 17, THE ASSESSEE WAS ADVISED THAT IT SHOULD HAVE FI LED AN APPEAL FOR ASSESSMENT YEAR 2015-16 ALSO. SINCE THE ISSUES URG ED IN BOTH THE YEARS ARE IDENTICAL IN NATURE, AND SINCE THE ASSESS EE CAME TO KNOW OF THE TAX IMPLICATIONS IN NOT FILING APPEAL FOR AS SESSMENT YEAR 2015-16, IT IMMEDIATELY TOOK STEPS FOR FILING APPEA L FOR ASSESSMENT YEAR 2015-16 ALSO AS ADVISED BY THE NEW COUNSEL. A CCORDINGLY, THE LD. A.R. SUBMITTED THAT THE ASSESSEE FAILED TO PREF ER APPEAL IN TIME DUE TO IGNORANCE OF LEGAL COMPLICATIONS. ACCORDING LY, LD. A.R. PRAYED THAT THE DELAY IN FILING APPEAL MAY KINDLY B E CONDONED. 5. WE HAVE HEARD LD. D.R. ON THIS PRELIMINARY ISSUE AN D PERUSED THE RECORD. HAVING REGARD TO THE SUBMISSIO NS MADE BY ASSESSEE IN ITS PETITION, WE ARE OF THE VIEW THAT T HERE WAS REASONABLE CAUSE FOR THE ASSESSEE IN NOT FILING APPEAL WITHIN THE LIMITATION ITA NO.473&474/BANG/2020 M/S. VALENCIA NUTRITION LIMITED, BANGALORE PAGE 3 OF 14 PERIOD BEFORE THE TRIBUNAL. ACCORDINGLY, WE CONDON E THE DELAY AND ADMIT THE APPEAL FOR HEARING. 6. THE FACTS RELATING TO THE CASE ARE DISCUSSED IN BRI EF. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANU FACTURING OF ENERGY DRINKS WITH BRAND NAME BOUNCE & VITA-ME. DURING FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR 2015 -16, THE ASSESSEE COMPANY HAS ISSUED 24538 SHARES HAVING FAC E VALUE OF RS.10/- EACH AT A SHARE PREMIUM OF RS.622/- PER SHA RE. ACCORDINGLY, THE ASSESSEE HAS COLLECTED SHARE CAPIT AL ALONG WITH THE SHARE PREMIUM TO THE TUNE OF RS.1.55 CRORES. THE A .O. NOTICED THAT THE ASSESSEE HAS FOLLOWED DISCOUNTED CASH FLOW ME THOD (DCF METHOD) FOR DETERMINING THE SHARE PRICE. AS PER TH E VALUATION REPORT PREPARED UNDER DCF METHOD, THE VALUE OF ONE SHARE OF ASSESSEE COMPANY WAS DETERMINED AT RS.634/- PER SHA RE. ACCORDINGLY, THE ASSESSEE HAD ISSUED SHARES @ RS.63 2/- PER SHARE, WHICH INCLUDED SHARE PREMIUM OF RS.622/- PER SHARE. THE A.O. TOOK THE VIEW THAT THE SHARE VALUATION UNDER DCF ME THOD HAS BEEN CARRIED OUT ON THE BASIS OF PROJECTIONS AND ESTIMAT IONS GIVEN BY THE MANAGEMENT AND ACCORDINGLY, HE HELD THAT THE VALUE OF SHARE @ RS.632/- PER SHARE WAS AN INFLATED VALUE. THE A.O. TOOK THE VIEW THAT THE VALUE OF SHARE SHOULD BE BASED ON NET ASS ET METHOD MENTIONED IN RULE 11UA OF THE INCOME TAX RULES. AC CORDINGLY, THE A.O. WORKED OUT THE VALUE OF SHARES AT RS.75/- PER SHARE UNDER NET ASSET METHOD. SINCE THE PAR VALUE OF SHARE IS RS.1 0/-, THE A.O. TOOK THE VIEW THAT THE ASSESSEE SHOULD HAVE COLLECT ED SHARE PREMIUM AT A PRICE OF MAXIMUM OF RS.65/- PER SHARE. HOWEVER, THE ASSESSEE HAS COLLECTED SHARE PREMIUM OF RS.622/- PE R SHARE. ACCORDINGLY, THE A.O. TOOK THE VIEW THAT THE SHARE PREMIUM COLLECTED IN EXCESS OF RS.65/- I.E. RS.557/- PER SH ARE IS EXCESS SHARE PREMIUM AND THE SAME IS ASSESSABLE U/S 56(2)( VIIB) OF THE ITA NO.473&474/BANG/2020 M/S. VALENCIA NUTRITION LIMITED, BANGALORE PAGE 4 OF 14 ACT. ACCORDINGLY, HE ASSESSED THE EXCESS SHARE PRE MIUM OF RS.1,36,67,666/- AS INCOME OF THE ASSESSEE UNDER TH E HEAD INCOME FROM OTHER SOURCES U/S 56(2)(VIIB) OF THE ACT. 7. IN THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEA R 2016-17, THE ASSESSEE HAS ISSUED 11480 SHARES @ RS.632/- PER SHARE AND COLLECTED SHARE PREMIUM OF RS.1,11,92,008/-. IN TH IS YEAR ALSO, THE ASSESSEE HAD FOLLOWED DCF METHOD TO DETERMINE THE V ALUE OF SHARES. THE A.O. IN THIS YEAR ALSO, TOOK THE VIEW THAT THE NET ASSET VALUE METHOD IS THE APPROPRIATE METHOD TO DETERMINE THE FAIR MARKET VALUE OF SHARE. ACCORDINGLY, THE A.O. DETER MINED THE NET ASSET VALUE OF SHARES AT RS.37/- PER SHARE. ACCORD INGLY, HE DETERMINED THE EXCESS SHARE PREMIUM AT RS.1,08,80,1 04/- AND ASSESSED THE SAME AS INCOME OF THE ASSESSEE UNDER T HE HEAD INCOME FROM OTHER SOURCES U/S 56(2)(VIIB) OF THE ACT. 8. IN BOTH THE YEARS, THE LD. CIT(A) CONFIRMED THE ADD ITION MADE BY THE A.O. HENCE, THE ASSESSEE HAS FILED THESE AP PEALS BEFORE US. 9. THE LD. A.R. SUBMITTED THAT THE A.O. DID NOT EXAMIN E THE WORKINGS GIVEN IN THE VALUATION REPORT PREPARED U/S DCF METHOD. HE SUBMITTED THAT THE DCF METHOD IS ONE OF THE RECO GNIZED METHODS UNDER RULE 11UA OF I T RULES. ACCORDINGLY, HE SUBMITTED THAT THE A.O. WAS NOT JUSTIFIED IN REJECTING THE DC F METHOD WITHOUT EXAMINING THE VALUATION REPORT FURNISHED BY THE ASS ESSEE. HE SUBMITTED THAT AN IDENTICAL ISSUE WAS CONSIDERED BY THE COORDINATE BENCH IN THE CASE OF M/S. INNOVITI PAYMENT SALES PV T. LTD. VS. ITO (ITA NO.1278/BANG/2018 DATED 9.1.2019) AND THE COOR DINATE BENCH HAS RESTORED THE ISSUE TO THE FILE OF THE A.O. WITH CERTAIN DIRECTIONS. ACCORDINGLY, THE LD. A.R. PRAYED THAT THIS ISSUE UR GED IN BOTH THE YEARS MAY ALSO BE RESTORED TO THE FILE OF THE A.O. WITH A SIMILAR ITA NO.473&474/BANG/2020 M/S. VALENCIA NUTRITION LIMITED, BANGALORE PAGE 5 OF 14 DIRECTIONS FOR EXAMINING THE VALUATION REPORT FURNI SHED BY THE ASSESSEE UNDER DCF METHOD. 10. THE LD. D.R., ON THE CONTRARY, SUPPORTED ORDERS PAS SED BY LD. CIT(A). HOWEVER, HE DID NOT OBJECT TO THE PROPOSAL THAT THE ASSESSEE TO RESTORE THE MATTER TO THE FILE OF THE A.O. FOLLO WING THE DECISION RENDERED BY COORDINATE BENCH OF THE TRIBUNAL. 11. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. WE NOTICE THAT THE CO-ORDINATE BENCH HAS EXAMINED T HE ISSUE OF VALUATION OF SHARES UNDER DCF METHOD IN THE CASE OF INNOVITI PAYMENT SOLUTIONS P LTD (SUPRA) AND HAS FOLLOWED TH E DECISION RENDERED BY HON'BLE BOMBAY HIGH COURT IN THE CASE O F VODAFONE M PESA LTD VS. PCIT (164 DTR 257). ACCORDINGLY, IT W AS HELD THAT THE AO SHOULD SCRUTINIZE THE VALUATION REPORT PREPARED UNDER DCF METHOD AND IF NECESSARY, HE CAN CARRY OUT FRESH VAL UATION EITHER BY HIMSELF OR BY CALLING A FINAL DETERMINATION FROM AN INDEPENDENT VALUER TO CONFRONT THE ASSESSEE. THE AO CANNOT CHA NGE THE METHOD OF VALUATION AND HE HAS FOLLOW DCF METHOD ONLY. TH E DECISION RENDERED IN THE CASE OF INNOVITI PAYMENT SOLUTIONS P LTD (SUPRA) WAS FOLLOWED BY ANOTHER CO-ORDINATE BENCH IN THE CA SE OF FUTURA BUSINESS SOLUTIONS P LTD (ITA NO.3404 (BANG) 2018. FOR THE SAKE OF CONVENIENCE, WE EXTRACT BELOW THE OBSERVATIONS M ADE 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 ITA NO.473&474/BANG/2020 M/S. VALENCIA NUTRITION LIMITED, BANGALORE PAGE 6 OF 14 NO.2541/BANG/2019 ORDER DATED 12-06-2020. THE TRIBU NAL, AFTER RELYING ON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF VODAFONE M-PESA LTD VS PR.CIT 164 DTR 257 A ND DECISION OF THE ITAT, BANGALORE 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 ARE 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 P ORTION 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 CHALLENGE THE SAME BUT THE AO IS WELL WITHIN HIS RI GHTS TO EXAMINE THE METHODOLOGY ADOPTED BY THE ASSESSEE AND /OR UNDERLYING ASSUMPTIONS AND IF HE IS NOT SATISFIED, HE CAN CHALLENGE THE SAME AND SUGGEST NECESSARY MODIFICATIONS/ALTERATIONS PROVIDED THE SAME ARE BAS ED ON SOUND REASONING AND RATIONALE BASIS. IN THE SAME TR IBUNAL ORDER, A JUDGMENT OF HON'BLE BOMBAY HIGH COURT IS A LSO TAKEN NOTE OF HAVING BEEN RENDERED IN THE CASE OF V ODAFONE M-PESA LTD. VS. PCIT AS REPORTED IN 164 DTR 257. TH E TRIBUNAL HAS REPRODUCED PART OF PARA 9 OF THIS JUDG MENT BUT WE REPRODUCE HEREIN BELOW FULL PARA 9 OF THIS JUDGMENT . '9. WE NOTE THAT, THE COMMISSIONER OF INCOME-TAX IN THE IMPUGNED ORDER DATED 23RD FEBRUARY, 2018 DOES NOT DEAL WITH THE PRIMARY GRIEVANCE OF THE PETITION ER. 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/ADOPTED AT THE ASSESSEE'S OPTION. NEVERTHELESS , HE DOES NOT DEAL WITH THE CHANGE IN THE METHOD OF VALUATION BY THE ASSESSING OFFICER WHICH HAS RESULT ED IN THE DEMAND. THERE IS CERTAINLY NO IMMUNITY FROM ITA NO.473&474/BANG/2020 M/S. VALENCIA NUTRITION LIMITED, BANGALORE PAGE 7 OF 14 SCRUTINY OF THE VALUATION REPORT SUBMITTED BY THE ASSESSEE. THEREFORE, THE ASSESSING OFFICER IS UNDOUBTEDLY ENTITLED TO SCRUTINISE THE VALUATION RE PORT AND DETERMINE A FRESH VALUATION EITHER BY HIMSELF O R BY CALLING FOR A FINAL DETERMINATION FROM AN INDEPENDE NT VALUER TO CONFRONT THE PETITIONER. HOWEVER, THE BAS IS 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. IF MR. MOHANTY IS CORRECT IN H IS SUBMISSION THAT A PART OF DEMAND ARISING OUT OF THE ASSESSMENT ORDER DATED 21ST DECEMBER, 2017 WOULD ON ADOPTION OF DCF METHOD WILL BE SUSTAINED IN PART , THE SAME IS WITHOUT WORKING OUT THE FIGURES. THIS W AS AN EXERCISE WHICH OUGHT TO HAVE BEEN 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. THERE FORE, THE DEMAND IN THE FACTS NEED TO BE STAYED.' 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 VALUA TION EITHER BY HIMSELF OR BY CALLING A FINAL DETERMINATION FROM AN INDEPENDENT VALUER TO CONFRONT THE ASSESSEE. BUT TH E BASIS HAS TO BE DCF METHOD AND HE CANNOT CHANGE THE METHO D OF VALUATION WHICH HAS BEEN OPTED BY THE ASSESSEE. HEN CE, IN OUR CONSIDERED OPINION, IN THE PRESENT CASE, WHEN T HE GUIDANCE OF HON'BLE BOMBAY 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 REQUIRED TO EXAMINE AND CONSI DER THESE TRIBUNAL ORDERS. RESPECTFULLY FOLLOWING THIS JUDGME NT OF HON'BLE BOMBAY HIGH COURT, WE SET ASIDE THE ORDER O F CIT (A) AND RESTORE THE MATTER TO AO FOR A FRESH DECISION I N THE LIGHT OF THIS JUDGMENT OF HON'BLE BOMBAY HIGH COURT. THE AO SHOULD SCRUTINIZE THE VALUATION REPORT AND HE SHOULD DETER MINE A FRESH VALUATION EITHER BY HIMSELF OR BY CALLING A F INAL DETERMINATION FROM AN INDEPENDENT VALUER AND CONFRO NT THE SAME TO THE ASSESSEE. BUT THE BASIS HAS TO BE DCF M ETHOD AND HE CANNOT CHANGE THE METHOD OF VALUATION WHICH HAS BEEN OPTED BY THE ASSESSEE. IN OUR CONSIDERED OPINI ON AND AS PER REPORT OF RESEARCH COMMITTEE OF (ICAI) AS RE PRODUCED ABOVE, MOST CRITICAL INPUT OF DCF MODEL IS THE CASH FLOW PROJECTIONS. HENCE, THE ASSESSEE SHOULD BE ASKED 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 ITA NO.473&474/BANG/2020 M/S. VALENCIA NUTRITION LIMITED, BANGALORE PAGE 8 OF 14 CERTAINTY ON THE BASIS OF FACTS AVAILABLE ON THE DA TE OF VALUATION AND ACTUAL RESULT OF FUTURE CANNOT BE A B ASIS OF SAYING 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 C AN BE USED TO MAKE A RELIABLE FUTURE ESTIMATE BUT IN CASE OF A START UP WHERE NO PAST DATA IS AVAILABLE, THIS VIEW OF US THAT THE PROJECTION SHOULD BE ON THE BASIS OF RELIABLE FUTUR E ESTIMATE SHOULD NOT BE INSISTED UPON BECAUSE IN THOSE CASES, THE PROJECTIONS MAY BE ON THE BASIS OF EXPECTATIONS AND IN SUCH CASES, IT SHOULD BE SHOWN THAT SUCH EXPECTATIONS AR E REASONABLE AFTER CONSIDERING VARIOUS MACRO AND MICR O 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. (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 HA S TO SATISFY ABOUT THE CORRECTNESS OF THE PROJECTIONS, DISCOUNTING FACTOR AND TERMINAL VALUE ETC. WITH THE HELP OF EMPIRICAL DATA OR INDUSTRY NORM IF ANY AND/OR SC IENTIFIC DATA, SCIENTIFIC METHOD, SCIENTIFIC STUDY AND APPLI CABLE 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 B OMBAY HIGH COURT RENDERED IN THE CASE OF VODAFONE M-PESA LTD., VS. PR. CIT (SUPRA). THE TRIBUNAL HAS NOTED THAT AS PER THE JUD GMENT OF HON'BLE ITA NO.473&474/BANG/2020 M/S. VALENCIA NUTRITION LIMITED, BANGALORE PAGE 9 OF 14 BOMBAY HIGH COURT, IT WAS HELD THAT AO CAN SCRUTINI ZE THE VALUATION REPORT AND HE CAN DETERMINE A FRESH VALUATION EITHE R BY HIMSELF OR BY CALLING A DETERMINATION FROM AN INDEPENDENT VALUER TO CONFRONT THE ASSESSEE BUT THE BASIS HAS TO BE DCF METHOD AND HE CANNOT CHANGE THE METHOD OF VALUATION WHICH HAS BEEN OPTED BY THE ASSESSEE. THE TRIBUNAL HAS FOLLOWED THE JUDGMENT OF HON'BLE BOMBAY HIGH COURT AND DISREGARDED VARIOUS OTHER TRI BUNAL ORDERS AGAINST THE ASSESSEE WHICH WERE AVAILABLE AT THAT P OINT OF TIME. IN THE PRESENT CASE ALSO, WE PREFER TO FOLLOW THE JUDG MENT OF HON'BLE BOMBAY HIGH COURT RENDERED IN THE CASE OF VODAFONE M-PESA LTD., VS. PR. CIT (SUPRA) IN PREFERENCE TO THE JUDGMENT O F THE HON'BLE KERALA HIGH COURT CITED BY DR OF THE REVENUE RENDER ED IN THE CASE OF SUNRISE ACADEMY OF MEDICAL SPECIALITIES (INDIA) (P.) LTD. VS. ITO (SUPRA) BECAUSE THIS IS SETTLED POSITION OF LAW BY NOW THAT IF TWO VIEWS ARE POSSIBLE THEN THE VIEW FAVOURABLE TO THE ASSESSEE SHOULD BE ADOPTED AND WITH REGARD TO VARIOUS TRIBUNAL ORDE RS CITED BY LEARNED DR OF THE REVENUE WHICH ARE AGAINST THE ASS ESSEE WE HOLD THAT BECAUSE WE ARE FOLLOWING A JUDGMENT OF HON'BLE BOMBAY HIGH COURT RENDERED IN THE CASE OF VODAFONE M-PESA LTD., VS. PR. CIT (SUPRA), THESE TRIBUNAL ORDERS ARE NOT RELEVANT. IN THE CASE OF INNOVITI PAYMENT SOLUTIONS PVT. LTD., VS. ITO (SUPRA), THIS JUDGMENT OF HON'BLE BOMBAY HIGH COURT WAS FOLLOWED AND THE MATT ER WAS RESTORED BACK TO THE FILE OF AO FOR A FRESH DECISIO N WITH A DIRECTION THAT AO SHOULD FOLLOW DCF METHOD ONLY AND HE CANNOT CHANGE THE METHOD OPTED BY THE ASSESSEE AS HAS BEEN HELD BY TH E HON'BLE BOMBAY HIGH COURT. THE RELEVANT PARAS OF THIS TRIBU NAL ORDER ARE ALREADY REPRODUCED ABOVE WHICH CONTAIN THE DIRECTIO NS GIVEN BY THE TRIBUNAL TO THE AO IN THAT CASE. IN THE PRESENT CAS E ALSO, WE DECIDE THIS ISSUE ON SIMILAR LINE AND RESTORE THE MATTER B ACK TO THE FILE OF AO FOR A FRESH DECISION WITH SIMILAR DIRECTIONS. ACCOR DINGLY, GROUND NO.3 OF THE ASSESSEE'S APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. 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 H IGHER THAN THE FAIR MARKET VALUE. THE FAIR MARKET VALUE CONTEMPLAT ED IN THE PROVISIONS ABOVE IS AS UNDER: - (A) THE FAIR MARKET VALUE OF THE 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.. ITA NO.473&474/BANG/2020 M/S. VALENCIA NUTRITION LIMITED, BANGALORE PAGE 10 OF 14 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 ADOPT ING EITHER NAV METHOD OR DCF METHOD. IF THE ASSESSEE DETERMINES TH E FAIR MARKET VALUE IN A METHOD AS PRESCRIBED, THE ASSESSING OFFI CER DOES NOT HAVE A CHOICE TO DISPUTE THE JUSTIFICATION. THE MET HODS OF VALUATION ARE PRESCRIBED IN RULE 11UA(2) OF THE RULES. THE PR OVISIONS OF RULE 11UA(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 EXPLANATION TO CLAUSE (VIIB) OF SUB-SECTION (2) OF SECTION 56 SHAL L 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: (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 SHOW N IN THE BALANCE-SHEET AS ASSET INCLUDING THE UNAMORTISED AM OUNT OF DEFERRED EXPENDITURE WHICH DOES NOT REPRESENT THE V ALUE OF ANY ASSET; L = BOOK VALUE OF LIABILITIES SHOWN IN THE BALANCE SHEET, BUT NOT INCLUDING THE FOLLOWING AMOUNTS, NAMELY: (I) THE PAID-UP CAPITAL IN RESPECT OF EQUITY SHARES ; (II) THE AMOUNT SET APART FOR PAYMENT OF DIVIDENDS ON PREFERENCE SHARES AND EQUITY SHARES WHERE SUCH DIVI DENDS HAVE NOT BEEN DECLARED BEFORE THE DATE OF TRANSFER AT A GENERAL BODY MEETING OF THE COMPANY; ITA NO.473&474/BANG/2020 M/S. VALENCIA NUTRITION LIMITED, BANGALORE PAGE 11 OF 14 (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 OF THE EXCESS OVER THE TAX PAYABLE WITH REFERENCE TO T HE BOOK PROFITS IN ACCORDANCE WITH THE LAW APPLICABLE THERE TO; (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 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 EITHE R BY HIMSELF OR BY CALLING A DETERMINATION FROM AN INDEPENDENT VALUER TO CONFRONT THE ASSESSEE BUT THE BASIS HAS TO BE DCF METHOD AND HE CANNOT CHANGE THE METHOD OF VALUATION WHICH HAS BEEN OPTED BY THE ITA NO.473&474/BANG/2020 M/S. VALENCIA NUTRITION LIMITED, BANGALORE PAGE 12 OF 14 ASSESSEE. THE DECISION OF ITAT, DELHI IN THE CASE O F AGRO PORTFOLIO LTD. 171 ITD 74 HAS ALSO BEEN CONSIDERED BY THE ITA T, 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 VALUATIO N REPORT 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.1,2 5,58,421/- 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 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 ITA NO.473&474/BANG/2020 M/S. VALENCIA NUTRITION LIMITED, BANGALORE PAGE 13 OF 14 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 VA LUATION 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 RELIABI LITY OF THE PROJECTIONS. THE PRIMARY ONUS TO PROVE THE CORRECTN ESS OF THE VALUATION REPORT IS ON THE ASSESSEE AS HE HAS SPECI AL KNOWLEDGE AND HE IS PRIVY TO THE FACTS OF THE COMPANY AND ONL Y HE HAS OPTED FOR THIS METHOD. HENCE, HE HAS TO SATISFY ABOUT THE COR RECTNESS OF THE PROJECTIONS, DISCOUNTING FACTOR AND TERMINAL VALUE ETC. WITH THE HELP OF EMPIRICAL DATA OR INDUSTRY NORM IF ANY AND/OR SC IENTIFIC DATA, SCIENTIFIC METHOD, SCIENTIFIC STUDY AND APPLICABLE GUIDELINES REGARDING 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. ACCORD INGLY, FOLLOWING THE DECISIONS RENDERED BY THE CO-ORDINATE BENCHES, WE SET ITA NO.473&474/BANG/2020 M/S. VALENCIA NUTRITION LIMITED, BANGALORE PAGE 14 OF 14 ASIDE THE ORDERS PASSED BY LD CIT(A) IN BOTH THE YE ARS AND RESTORE THE IMPUGNED ISSUE IN BOTH THE YEARS TO THE FILE OF THE AO WITH THE DIRECTION TO EXAMINE THIS AFRESH AS PER THE DIRECTI ONS GIVEN BY THE CO-ORDINATE BENCH IN THE CASE OF INNOVITI PAYMENT S OLUTIONS P LTD (SUPRA). 13. IN THE RESULT, BOTH THE APPEALS OF THE ASSE SSEE ARE TREATED AS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 9 TH OCT, 2020 SD/- (GEORGE GEORGE K.) JUDICIAL MEMBER SD/- (B.R. BASKARAN) ACCOUNTANT MEMBER BANGALORE, DATED 9 TH OCT, 2020. VG/SPS 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.