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.
FULL TEXT OF THE ITAT JUDGEMENT
The aforesaid appeal has been filed by the assessee against order, dated 24.09.2018, passed by Ld. CIT (Appeals)-2 for the quantum of assessment u/s 143(3) for the assessment year 2015-16. Following grounds have been raised to challenge the impugned order:
1. That the order dated 24.09.2018 passed by Ld. Commissioner of income-tax Appeals (‘CIT (A)’) u/s 250 of the Act is bad in law and void ab-initio.
Addition in respect of share premium received
2. That Ld. CIT(A) has erred in law and on facts and circumstances of the case in upholding the addition of Rs. 90,95,46,200/- made by the Ld. AO to the assessee’s returned income u/s 56(2)(viib) read with rule 11UA(2)(b) in respect of share premium received on issue of equity shares during the year on wholly erroneous, illegal and untenable grounds:
a. That Ld. CIT(A) has erred in law and on facts and circumstances of the case in upholding the aforesaid addition made by Ld. AO by treating the amount of share premium ought to be received by the assessee as NIL without affording any cogent reasons.
b. That Ld. CIT(A) has erred in law and on facts and circumstances of the case in holding that value of entire share premium received of represents the income of the assessee.
Rejection of valuation report
3. That Ld. CIT(A) has erred in law and on facts and circumstances of the case by upholding the aforesaid addition made by the Ld. AO by disregarding the valuation report submitted by assessee on completely whimsical and superficial grounds:
a. That Ld. AO and subsequently Ld. CIT(A) have erred in law and on facts and circumstances of the case in taking a hindsight by comparing the projections made at the time of issuance of shares with the subsequent events and actual financial results despite the settled legal proposition that valuation cannot be judged in light of subsequent events or hindsight.
b. That Ld. AO and subsequently Ld. CIT (A) have erred in not appreciating the role and responsibilities of valuer in the right perspective.
c. That Ld. CIT (A) has erred in law and on facts and circumstances of the case in making several factually incorrect statements/ baseless assertions without affording any supporting evidence.
d. That, without prejudice, Ld. AO and consequently Ld. CIT (A) have erred in law and on facts and circumstances of the case in not computing alternate fair market value relying on any of the prescribed methods [under Sec 56(2)(viib) read with Rule 11 UA(2) of Income Tax Rules] which amounts to dereliction of their statutory duty under the Income Tax Act.
Rejection of valuation methodology
4. That Ld. AO and subsequently Ld. CIT (A) have erred in law and on facts and circumstances of the case in not appreciating the fact that the valuation of the shares of the assessee is based on the prescribed method (DCF Method) under Rule 11UA (2)(b) by a prescribed expert, i.e., Chartered Accountant, and the same can neither be varied nor disregarded by the Ld.AO for determination of fair market value for the purposes of section 56(2)(viib).
Questioning the commercial wisdom
5. That Ld. CIT(A) has grossly erred in law and on facts and circumstances of the case by upholding the action of Ld. AO of making the aforesaid addition by challenging the assessee’s commercial wisdom and questioning the investment made by the assessee in compulsorily convertible debentures.
Penalty & Interest
6. The Ld. AO has grossly erred in initiating penalty proceedings under section 271(1)(c) of the Act mechanically and without recording any satisfaction for its initiation.
7. That the Ld. A.O has erred in law in charging interest u/s 234B of the Act on wholly illegal and untenable grounds.
2. Ground no. 1 being general in nature does not require any specific adjudication. Main issue has been raised vide ground nos. 2 to 5, pertaining to addition of share premium received by invoking section 56(2)(viib) of the Act.
3. Briefly stated the facts of the case are that The assessee company was incorporated on 19th September 2013 with the objective of carrying on all kinds of business of production and distribution of feature film, television film, video films, magazine tapes and video cassettes and documentary films etc., production and distribution of contents for TV and Internet and other activities thereto. During the year the assessee was in the initial phase of setting-up of the above business, therefore, there was no business of film production. For assessment year 2015-16, the assessee filed return of income on 28.09.2015 declaring NIL income. The case was selected for scrutiny and order of assessment was passed u/s 143(3) of the Income-tax Act, 1961 (‘the Act’) vide order dated 31.12.2017 determining the income of the assessee at Rs.90,95,46,200/-. The only addition / disallowance made by the assessing officer is the addition of entire share premium amounting to Rs. 90,95,46,201/- received during the year by the assesse u/s 56(2)(viib) of the Act r.w.r. 11UA of the Income-tax Rules, 1962 (‘the Rules’).
4. The assessee has received share premium of Rs. 90,95,46,201/- from various subscribers/equity partners as stated before the authorities below:-
