Income Tax Appellate Tribunal - Delhi
Broom Publications Pvt. Ltd., ... vs Ito Ward 1(2), Faridabad on 27 June, 2023
THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'A', NEW DELHI
Before Sh. Saktijit Dey, Judicial Member
Dr. B. R. R. Kumar, Accountant Member
ITA No. 6176/Del/2019: Asstt. Year: 2015-16
Balgopal Cold Storages Pvt. Ltd., Vs. Income Tax Officer,
1002, Shiv Colony, Near Talab Old, Ward-1(2),
Faridabad, Haryana 121002 Faridabad
(APPELLANT) (RESPONDENT)
PAN No. AAFCB2496K
ITA No. 6177/Del/2019 : Asstt. Year: 2015-16
Broom Publications Pvt. Ltd., Vs. Income Tax Officer,
1002, Shiv Colony Near Talab, Ward-2(1),
Faridabad, Haryana-121002 Faridabad
(APPELLANT) (RESPONDENT)
PAN No. AAFCB2495L
Assessee by : Sh. Rajeev Saxena, Adv.
Revenue by : Sh. Kanv Bali, Sr. DR
Date of Hearing: 25.04.2023 Date of Pronouncement: 27.06.2023
ORDER
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeals have been filed by the asse ssees against the or ders of ld. CIT(A), Faridabad dated 29.03.2019.
2. Delay co ndoned.
3. The assessee has raised six grounds of appeal. The ld. AR has not presse d ground nos. 1, 4, 5 & 6.
2 ITA Nos. 6176 & 6177/Del/2019Balgopal Publication & Broom Publications Pvt. Ltd.
4. Ground No. 2 relates to addition of Rs.9,00,000/- u/s 68 of the I ncome Tax Act, 1961.
5. Ground No. 3 relates to enhancement of income by Rs.70 ,50,000/- u/s 56(2)(viib).
6. Heard the arguments of both the parties and peruse d the material available on record.
7. The AO made addition of the entire share application mone y of Rs.94,00,000/- u/s 68 of the Income Tax Act, 1961 base d on the bank statements and lack of creditworthiness of the applicant parties. The AO treated entire receipt as bogus transaction and unexplained credit. The ld. CIT(A) held that the assessee has received Rs.85,00,000/- in the ear lier years and held that no addition u/s 68 called for in the current ye ar. At the same time, the ld. CIT (A) held that an amount of Rs.70 ,50,000/- be trea ted u/s 56(2)(viib).
Arguments o f the ld. AR against the issue of Section 56(2)(viib):
8. The assessee justified the value of the shares based on the report of the valuer. It was argued that the repo rt for the DCF has considered the cash flow from the e quity for Rs. 90,00,000/-. On this basis, value of each sha res has been deter mined @ Rs.40/- per share. The assessee has submitted the valuation report and argued that no mistake in the valuation report has been found by the revenue. It was argued that the revenue canno t change the method of valuation and also c annot 3 ITA Nos. 6176 & 6177/Del/2019 Balgopal Publication & Broom Publications Pvt. Ltd.
rejec t the valuation done without bringing on record any cogent reasoning.
Arguments of the ld. DR in support of the issue of Section 56(2)(viib):
9. It was argued that no corroborative details have been furnished to substantiate the cash flow of Rs.90 ,00,000/- from the equity. The assessee has no business worth and no tangible business activity was carried out by the assessee since incor poration. Further , there were no fixed asset or any intangible asset in position of the company to justify such kind of cash flow in the future years. In the absence o f any business worth of the assessee , the reliance of the appellant on the valuation report for the premium charged of Rs.30/- on each share under Rule 11UA(2) does not carry any force. Such valuation report has been found witho ut any basis and thus needs to be rejected. Reliance was placed upon the decis ion of ITAT Delhi in the case of Agro Portfolio Pvt. Ltd. vs. ITO 2018, 171/ITD/74 (Del).
10. We have gone through the facts on record and the judgment quoted by the revenue. The order in the case of Agro Portfolio Pvt. Ltd. vs. ITO (supra) is not applicable to the facts of this case. In the similar issue stands adjudicated by the order of the Tribunal in the case of ACIT Vs . M/s G amma Pizzakraft (Overseas) Pvt. Ltd. in ITA No. 1309/Del/2020 vide order dated 12.05.2023. The re levant part is as under:
"20. Whether the AO can change the method of valuation of unquoted shares under Rule 11UA of I.T. Rules 196 2?4 ITA Nos. 6176 & 6177/Del/2019
Balgopal Publication & Broom Publications Pvt. Ltd.
21. The provisions of Section 56 and Rule 11UA as under:
" In c om e f r o m oth e r s ou rc e s .
5 6. ( 1) Inc o m e of e v er y k in d w h i c h i s n ot to b e e xc l ud e d f r om t h e t ota l in c om e u n d e r t hi s Ac t s h a ll b e c h a rg e a b l e t o in c o m e-t a x u nd e r th e h ea d " In c om e f r om ot h e r s ou r c es " , if it i s n ot ch a rg e a bl e t o in c om e- t a x u nd e r an y of t h e h ea d s s p e c i fi ed in se ct i on 1 4 , i t em s A t o E .
( 2) I n p a r ti cul a r , a n d w i th ou t p r eju di c e to t h e ge n er a li t y o f t h e p r ovi si on s o f sub - se cti on ( 1) , t he f ol l o wi ng i n c o m e s, sh a l l b e c ha rg e a bl e t o i nc o m e- ta x u nd e r th e h ead " In c om e f r o m oth e r s ou rc e s " , na m el y : --
( i) d ivi d en d s ;
( ia ) i n com e r e f e r r ed t o in su b - cl a u s e ( v i i i) o f c l a u s e ( 2 4 ) of s ect i on 2 ;
ib )... ... ... ...
(v i ib ) w he r e a c o m p a ny , not b ei n g a c om p a ny in w h ic h t he p ub l ic a re s u b st a nt i all y i nt e r e st ed , re c e i v es , i n a ny p re v io us y e a r, f r o m a ny p e r so n be i ng a re s id e nt , a n y c on s id e r at io n f o r is su e o f s h a re s t h at ex c ee d s the f ac e v a l ue of su ch sh a r e s, t he a g g r eg a t e c o ns i d e r at i on r e c ei v ed fo r s uc h s h a r e s a s ex c e e ds t he f a i r m a rk et v a l u e of th e sh a r e s :
Pr ov id e d t h a t t h i s c lau s e s h a ll no t a pp l y w he r e th e c o ns id er a ti o n fo r i ss u e o f s h a re s i s re c e iv e d --
(i ) by a v en t ur e c a p it a l u nd e rt ak i n g f ro m a v en t u r e c a p i t al c om p a ny o r a v e nt ur e c a p it a l f u nd ; o r ( ii) by a c om p a n y f r om a cl a s s o r c l a ss e s o f pe r s on s a s ma y b e n ot i fi ed by t h e C ent ra l G o v e rnm en t i n th i s b eh a l f.
E xp l a na t i on . --F o r th e pu rp o s e s o f t h i s cl a u s e , --
(a) th e f ai r m a rk et v a l u e of th e s h a r e s sh a l l b e th e v a lu e --
( i) a s m ay b e d et e r m i n ed i n a c c o rda n c e wi th s u ch m e th od a s m a y b e pr e sc rib ed; o r 5 ITA Nos. 6176 & 6177/Del/2019 Balgopal Publication & Broom Publications Pvt. Ltd.
( ii) a s ma y b e s ub s ta n ti a t ed b y t h e c o mp a ny t o t h e sa t i s fa ct i on o f th e As s es si n g Of fi c e r, b a s ed on t h e v a l u e , on t h e d a t e o f i ss u e o f sh a r e s, o f i t s as s et s , in clu d in g i n ta n gi b l e a s s et s b ein g g o od w i ll , k n o w -h ow , p a t en t s , c op yr i gh t s, t r a d em a r k s , li c en c es , fr a nc h i s e s or any o t he r b u si n e ss or c om m er ci a l righ t s o f s i m ila r n a t u r e, w h i ch ev e r i s hi gh e r;
( b) " v en tu r e c a pi t a l c om pa n y " , " v ent u r e ca p i t a l fu nd " and "v en tu r e ca p i tal u nd e rta k i ng " sh a ll h a v e th e me a n in g s r e s p e ct i v el y a s si gn e d t o th e m in cl au s e (a ) , c la u s e ( b ) a n d cl a u se ( c) of E xp l a n a ti on t o cl a us e ( 23 F B) o f s e cti on 1 0 ;"
22. From the above, it is evident that the FMV o f the unquoted share be the value as determined by the prescribed method or as substantia ted by the assessee whichever is higher . The appellant has chosen to the first optio n i.e. value as per the prescribed me thod. The method of determining the FMV is given in Rule 11UA(2) of IT Rules 1962 which are reproduced below:
" N ot w it h st and in g a n y th i ng c on t a in ed i n su b- cl a u se ( b) o f cl a u s e ( c) o f s ub - ru l e ( 1) , th e f a i r m a r k et v a lu e of un qu ot ed eq ui t y s h a r e s fo r th e pu rp o s e s o f su b -c lau s e (i ) o f c la u s e ( a ) o f Ex pl a na t i on t o c la u s e (vii b ) o f su b- s ect i on ( 2 ) of s e cti o n 5 6 s h a l l b e t h e v a l ue , on th e v a lu a t i o n d a t e , of su ch u nq uo t ed equ i ty s h a r e s a s d et e r m in ed in t h e f ol l ow in g ma n n e r u nd e r cla u s e ( a ) o r c l au s e (b ) , a t th e opt i on o f t h e a s s e ss e e , na m el y: --
(a) t he fai r ma rk e t v a l u e o f un q u ot ed equ it y s ha r e s = ( A- L) x ( PV) / ( P E) w h er e , A = b oo k v a lu e o f t h e a s s et s i n th e b a la n c e- sh e et a s r edu c ed b y an y am ou n t o f t ax pa i d a s d e du ct i on o r c ol l e c t io n a t s ou r c e o r a s a d v an c e ta x p a y m en t as r ed u c ed b y th e a m ou n t o f ta x c la i m ed a s r e fun d u nd e r th e In co m e-t a x A ct a n d a n y a m ou nt sh o w n in t h e ba l a n ce - sh e et a s a s s et in clu di ng th e u n am o rt i s ed a mou nt o f d e f er r e d e xp en d itu r e w hi ch d o e s n ot r ep r e s en t t h e va l u e o f a n y a s s et;
L = b o ok v alu e of l i a b il it i es sh own i n t he b a la n c e- sh e et , b u t not i n clu d in g th e f o ll ow i n g a m ou n t s , n a m el y : --
( i) th e pa i d- up c a pi ta l in r e sp e ct o f equ it y sh a r e s;
6 ITA Nos. 6176 & 6177/Del/2019Balgopal Publication & Broom Publications Pvt. Ltd.
( ii) th e a m ou nt s et a pa rt f o r pa y m en t of di vi d en d s on pr e f e r en c e s ha r e s an d equ it y sha r e s w he r e s u c h d i v id en d s h a v e n ot b e en d ec l a r e d b ef o r e th e da t e o f t ra n s f er a t a g en e ra l b od y m e eti ng of t h e c om p a n y;
( iii ) r es e r v es an d s u rpl us , by w h a t e v e r n a me c all ed , ev en if t h e r e s ul ti n g fig u r e i s n eg a t i v e, o t h e r t ha n th o s e s e t a p a rt t ow a rd s d ep r e cia t i on ;
( iv ) a n y a m ou nt r ep r e s en ti n g p ro v i si on f o r t a xa t i on, ot h e r th a n a m ou nt o f t a x p aid a s d edu c ti on o r c oll e ct io n a t s ou rc e o r a s a d va n c e ta x pa ym ent as r ed u ced by th e a m ou n t o f ta x c la i me d a s r efun d u n d e r th e I nc o m e-t a x Ac t , t o t h e ext en t o f t h e e x c e ss o v e r t h e ta x pa ya bl e w i t h r e f er e n c e t o th e bo ok p r o fit s in a c c o rd a nc e w it h t h e l a w a p pl i ca b l e th e r et o;
( v) a n y a m ou nt r ep r e s en ti ng p r ov is i on s ma d e f o r m e e t in g l ia b il it i e s, ot h e r t han a s c e rt a i n ed li a bil it i e s;
( vi ) a n y a m ou n t r ep r e s en ti ng c on tin g ent l i a b ili t i es ot h e r th a n a r r e a r s of di v id e nd s p a y abl e in r es p ect o f cu m ul a t i v e p r e f e r en c e s ha r e s;
PE ~ t ot a l a m ou n t o f pa i d u p eq ui t y sh a r e c a p ita l a s sh ow n in th e ba l a n c e- sh e et ;
PV = t he p a id u p v a l u e o f su c h equ i t y sh a r e s ; or ( b) t he f ai r ma rk et v a l u e o f th e u n q u o t ed e qu it y s h a r e s d et e r m in e d b y a me r ch a n t b a n k e r o r a n a c c o un t a n t a s pe r t h e D i s c oun t ed Fr e e C a sh F l o w me t h od. ' '
23. From the above, it is evide nt that Rule 11UA(2) prescribes two methods - Book Value method and DCF method. However, the s aid rule also provides that the method to be adopted is left to the choice of the assessee.
24. Thus, the option to choose the method to be adopted to deter mine the FMV of unquoted shares is not w ith the AO but with the assessee. In the instant case the assessee opte d for the DCF method.
7 ITA Nos. 6176 & 6177/Del/2019Balgopal Publication & Broom Publications Pvt. Ltd.
25. Whether the AO erred in rejecting the DCF method beca use the Valuer failed to furnish the documents called for b y him?
26. The AO has rejected the DCF method by observing that the Valuer did no t have proper understanding of the methodology and intricacie s of the DCF method and that the Valuation report is jus t of 4 pages. The AO required the Valuer to appear before him along with his working papers which he failed to carry on the date when his statement was recorde d. The AO asked him to produce the same on 26.11.2018 which he failed to do. On the other hand the Valuer has submitted in the Affida vit that he had visite d the AO's office on the appointed date but could not meet the AO as he was busy with some other matter a nd that the he (valuer) could not wait longer as he had other appointments. Further, the appellant has provided answers to the queries raised by the AO to the Valuer and also supplied the documents /projection estimates given to the Valuer. The AO ha s not accepted this. It is no ted here that there is merit in the AO's observation that the valuation report is very brief. However, in the absence of any prescribed format or size, one cannot reject the valuation merely on that ground. Further, the AO ha s not pointed out any specific deficiency in the Valuatio n Report itself Hence, it would be incorrect to reject the DCF method solely on that ground.
Issue no. 4:
27. Whether DCF is the mo st appropriate method in the instant case as espoused by the appellant?
8 ITA Nos. 6176 & 6177/Del/2019Balgopal Publication & Broom Publications Pvt. Ltd.
28. The appellant besides explaining DCF in detail has also submitted that DCF method is a scientific method of valuation of share duly re cognized by professional and acc ounting bodies worldwide and also the ICAI. DCF me thod is often use d for valuation of unquoted equity shares of a going c oncern as it is base d on present value of pro jected future cash flow of the business, which are de pendent o n various variable factors.
29. The provisions of Rule 11UA shows that the legislature has not made any distinction as going co ncern or otherw ise in valuation of unquoted equity shares. The Rules give option to choo se between the two methods and the only criteria to choose is the option to be exercised by the asse ssee. In the absence of any such prescription under the law, one cannot read into the statute anything witho ut showing that the Legislature intended it. Hence, the AO has erred in not accepting DC F as the most appropriate and scientific method for valuing shares of the appellant.
Issue no. 5:
30. Whether AO can reject the DCF method when this method has b een duly prescr ibed und er the Law itself?
31. The DCF method is one of the duly prescribe d methods for valuing unquo ted shares of a company. Rule 11UA gives option to the assessee to choose between the two methods. The said rule nowhere fixes any hierarchy between the two me thods. Once the option has been exercised by the assess ee, AO has no right to reject the method. However, the rejectio n of method is not appropriate not because it is a prescribe d metho d but because the AO has no role in selection or re jection of the 9 ITA Nos. 6176 & 6177/Del/2019 Balgopal Publication & Broom Publications Pvt. Ltd.
method under Rule 11UA. Hence, the AO has err ed in rejecting the DCF method especially when it is one of the duly pres cribed methods under the IT Rules."
11. In the instant case also, the ld. CIT(A) has not brought out any defect in the methodology and summarily rejected the valuation made under the prescribed rules. Hence, we cannot support the decision of the ld. CIT(A) on this iss ue. The a ppeal of the assessee on this ground is allowed.
12. With regard to Rs.9,00,000/- received on 04.09.2014 by the assessee during the year which has been co nfirmed by the ld. C IT(A) u/s 68, we find that the assessee has discharged his onus before the revenue author ities. The AO and the ld. CIT(A) rejec ted the explanation of the assessee solely based o n the limited issue of low profit of R s.1,47,875/- as on 31.03 .2015 and Rs.3,05,745/- as on 31.03 .2014. There were no enquiries made nor any evidence to reject the do cuments/evidences filed by the assessee. Hence, we hold that no addition u/s 68 is calle d for in this case.
ITA No. 6176/Del/2019: A.Y. 2015-16Balgopal Cold Storage Pvt. Lt d.
13. The ld. CIT(A) enhanced and considered the income of the assessee u/s 56(ii)(viib) at Rs.69,60,000/- intra-po lating Section 68. Since, the issue is similar to the one disc ussed above, the same ratio applies. In the result, the appeal of the assessee on this ground is allowed.
10 ITA Nos. 6176 & 6177/Del/2019Balgopal Publication & Broom Publications Pvt. Ltd.
14. In the result, both the appeals of the assessees are allowed.
Order Pronounced in the Open Court on 27/06/202 3.
Sd/- Sd/-
(Saktijit Dey) (Dr. B. R. R. Kumar)
Judicial Member Accountant Member
Dated: 27/06/2023
*Subodh Kumar, Sr. PS*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR