Appeal Details
Counselvise Citation
[2023] 102 COUNSELVISE.COM (IT) 0863 (ITAT-CHANDIGARH)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
1 year(s) 2 month(s) 29 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
10-10-2023
Appeal Filed By
Department
Order Result
Dismissed
Bench Allotted
A
Next Hearing Date
27-08-2023
Assessment Year
2018-2019
Appeal Filed On
11-07-2022
Judgement Text
आयकर अपील य अ धकरण,च डीगढ़ यायपीठ , च डीगढ़ IN THE INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH BENCH ‘A’ CHANDIGARH BEFORE: SHRI A.D.JAIN, VICE PRESIDENT AND SHRI VIKRAM SINGH YADAV, ACCOUNTANT MEMBER आयकर अपील सं./ ITA No. 548/CHD/2022 नधा रण वष / Assessment Year : 2018-19 The ACIT, Circle, Shimla. बनाम VS I.A. Hydro Energy Pvt. Ltd., D-17, Sector-1, Lane-1, New Shimla (HP). थायी लेखा सं./PAN /TAN No: AAECI5443B अपीलाथ /Appellant यथ /Respondent नधा रती क ओर से/Assessee by : Shri Ajay Vohra, Sr.Advocate,with Ms. Somya Jain, CA राज व क ओर से/ Revenue by : Shri Rohit Sharma, CIT-DR तार"ख/Date of Hearing : 28.08.2023 उदघोषणा क तार"ख/Date of Pronouncement : 11.10.2023 VIRTUAL HEARING आदेश/ORDER PER A.D.JAIN, VICE PRESIDENT This is assessee's appeal for assessment year 2018-19 against the order dated 13.05.2022 passed by the ld. Commissioner of Income Tax (Appeals) NFAC, Delhi [in short ‘the CIT(A)]. The following grounds have been taken : 1. The Ld CIT (A) erred in deleting the addition of Rs. 202.50 Crores under the Head "Income from Other Sources" u/s 56(2)(viib) of the Act on account of excess amount per share paid as premium. 2. The Ld CIT (A) eared in holding that there is no case of application of Section 56(2)(viib) to the facts of appellant's case where pre-existing ITA 548/CHD/2022 A.Y.2018-19 Page 2 of 59 unsecured loans of partners/ shareholders were converted into equity shares at premium and the facts of the assessment order do not indicate any case of tax abuse involved in such share conversion. 3. The Ld CIT (A) erred in deleting the addition as the DCF (Discounted Cash Flow) valuation used by the assessee was done with fictitious figures having no correlation with actual affairs of the assessee company. 2. The brief facts of the case are that the assessee is an Indian company engaged in the business of generation and distribution of electricity and owns a Hydro Electric Project in Chanju, Himachal Pradesh; that for the relevant year, the assessee filed return of income on 18.10.2018 under section 139(1) of the Income tax Act, 1961 ( in short 'the Act') declaring loss of Rs.67,15,30,280/-; that the assessment in the case of the assessee was completed vide order dated 12.04.2021 passed under section 143(3) read with sections 143(3A) & 143(3B) assessing total income of the assessee at Rs.135,36,85,457/- after making addition of Rs 202,50,00,000/- u/s 56(2)(viib) of the Act, alleging that the assessee had issued equity shares at a premium which is in excess of the fair market value of shares. On appeal, the CIT(A) deleted the addition made by the assessing officer. Aggrieved, the department is in appeal. 3. The ld. DR, challenging the impugned order, has contended that the Ld CIT (A) erred in deleting the addition of Rs. 202.50 Crores under the Head "Income from Other Sources" u/s 56(2)(viib) of the Act on account of excess amount per share ITA 548/CHD/2022 A.Y.2018-19 Page 3 of 59 paid as premium; that the Ld CIT (A) eared in holding that there is no case of application of Section 56(2)(viib) to the facts of appellant's case where pre-existing unsecured loans of partners/ shareholders were converted into equity shares at premium and the facts of the assessment order do not indicate any case of tax abuse involved in such share conversion; that the Ld CIT (A) erred in deleting the addition as the DCF (Discounted Cash Flow) valuation used by the assessee was done with fictitious figures having no correlation with actual affairs of the assessee company. 4. The ld. DR contended that the assessee, a private limited company has, during the year allotted 2,25,00,000 shares of face value Rs.10/- each at a premium of Rs. 90/- each; that the market value of the shares as per the NAV method and Rule 11UA of the Income Tax Rules is far less than the value at which the shares have been allotted; that the assessee has submitted that the value of the shares has been determined at Rs. 106/- per share by the Discounted Cash Flow (DCF) method and has submitted CA certificate in support of the same; that the CA certificate mentions that all the values of variables in the DCF method have been taken as per figures provided by the management of assessee company; that the assessee failed to produce any valid justification in respect of projection of financial statements, which is baseless, unsubstantiated and far ITA 548/CHD/2022 A.Y.2018-19 Page 4 of 59 removed from the actual business and financial realities of the assessee company. 5. The ld. DR has contended that there is considerable degree of divergence between the projected figures in the valuation report and actual figures reported in audited books of accounts of assessee. Specifically, the actual Profit before Taxes (PBT) is considerably less than the projected PBT; that the major component is decrease in finance costs which is impacting (increasing) the profit before taxes in the projected P & L account; that In the projected P & L account, figures of projected sales of primary energy are constant at Rs. 57.72 Cr. from F.Y. 2018-19 to 2028-29. It was further contended that there is no increase in projected production capacity as block of fixed assets "remains at Rs. 631.20 Cr. from F.Y. 2017-18 To "F.Y. 2028-29 therefore, the scale of business of company is constant throughout the projected tenure. 6. The ld. DR has further contended that Rule 11U and 11UA of the Rules give the assessee a choice to adopt any method between (A-L)*PV/PE method or DCF method; that there is no dispute as to the suitability of DCF method for determination of value of shares as the same is approved as a valid method of valuation by the Act and the Rule; that it is a matter of fact that the DCF uses estimation of future cash flows. While genuine ITA 548/CHD/2022 A.Y.2018-19 Page 5 of 59 estimation can certainly qualify as a valid valuation, note needs to be taken of imaginary and fictitious estimation having no correlation with actual affairs of the assessee for arriving at premeditated figures of share value. The Act presumes that the DCF has been done bona fide. DCF takes into account estimation. It goes without saying that such estimation cannot be a fictitious figure invented and coined only to arrive at a premeditated figure of share value; that the assessee has arrived at a value of Rs. 106/- per share which is at huge variance with value of Rs. 8.54 ascertained using (A-L)*PV/PE method. 7. The ld. DR has contended that in the above facts, the AO has rightly held that the DCF valuation used by the assessee is bogus and sham and has no connection with the real figures. The valuation was done with fictitious figures having no correlation with actual affairs of the assessee. The valuation was done using imaginary figures to arrive at a premeditated value of Rs. 106 (exceeding Rs. 100/-) per share. The same is further supported by fatal deficiency due to the fact that the Chartered Accountant has relied purely on the projected figures provided by the management of the assessee company. The valuation does not constitute an audit, due diligence or certification of projected financial statements and the Chartered Accountant did not express an opinion on the accuracy of any financial information related to this information. The Chartered ITA 548/CHD/2022 A.Y.2018-19 Page 6 of 59 Accountant has relied upon the information provided by the assessee without detailed enquiry. The Chartered Accountant has clearly shifted the responsibility and said that projected working results of the assessee was the responsibility of the management of the assessee company. 8. The ld. DR has contended that the AO has correctly observed that since the valuation report has been prepared on 20/04/2017 and the latest results of assessee company available as on that date pertains to F.Y. 2016-17, therefore the fair market value of unquoted shares is computed as per Rule 11UA r.w.s. 56(viib) on the basis of balance sheet figures for F.Y. 2016-17. 9. The ld. DR further contended that the AO has correctly held that the need for valuation of shares has to be taken into account. It is stated by assessee that the assessee company was incorporated on 23/03/2017 and prior to that business was carried out in the status of partnership firm namely M/s. I A Energy which was constituted on 18/06/2010. On conversion of partnership firm into company, all the partners of the firm became shareholders. Later on, unsecured loan given by the erstwhile partners was converted into equity shares which were issued at a premium. Thus, at the outset the intent behind adopting the DCF valuation method is questionable, since ITA 548/CHD/2022 A.Y.2018-19 Page 7 of 59 shares were issued to existing partners of the assessee firm which was later on converted into a company. In this regard, reliance is placed on Hon'ble Supreme Court's decision In the case of McDowell and Co. Ltd. [1985] 154 ITR 148. As regards the decisions quoted by the assessee to justify that AO cannot preclude the assessee from adopting the valuation method of its choice, it is stated that this is a undecided legal issue which has not attained finality. Therefore, in absence of valid arguments by the assessee to justify the valuation adopted by it for issuing equity shares at a premium, AO is not bound to accept the valuation offered by assessee. 10. The ld. DR has, submitted that therefore, the order of the ld. CIT(A) having been wrongly passed, the same be set aside and cancelled and that passed by the AO be restored, upholding the addition made by the AO. 11. On the other hand, ld. Counsel for the assessee has contended that during the course of assessment proceedings, the Assessing Officer issued show-cause notice dated 22.03.2021 incorporating draft order wherein, merely on comparison of the financial projections used for DCF valuation with the actual financial results for certain period, the Assessing Officer treated the valuation of shares as per DCF method as fictitious, bogus and sham, thereby rejecting the ITA 548/CHD/2022 A.Y.2018-19 Page 8 of 59 valuation report and determining the FMV on the basis of Net Asset Value method. The allegations made in the aforesaid draft order were rebutted by the assessee vide reply dated 08.04.2021 wherein the assessee duly explained the basis of projections and reasons for variation. The Assessing Officer however, without judiciously considering the submissions of the assessee and without providing adequate opportunity of being heard, proceeded to pass the assessment order making a huge addition of Rs. 202.50 crore under section 56(2)(viib) of the Act. The CFF(A), after considering the detailed submission of the assessee duly explaining the reasons for variation in the project and actual reasons and the legal position, deleted the addition made by the AO observing that the provisions of section 56(2)(viib) of the Act were not applicable inasmuch as no consideration was received during the year. The CIT(A) further held that the DCF method applied by the assessee could not have been rejected for mere variation in the actual figures vis-a- vis the projected figure without any evidence being brought on record to establish any tax abuse involved. The aforesaid section provides for taxation of consideration received during the year by a company in excess of fair market value of shares issued at premium. The fair market value is to be determined in accordance with valuation method prescribed in Rule 1 1UA(2) of the Rules. ITA 548/CHD/2022 A.Y.2018-19 Page 9 of 59 11.1 It was contended that 'Fair market value' of the shares has been prescribed to be higher of the value as determined by the assessee in any of the following ways: (a) Value as determined in accordance with the method prescribed under sub-rule (2) of Rule 11UA of the Rules, which provides the assessee with an option to determine the fair market value of the unquoted shares, cither by: - (a) NAV method prescribed therein: or (b) obtaining valuation certificate from merchant banker or accountant as per DCF method; b) Value as may be determined by any other method, which to the satisfaction of the assessing officer, reflects the fair value (considering all assets including intangible assets) of the unquoted shares. 11.2 It was submitted that in terms of the aforesaid Rule, the assessee has an option to determine the FMV of the unquoted shares cither by (a) Net Asset Value Method ("NAV method") prescribed therein; or (b) as determined by a merchant banker or accountant as per DCF method contending that no money/consideration was actually received by the assessee on conversion of loans to shares, after a conversion of the partnership firm of the assessee company, and that thereby, the provisions of Section 56(2)(viib) of the Act are not applicable. The ld. Counsel for the assessee has submitted that Section 56(2)(viib) of the Act provides for taxation, if the company receives any consideration in excess of fair market value of shares. That the assessee has not received any money/ consideration on issuance of shares; the shares have been ITA 548/CHD/2022 A.Y.2018-19 Page 10 of 59 issued in lieu of already outstanding loan received from existing shareholders itself. It was reiterated that the assessee company came into existence on 23.03.2017 by conversion of the Firm. All the partners of the Firm became shareholders of the company. The Firm was also enjoying substantial amount of loan facility from its partners, namely, SBIPL and SBEPL granted from time to time vide loan agreement(s) dated 01.07.2010. It was upon conversion of the firm to Company that the existing loans were converted into equity shares and thereby the assessee issued 2,25,00,000 equity shares of Rs 10/- each at premium of Rs 90/- in lieu of outstanding loans. It was submitted that the aforesaid unsecured loans received from the partners, starting from the year 2010, have always been accepted as genuine in the hands of the Firm inasmuch as no doubt/addition/ disallowance in respect of such loans has been made in completed scrutiny assessment(s) for AYs 2013-14, 2014-15, 2016-17 and 2017-18. It was submitted that it is apparently clear that no fresh consideration/ money has flown to the assessee company on issue of shares during the relevant year. In effect, the loans received in preceding year and which were outstanding, have merely changed form during the relevant year, i.e., from ‘loan' to 'equity share capital'. there is no consideration received by the assessee company during the year in lieu of share of shares allotted, warranting application of ITA 548/CHD/2022 A.Y.2018-19 Page 11 of 59 section 56(2)(viib) of the Act. It was mentioned that clause (viib) of sub section (2) of section 56 was inserted vide Finance Act, 2012 with a view to curb the practice of closely held companies from introducing undisclosed money of promoters/ directors by issuing shares at high premium, over and above the book value of share of the company, escaping the rigours of section 68 of the Act. 12. Attention has been drawn to the Budget Speech, 2012 wherein the object behind the introduction of Section 56(2)(viib) in the Act was explained: 28. In view of the aforesaid, considering that section 56(2)(viib) of the Act is aimed at curbing practice of routing unaccounted/ black money, the said provisions would not, in our respectful submission, apply in case of bona-fide transaction of conversion of existing loans, accepted as genuine in the year of receipt, to share capital, that, too, related to existing shareholders refer PCIT v. Cinestaan Entertainment Pvt Ltd. : ITA No. 1007/2019 (Del H Q ; C /earview Healthcare (P.) Ltd. v. ITO: 181 ITD 141 (Del Trib.); Vaani Estates (P.) Ltd. v. ITO: 172 ITD 629 (Chennai Trib.)\. 29. Further, Circular No.1/201 I dated 6 April, 201 1 issued by the CBDT explaining the provision of section 56(2)(vii) of the Act specifically states that the section was inserted as a counter evasion mechanism to prevent money laundering of unaccounted income. In paragraph 13.4 thereof, it is stated that "the intention was not to tax transactions carried out in the normal course of business or trade, the profit of which are taxable under the specific head o f income". The said circular, it is respectfully submitted, further fortifies the contention of the assessee that the provision of section 56(2)(viib) of the Act arc not applicable on genuine business transaction without there being any evidence stating otherwise. ITA 548/CHD/2022 A.Y.2018-19 Page 12 of 59 30. In view of the aforesaid, in absence of any money/ consideration flowing to the assessee company on issue of shares and keeping in mind the avowed objective behind introduction of section 56(2)(viib) of the Act, the said section has no application. In that view of the matter, addition made by the assessing officer under section 56(2)(viib) of the Act is liable to be deleted at the threshold, on the said ground itself. 31. It is further submitted that once the transaction is tested by the tax department and the assessing officer is satisfied that the transaction is a genuine business transaction, i.e., without any clement of tax avoidance, then, there is no requirement to further test FMV of issue of shares at premium, applying provisions of section 56(2)(viib) of the Act. 13. Regarding the Valuation Report obtained by the assessee from the technical expert being binding in nature, it has been contended on behalf of the assessee that in the facts of the present case, prior to issuance of shares in lieu of outstanding loans, the assessee obtained valuation report from A.N. Kothari, Chartered Accountant, Mumbai, wherein the FMV of share of the assessee company was ascertained at Rs 106/- per share In the said valuation report dated 20.04.2.015, the valuation was done using Discounted Cash flow (DCF) Method as recognized and permitted under Rule 1 UJA(2)(b) of the Rules. Basis the said report, the assessee company duly issued shares of Rs 10/- each at premium of Rs 90/- per share. The Assessing Officer however, rejected the valuation report submitted by the assessee for the reason that the same has been prepared on the basis of projected financial data provided by the assessee which was not ITA 548/CHD/2022 A.Y.2018-19 Page 13 of 59 independently verified by the Chartered Accountant. In this regard, it was submitted that once the value of the shares has been determined by adopting any of the method(s) as prescribed under Ruled 1UA, i.e., NAV or DCF, then, such value shall be deemed to be the 'fair market value' of shares of the assessee company and die assessing officer cannot, in our respectful submission, question the valuation per se. It was contended that the Rule specifically provides that such valuation should be undertaken and determined by a merchant banker or accountant, i.e., in other words, a technical expert in the subject matter. It was submitted that, when there is a statutory requirement to obtain report/certificate from a technical expert in support of the valuation of shares, such report/certificate, would be binding on the Assessing Officer. 14. Reliance has been placed on the following case laws : i ) Decision of the Hon'ble Supreme Court in Hindustan Lever Employees' Union v. Hindustan Lever Ltd.: 1995 AIR (SC) 470; 2. Decision of Delhi Bench of the Tribunal in Cinestaan Entertainment (P.) Ltd. v. [TO: 170 ITD 809 3. Affirmed by the jurisdictional Delhi High Court in PC1T v. Cinestaan Entertainment Pvt Ltd. : ITA No.1007/2019) 4. Urmin Marketing Pvt. Ltd. Vs DCIT (2020) 122 taxmann.com 40 (Ahd) 5. Pramila M Dcsai, HUF v. DCIT: ITA No. 04/Ahd/ 2012 (Ahd. Trib.) - affirmed by Gujarat High Court in [2014] 221 Taxman 158 6. CIT vs. Manjulabcn M. Unadkat: 229 Taxman 53 1 (Gujarat) ITA 548/CHD/2022 A.Y.2018-19 Page 14 of 59 7. Shri Rajendra 11 Seth v. ACIT in ITA No. 1495/Ahd/2007 (Ahd. Trib.) Sosamma Paulosc vs. JOT: 79 TTJ 573 (Coch.) 8. Rameshwaram Strong Glass (P.) Ltd v. [TO: |2018| 172 1TD 571 (Jaipur) 14.1 So far as the action of the AO in substituting the method of valuation being allegedly beyond jurisdiction, the ld. Counsel for the assessee has contended that while section 56(2)(viib) of the Act intends to tax the consideration received for issue of share which is in excess of fair market value of such shares, Rule 1 lUA(2)(a) & (b) of the Rules provide two methods of valuation for ascertaining FMV of unquoted equity shares (i) Discounted Cash Flow (DCF) and (ii) Net asset Value (NAV) method. The assessee, it is submitted, has option to choose any of the aforesaid two methods. It was further contended that the valuation of shares of the assessee company has been undertaken using the DCF method based on projected financial position for the next 12 years; that Discounted Cash Flow Method is the most accepted international methodology for valuing an enterprise on a going concern basis and for determining the value of the holding of an investor; that Investors are interested in ascertaining the present value of their investments, considering the future earning potential of the underlying asset. It was contended that ascertaining net present value of future earnings is more appropriate, in case market value of an investment is not readily ascertainable ITA 548/CHD/2022 A.Y.2018-19 Page 15 of 59 applying conventional methods. Further, for the purposes of section 56(2)(viib) of the Act, Rule 11UA(2)(b) permits, at the option of the assessee, use of DCF Method by the merchant banker or the chartered accountant doing the valuation. It has been contended that the aforesaid fact has also been acknowledged by the assessing officer in as much as the assessing officer has at para 4.3 of the order stated that the DCF Method is considered to be a valid method of valuation. In this regard, it is submitted that once the assessee has exercised the option to adopt DCF method, the Assessing Officer cannot seek to substitute the method. 15. Reliance has been placed on Vodafone M-Pesa Ltd. vs. PCIT: 256 Taxman 240; Karmic Labs Pvt. Ltd. Vs ITO (ITAT Mumbai) (2020) 59 CCH 0360; M/s Innoviti Payment Solutions Vs ITO (2019) 55 CCH 0070; Creditalpha Alternative Investment Advisors (P.) Ltd. (2022) 134 taxmann.com 223 (Mum); Cinestaan Entertainment (P.) ltd. Vs ITO 170 ITD 809 (Del.); Chemicon Engineering Consultant (P.) Ltd. v. ACIT [2022] 142 taxmann.com 297 (Mumbai -Trib.); Mantram Commodities (P.) Ltd. v. [TO [2021 ] 1 2' 7 taxmann.com 462 (Delhi - Trib.); Vaani Estates (P.) Ltd. v. ITO [2018] 98 taxmann.com 92 (Chennai - Trib.); Lalithaa Jewellery Mart (P.) Ltd. v. ACIT [2019] 108 taxmann.com 490 (Chennai - Trib.); ACIT V. Subodh Menon 175 ITD 449 (Mumbai-Trib); Milk Mantra Dairy (P.) Ltd. v. DCIT: 196 ITA 548/CHD/2022 A.Y.2018-19 Page 16 of 59 ITD 333 (Kolkata-Trib.); DCIT v. HolisolLogistrics P. Ltd.: ITA No. 4361/Del/2018 (Del.); Narang Access Pvt. Ltd. V. DCIT: ITA No. 3521/Mum/20I8 (Mum.). 16. On the issue of variation between projections and actual results, alleging that there is no basis for the AO to discard the DCF method, the ld. Counsel for the assessee has contended that for application of DCF Method, the following factors are required to be ascertained to compute the value of business: (i) Explicit forecast period and projected cash (lows in the explicit forecast period; (ii) 'Appropriate discount rate to be applied to cash flows; (iii) Sustainable growth rate and terminal value after explicit forecast period. The forecasted results usually change because of some events and circumstances that do not occur as expected or are not anticipated; market conditions arc changing rapidly due to fast changing technology and also due to changing Government policies. Actual results will, therefore, always differ from the forecast and sometimes the difference may be material. To put it differently, considering that the DCE Method is essentially based on projections (estimations), the projections cannot be compared with the actuals so as to expect the same figures as were projected. Accordingly, the projections under DCF method have to be scrutinised with the facts and data available on the ITA 548/CHD/2022 A.Y.2018-19 Page 17 of 59 date of valuation and not by comparison with the actuals. In that view of the matter, variation between the projections and the actual results achieved cannot be the basis for disregarding/rejecting the valuation as per DCF method. 17. For the proposition that the FMV of a share determined as per the DCF method and duly supported by the Valuation Report of the ld. CIT(A) cannot be rejected merely on the ground that the valuation of the equity shares was based on projection of revenue which did not match with the actual reviews of subsequent years. Reliance has been placed on : i ) CIT Vs VVA Hotels Private Ltd. (2021) 276 Taxman 330 (Mad) ii) PCIT Vs Microfilm Capital (P.) Ltd. (2020) 113 taxmann.com 88 (Cal) iii) Vodafone M-Pesa Ltd. Vs DCIT 181 ITD 242 iv) Cinestaan Entertainment (P) Ltd. Vs ITO : ITA No.8113/Del/2018 (Delhi- Tribunal) v) PCIT Vs Cinestaan Entertainment Pvt. Ltd. ITA No. 1007/2019 vi) Intelligrape Software Pvt. Ltd., v. [TO: ITA No. 3925/Del/2018(Delhi - Trib.) vii) Karmic Lab vs ITO: ITA No. 3955/MUIT1/2018, order dated August 10, 2010 Mum) viii) India Today Online (P.) Ltd. v. ITO: [2019] 104 taxmann.com 385 (Delhi - Trib.) ix) Rockland Diagnostics Services Pvt. Ltd. v. [TO: ITA No.316 /Del/2019 (Delhi - Trib.) x) Creditalpha Alternative Investment Advisors (P.) Ltd. (2022) 134 taxmann.com 223 (Mum) ITA 548/CHD/2022 A.Y.2018-19 Page 18 of 59 18. Concerning the issue of variation between projections and the actual, which were stated to have been explained and the assessee's rebuttal to the allegations of the AO and the observations of the AO in this regard, the ld. Counsel for the assessee has contended that without prejudice to the aforesaid primary contention of the assessee that the valuation report of a technical expert, i.e., Chartered Accountant cannot be questioned and tinkered with. It was further submitted that even otherwise, the basis of the assessing officer in doubting the 'fair market value' of shares of the assessee as determined in the valuation report dated 20.04.2017 duly prepared in accordance with the prescribed DCF method is grossly erroneous and not sustainable. It is noted that the Assessing Officer has disregarded the valuation report to be bogus and sham for the following reasons: i. comparing the estimated profits taken for DCF with actual results for FY 2017-18, 2018-19 and 2019-20, the assessing officer observed that there is wide variance and thus the estimated results are not genuine; ii. the valuer has placed high degree of reliance on the details/ estimation of the management of the company. It was submitted that the observations and actions of the assessing officer arc baseless, contrafactual and not sustainable for the following reasons: ITA 548/CHD/2022 A.Y.2018-19 Page 19 of 59 19. While no adverse inference has been drawn in respect of discounting factor and terminal value used by the valuer for valuation as per DCF method, the assessing officer has doubted the forecasted/ estimated profits used for valuation on the ground that the same are not corroborated by the actual financial results for few years, viz., FY 2017-18, 2018-19 and 2019-20. 20. In this regard, it is submitted that profit forecast necessarily depends upon subjective judgment. It is always assumed that the business continues normally without any disruption due to internal/ external occurrence. The forecast is based on present circumstances, as to most likely set of conditions and the most likely course of action. It is usually the case that some events and circumstances do not occur as expected or arc not anticipated. For that reason, actual results achieved in future cannot be a basis to decide about reliability of the projections. 21. Projection of cash flow is based on projected fund flow and profit and loss account, in a new-industry, as in the present case of the assessee, the projection has to be made before commencement of actual operation. Thus, projection has to be based on the norms of the industry. On the basis of proposed installed capacity, cost of the project and its funding, i.e., ITA 548/CHD/2022 A.Y.2018-19 Page 20 of 59 equity & debt is ascertained. Quantum of electricity generation and its sale value is determined after considering market rate of the product, basis estimation of capacity utilisation. Cost of finance is determined after considering proposed rate of interest chargeable by the banks. Depreciation is charged on the basis of various method and rates prescribed in respect of various assets. Operation and maintenance cost is ascertained on the basis of experience in similar industries. Current tax is determined on the basis of current tax rate provided under the Act. Similarly, various reasonable assumptions are to be made for estimation based on certain fundamentals prevailing on the date of assumption. 22. To facilitate the verification of the financial projections for the period of 12 years (i.e., up to F.Y.2028-29) which were furnished by the assessee company during March 2017 to the valuer, the basis of assumptions then prevailing, which was also submitted before the assessing officer, is explained as under: Particulars Basis of working Equity share capital The company was incorporated on 17.03.2017 having equity share capital of Rs 10 crores; hence the same amount was taken for projection. Term Loan, cash credit and current maturities of term loan Unsecured Loan As explained above the company came in existence by conversion of firm into company. Hence the amount of term Loan/ unsecured loan availed by the firm was taken for projection. Gross block of fixed assets The fixed assets were almost erected.' installed; hence the value as shown in the books were taken for projection. Current assets Projected on the basis of current assets then available in the books of account ITA 548/CHD/2022 A.Y.2018-19 Page 21 of 59 In nut shell, the financial projections were made in March 2017 when the hydcl project was almost completed; hence the sources of fund and its application were projected considering the actual facts available with the assessee. Sale of primary energy Saleable primary energy is worked out on the basis of capacity utilization reduced by auxiliary consumption, transmission loss, free electricity to be given to Govt of Himachal Pradesh. The tariff of electricity has been taken on the basis of Power Purchase Agreement executed with Knowledge Infrastructure Private Limited. Other direct income : CER (Carbon credit) On the date of assumption, carbon credit was saleable and the Hydro Plants having capacity up to 50 MW were entitled. It was traded on the basis of quoted rates. Later the eligibility to avail CER was reduced from 50 MW to 25 MW. Thus, the assessee later became ineligible. 0 & M Expenses Operation and maintenance expenses were estimated to 1% of the cost of fixed assets with annual increase of 5.72% Depreciation It is worked out on the basis of rate of depreciation provided under Indian Companies Act. Finance Cost interest on working capital and term loan has been worked out considering rate of interest then charged by the banks, i.e., 10.35% for working capital and 12,65% for term loan. As regards unsecured loan, the lenders were the shareholders and were not charging any interest in the past; hence not considered. Current Tax Company was eligible for tax holiday u/s 80IA, however was liable for MAT which has been worked out on the basis of then prevailing rate. 23. Detailed working sheet of assumptions (reference has been made to pages 70-73 of PB) based on which projections were made, is enclosed together with copy of Power Purchase Agreement with Knowledge Infrastructure Private Limited (reference has been made to pages 74-81 of PB) and copy of sanction letters from banks evidencing rate of interest (reference has been made to pages 82-90 of PB). 24. It was submitted that in the present facts, variation of actual profits from those estimated are, inter alia, attributable to the following: that the hydroelectricity project mostly depends ITA 548/CHD/2022 A.Y.2018-19 Page 22 of 59 upon How of water in the river. The project is located at Chanju, Himachal Pradesh, i.e., at high altitude where the water may freeze during the month of November to February and water How increases during melting of snow, i.e., during May to August. The said weather conditions cannot be predicted in advance. Any climatical changes result in variation with the actual generation of electricity and so the financial results. It is matter of common knowledge that the changes in weather/ climate in the last 3-4 years has been very rapid and has resulted in disruption of business operations to achieve desired results; that the assessee company, during the year under consideration, had three turbines out of which two turbines commenced production in February 2017 and the third one was delayed by about 5 months and commenced production only on 26.07.2017. The production was also disrupted for 30 days in August 2017 due to the river carrying silt into the turbine. Claim for the same had been lodged with insurance company which is enclosed herewith at page 91 of Paper Book; that for these reasons, the actual generation of electricity for FY 207-18 declined from projected units of 8,87,52,686 to 8,29,04.850 units resulting into lesser revenue receipt for 58,47,836 unit and in terms of projected rate amounting to Rs 2.48 crores. There was also decline in generation of electricity in F.Y. 2018- 19 to the extent of 57,40,261 units (projected units ITA 548/CHD/2022 A.Y.2018-19 Page 23 of 59 13,58,11,509 actual units 13,00,71,248) and in terms of projected rate lesser revenue by Rs 2.44 crores; that due to many such unforeseen calamities , events beyond control, the financial results arc-greatly affected and thereby the actuals arc likely to differ from the projected financial forecast. It does not mean that the estimations arc fictitious and meant to suit the requirement of the assessee; that the assessee company was selling electricity to Chhattisgarh State Power Distribution Company Limited (CSPDCL) during 8 th July 2017 to 31 si May 2018 at interim rates of Rs.3.14 per unit as against projected rate of Rs.4.25 per unit. Later, Chhattisgarh Slate Electricity Regulatory Commission (CSERC) has approved the final tariff at Rs 5.98 per unit resulting into likely gain of Rs 12.16 Crores for F.Y. 2017-18 and Rs 4.80 crores in F.Y. 2018-19. This has affected the actual PB f considered for F.Y.2017-18 & 2018-19. Relevant extract of order of CSERC approving the tariff of Rs.5.98 per unit is available at pages 92-112 of PB. 25. It was submitted that the assessee has borrowed more than Rs. 330 crores from banks, finance cost was assumed adopting interest rate of 12.65% p.a whereas interest was paid @ 12.71% pa. during F.Ys 2017-18, 2018-19 and @ 13.05% in FY. 2019- 20. It has resulted in payment of excess interest than projected at Rs 3.77 crores. Rs.4.01 crores and Rs.4 crores for FY. 2017- 18, 2018-19 and 2019-20 respectively. Further, the implied ITA 548/CHD/2022 A.Y.2018-19 Page 24 of 59 allegation that the valuation has been inflated through profit projections in DCF valuation is baseless, as is evident from the following: The trend in results as estimated while making DCF calculations is corroborated with the actual results inasmuch as the PBT was expected to be loss for 1 ; Y 2017-18 and 2018-19 and profit of FY 2019-20 which has actually happened dehors the quantum. In fact, the actuals revenues for FYs 2018-19 and 2019- 20 are more than the estimated revenues. Further, quantum of profits/ loss expected for FYs 2018- 19 and 2019-20 arc actually not at wide variance in as much (i) for FY 201 8-19, PBT was expected at loss of Rs. 1.38 crores as against actual loss of Rs.1.70 crores resulting in variation of merely Rs.0.22 crores which is around 0.3% of estimated revenues; (ii) for FY 2019-20, PBT was Rs.2.22 crores while actual tor the same year was at Rs.1.22 crores resulting in variation of around Rs.l erorc winch is merely around 1.7% of the expected revenues. 25.1 It was submitted that the aforesaid difference between projected versus actual results cannot be termed as wide variation as alleged by the assessing officer to doubt the valuation on DCF method. In view of the aforesaid, dehors the fact that actual result could vary from the estimated results, in the present case, there is no wide variation as alleged by the assessing officer. Being so, branding the valuation done by the assessee as fictitious and imaginary on the sole basis that ITA 548/CHD/2022 A.Y.2018-19 Page 25 of 59 actual results do not corroborate with the projected Financials, is contrafactual, illegal, bad in law and not sustainable. 25.2 As regard the observation of the assessing officer at para 4.3.1 and para 4.3.6 of assessment order with regard to some qualifying remark of the valuer relying on data provided by the management, it was submitted that such remarks / caveat by the valuer arc common and prevalent in the industry and can usually be found in all valuation reports; that the valuer is not an auditor and cannot, therefore, own the responsibility of accuracy of the projections furnished by the assessee seeking valuation. However, before using the data provided by the management, the valuer carries necessary exercise to determine reasonableness and consistency of the estimation. Thus, no adverse inference can be drawn from the fact that data provided by management of the company has been relied by the valuer. 25.3 It was submitted that the valuer in the present case has analysed and reviewed the data and found it to be consistent and reasonable. The valuer has categorically stated that there is nothing to indicate that the information provided had material mis-statement (reference has been made to the Valuation Report placed at pages 57-69 of IMS). Further, it was submitted that for various reasons, the actuals are bound to differ with the projections and therefore, in such a situation to ITA 548/CHD/2022 A.Y.2018-19 Page 26 of 59 avoid any allegation of professional negligence, the valuer always adds a disclaimer/caveat qua the projections, which the valuer has no means to verify; that the same does not mean that the value assigned by the valuer is unreliable or unrealistic, especially when the valuation has been done with widely and internationally accepted methodology. It was submitted that there are valid reasons for variation between the projections and actual and if the above valid reasons are considered, the variation between the projected PBT and actual PBT stands duly explained and there will be no room to disbelieve the projections which were the basis for valuation under DCF method. It was submitted that the estimation which formed the basis of valuation should not be treated as fictitious, sham/ bogus and the value of share assigned by the valuer deserves to be accepted for the purpose of section 56(2)(viib) of the Act. 26. We have heard the parties and have perused the material available on record. The undisputed facts are that the assessee company came into existence by conversion of a partnership firm into a Private Limited company on 23.03.2017. Prior thereto, the business was carried in the status of partnership firm, namely, M/s I A Energy (hereinafter referred to as 'the Firm') which was constituted on 18.06.2010. The erstwhile Firm received unsecured loans from its partners, namely. Shri Bajrang Ispat and Power Ltd. (SBIPL) and Shri Bajrang Energy ITA 548/CHD/2022 A.Y.2018-19 Page 27 of 59 Private Limited (SBKPL) from time to time since 2010 for the purpose of implementing hydcl power project. On conversion of partnership firm into company (assessee), all the partners of the Firm became the shareholders of the assessee company. Immediately prior to conversion of the Firm, the capital and loan position of the partners together with their profit-sharing ratio was as under: S . N o . N a m e o f P a r t n e r s P S R C a p i t a l U n s e c u r e d L o a n 1 . S h r i B a j r a n g P o w e r & I s p a t L t d . 7 4 % 7 , 4 0 , 0 0 , 0 0 0 2 1 6 , 5 9 , 3 1 , 8 8 2 / - 2 S h r i B a j r a n g E n e r g y ( P ) L t d . 2 1 % 2 , 1 0 , 0 0 , 0 0 0 3 8 , 5 5 , 1 2 , 9 7 1 /- 3 A n a n d G o e l 1 % 1 0 , 0 0 , 0 0 0 0 4 A s h u t o s h G o e l 1 % 1 0 , 0 0 , 0 0 0 0 5 B a j r a n g G o e l 1 % 1 0 , 0 0 , 0 0 0 0 6 P a w a n G o e l 1 % 1 0 , 0 0 , 0 0 0 0 7 S a n d e e p G o e l 1 % 1 0 , 0 0 , 0 0 0 0 27. The loans were originally given by the partners to the erstwhile firm pursuant to respective Loan Agreements. A copy of the Loan Agreement dated 01.07.2010, entered into with Shri Bajrang Ispat & Power Ltd. and Shri Bajrang Energy (P) Ltd. has been appended at pages 37 to 46 of the assessee's Paper Book (‘APB’ for short). Post conversion of the firm into the assessee company, fresh Loan Agreement dated 23.03.2017 was entered into with Shri Bajrang Ispat & Power Ltd. and Shri Bajrang Energy (P) Ltd. A copy of the said Agreement has been filed at ITA 548/CHD/2022 A.Y.2018-19 Page 28 of 59 APB 47-48. These Agreements were entered into between the assessee company and the lenders (partners/shareholders), primarily for novation of loans from the firm to the assessee company. By virtue of the said agreements, the shareholders agreed to grant/novate loans in favour of the assessee company. Further, the covenant in the said Agreement provided for conversion of loan to shares of the assessee company, at the option of the lenders/shareholders. 27.1 The loans were originally given by the partners to the Firm pursuant to respective loan agreement(s) dated 01.07.2010 (reference pages 37-46 of PB). Post conversion of the Firm into the assessee company, fresh loan agreements dated 23.03.2017 (reference pages 47-56 of PB) were entered between the latter (assessee) and the lenders (partners/ shareholders), primarily for novation of loans from the Firm to the assessee company. Vide the said agreements, the shareholders agreed to grant/ novate loan in favour of the assessee company; further, a covenant in the said agreement provided for conversion of loan to shares of the assessee company, at the option of the lenders/ shareholders. 27.2 In pursuance of the aforesaid loan agreement(s), the pre-incorporation loan given by the erstwhile partners (now shareholders) were converted into shares of the assessee ITA 548/CHD/2022 A.Y.2018-19 Page 29 of 59 company, by issue of fresh equity shares of Rs 10/- each at premium of Rs. 90/- per share (total Rs.100 per shares) during the relevant year. A copy of the Valuation Report obtained by the assessee from its Chartered Accountant has been filed at APB 57-69. 27.3 During the course of assessment proceedings, the Assessing Officer issued show-cause notice dated 22.03.2021 incorporating draft order wherein, merely on comparison of the financial projections used for DCF valuation with the actual financial results for certain period, the Assessing Officer treated the valuation of shares as per DCF method as fictitious, bogus and sham, thereby rejecting the valuation report and determining the FMV on the basis of Net Asset Value method (reference page F13-116 of PB). The allegations made in the aforesaid draft order were rebutted by the assessee vide reply dated 08.04.2021 wherein the assessee duly explained the basis of projections and reasons for variation (reference pages 127- 143 of PB). A copy of the Show Cause Notice, issued to the assessee by the AO, incorporating the draft assessment order dated 22.03.2021, has been annexed at APB- 113-126 and a copy of the reply dated 08.04.2021 filed by the assessee in response to the said Show Cause Notice, is at APB-127-143. ITA 548/CHD/2022 A.Y.2018-19 Page 30 of 59 28. The AO, however, for the reasons recorded in the assessment order, made addition of Rs.202.50 Cr, invoking the provisions of Section 56(2)(viib) of the Act, which addition, the ld. CIT(A) has deleted. 29. The ld. CIT(A) while deleting the addition made by the AO, has observed as follows : Grounds of Appeal 2 to 6: Vide these grounds, the appellant has challenged the addition of Rs.2,02,50,00,0007-u/s. 56(2)(viib) of the Act pertaining to the share capital issued to the two existing lenders to the predecessor firm which got converted into the company during the current assessment year. The opening balance of unsecured loans as on 01.04.2017 was converted into share capital as per agreement. In the assessment order, the AO has analyzed the valuation of shares by the appellant at Rs. 106 per share by DCF method and observed following defects to reject the said valuation :- (i) The valuation report dated 20.04.2017 by Chartered Accountant indicates that the report was based on the data provided by the assessee. (ii) There was considerable degree of divergence between the projected figures and actual figures reported in the audited books of accounts of the assessee. It was noted by the AO that valuation of DCF method cannot take a fictitious figures invented and coined only to arrive at a premeditated figure of share value. It was further observed by the AO that DCF method Valuation led to share value of Rs. 106 per share as compared to Rs.8.54 per share by NAV method. As there was huge difference in value shown by two different methods prescribed under rule 11 UA of I.T. Rules, it was concluded by the AO that appellant could not justify the projection of financial statements which was far removed from the actual business and financial realities of the assessee company. (iii) The AO referred to the decision of Hon'ble Supreme Court in the case of McDowell & Co. Ltd. , 154 ITR 148, CIT vs. Durgaprasad More 82 ITR 540, CIT Vs. Sri Meenakshi Mills Ltd., 63 ITR 609 and concluded that the DCF valuation used by the assessee was bogus and sham and has no connection with the real figures. (iv) The AO noted that on conversion of the firm into company on 23.03.2017, all the partners became shareholders and unsecured loans given by the erstwhile partners were converted into equity shares at a premium Thus, there was intent behind adopting DCF method of valuation. Finally, it was concluded that DCF method of valuation was ITA 548/CHD/2022 A.Y.2018-19 Page 31 of 59 colourable device to avoid tax and made addition of Rs.202,00,00,000/- u/s. 56(2)(viib) of the Act. In the appellate proceedings, the appellant has enclosed the submission made during the assessment proceedings and countered the AO's findings and conclusions in the assessment proceedings by following arguments :- 1. The appellant has referred to the provision of Section 56(2)(viib) and contended that there is no consideration received on issue of shares in the current assessment as the shares were allotted by conversion of outstanding loans received in earlier years and sources whereof was satisfactorily explained as per scrutiny assessments for A.Y. 2013-14, 2014-15, 2016-17 and 2017-18. It was emphasized that in the absence of any consideration received in the current assessment year, the provision of Section 56(2)(viib) was not applicable to the facts of the appellant's case. The provision of S.56(2)(viib) was reproduced for ready reference as under: (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: 12 Provided that this clause shall not apply where the consideration for issue of shares (ii) The appellant has referred to the objective behind provision of Section 56(2)(viib) introduced by Finance Act, 2012 by relying on the Budget Speech 2012 and contended that section was introduced as an anti-abuse provision to arrest circulation of unaccounted y in the economy. Reference to Hon'ble Supreme Court decision in the case of K.P. Verghese Vs. lTO, 131 ITR 597 was also made wherein the Hon'ble Apex Court held that the h of Finance Minister while Introducing Finance Bill, carries considerable weightage to determine the intent behind the provisions inserted/amended. It was thus, contended that bonafide transaction of conversion of existing loans accepted as genuine in the year of receipt to share capital and that too for existing shareholders will not fall under the purview of Section 56(2)(viib) of the Act (iii) It was also contended that once the transaction is tested by the tax department and found genuine without any element of tax avoidance, there cannot be any requirement to test FMV of issue of shares at premium applying the provision of Section 56(2)(viib) of the Act. The appellant has relied on the decision in Clearview Healthcare Pvt. Ltd. Vs. ITQ 181 ITD 141 (Delhi branch). Cinestaan Entertainment Pvt. Ltd., 170 ITD 809 (Delhi branch) and similar other decisions to support this contention. iv) As regards the rejection of appellant's valuation of DCF method, it is contended that the choice of valuation method is available to the assessee (NAV or DCF) as per provision of Rule 11UA of IT. Rules and the AO substituting the method of valuation by NAV is completely beyond jurisdiction and invalid. The appellant relied on the decision of Bombay High Court in the case of Vodafone M-Pera Ltd. Vs. DCIT, 164 ITR 257, wherein the Hon'ble Court held that the AO cannot change the method adopted by the assessee for share valuation by DFC method which was violation of Rule 11UA. The appellant has referred to similar decision of Mumbai ITAT, Bangalore, ITAT Delhi ITAT to emphasize ITA 548/CHD/2022 A.Y.2018-19 Page 32 of 59 that the AO could not have substituted the- assessee's choice of method of valuation as mandated by Rule 11UA of IT. Rules. v) The appellant has referred to the decision of CIT Vs. WA Hotels Pvt. Ltd., 276 Taxmann 330 (MAD) to support its contention that variation between projection and actual results cannot be the ground for rejection of DCF method to value shares. In the case of VVA Hotels, Hon'ble Madras High Court held that unless the AO is able to bring out any evidence of abuse of benevolent provision with an intention to defraud the revenue, the option given to the assessee shall be held to be absolute as regards DCF method of share valuation. The appellant also referred to similar other decisions to support this view point. In the case of Creditapha Alternative Investment Advisors Pvt. Ltd., 134 Taxmann.com 223, Hon'ble Mumbai ITAT held that the Assessing Officer has no authority to pick and choose the valuation method and make addition as it was the assessee who has option to choose the method of valuation. vi) Appellant contended that the AO cannot on his "ipse dixit" reject the valuation report of an expert and supported this contention by referring to relevant decisions of various Courts / tribunals . The appellant relied on the decision in the case of Urmin marketing Pvt ltd 122 Taxmann.cm.40 (Aha; wherein it was held that the valuation report prepared by technical expert cannot be disturbed by the AO without taking opinion of the technical person. vii) The appellant contended that even the observations of the AO as regards variation in projected figures and actual figures were duly explained through detailed charts and reasonable assumptions made. After considering the AO's findings in the assessment order and appellant' submission, following facts emerge i) It is undisputed fact that the appellant did not receive any consideration for allotment of shares in the previous year relevant to current assessment year. The AO has not discussed this fact neither countered this contention of the appellant. It is a clear fact that the erstwhile partners of the erstwhile Firm (converted into appellant company) had given loans to the said firm which was converted into share capital of those partners becoming the shareholders. The AO has mentioned in the assessment order that the loans outstanding as on 01.04.2017 were converted into share capital. The shares were issued at Rs.10 per share face value and premium of Rs.90 per share. After plain reading of S.56(2)(viib), there is no doubt that this provisions is applicable to the considerations received in the previous year under consideration for taxing the excess premium charged over and above fair market value of shares determined as per prescribed method under Rule 11UA. In the current facts of the case, the appellant did not receive any consideration in the current assessment year and the outstanding loans of existing partners of erstwhile firm was converted into the shares of the appellant company. Thus, prima facie, there is no justification for the AO to apply Section 56(2)(viib) of the Act in the appellant's case. The said consideration in the form of unsecured loans were received from the partner of the erstwhile firm in the year 2010 (as evidenced from loan agreement) and the AO could not bring out any material facts to show that such conversion of loans to equity shares was a ploy to defraud revenue of the tax on such transaction. In fact, the loans received in earlier years also got tested through scrutiny assessments completed for assessment year 2013-14, ITA 548/CHD/2022 A.Y.2018-19 Page 33 of 59 2014-15, 2016-17 and 2017-18 in the case of the erstwhile firm. Thus, it can be concluded that the AO has not made out any case that the share conversion by the appellant led to defrauding revenue of its due taxes. Thus, firstly ,the amount is not received in the relevant previous year makes the applicability of S.56(2)(viib) invalid in the case of the appellant and secondly, the legislative intent to arrest abuse of tax laws to defraud revenue is also not available in the current facts of the case as the receipt of loans in the earlier years were from the existing partners of the erstwhile firm which got duly verified in the scrutiny of various assessment years after loans receipt. ii) As regards the valuation of shares, in the decision referred by the appellant, the Courts / Tribunals have invariably held that the AO is not authorized to pick and choose a particular method of valuation of share as the option is specifically given to the assessee as per Rule 11UA(2) of IT. Rules. The AO has power to verify the method of valuation adopted by the assessee but the same cannot be substituted by NAV method once the assessee has exercised option of DCF valuation method. In the case of Creditalpha Alternatives Investment Advisors Pvt. Ltd. (supra), the Hon'ble Mumbai Tribunal held that the AO can question the basic assumptions made by the valuer and if those are unreasonable, adjust the valuation so claimed at, but cannot substitute the method of valuation as discretion was given to the assessee. In the current case, I find that the AO has not found any specific error in the assumptions of projected figures neither adjusted the same with different valuation by the DCF method itself. Rather, the AO rejected DCF method and proceeded to value shares by NAV method merely on the ground that there was huge difference in projected figures and actual results available for some years. The Courts/tri decisions have held that the rejection of appellant's method of valuation is not permitted by the provision of Rule 11UA(2). In view of the appellant's rebuttal of AO'S defects in valuation and detailed charts and basis of assumption explained by the appellant as well as findings in the decisions of various courts/tribunals on this issue referred by appellant, i do not find any reason to revisit the DCF valuation by the appellant so as to re-adjust the same. Even otherwise, I am of the firm opinion that this S.56(2)(viib) of the Act is not applicable to the facts of the current case. iii) The AO's only reasons for rejection of DCF method of valuation is found to be variation in projected figures and actual figures. The Courts / Tribunals have held in the decisions referred by the appellant that there is bound to have difference in projected and actual figures and valuation method cannot be rejected on this ground. In view of the above facts and discussion, it is apparent that there is no case of application of Section 56(2)(viib) to the facts of appellant's case where pre-existing unsecured loans of partners/shareholders were converted into equity shares at premium and the facts of assessment order do not indicate any case of tax abuse involved in such share conversion. Even the AO's decision to substitute DCF method of share valuation by NAV method is not in accordance with the Rule 11UA of IT. Rules. Accordingly, addition of Rs 202,50,00,0007- u/s. 56(2)(viib) of the Act is hereby deleted. 30. It is, thus, seen that the ld. CIT(A) has observed that it is undisputed fact that the appellant did not receive any ITA 548/CHD/2022 A.Y.2018-19 Page 34 of 59 consideration for allotment of shares in the previous year relevant to current assessment year. The AO has not discussed this fact neither countered this contention of the appellant. It is a clear fact that the erstwhile partners of the erstwhile Firm (converted into appellant company) had given loans to the said firm which was converted into share capital of those partners becoming the shareholders. The AO has mentioned in the assessment order that the loans outstanding as on 01.04.2017 were converted into share capital. The shares were issued at Rs.10 per share face value and premium of Rs.90 per share. After plain reading of S.56(2)(viib), there is no doubt that this provisions is applicable to the considerations received in the previous year under consideration for taxing the excess premium charged over and above fair market value of shares determined as per prescribed method under Rule 11UA. In the current facts of the case, the appellant did not receive any consideration in the current assessment year and the outstanding loans of existing partners of erstwhile firm was converted into the shares of the appellant company. Thus, prima facie, there is no justification for the AO to apply Section 56(2)(viib) of the Act in the appellant's case. The said consideration in the form of unsecured loans were received from the partner of the erstwhile firm in the year 2010 (as evidenced from loan agreement) and the AO could not bring out any ITA 548/CHD/2022 A.Y.2018-19 Page 35 of 59 material facts to show that such conversion of loans to equity shares was a ploy to defraud revenue of the tax on such transaction. In fact, the loans received in earlier years also got tested through scrutiny assessments completed for assessment year 2013-14, 2014-15, 2016-17 and 2017-18 in the case of the erstwhile firm. Thus, it can be concluded that the AO has not made out any case that the share conversion by the appellant led to defrauding revenue of its due taxes. Thus, firstly ,the amount is not received in the relevant previous year makes the applicability of S.56(2)(viib) invalid in the case of the appellant and secondly, the legislative intent to arrest abuse of tax laws to defraud revenue is also not available in the current facts of the case as the receipt of loans in the earlier years were from the existing partners of the erstwhile firm which got duly verified in the scrutiny of various assessment years after loans receipt. 30.1 As regards the valuation of shares, in the decision referred by the appellant, the Courts / Tribunals have invariably held that the AO is not authorized to pick and choose a particular method of valuation of share as the option is specifically given to the assessee as per Rule 11UA(2) of IT. Rules. The AO has power to verify the method of valuation adopted by the assessee but the same cannot be substituted by NAV method once the assessee has exercised option of DCF valuation method. In the case of Creditalpha Alternatives ITA 548/CHD/2022 A.Y.2018-19 Page 36 of 59 Investment Advisors Pvt. Ltd. (supra), the Hon'ble Mumbai Tribunal held that the AO can question the basic assumptions made by the valuer and if those are unreasonable, adjust the valuation so claimed at, but cannot substitute the method of valuation as discretion was given to the assessee. In the current case, I find that the AO has not found any specific error in the assumptions of projected figures neither adjusted the same with different valuation by the DCF method itself. Rather, the AO rejected DCF method and proceeded to value shares by NAV method merely on the ground that there was huge difference in projected figures and actual results available for some years. The Courts/tri decisions have held that the rejection of appellant's method of valuation is not permitted by the provision of Rule 11UA(2). In view of the appellant's rebuttal of AO'S defects in valuation and detailed charts and basis of assumption explained by the appellant as well as findings in the decisions of various courts/tribunals on this issue referred by appellant, i do not find any reason to revisit the DCF valuation by the appellant so as to re-adjust the same. Even otherwise, I am of the firm opinion that this S.56(2)(viib) of the Act is not applicable to the facts of the current case. 30.2 The AO's only reasons for rejection of DCF method of valuation is found to be variation in projected figures and actual figures. The Courts / Tribunals have held in the decisions ITA 548/CHD/2022 A.Y.2018-19 Page 37 of 59 referred by the appellant that there is bound to have difference in projected and actual figures and valuation method cannot be rejected on this ground. 30.3 In view of the above facts and discussion, it is apparent that there is no case of application of Section 56(2)(viib) to the facts of appellant's case where pre-existing unsecured loans of partners/shareholders were converted into equity shares at premium and the facts of assessment order do not indicate any case of tax abuse involved in such share conversion. Even the AO's decision to substitute DCF method of share valuation by NAV method is not in accordance with the Rule 11UA of IT. Rules. Accordingly, addition of Rs 202,50,00,0007- u/s. 56(2)(viib) of the Act is hereby deleted. 31. The grievance of the Department is that the addition of Rs.202.50 Cr. Was correctly made by the AO under the head of "income from other sources" u/s 56(2)(viib) of the Act on account of excess amount per share paid as premium. 32. Let us see, if the conclusion arrived at by the CIT(A) is in accordance with law. For this, it has to be ascertained as to whether the valuation got done by the Assessee as per the Valuation Report dated 11.09.2014 (APB 68-74) filed before the Assessing Officer, is correct as per law. or the valuation arrived at by the CIT(A) is the correct valuation. ITA 548/CHD/2022 A.Y.2018-19 Page 38 of 59 33. The stand taken by the Assessee is that the fair market value of Rs. 450/- per share was arrived at by the Id. PCIT by following the 'Book Value', or the Net Asset Value (NAV) Method for valuing shares as per the Balance Sheet of the immediately preceding year, whereas the valuer of the Assessee had followed the 'Discounted Free Cash Flow' or 'DCF' method for valuation of the shares; that this method is permitted by section 56(2)(viib) of the Act read with rule 11UA of the Rules; and that for this reason, the "Book Value' or the Net Asset Value (NAV) Method of valuation cannot be preferred over and above the 'DCF' Method. 34. The relevant provisions first. 35. Section 56(2) of the I.T. Act prescribes incomes which are not to be excluded from the total income under the Act and shall be chargeable to income tax under the head 'Income from Other Sources'. Clause (viib) of section 56(2) prescribes one such income, as follows; '56(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 ) to (viia) (viib) where a company, not being a company in which the public are substantially interested, receives, in the 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... ' ITA 548/CHD/2022 A.Y.2018-19 Page 39 of 59 36. Thus, as per section 56(2)(viib), the aggregate consideration received in excess of the fair market value of the shares to be issued, where the consideration received exceeds the face value of such shares, is to be charged to tax as income from other sources. 37. 'Fair market value' of the shares, for the purposes of section 56(2)(viib), is defined by Explanation (a) to the section, as the higher of the value as may be determined in accordance with the method prescribed by rules 11U and 11UA of the I.T. Rules, or the value as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value of its tangible and intangible assets as on the date of issue of shares. 38. For ready reference, explanation (a) to section 56(2)(viib) is reproduced hereunder: 'Section 56(2)(viib)... Expl anation - For t he purposes of this clause, - (a) the fair market val ue of the shares shall be the value - (i) as may be determined i n accordance with such method as may be prescri bed; or (ii) as may be subst antiated by the company t o the satisf action of the Assessing Officer, based on the value, on the dat e of issue of shar es, of its asset s, including intangible asset s bei ng goodwill, know-how, patents, copyrights, trademar ks, licences, franchises or any other business or commer cial rights of similar nature, whichever is higher;' ITA 548/CHD/2022 A.Y.2018-19 Page 40 of 59 39. Rule 11U of the I.T. Rules, 1962 gives the meaning of expressions used in determination of fair market value of property other than immovable property for arriving at the income to the treated as income from other sources under section 56(2)(viib) of the I.T.Act. The portion thereof which is relevant for our present purposes is reproduced as under; ' 1 1 U For the purpose of this rule and rule 11UA, - ( a ) ..... ( b ) "balance sheet", in relation to any company, means, - (c) ( i ) for the purpose of sub-rule ( 2 ) of rule 11UA, the balance sheet of such company (including the notes annexed thereto and forming part of the accounts) as drawn up on the valuation date which was been audited by the auditor of the company appointed under section 224 of the Companies Act, 1956 ( 1 of 1956) and where the balance sheet on the valuation date is not drawn up, the balance sheet (including the notes annexed thereto and forming part of the accounts) drawn up as on a date immediately preceding the valuation date which has been approved and adopted in the annual general meeting of the shareholder of the company (ii).... (c) to ( i ) ( j ) "valuation date" means the date on which the property or consideration, as the case may be is received by the assessee.' 40. The fair market value, for the purposes of section 56 of the I.T. Act, of property, other than immovable property, in the nature of unquoted equity shares, is to be determined in the manner provided in rule 1 lUA(l)(c)(b), as follows: '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 - (a).... (b).... ( c ) valuation of shares and securities, - ( a ) ...... ITA 548/CHD/2022 A.Y.2018-19 Page 41 of 59 ( b ) the fair market value of unquoted equity shares shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner, namely:— the fair market value of unquoted equity shares =(A+B+C+D -L ) x (PV)/(PE), where, A= book value of all the assets (other than jewellery, artistic work, shares, securities and immovable property) in the balance-sheet as reduced by,— ( i ) any amount of income-tax paid, if any, less the amount of income-tax refund claimed, if any; and ( i i ) any amount shown as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset; B = the price which the jewellery and artistic work would fetch if sold in the open market on the basis of the valuation report obtained from a registered valuer; C = fair market value of shares and securities as determined in the manner provided in this rule; D - the value adopted or assessed or assessable by any authority of the Government for the purpose of payment of stamp duty in respect of the immovable property; 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; ( i i ) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company; ( i i i ) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation; ( i v ) any amount representing provision for taxation, other than amount of income-tax paid, if any, less the amount of income-tax claimed as refund, if any, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto; ( v ) any amount representing provisions made for meeting liabilities, other than ascertained liabilities; ( v i ) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares; ITA 548/CHD/2022 A.Y.2018-19 Page 42 of 59 PV- the paid up value of such equity shares; PE - total amount of paid up equity share capital as shown in the balance- sheet; 41. However, overriding the provisions of rule llUA(l)(c )(b) of the Rules, rule 11UA(2) provides for the fair market value of unquoted equity shares to be determined in the manner laid down in clause (a) or clause (b) of the rule, i.e., by following either the Book Value (NAV) Method, or the Discounted Free Cash Flow Method, at the option of the assessee. Rule 11UA(2) reads thus: ( 2 ) Notwithstanding anything contained in sub-clause ( b ) of clause ( c ) of sub-rule ( I ) , 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:— (a) the fair market value of unquoted equity shares = (A-L) / (PE) X (PV) where A = book value of the assets in the balance-sheet as reduced by any amount of tax paid as deduction or collection at source 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 balance-sheet as 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 balance-sheet, but not including the following amounts, namely:-— ( i ) the paid-up capital in respect of equity shares; ( i i ) the amount set apart for payment of dividends on preference shares and equity shares where such dividends 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; ( i v ) any amount representing provision for taxation, other than amount of tax paid as deduction or collection at source or as ITA 548/CHD/2022 A.Y.2018-19 Page 43 of 59 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 the book profits in accordance with the law applicable thereto; ( v ) any amount representing provisions made for meeting liabilities, other than ascertained liabilities; (vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares; PE = total amount of paid up equity share capital as shown in the balance-sheet; PV = the paid up value of such equity shares; or (b) the fair market value of the unquoted equity shares determined by a merchant banker as per the Discounted Free Cash Flow method. 42. It is evident from the fact that the Id. PCIT did not raise any challenge in this regard, that sub-clause (ii) of clause (a) of the Explanation to section 56(2)(viib) is not applicable to the case of the Assessee, and the Assessee was not required to satisfy the Assessing Officer about the valuation done. The fair market value of the shares was, therefore, essentially to be as per sub-clause(i) of clause (a) of the Explanation to section 56(2)(viib), i.e., the value to be determined in accordance with the method prescribed by rule 11UA(2) of the Income Tax Rules,1962. 43. On a query as to how, in the absence of anything evincible on the record in this regard, the Assessee maintains that the Id. PCIT has computed the fair market value of the shares, in ITA 548/CHD/2022 A.Y.2018-19 Page 44 of 59 accordance with the NAV / Book Value Method of valuation at Rs. 450/- per share, our attention has been drawn to the Assessee's Balance Sheet as on 31.3.2016 (APB 11-18), from which, it is seen that as on 31.3.2015, the Assessee had share capital of Rs. 96,004,600/-and its total reserves and surpluses were at Rs. 3,35,605,909/-, giving a total amount of Rs. 431,610,509/-. There was 900046 fully paid shares. It was from this that the fair market value was arrived at by the Id. PCIT at Rs. 450/-. That this is as per the NAV Method, in accordance with rule HUA(2)(a), is clear, and not disputed. Thus, though it is not so stated, either in the Show Cause Notice dated 17.2.2021 (APB- 1-2), issued u/s 263 of the Act, or in the Order under appeal, it is evident and not disputed that the Id. PCIT employed the Book Value or NAV Method, as per rule 11UA(2)(a) of the Rules, for determining the fair market value of the unquoted equity shares issued by the Assessee, in violation of the option provided by rule 11UA (2), as noted hereinabove. 44. The assessee. on the other hand, exercised the option made available by rule 11UA(2), and arrived at the market value of its unquoted shares on the basis of the Discounted Free Cash Flow Method, or the DCF Method, as provided in rule 11UA(2(b). In the Reply dated 23.3.2021 (APB-3) to the Show Cause Notice ITA 548/CHD/2022 A.Y.2018-19 Page 45 of 59 issued by the PCIT under section 263 of the Act, the Assessee stated that (para 1 of the Reply): "As per rules 11 and 11UA, a valuation report was obtained from a Chartered Accountant for the purpose of valuation of equity shares. The valuation report was already provided to the Assessing Officer for the purpose of assessment. As per the valuation report the fair market value of shares was arrived at at Rs. 1,087. The valuation report has been attached herewith for your reference. " 45. In the order under appeal, the Id. PCIT has observed that the Assessee had stated in its Reply that the valuation report had already been supplied to the A.O. and the fair market value of each share was arrived at Rs. 1,087/- as per the Valuation Report of the valuer; that this stand of the Assessee was not acceptable; that the fair market value of the shares, as per rules 11U and 11UA of the Rules, had been computed at Rs. 450/- per share; and that the share premium received by the Assessee in excess of the rate of Rs. 450/- per share had remained from being assessed at the hands of the Assessing Officer. The Id. PCIT, however, did not venture to elaborate as to how the determination of the fair market value of the shares, as arrived at Rs. 1.087/- per share by the Assessee, on the basis of the DCF Method and certified by the Assessee's Chartered Accountants, was not acceptable, remaining oblivious to the statutory mandatory option made available to the Assessee by the provisions of rule 11UA(2) of the Rules, laying down that the fair market value of unquoted shares shall be, as provided in ITA 548/CHD/2022 A.Y.2018-19 Page 46 of 59 the said rule, the value as determined either under clause (a), or clause (b) of the rule, that is, by invoking the Book Value (NAV) Method, or the Discounted Free Cash Flow (or DCF) Method, at the option of the Assessee. 46. That the above position is the correct position of law has been recognized in various decisions. Some such decisions are being discussed infra. 47. In 'Vodafone M-Pesa Ltd. Vs. PCIT', (2018) 101 CCH 230 (Bom.), demand was raised by the AO on account of fair market value of the shares which had been issued at a premium. The AO had, for the purposes of determining the fair market value of the shares, substituted the DCF Method by the Book Value / NAV Method. In its application for stay filed before the Commissioner, the Assessee contended that this was contrary to rule 11UA of the I.T. Rules, as the rule provided an option to the Assessee to arrive at a fair market value of the shares, either as prescribed in rule llUA(2)(a) of the Rules, i.e., the NAV Method, or in terms of rule llUA(2)(b) of the Rules, i.e., the DCF Method. In exercise of this option, the Assessee had provided a valuation report based on adoption of the DCF Method. The AO, without any justification, as done by the Id. PCIT in the case at hand, gave a complete go-by to the DCF Method and adopted the NAV Method to determine the market value of the shares. The ITA 548/CHD/2022 A.Y.2018-19 Page 47 of 59 Hon'ble High Court observed that in the impugned order the Commissioner, however, did not deal with this primary grievance of the Assessee, even though he conceded that the method of valuation, namely, either the NAV method, or the DCF Method, to determine the fair market value of shares, has to be adopted at the Assessee's option; that nevertheless, the Commissioner had not dealt with the change in the method of valuation by the Assessing Officer, which change had resulted in the demand; that it was not open to the Assessing Officer to change the method of valuation which had been opted for by the Assessee: that in fact, the Assessing Officer had completely disregarded the DCF Method for arriving at the fair market value; and that therefore, the demand needed to be stayed. 47.1 In 'Rameshwaram Strong Glass (P.) Ltd. Vs. ITO', [2018J 96 taxmann.com 542 (Jaipur-Trib.), the Assessee company issued 1,40,000/- shares having face value of Rs. 10 each, at a premium of Rs. 60 per share. The Assessee had determined the fair market value of the shares on the basis of the DCF Method, in accordance with rule HUA(2)(b) of the Rules read with section 56(2)(viib) of the Act. The Assessing Officer rejected such market valuation and determined the fair market value of the shares on the basis of the NAV Method. The AO found that the calculation of the share premium was not in accordance with rule 11UA of the Rules, and after referring to ITA 548/CHD/2022 A.Y.2018-19 Page 48 of 59 Rule 11UA (2)(b), the fair market value of the shares was computed on the basis of Book Value. The Assessing Officer held that the fair market value of the unquoted shares of the Assessee came to Rs. 32.76 only, and the Assessee was entitled to charge premium of Rs. 2.27 lakhs L Rs. 32.76 (-) Rs. 10.00 = Rs. 22.76 x 10,000 shares], against which, the Assessee had charged premium of Rs. 84 lakhs; and that thus, the excess premium of Rs. 81.72 lakhs received by the Assessee was not justified and not in accordance with the amended provisions of section 56(2)(viib). The Id. CIT(A) partly confirmed the addition by rejecting the valuation done as per the DCF method. 47.2 The Tribunal observed that there was no dispute between the parties that rule 11UA(1) was not applicable to the facts and circumstances of the case; that rule 11UA(1) is a provision of general nature, whereas rule 11UA(2) is a specific rule providing for the valuation of unquoted shares; that the matter of valuation of unquoted equity shares has been left, by rule 11UA(2), completely to the discretion of the Assessee and it is his option whether to choose the NAV Method (Book Value) under clause (a), or the DCF Method under clause (b), and the Assessing Officer cannot adopt a method of his own choice: that the Authorities cannot compel the Assessee to choose the NAV Method only, as against the DCF Method; and that when the legislation has conferred an option on the Assessee to choose a ITA 548/CHD/2022 A.Y.2018-19 Page 49 of 59 particular method, the valuation of shares has to be in accordance with such method only. 47.3 The Tribunal further observed that the Assessee- company had exercised the option to value the shares by the DCF Method; that however, the AO had worked out the value based on the NAV method; that though in the body of the assessment order, he had referred to Rule 11UA(2)(b), in substance, he had valued the shares based on the book value figures only, by considering the value of the assets shown in the Balance Sheet. 47.4 The Tribunal further observed that though the Commissioner (Appeals) too had considered the case in the context of rule 11UA(2)(b), his action of asking for a valuation report only on actual figures was nothing other than asking for a valuation done on the basis of the Net Asset Value Method; that from the facts, it was clear that the taxing Authorities wanted to impose on the Assessee, the method of valuation of their own choice, completely disregarding the legislative intent which has given the Assessee an option to choose any one of the two methods of valuation; that when the law has specifically provided different methods of valuation and the Assessee ITA 548/CHD/2022 A.Y.2018-19 Page 50 of 59 exercised an option by choosing a particular method, changing that method would go beyond the powers of the Revenue Authorities; that permitting the Revenue Authorities to do so would render clause (b) of rule 11UA(2) nugatory and purposeless; and that thus, to this extent, the action of the taxing Authorities was not justified. It was held that the Assessee had all the right to choose a method, which could not be changed by the Assessing Officer. 47.5 It was further observed by the Tribunal that coming to the aspect whether the Assessee had complied with the conditions laid down under rule 11UA(2)(b), it was clear that to comply with this rule, the Assessee was required to obtain a certificate of a Merchant Banker or a Chartered Accountant and to base the valuation on the DCF Method only; and that to exercise the option under this clause, the Assessee was not to be subjected to the fulfillment of any other condition, except these two, which the Assessee had done. 47.6 The Tribunal next observed that CBDT Instruction (File No. 173/14/2018-ITA.I) dated 6.2.2018, given in the case of startup companies, is useful in the context of determination of fair market value of unquoted equity shares under section ITA 548/CHD/2022 A.Y.2018-19 Page 51 of 59 56(2)(viib) read with rule 11UA(2), which Instruction states that though startup companies invariably submit valuation reports in accordance with rule llUA(2)(b). in the assessments, such reports are not being accepted and are being rejected / modified by the Assessing Officers, considering the same as based on abnormal valuations, which results in additions; and that the CBDT has, accordingly, directed not to take coercive measures in such cases for recovery of demand resulting in additions, and the Commissioners (Appeals) have been directed to dispose such appeals expeditiously. 47.7 It was also observed by the Tribunal that it appeared that the taxing Authorities had ignored Explanation (a) below section 56(2)(viib); that 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., under rule 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, trademarks, liences, franchises or any other business or commercial rights of similar nature, whichever is ITA 548/CHD/2022 A.Y.2018-19 Page 52 of 59 higher; and that it is only the Explanation (a)(ii), which speaks of the satisfaction of the Assessing Officer, but there appears no such condition in the Explanation (a)(i) and, therefore, the Assessing Officer is not permitted to interfere in the valuation done in accordance with the method prescribed in rule 11UA(2). 47.8 The Tribunal concluded that thus, there was no justification behind rejecting the declared value of the shares and in the addition made by the Assessing Officer but partly sustained by the Commissioner (Appeals). The addition was deleted. 48. In 'Cinestaan Entertainment (P) Ltd. Vs. Income Tax Officer, Ward-6(2), New Delhi', [2019] 177 ITD 809 (Delhi), it was held that the Assessee has an option to do valuation of shares and determine fair market value either on the DCF Method, or the NAV Method; that the Assessing Officer cannot examine or substitute his own value in place of the value determined; that the Income Tax Department cannot sit in the armchair of the businessman to decide what is profitable and how business should be carried out; that commercial expediency has to be seen from the point of view of the businessman; that strategic investments and risks are undertaken for appreciation ITA 548/CHD/2022 A.Y.2018-19 Page 53 of 59 of capital and larger returns, and not simply dividend and interest; that any businessman or entrepreneur visualises the business based on certain future projections and undertakes all kinds of risks; that 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 as to in which manner risk has to be undertaken; that such an approach of the Revenue has been judicially frowned upon by the Apex Curt on several occasions; that the Income Tax Rules provide for two valuation methodologies; that one is the assets based NAV Method, which is based on actual numbers as per the latest audited financials of the Assessee Company, whereas in the other method, that is, the DCF Method, the value is based on estimated future projection; that if the investment has been made keeping in mind the Assessee's own business objective, then such commercial wisdom cannot be questioned; that 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, nor does it require any satisfaction on the part of the Assessing Officer to tinker with such valuation; that section 56(viib) of the Income Tax Act is a deeming provision and one cannot expand the meaning or scope ITA 548/CHD/2022 A.Y.2018-19 Page 54 of 59 of any word while interpreting such a deeming provision; that if the statute provides that the valuation has to be done as per the prescribed method, and one of the prescribed methods has been adopted by the Assessee, then the Assessing Officer has to accept the same and even in case he is not satisfied, he cannot do otherwise, as there is no express provision under the Act or the Rules, whereunder the Assessing Officer can adopt his own valuation, or get it done by some different valuer ; that there has to be some enabling provision under the Rules or the Act, giving power to the Assessing Officer to tinker with the valuation report obtained from an independent valuer, as per the qualification given in rule 11UA; that such a provision is absent; and that in any case, if the law provides for 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 experts under the law. 48.1 In 'Principal Commissioner of Income Tax Vs. Cinestaan Entertainment Pvt. Ltd.', (2021) 433 ITR 82 (Del), it was contended on behalf of the Assessee-Respondent before the Hon'ble High Court, inter alia, that section 56(2)(viib) of the Act is not applicable to genuine business transactions; that the ITA 548/CHD/2022 A.Y.2018-19 Page 55 of 59 genuineness and creditworthiness of the strategic investors was not doubted by either the AO, or the CIT(A); that sub-clause (ii) of clause (a) of the Explanation to section 56(2)(viib) was not applicable to the case of the Respondent-Assessee and the Assessee was not required to satisfy the Assessing Officer about the valuation done; and that in accordance with sub-clause (i) of clause (a) of the Explanation to section 56(2)(viib). the Respondent-Assessee had an option to carry out a valuation and determine the fair market value of the shares only on the Discounted Cash Flow Method (the DCF Method), which was appropriately followed by the Respondent-Assessee. 48.2 Dismissing the appeal filed by the Department, the Hon'ble High Court observed, inter alia, that the shares were issued based on the valuation report received from the prescribed expert, i.e., a Chartered Accountant, who used the DCF Method, which is one of the methods stipulated under section 56(2)(viib) read with rule llUA(2)(b); that based on the valuation report of the Chartered Accountant, the Assessee issued shares to various equity partners at a premium; that the test laid down by the Courts for interfering with the findings of a valuer was not satisfied in that case, as the Respondent- Assessee had adopted a recognised method of valuation and the ITA 548/CHD/2022 A.Y.2018-19 Page 56 of 59 Appellant-Revenue had been unable to show that the Assessee had adopted a demonstrably wrong approach, or that the method of valuation was made on a wholly erroneous basis, or that it had committed a mistake going to the root of the valuation process; that the Tribunal had followed the dicta laid down by the Hon'ble Supreme Court in matters relating to the commercial prudence of an assessee relating to valuation of an asset; that the law required determination of fair market value as per prescribed methodology; that the Appellant- Revenue had the option to conduct its own valuation and to determine the fair market value on the basis of either the DCF Method, or the NAV Method; that the Respondent-Assessee, being a start-up company, had adopted the DCF Method to value its shares; that this had been carried out on the basis of information and material available on the date of valuation and projection of future revenue; and that there was no dispute that the method adopted by the Assessee had been done applying a recognised and accepted method. 49. In 'DCIM Vs. Ozoneland Agro Pvt. Ltd.' vide order dated 2.5.2018, passed for assessment year 2013-14, in ITA No. 4854/Mum/2016, the Mumbai Tribunal held that section 56 allows the Assessees to adopt one of the methods of their ITA 548/CHD/2022 A.Y.2018-19 Page 57 of 59 choice; that however, the Assessing Officer held that the Assessee should have adopted only one method for determining the value of the shares; that it was beyond the jurisdiction of the Assessing Officer to insist upon a particular system, especially when the Act allows to choose one of the two methods; that unless and until the legislature amends the provisions of the Act and prescribes only one method for valuation of the shares, the Assessees are free to adopt any one of the methods: and that the Assessing Officer had 'tampered with' the provisions of the Act. 50. In 'Karmic Labs Pvt. Ltd. Vs. ITO order dated 28.7.2020, passed for assessment year 2014-15, in ITA No. 3955/Mum/2018, 'DOT Vs. M/s Ozoneland Agro Pvt. Ltd.,(supra) and 'Vodafone M-Pesa Ltd. Vs. PCIT' (supra) were followed. 51. In 'Dada Ganpati Guar Products Pvt. Ltd. Vs. Principal Commissioner of Income Tax', (2021) 92 ITR (Trib) 408 (Chandigarh), the Chandigarh Tribunal has followed "Vodafone M-Pesa Ltd. Vs. Principal Commissioner of Income Tax'(supra), 'Principal Commissioner of Income Tax Vs. Cinestaan Entertainment Pvt. Ltd.' (supra), 'Rameshwaram Strong Glass ITA 548/CHD/2022 A.Y.2018-19 Page 58 of 59 (P.) Ltd. Vs. Income Tax Officer, Ward-2(1), Ajmer' (supra), and 'Cinestaan Entertainment (P.) Ltd Vs. Income Tax Officer, Ward- 6(2), New Delhi' (supra). 52. In 'Nirbhai Textiles Pvt. Ltd. Vs. The ACIT, Circle-2 Ludhiana', order dated 22.8.2022, for A.Y. 2014-15, in ITA No. 1401/Chd/2018. the Chandigarh Tribunal has followed "Principal Commissioner of Income Tax Vs. Cinestaan Entertainment Pvt. Ltd.'(supra), 'Vodafone M-Pesa Ltd. Vs. Principal Commissioner of Income Tax' (supra) and 'Dada Ganpati Guar Products Pvt. Ltd Vs. Principal Commissioner of Income Tax'(supra). 53. No decision contrary to the afore-discussed case-laws has been cited before use. 54. In view of the above discussion, we are of the considered opinion that: (a) The Assessee followed the DCF Method for valuing the shares, whereas the Id. PCIT utilised the NAV Method to do so. (b) This action of the Id. PCIT is in direct contravention of the provisions of Explanation (a) (i) to section 56(2)(vii) of the I.T. Act read with rule 11UA(2) (b) of the I.T.Rules. (c) The AO could not have changed the method of valuation opted by the Assessee, in view of the statutory mandate of rule 11UA(2) of the Rules. ITA 548/CHD/2022 A.Y.2018-19 Page 59 of 59 (d) The above is in keeping with the caselaws discussed hereinabove. (e) Therefore, there was no error in the Assessing Officer's Order dated 21.12.2018, calling for revision under section 263 of the I.T. Act. 55. To similar effect, under mutatis-mutandis, similar is our order dated 24.02.2023 passed in the case of Apna Punjab Resorts Limited Vs PCIT, in ITA 111/CHD/2021, for assessment year 2016-17. 56. Accordingly, the grievance sought to be raised by the Department by way of its ground of appeal is found to be shorn of merit and it is rejected as such. 57. In the result, the appeal is dismissed. Order pronounced on 11 th October,2023. Sd/- Sd/- (VIKRAM SINGH YADAV) (A.D.JAIN ) ACCOUNTANTMEMBER VICE PRESIDENT “Poonam” आदेश क琉 灹ितिलिप अ灡ेिषत/ Copy of the order forwarded to : 1. अपीलाथ牸/ The Appellant 2. 灹瀄यथ牸/ The Respondent 3. आयकर आयु猴/ CIT 4. िवभागीय 灹ितिनिध, आयकर अपीलीय आिधकरण, च瀃डीगढ़/ DR, ITAT, CHANDIGARH 5. गाड榁 फाईल/ Guard File आदेशानुसार/ By order, सहायक पंजीकार/ Assistant Registrar
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