Case Law Details
Cinestaan Entertainment P. Ltd. Vs ITO (ITAT Delhi)
Conclusion:
Where there was an option under Rule 11UA(2) to determine the FMV by either the ‘DCF Method’ or the ‘NAV Method’, AO had no jurisdiction to discard the valuation report of the CA mainly on the ground that valuation of equity shares carried out by assessee was based on projection of revenue which did not match with the actual revenues of the subsequent years. Moreover, top and independent investors had invested in assessee’s start-up proved that the FMV as determined by assessee was proper.
Held:
Assessee-company was incorporated with the objective of carrying of business of production and distribution of films. During the year under consideration, assessee-company approached accredited ace investors of India to join in as equity partners by raising premium on shares over and above the face value of Rs.10/- per share. Assessee before issuing the shares had got the share valued by Chartered Accountant, as provided under Rule 11UA(2) by using the ‘DCF Method’ which was one of the prescribed method in Rule 11UA(2)(b) r.w.s. 56(2)(viib). AO had discarded the valuation report of the CA mainly on the ground that valuation of the equity shares carried out by assessee was based on projection of revenue which did not match with the actual revenues of the subsequent years. He further held that no efforts had been made by assessee to substantiate the figures of projected revenue in the valuation report and had also failed to submit any basis for projection. Instead, AO held that assessee should have invested the share premium amount to earn some income, whereas assessee had made investment in debentures of its associate company and hence the basic substance of receiving the high premium was not justified. After invoking the provision of Section 56(2)(viib), AO took fair market value of premium at Nil and face value of Rs. 10/- per share. It was held if law provides the assessee to get the valuation done from a prescribed expert as per the prescribed method, then the same could not be rejected because neither AO nor assessee had been recognized as expert under the law. If the investment had made keeping assessee’s own business objective of projection of films and media entertainment, then such commercial wisdom could not be questioned. Even the prescribed Rule 11UA (2) did not give any power to AO to examine or substitute his own value in place of the value determined or required any satisfaction on the part of AO to tinker with such valuation. Here, in this case, AO had not substituted any of his own method or valuation albeit had simply rejected the valuation of assessee. Moreover, the investors would not make any investment merely to carry out any charity to a start-up company, albeit their decision was guided by business and commercial prudence to evaluate a start-up company like assessee, what they can achieve in future. Thus. the finding of AO or CIT(A) so to take the fair market value of the share at ‘Nil’ under the provision of Section 56(2)(viib) and thereby making the addition of Rs.90.95 crores could not be approved.
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