ACIT Vs Gamma Pizzakraft (Overseas) Pvt Ltd (ITAT Delhi)
ITAT Delhi held that the assessee has option to determine the method of valuation and the AO has no power to reject the method resorted by the assessee as no infraction of methodology has been brought out by the AO.
Facts- The assessee is a Private Limited Company and holding company of wholly owned subsidiaries namely, M/s Gamma Pizzakraft Private Limited, M/s Gamma Pizzakraft Lanka Private Limited and M/s French Restaurants Private Limited. The assessee company is doing its operational and business activities of operating a bakery restaurant and operating quick service restaurants (QSR) in India and Sri Lanka through its wholly owned subsidiaries (WOS).
During the year, the assessee company had issued 54,33,548 equity shares to Sapphire Foods India Pvt. Ltd. at a premium of Rs.55.65 for the share of Face Value of Rs.10/- and received a total of Rs.30,23,74,146/-. Sapphire Foods Pvt. Ltd. is an entity of large venture capitalists [Goldman Sachs Investments Holding (Asia) Limited] and the investment in the assessee company was part of overall transaction of acquisition of Pizza Hut and KFC outlets in India and Sri Lanka. The overall transaction has been cleared by the Competition Commission of India (CCI) vide its order dated 13.08.2015 under section 31(1) of Competition Act, 2002.
The AO passed the Assessment Order rejecting the valuation of shares under DCF method and determined the value of shares at Rs.10/- per share by adopting “Net Asset Value/ Book Value method” and made an addition of Rs.24,80,39,169/-being difference between the “Consideration received” and the “Book Value of the shares”.
Conclusion- The Tribunal disagreed with the authorities below by holding that the AO/CIT(A) had no power/authority to change the valuation methodology from DCF to Book Value Method and hence such action was arbitrary. It was also held that the valuation based on future projections at the time of issue of shares cannot be inferred as the actual figures may vary depending on the market conditions and host of other factors.
Hence, keeping in view that DCF is correct method of determining the FMV of the unquoted shares, the assessee has option to determine the method of valuation and the AO has no power to reject the method resorted by the assessee, the results in the instant case of the holding company have exceed the projections, as no infraction of methodology has been brought out by the AO and non-payment of advance tax cannot be a collateral reason to reject the DCF method, we decline to interfere with the well reasoned order of the ld. CIT(A).
FULL TEXT OF THE ORDER OF ITAT DELHI
The present appeal has been filed by Revenue against the order of ld. CIT(A)-4, New Delhi dated 20.01.2020.
2. Following grounds have been raised by the Revenue:
“1. Whether on the facts and circumstances of the case and in law, the ld. CIT(A) has erred in deleting the addition of Rs.24,80,39,169/- made by the AO on account of valuation of shares at a premium of Rs.55.65 per share u/s 56(2)(viib) of the Income Tax Act, 1961.”
Facts of the Case:
3. The assessee is a Private Limited Company and holding company of wholly owned subsidiaries namely, M/s Gamma Pizzakraft Private Limited, M/s Gamma Pizzakraft Lanka Private Limited and M/s French Restaurants Private Limited. The assessee company is doing its operational and business activities of operating a bakery restaurant and operating quick service restaurants (QSR) in India and Sri Lanka through its wholly owned subsidiaries (WOS).
4. The assessee had filed its return of income for AY 2016-17 on 08.10.2016 declaring a loss of Rs. 10,24,33,542/-. The AO passed order u/s 143(3) of the Act assessing the income at Rs. 14,56,05,630/- after making an addition of Rs.24,80,39,169/-under section 56(2)(viib) of the Act.
5. During the year, the assessee company had issued 54,33,548 equity shares to Sapphire Foods India Pvt. Ltd. at a premium of Rs.55.65 for the share of Face Value of Rs.10/- and received a total of Rs.30,23,74,146/-. Sapphire Foods Pvt. Ltd. is an entity of large venture capitalists [Goldman Sachs Investments Holding (Asia) Limited] and the investment in the assessee company was part of overall transaction of acquisition of Pizza Hut and KFC outlets in India and Sri Lanka. The overall transaction has been cleared by the Competition Commission of India (CCI) vide its order dated 13.08.2015 under section 31(1) of Competition Act, 2002.
Invocation of Section 56(2)(viib):
6. The assessee company has obtained a valuation report from the Chartered Accountant as required under Rule 11UA(2)(b) of IT Rules, 1963 who had certified the fair market value (‘FMV’) of unquoted equity share of the company to be Rs.65.65 per share by adopting Discounted Free Cash Flow Method (“DCF”) for valuing the shares.
7. In the course of assessment proceedings, the AO examined the valuation report prepared by the Valuer Sh. Ashok Kumar Verma, CA and noted that the valuer has determined the FMV of the shares at Rs.65.65/- per share while the same worked out to Rs.10/- per share under Net Asset Value Method. Further, the AO compared the projections of Profit After Tax (PAT) made in the valuation report with the actuals achieved in the intervening period and observed that there was a difference between the actual profit/loss as per financial statements for the next two years i.e. F.Y.2016-17 and F.Y.2017-18 and the figures as projected in the valuation report.
8. Thereafter, the AO summoned the valuer and recorded his statement. Based on this statement, the A.O. made observation that the valuer has not verified the data and the valuation has been made on the basis of projections and other details provided by the management. The AO further noted that the valuer has also failed to produce all the documents relied upon while preparing the valuation report. The AO held that according to the Valuer, if the projections are not achieved, the basis of valuation shall lose its sanctity as DCF method.
9. The A.O. show-caused the assessee on 22.11.2018 which reads as under:
“CA Neeraj Wadha wan, VP Finance in the group companies and Authorized Representative of assessee attended today. Assessee has issued shares to M/s Sapphire Foods India Pvt. Ltd. @ 65.65 per share of Rs.10/- face value and received Rs.55.65 as premium. Assessee has followed and relied on DCF method and valuation was done by CA Sh. Ashok Kumar Verma. In this regard Valuer CA Sh. Ashok Kumar Verma was summoned and his statement was recorded with regard to valuation report as prepared by him. During recoding of statement, Mr. Ashok Kumar Verma accepted that DCF is based on projections and if projections have failed valuation of shares will lose their its sanctity. Further, if assessee was aware that in upcoming years, it will perform as per projections made in DCF report, why did it not pay advance tax as per projections. To sum up since valuation report as per DCF prepared by Mr.Ashok Kumar Verma has lost its sanctity & company has not performed accordingly. Therefore assessee through its authorized representative is hereby show caused as to why valuation report submitted by assessee should not be rejected & value per share should be taken as per method provided in rule as per I.T. Rules, 1962. After taking value of shares as per Rule 11UA, necessary addition to be made in assessee’s income as per S.56 (2)(viib) of the I.T. Act.”
10. In response to the said show cause, the assessee filed its reply on 03.12.2018 highlighting the following points:
a) As per the requirement under the Act, the company had obtained a report from the accountant who has determined FMV of the share under DCF method and that DCF method was the most appropriate method for valuation of share of a going concern.
b) For larger businesses entities, DCF value is commonly a sum-of-the-parts analysis, where different business units are modeled individually and added together.
c) Even though DCF is based essentially on projections, it is not correct to expect the same figure in actual performance. The projections are always estimates and the same may or may not match with the actual performance figures as the business environment is very dynamic and keeps on changing every moment.
d) The statement of the CA that the DCF method loses its sanctity if the actual figures did not match with projections cannot be a ground for rejection of valuation done under DCF method.
e) The assessee was a holding company and its valuation is dependent on the business of its subsidiaries. Even if the subsidiaries outperform the projections, there would be no income tax liability in the hands of the holding company and that is why the assessee need not have paid higher advance tax on the basis of the projections made in the DCF method.
f) The Book Value method which is based on historical cost method is not appropriate method for valuing the shares of a going concern like the assessee. In support of the same, copy of technical guide issued by ICAI was submitted to the AO.
g) The investors are well known business owners having vast business experience and obtained the best price for the shares.
h) The assessee submitted that certain general statement of the valuer could not be a basis for making additions.
11. It is a fact on record that the assessee made further submissions on 07.12.2018 vide letter dated 06.12.2018. The AO refused to accept the said letter on 07.12.2018. The assessee attempted to submit the letter through Speed Post also met with “unclaimed” remark by the Postal Authorities and in that background the Assessee uploaded the reply on the portal on 10.12.2018. [Relevant facts are summarized at para 12 of Order of CIT(A)].
12. The AO passed the Assessment Order rejecting the valuation of shares under DCF method and determined the value of shares at Rs.10/- per share by adopting “Net Asset Value/ Book Value method” and made an addition of Rs.24,80,39,169/-being difference between the “Consideration received” and the “Book Value of the shares”.
13. Aggrieved by the Assessment Order, the assessee filed first appeal under section 246A of the Act before CIT(A)-4, New Delhi on 24.01.2020.
14. Before the ld. CIT(A), the assessee filed the following documents to support their case:
