Income Tax Appellate Tribunal - Delhi
Acit Circle-10(1), New Delhi vs Gamma Pizzakraft (Overseas) Pvt Ltd, ... on 12 May, 2023
THE INCOME TAX APPELLATE TRIBUNAL
DELHIBENCH 'C', NEW DELHI
Before Sh. C. M. Garg, Judicial Member
Dr. B. R. R. Kumar, Accountant Member
ITA No. 1309/Del/2020 : Asstt. Year: 2016-17
ACIT, Vs. M/s Gamma Pizzakraft (Overseas)
Circle-10(1), Pvt. Ltd., 802, Ansal Bhawan, 16,
New Delhi-110001 KG Marg, New Delhi-110001
(APPELLANT) (RESPONDENT)
PAN No. AACCG8016D
Assessee by : Sh. T. M. Shiva Kumar, Adv. &
Ms. S. V. Rateria, Adv.
Revenue by : Mohd. Gayasuddin Ansari, CIT DR
Date of Hearing: 16.02.2023 Date of Pronouncement: 12.05.2023
ORDER
Per Dr. B. R. R. Kumar, Accountant Member:
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."2 ITA No. 1309/Del/2020
Gamma Pizzakraft (Overseas) Pvt. Ltd.
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.
3 ITA No. 1309/Del/2020Gamma Pizzakraft (Overseas) Pvt. Ltd.
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.
4 ITA No. 1309/Del/2020Gamma Pizzakraft (Overseas) Pvt. Ltd.
9. The A.O. show-caused the assessee on 22.11.2018 which reads as under:
"CA Neeraj Wadhawan, VP F inance in the group companies and Authorize d Re presentative of assessee attende d to day. Assessee has issued shares to M/s Sapphire Foo ds India Pvt. Ltd. @ 65.65 per share of Rs.10/- face value and receive d Rs.55.65 as premium . Assessee has follo wed and re lie d on DCF method and valuation was done by CA Sh. A shok Kumar Verm a. I n this regard Value r CA S h. Ashok Kumar Verma was summoned and his stateme nt was recorded with regard to valuation re port as prepared by him. During reco ding of statement, Mr. Ashok Kumar Verma accepted that DCF is based on projections and if projections have faile d valuation of shares will lose their its sanctity. Further, if assessee was aware that in upcoming years, it will pe rfo rm 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 pre pared by Mr.Ashok Kumar Verma has lost its sanctity & company has not pe rformed accordingly. There fore assessee through its authorize d represe ntative is hereby sho w caused as to why valuation re port submitted by assessee should not be rejected & value per share should be taken as per method provide d in rule as per I.T. Rules, 1962. Afte r taking value of shares as per Rule 11UA, necessary additio n to be made in assessee's income as pe r 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 5 ITA No. 1309/Del/2020 Gamma Pizzakraft (Overseas) Pvt. Ltd.
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.
6 ITA No. 1309/Del/2020Gamma Pizzakraft (Overseas) Pvt. Ltd.
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:
• Evidence of speed post of reply dated 06.12.2018 on 7.12.2018 on 19.56 hrs which is not acknowledged by AO • Confirmation as available on e-filing portal of appellant w.r.t. to fact that reply dated 06.12.2018 was uploaded on 10.12.2018 as e-proceedings were not closed though Order is of date as 09.12.2018.7 ITA No. 1309/Del/2020
Gamma Pizzakraft (Overseas) Pvt. Ltd.
• Sworn Affidavits of Ashok Kumar Verma, Chartered Accountant Valuer of FMV of Equity Shares issued during the financial year ending 31.03.2016 relevant for assessment year 2016-17.
• Document and Papers relied by the Valuer for preparing the Valuation report.
• Audited financial statements of the company as provided by the management for the year ended March 31, 2014. • Provisional financial statements of the company as provided by the management for the year ended March 31, 2015.
• Financial projections of the company for years ended on March 31, 2016 (part period); March 31,2017; March 31,2018; March 31,2019 and March 31,2020. • Management certificate of fair value of share of its subsidiaries In Sri Lanka viz. French Restaurants (Private) Limited and Gamma Pizzakraft Lanka (Private) Limited from respective management of its subsidiaries. • Information on the business and profile of the Company. • Information and explanations provided to the valuer for the valuation of shares - Shareholder's agreement dated 28.04.2015 entered by and among following parties. • Existing shareholders listed in Schedule I of the said agreement AND Gamma Pizzakraft (overseas) Private Limited (appellant); AND Sapphire Foods India Private Limited (Investor).
• Order under section 31(1) of the Competition Act, 2002 by the Competition Commission of India.
8 ITA No. 1309/Del/2020Gamma Pizzakraft (Overseas) Pvt. Ltd.
15. At this juncture, it is relevant to reproduce the order of the ld. CIT(A) with regard to the sequence of events pertaining to explanation of the assessee to the show cause issued by the AO and the subsequent events that took place.
"12. From the assessment order, it is clear that the AO had duly show-caused the Appellant on 22.11.2018 to submit its re buttals against his propo sal to reject the valuatio n o f shares under DCF method base d on the statement of the Value r Ashok Verma, CA . The appe llant seems to have furnished certain reply on 03.12.2018 which did not satisfy the AO. There after according to the appellant, it tried to submit further lette r and de tails on 07.12.2018 vide letter dated 06.12.2018 which were not ente rtained by the AO. On AO's refusal to entertain their submissions, the appellant has sent the same le tter and details by Speed Post o n 07.12.2018 at 19:56 hrs. (proof has been submitted as part o f additional evidence) . The A O, howe ver has 'refuse d' to accept the Speed Post which is e vident from the postal remark 'Refused' on the envelo pe submitted as part of the additio nal evide nce. Le ft with no other alternative , the appe llant had uploade d the letter on the e-filing portal on 10.12.2018. 8th and 9th Dec 2018 happen to be non-working days be ing weeke nd. The appe llant has submitted that the successful uplo ading o f the response on the e- filing portal indicated that the e-pro ceedings had no t been closed by then, though Assessment Order is date d 09.12.2018. According to the Appe llant, the order was passed on 11.12.2018 tho ugh it is dated 09.12.2018. The Appellant has subm itte d the affidavits of Mr. Neeraj Wadhawan, the A R in e xplaining the details of how all this took place . In the Remand report the AO has stated that the assessment order has been passed o n 09.12.2018 itse lf as is e vide nt from the system date on the order and that system does not allow backdating of the o rde r.9 ITA No. 1309/Del/2020
Gamma Pizzakraft (Overseas) Pvt. Ltd.
13. The Appellant has also submitted the documents, which we re require d to be file d by the Valuer to the A O, as additional e vidence . They have also filed an affidavit from the Value r who has claimed that he had visite d the office o f the AO on the appo inte d date i.e. 26.11.2018 but had to re turn without filing the details as the A O was busy with some other matte r and he could no t wait lo nger as he had some other appointment. In the Re mand Repo rt, the AO has stated that this fact is not emerging from the Assessment Orde r and that the AO has clearly state d that the V alue r did no t submit the details till the date of order.
14 Finally the AO, in her Remand Re port, requested this office no t to entertain the Additional Evidences as the co nditio ns specified under Rule 46A are not satisfie d.
Decision on admission o f additio nal evide nce
15. Examination of facts sho ws that the appellant had made an attempt to subm it ce rtain reply and details vide letter date d 06.12.2018. This fact is established by the Spee d Post details, affidavit of the AR and also the uplo ading of the letter on 10.12.2018. All these events co uld not have bee n an afte rthought as the same are supported by hard evide nces. As re gards, date o f order, I agree with the AO that the system does no t allow backdating of the order and thus the appe llant' s submission that the orde r was passed o n 7.12.2018 cannot be accepted. Ho wever, it cannot be denie d that the appellant did try to submit the re ply by at least before the date on which the order seems to have been passed. It is noted here that the Speed Po st is dated 07.12.2018 and the order is date d 09.12.2018. The re fusal by the AO of the Speed Post on 10.12.2018 (supporte d by postal remark 'Re fused') indirectly suppo rts the claim of the appe llant that they tried to file the de tails before the AO on 07.12.2018 and only after the ir failure the y had sent the lette r by Speed Post. Further, the Valuer is a third party 10 ITA No. 1309/Del/2020 Gamma Pizzakraft (Overseas) Pvt. Ltd.
who may not be m uch bo the red about the Appellant's fate due to his wrong conduct. If he had not furnished the documents required by the AO, it was for the AO to have enfo rced his attendance and ensure d compliance.
16. From the above facts, it is cle ar that the AO had refused to admit the e vidences which he should have admitted, as the same were re levant to the matter under consideration by him. The assessment was getting barred by limitation only o n 31.12.2018 and he had sufficient time to entertain the appellant's submissions. This also amounts to not giving sufficient oppo rtunity to the appellant before making such huge addition to the to tal income."
16. Having considered the submissions of the assessee, the ld. CIT(A) diligently raised the following issues:
i. Whether AO was correct in rejecting the DCF method and the fair market value (FMV) determined under DCF method by comparing the actual performance figures with the projections used under the DCF method. ii. Whether the AO can change the method of valuation of unquoted shares under Rule 11UA of I.T. Rules 1962. iii. Whether the AO erred in rejecting the DCF method because the Valuer failed to furnish the documents called for by him.
iv. Whether DCF is the most appropriate method in the instant case as espoused by the appellant.
v. Whether AO can reject the DCF method when this method has been duly prescribed under the law itself. vi. Whether there is any requirement to show the existence of intention to evade tax in order to invoke provisions of section 56(2)(viib) of the Act.11 ITA No. 1309/Del/2020
Gamma Pizzakraft (Overseas) Pvt. Ltd.
vii. Whether the AO erred in observing that the appellant should have deposited advance tax as per the projection figures.
17. The decision of Ld. CIT(A) on each of these issues is at para 20-26 of the order which has been duly perused.
Issue no. 1:
18. Whether AO is correct in rejecting the DCF method and the FMV determined under DCF method by comparing the actual performance figures with the projections used under the DCF method?
The appellant had issued shares to M/s Sapphire Foods India Pvt. Ltd. at Rs.65.56per share of face value Rs.10/- per share. The valuation has been carried out by Shri Ashok Verma, CA who determined the value based on DCF method. He has relied upon the projections as estimated by the Management. The question here is whether he is required to independently verify the correctness of the projections given by the Management. It is a fact that a chartered accountant / valuer is an expert in valuing the shares as per certain set rules and guidelines issued by Accounting bodies such as the Institute of Chartered Accountant of India (ICAI). He is not expected to have an expertise on the potential of any business operation. Hence, his reliance on the estimated projection of financials given by the Management cannot be faulted in 12 ITA No. 1309/Del/2020 Gamma Pizzakraft (Overseas) Pvt. Ltd.
entirety. However, it is noted here that if the projections are very unrealistic and any unusual fact is apparent on the very face of it, then a valuer is required to verify if there are any factors which he should consider while determining the value o f the share. In the instant case, the AO has compared the actual performance of the company post valuation date with the projections. The AO thus has the benefit of hindsight. But the valuers do not have it. The AO has not pointed out any relevant facts which should have been considered by the Valuer at the time of valuation which he ha d missed out. Basing his decision on the basis of hindsight is not only unfair but also goes against the very principles of valuation of shares today o n the basis of projecting their future performance. The performance should always match with the projections made at the time of valuation, unless it is shown that the Valuer missed considering a vital fact which was available at that point of time and that the same affected the final value arrived at.
Even otherwise, it is noted that the AO has overlooked that the appellant is a holding company and its share value would depend on the performance of business of its subsidiaries. The appellant has produced the performance figures as per its consolidated audited financial statements. A perusal of the same shows that the performance, in fact, was much better than the projections adopted 13 ITA No. 1309/Del/2020 Gamma Pizzakraft (Overseas) Pvt. Ltd.
in the DCF method for F.Y. 2016-17 and 2017-18. The comparison between profit figures considered in the Valuation Report and Profit as per Consolidated Audited Balance sheet as laid down in appellant's letter dated 06.12.2018 are noted below:
PARTICULARS FY- 2016-17 FY- 2017-
EBITDA
As per Projections 27,851/- 42,436/-
As Per Actual 1,40,179/- 1,35,845/-
PAT
As per Projections 15,766/- 24,452/-
As Per Actual 34,349/- 32,246/-
19. Hence, the ld. CIT(A) concluded that in the instant case there is no merit in rejecting the DCF method on the ground of mismatch between the projections adopted in DCF method and those achieved during the first two years post-valuation date.
Issue no. 2:
20. Whether the AO can change the method of valuation of unquoted shares under Rule 11UA of I.T. Rules 1962?
21. The provisions of Section 56 and Rule 11UA as under:
"In c om e f r o m ot h e r s ou rc e s .
5 6 . ( 1) In c o m e of e v er y k in d wh i ch i s n ot t o b e e xclu d e d f r om t h e t ot a l in c om e u n d e r t h i s A ct sh all b e ch a rg e ab l e t o in c o m e- t a x u n d e r t h e h ead "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 ab l e t o in c om e- t ax u n d e r an y of t h e h ead s sp e ci fi ed in s e ct i on 1 4 , i t em s A t o E .
( 2) I n p ar t i cu la r , a n d wi t h ou t p r ej u d i c e t o t h e g e n er alit y o f t h e p r ovi si on s o f su b - s e ct i on ( 1) , t h e f oll o win g in co m e s, sh all b e ch a rg e ab l e t o in c o m e- t ax u n d e r t h e h ead "In c om e f r o m ot h e r s ou rc e s ", n a m el y : --14 ITA No. 1309/Del/2020
Gamma Pizzakraft (Overseas) Pvt. Ltd.
( i) d ivi d en d s;
( ia) in c om e r e f e r r ed t o in su b - cl au s e ( vi ii) o f cl au s e ( 2 4) of s ec t 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 i n w h ic h t he p ub l ic a re s u b st a nt i al l y i nt er e st ed , re ce i v es , i n a ny p re v io us y e a r, f ro m a ny pe 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 i s su e o f s h a re s th at ex c ee d s th e f ac e v a l ue of su ch sh a r e s, t he a gg r eg a te co ns i de r at i on r e c ei v ed fo r s uc h s h a re s a s ex ce e ds t he f a i r m a rk et va l u e of th e sh a r e s :
Pr ov id e d th a t t h i s c l au s e s h a ll not a pp l y w he r e th e co ns i d er a ti o n fo r i ss u e o f s h a re s i s re ce i ve d --
(i ) by a v en t ur e c a pi t a l u nd e rt ak i n g f ro m a v en tu r e c a pi t al com p a ny or a v e nt ur e c a p it a l f u nd ; o r ( ii) b y a c om p an y f r om a cla s s o r c la ss e s o f p e r s on s a s m a y b e n ot i fi ed b y t h e C en t ra l G o v e rn m en t i n t h is b eh al f.
E xp l an at i on . --F o r t h e p u rp o s e s o f t h i s cl au s e , --
( a) t h e f ai r m a rk et val u e of t h e s h a r e s sh a ll b e th e v alu e --
( i) as m ay b e d et e r m i n ed in a c c o rd an c e wit h su ch m e t h od a s m ay b e p r e s c rib ed ; o r ( ii) as m a y b e su b st an t iat ed b y t h e co m p an y t o t h e sat i s fa ct ion o f t h e A s s es sin g Of fi c e r, b as ed on t h e v alu e , on t h e d at e o f i s su e o f sh a r e s, o f it s as s et s, in clu d in g i n t an g ib le a s s et s b ein g g o od will , k n o w- h ow , p at en t s , c op yr ig h t s, t r ad em ar k s , li c en c es , f r a n ch i s e s or an y other b u sin e s s or c om m er ci al rig h t s o f si m ila r n a t u r e, wh i ch ev e r i s hig h e r;
(b) "v en t u r e cap i t al c om p an y" , " v en t u r e cap i t al fun d " an d "v en t u r e cap it al u n d e rt a k in g " sh all h a v e t h e m e an in g s r e sp e ct i v el y a s sig n e d t o t h e m in cl au s e ( a) , clau s e ( b ) an d cl au s e ( c) of E xp lan at i on t o cl au s e ( 2 3 F B) o f s e ct i on 1 0 ; "15 ITA No. 1309/Del/2020
Gamma Pizzakraft (Overseas) Pvt. Ltd.
22. From the above, it is evident that the FMV of the unquoted share be the value as determined by the prescribed method or as substantiated by the assessee whichever is higher. The appellant has chosen to the first option i.e. value as per the prescribed method. The method of determining the FMV is given in Rule 11UA(2) of IT Rules 1962 which are reproduced below:
"N ot wit h st an d in g an yt h in g c on t ain ed in su b - cl au s e (b ) o f cl au s e ( c) o f su b - ru l e ( 1) , t h e f ai r m ar k et valu e of u n q u ot ed eq u it y sh ar e s f o r t h e p u rp o s e s o f su b - c lau s e ( i) o f c lau s e ( a) o f Ex p lan at i on t o c lau s e ( viib ) o f su b - s ec t i on ( 2) of s e ct i o n 5 6 sh al l b e t h e v a lu e , on t h e v alu at i o n d at e , of su ch u n q u o t ed eq u it y s h ar e s a s d et e r m in ed in t h e f ol l owin g m an n e r u n d e r clau s e ( a ) o r c lau s e ( b ) , at t h e op t i on o f t h e as s es se e , n a m el y: --
( a) t h e fai r m a rk e t v al u e o f u n q u ot ed eq u it y sh a r e s = ( A - L) x ( PV ) / ( P E) wh er e , A = b oo k v alu e o f t h e a s s et s i n t h e b alan c e- sh e et as r ed u c ed b y an y am ou n t o f t ax p aid a s d e d u ct i on o r c oll e ct io n a t s ou r c e o r a s ad van c e t ax p ay m en t as r ed u c ed b y t h e am ou n t o f t a x clai m ed as r e fu n d u n d e r t h e In c o m e- t a x A ct an d an y a m ou n t sh o wn in t h e b al an c e - sh e et a s a ss et in clu d in g t h e u n am o rt i s ed a m ou n t o f d e f er r e d e xp en d it u r e wh i ch d o e s n ot r ep r e s en t t h e va lu e o f an y a s s et ;
L = b o ok v alu e of l i ab ilit i es sh own i n t h e b a lan c e- sh e et , b u t n ot in clu d in g t h e f o ll owi n g am ou n t s , n am el y: --
( i) t h e p ai d - u p c ap i t al in r e sp e ct o f eq u it y sh a r es;
( ii) t h e a m ou n t s et a p a rt f o r p a ym en t of d i vid en d s on p r e f e r en c e sh a r e s an d eq u it y sh a r e s w h e r e su ch d i vid en d s h av e n ot b e en d ec l ar e d b ef o r e t h e d at e o f t ran s f er a t a g en e ral b od y m e et i n g of t h e com p an y;
( iii) r es e r v es an d su rp l u s, b y wh at e v e r n a m e c all ed , ev en if t h e r e su lt in g fig u r e i s n eg at i v e, o t h e r t h an t h o s e s e t ap a rt t ow a rd s d ep r e cia t i on ;
( iv) an y am ou n t r ep r e s en t i n g p ro vi si on f o r t axat i on , ot h e r t h a n am ou n t o f t ax p aid a s d ed u ct i on o r c oll e ct io n a t s ou rc e o r a s ad va n c e t a x p a ym en t as r ed u c ed b y t h e am ou n t o f t a x c lai m e d a s r efu n d un d e r t h e I n c o m e- t a x 16 ITA No. 1309/Del/2020 Gamma Pizzakraft (Overseas) Pvt. Ltd.
A ct , 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 t a x p a ya bl e wi t h r e f er e n c e t o t h e b o ok p r o fit s in ac c o rd an c e wit h t h e la w ap p li ca b l e t h e r et o;
( v) an y a m ou n t r ep r e s en t in g p r ov isi on s m ad e f o r m ee t in g liab il it i e s, ot h e r t h an a s c e rt a in ed li ab il it i e s;
( vi) an y am ou n t r ep r e s en t i n g c on t in g en t li ab ilit i es ot h e r t h an ar r e ar s of d ivid e n d s p ay ab l e in r es p ect o f cu m u lat i v e p r e f e r en c e sh a r e s;
PE ~ t ot al am ou n t o f p aid u p eq u it y sh a r e ca p it al a s sh own in t h e b a lan c e- sh e et ;
PV = t h e p aid u p v alu e o f su ch eq u i t y sh a r e s; or
(b) t h e f ai r m a rk et v alu e o f t h e u n q u o t ed e q u it y s ha r e s d et e r m in e d b y a m e r ch an t b an k e r o r an a c c ou n t an t as p e r t h e D i s c ou nt ed F r e e C ash F l o w m e t h od . ' '
23. From the above, it is evident that Rule 11UA(2) prescribes two methods - Book Value method and DCF method. However, the said 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 determine the FMV of unquoted shares is not with the AO but with the assessee. In the instant case the assessee opted for the DCF method and the AO could not have switched the method from DCF to Book Value method for determining the FMV of the unquoted shares.
Issue no. 3:
25. Whether the AO erred in rejecting the DCF method because the Valuer failed to furnish the documents called for by him?
17 ITA No. 1309/Del/2020Gamma Pizzakraft (Overseas) Pvt. Ltd.
26. The AO has rejected the DCF method by observing that the Valuer did not have proper understanding of the methodology and intricacies of the DCF method and that the Valuation report is just 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 recorded. 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 Affidavit that he had visited the AO's office on the appointed date but could not meet the AO as he was busy with some other matter and 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 has not accepted this. It is noted 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 has not pointed out any specific deficiency in the Valuation Report itself Hence, it would be incorrect to reject the DCF method solely on that ground.
Issue no. 4:
27. Whether DCF is the most appropriate method in the instant case as espoused by the appellant?
28. The appellant besides explaining DCF in detail has also submitted that DCF method is a scientific method of valuation of share duly recognized by professional and accounting bodies worldwide and also the ICAI. DCF method is often used for valuation of unquoted equity shares of a going concern as it is 18 ITA No. 1309/Del/2020 Gamma Pizzakraft (Overseas) Pvt. Ltd.
based on present value of projected future cash flow of the business, which are dependent on various variable factors.
29. The provisions of Rule 11UA shows that the legislature has not made any distinction as going concern or otherwise in valuation of unquoted equity shares. The Rules give option to choose between the two methods and the only criteria to choose is the option to be exercised by the assessee. In the absence of any such prescription under the law, one cannot read into the statute anything without showing that the Legislature intended it. Hence, the AO has erred in not accepting DCF 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 been duly prescribed under the Law itself?
31. The DCF method is one of the duly prescribed methods for valuing unquoted 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 methods. Once the option has been exercised by the assessee, AO has no right to reject the method. However, the rejection of method is not appropriate not because it is a prescribed method but because the AO has no role in selection or rejection of the method under Rule 11UA. Hence, the AO has erred in rejecting the DCF method especially when it is one of the duly prescribed methods under the IT Rules.
19 ITA No. 1309/Del/2020Gamma Pizzakraft (Overseas) Pvt. Ltd.
Issue no.6:
32. Whether there is any requirement to show the existence of intention to evade tax in order to invoke provisions of section 56(2)(viib) of IT Act?
33. The appellant has stated that there was neither the intention nor actual evasion of the taxes while issuing shares and that the subscriber of the shares was an entity of well known "Venture Capitalists" and that the prices were duly accepted after the due diligence by reputed experts. This throws up the issue as to whether there is any requirement to show the existence of intention to evade tax in order to invoke provisions of section 56(2)(viib) of IT Act.
34. The appellant has submitted that section 56(2)(viib) has been introduced in the Act by the Finance Act, 2012 as one of the measures to prevent generation and circulation of unaccounted money. The Hon'ble Finance Minister has also clarified the main purpose of introducing as series of measures to deter the generation and use of unaccounted money. The appellant has also quoted the Speech of Hon'ble Finance Minister in its submissions. Further it has been submitted that from basic contents of Hon'ble Finance Minister's Speech, Finance Bill, 2012 and the Act, it was quite evident that the provisions of section 56(2)(viib) have been introduced to as an anti-abuse measure to prevent receiving unreasonable share premium to account for unaccounted money of the company and its existing shareholders. In that background it is the contention of the appellant that the AO has erred in invoking the provisions of 56(2)(viib) even when there was no case of 20 ITA No. 1309/Del/2020 Gamma Pizzakraft (Overseas) Pvt. Ltd.
accommodation entries or intension of introducing unaccounted money of the company or its shareholders.
35. The AO cannot be burdened with proving the intension to avoid tax by introducing unaccounted money in the garb of share premium. The law is very clear that the moment there is a difference in the FMV of the shares and the consideration received therein, the provisions of section 56(2)(viib) would trigger. There is no requirement to prove or show that the company or its shareholders are trying to introduce their unaccounted money. This is very clear by the language used in the charging provision of section 56(2)(viib). Therefore, the ground raised by the assessee to this effect cannot be accepted.
Issue no. 7:
36. Whether the AO erred in observing that the appellant should have deposited advance tax as per the projection figures?
37. The AO has observed in the assessment order that non- payment of advance tax as per the projection of financial figures in the DCF method would show that the projections were meant only to arrive at the desired value of shares under DCF method.
38. Thus, after detailed analysis of the issue, the ld. CIT(A) deleted the addition.
39. Aggrieved by the order of CIT(A), the revenue has filed appeal before us.
21 ITA No. 1309/Del/2020Gamma Pizzakraft (Overseas) Pvt. Ltd.
40. The ld. DR argued that the ld. CIT(A) has erred in deleting the addition when the AO examined the valuer and disputed that the valuer is not competent enough to do the valuation. The ld. DR argued that the entire valuation has been made at the behest of the assessee company and the inputs given by them and there was no independent analysis or application of mind by the valuer. He referred to the statement of Sh. Ashok Kumar Verma, Chartered Accountant recorded by the AO with specific reference to Question No. 3, 13, 16 and 17. The ld. DR has also argued that the book value of the shares has to be considered and any payment beyond the value of the company received by the assessee be treated as infusion of an unaccounted money and hence the provisions of Section 56(2)(viib). It was argued that the vary failure of the assessee to pay the advance tax in the instant year itself proves that the assessee is clear about the lack of profits but still got valued the shares at higher rate only to get higher share premium. Further, it was argued that the non-achievement of projections clearly proves that the DCF method embarked upon by the assessee was defective. The ld. DR relied on the order of the ITAT Delhi in the case of M/s Agro Portfolio Pvt. Ltd. Vs. ITO.
41. On the other hand, the ld. AR prayed invoking Rule 27 of the ITAT Rules, 1963. He argued that the subsequent results cannot be considered which were not available to the valuer at the time of valuation and it was only in the hind sight that the AO tried to collate the value at the time of valuation and at a later time. He reiterated that DCF method is the right method for ongoing concern and the assessee had choice to resort to 22 ITA No. 1309/Del/2020 Gamma Pizzakraft (Overseas) Pvt. Ltd.
any of the methods prescribed under Rule 11UA and the AO is not empowered to change the method of valuation.
42. Heard the arguments of both the parties and perused the material available on record.
43. We have gone through the facts of the case, reasons of the AO for making addition u/s 56(2)(viib) and the ratio of the ld. CIT(A). The AO has recorded the statement of the valuer during the assessment proceedings.
44. The relevant part of the statement is as under:
"Q.6. K indly e xplain DCF method fo rmula in de tail?
Ans: Unde r this DCF method one needs to value the share on the basis of the pre scribed procedure taking into account we ighted average cost of capital (WACC) , Beta Factor and Equity Risk Premium .
Q.7. What do yo u mean by We ighted ave rage cost o f capital and hoe have yo u calculated it in respect of M/s Gamma PizzaKraft (Overse as) Pvt. Ltd. (PAN: AACCG8016D)?
Ans: WACC is a weighted ave rage o f companies equity and de bt the said has been worked out using the following pre scribe d formula:
Risk F ree Re turn + (Beta x Equity Risk Premium) 0.8. What was the risk premium return and equity risk premium for the M/s Gamma PizzaK raft (Overseas) Pvt. Ltd. (PAN: AACCG8016D) and how have yo u calculated this?
Ans: Risk free return I have taken at 7.85 base d on re turn o f government securities. Further, I conside r equity risk premium equal 23 ITA No. 1309/Del/2020 Gamma Pizzakraft (Overseas) Pvt. Ltd.
to 7%. This is based on the expecte d marke t return o ver and above risk free rate considering the risk o f investment in the security.
Q.9. Can yo u provide the de tails o f Government securities where risk free return is 7.8% and equity risk premium which is 7% in this case as taken by yo u? Furthe r, these figures has been taken by you or give n by the asse ssee company i.e . equity risk premium which is 7% in this case i.e. M/s Gamma PizzaKraft (Overse as) Pvt. Ltd. (PAN: AACCG8016D) Ans: The company did not provide m e these info rmatio n. These rate s keep on fluctuating with the passage of time I took these rate s at the time of pre paring repo rt fro m the informatio n available on authenticated inte rnet sites containing these information.
Q.10. Can you name few sites where you go t these information?
Ans: These info rmation can be procure d by making a se arch on google .
Q.11. Please provide formula for equity risk premium?
Ans: There is no formula for e quity risk premium it is one of the factor to calculate valuation of share s under DCF Metho d.
Q.12. Are yo u aware with any m ethod which is being use d for calculating e quity risk premium?
Ans: As conveye d earlier equity risk premium which is conside red at 7% is applied as this was the rate which are prevalent during the perio d o f valuatio n of shares.
Q.13. Have you ever heard about CA PM Method for calculating equity risk premium?
Ans: I am no t aware with CAPM Method, howe ver, I tho ught it prudent to apply 7% rate which are prevale nt at that time.24 ITA No. 1309/Del/2020
Gamma Pizzakraft (Overseas) Pvt. Ltd.
Q.14. What are the constituent o f CAPM Method?
Ans: Right no w I canno t recollect the details o f CAPM Method.
Q.15. Please te ll full fo rm o f CA PM.
Ans: Right no w I am not aware .
Q.16. Ple ase com municate in de tails the components used in DCF Method.
Ans: Valuation in DCF Method is based on projections and the use of the prescribed fo rmula.
Q.17. Do yo u kno w anything else about the fo rmula and method used by yo u as you are still no t te lling o r mentio ning the components o f technical formula which are used while applying DCF M ethod?
Ans: I have alre ady e xplained the components o f the formula for valuation of share s.
Q.18. Do you know any o ther method/Fo rmula fo r valuation of shares?
Ans: There are few more methods like underlying asset appro ach which is primarily used for concerns doing the business not as a going co ncern. This is also known as histo ric method. There is also another metho d which is known as market price method, this metho d is primarily in relation to share of those companies whose share s are listed in sto ck e xchange .
Q.19. Acco rding to you which method is the most scientific method for valuation of share and on what basis?
Ans: The selectio n of the metho d of valuation o f shares depe nds upon se veral factors in the prese nt case as the co mpany was not listed and further as the company was running as a going conce rn I 25 ITA No. 1309/Del/2020 Gamma Pizzakraft (Overseas) Pvt. Ltd.
conside r this DCF method which is appropriate for the valuatio n of shares.
Q.20. You have prepared share valuation re port in respect of M/s Gamma PizzaKraft (Ove rseas) Pvt. Ltd. ( PAN: AACCG8016D) witho ut mentioning the basis of valuation, valuation process in detail, marke t situation, growth phase . Why?
Ans: There are differe nt templates of share valuation repo rts. Altho ugh my report might not have contained me ntio n of these attributes, I considered all these attributes to the exte nt possible for compiling valuatio n re port.
Q.21. What do yo u unde rstand by discount factor? And haw have yo u calculated discounts factor of 0.51 in the present case and what material documents/pape rs did yo u use fo r calculating this disco unt factor?
Ans: As the name DCF stands for discounte d cash flow it is based o n future projections, the future incomes and othe r financial informatio n needs to be discounte d to ascertain the prese nt value. The discounte d factor as shall be evident from the re port varies from year to year. It was .89 in re latio n to F. Y. 2015-16 and it kept on reducing from year to year.
Q.22. How you have reache d to these values o f discount factor of 0.89, 0.77, 0.67, 0.58, 0.51 fo r F.Y. 2015- 16 to F.Y .2019-20. Ple ase produce calculation? I am again asking that what mate rial documents/ papers did you use fo r calculating this disco unt facto r?
Ans: The base discounting factor for F.Y. 2015-16 was determined on the basis information available o n differe nt interne t sites and the same rate was applied for the subsequent years.26 ITA No. 1309/Del/2020
Gamma Pizzakraft (Overseas) Pvt. Ltd.
Q.23. This means that you not done any calculation and just relied only on inte rne t for calculation discount factor and equity risk premium e tc. Ple ase explain?
Ans: Our calculations are base d on rate picke d from re liable authenticated web conte nts are available .
Q.24. Please tell the name of fe w site s where authenticated web contents are available .
Ans: These websites can be sourced by making se arch in the google.
Q.25. Please te ll that e xcept the interne t material what pape rs/documents did yo u use for calculating of cash flow and other components of DCF Method?
Ans: I relied on so urces of information as para 4 of o ur re port.
Q.26. As para 4 you have mentioned that yo u have relied on the info rmation made available by the management of the company. Please te ll that e xcept audited financial statements for year ending 31.03.2014 and projections fo r 31.03.2016, 31.03.2017, 31.03.2018, 31.03.2019 and 31.03.2020 what else document we re provided by the management o f the assessee co mpany. Please be specific in your answe r and mention names and title of documents.
Ans: Apart from above , I were provide d projections for the future perio d till 31.03.2020. Also I ask fo r valuation of shares of its two subsidiaries.
Q.27. Who ce rtified these audited financial statements and projections as mentio ned in preceding questions.
Ans: Audited accounts do wnlo ade d from ROC records. And the projections were sent to me through mail.
27 ITA No. 1309/Del/2020Gamma Pizzakraft (Overseas) Pvt. Ltd.
Q.28. Who maile d you these projections and did yo u rely on mailed projections only? Did you also make some enquiries o n your own with regard to these projections?
Ans: The projectio ns were maile d by the company and sent to me by the finance official of the company. As discusse d in the para 4.6 I also discusse d with the co ncern staff about the projections.
Q.29. You have no t mentione d any formula in yo ur report with regard to DCF, why?
Ans: The whole process has been explaine d very clearly in terms of para 6 o f the re po rt.
Q.30. What do yo u unde rstand by WACC? On what basis/calculatio n WACC has been taken as 14.85%?
Ans: As has bee n explained earlier WACC stands for weighte d average co st o f capital. Please see page 6 o f our report last two tables, the se t two table s contains comple te details abo ut the calculatio n o f WA CC Q.31. In the valuation repo rt prepare d by you, you have not mentione d any fo rmula/calculatio n, you have just arrive d at the differe nt value s such as cash flo w of explicit period as 34641, present value for the te rminal value as 270696. Kindly explain.
Ans: Terminal value was calculate d on the basis o f the specific formula, this has been calculated in exce l sheet.
Q.32. And what about cash flow fo r e xplicit period?
Ans: The figure o f cash flow has been ascertained and taken from anne xure 1 above .
Q.33. You have no t annexe d any se parate shee ts fo r calculation with valuation re port as you are mentioning. Please explain.
28 ITA No. 1309/Del/2020Gamma Pizzakraft (Overseas) Pvt. Ltd.
Ans: All the calculation in re latio n to valuation of shares as per anne xure attached with the report.
Q.34. Howe ver, in anne xure 1 there are only figures based on audite d financial statements or proj ections in upcoming ye ars there is no any calculation in anne xure 1.
Ans: In case yo u see the anne xure 1 in to tality there are calculatio n also .
Q.35. You were requeste d to bring all the documents and papers which you relied on for pre paring report. Are yo u carrying these documents please show me .
Ans: I am carrying some of the do cuments, rest are the re in our computer. In case you need any spe cific documents in relation to the same I can file the same as when re quire d, Q. 36. Please produce all the docum ents and papers which yo u relied on fo r pre paring o f report.
Ans: I will provide all the documents be fore 26.11.2018.
Q. 37. Have you e ver do ne audit fo r any financial ye ar of M/s Gamma PizzaK raft (Overse as) Pvt. Ltd.?
Ans: No. Q. 38. A re yo u aware that projections as pro vide d by company for preparing valuatio n re port has been prove d wrong?
Ans: As conveye d earlier I compiled share valuation re port based o n the projectio ns provide d by the management. Thereafter, I ne ver had any interaction with the said com pany. As such I am not aware whethe r projections eventually prove d co rrect or not.
Q. 39. If projectio ns have pro ved wrong, what is you say about the validity o f valuatio n re port pre pare d by you fo llo wing DCF Metho d.
29 ITA No. 1309/Del/2020Gamma Pizzakraft (Overseas) Pvt. Ltd.
Ans: The projectio ns are projections only these may be achieve d or may not achieve d. I agree in case projectio ns are no t achie ved the basis of valuatio n shall lose its sanctity as DCF Method is only base d on projections.
Q. 40. I am showing you the audite d financial statements of the M/s Gamma Pizza Kraft ( Ove rseas) Pvt. Ltd. where you can see that projections which you re lie d on fo r pre paring the valuation re port have complete ly faile d. In these circumstances what is the sanctity of valuation report pre pared by you.
Ans: I can' t comment on this point as I am not aware what went wrong in the functioning of the co mpany as I was never associate d with the company in any capacity after issuing the ce rtificate .
Q. 41. Do you want to say any this e lse?
Ans: No Oath take n Oath Administered, Ashok Kumar Verma Prashant Shukla (DCIT) Chartere d Acco untant
45. We have re-examined the pertinent questions raised by the ld. DR. The AO asked about CAPM method for calculating equity risk premium which the valuer is not aware. The valuer could not answer the details of CAPM method or its full form. This led to a passive allegation that the valuation made by the valuer is not correct and the valuer is not competent enough We find that the Capital Asset Pricing Model (CAPM) is a model that describes the relationship between the expected return and risk of investing in a security. It shows that the expected return on a security is equal to the risk-free return plus a risk premium, which is based on the beta of that security. CAPM formula is as under:
30 ITA No. 1309/Del/2020Gamma Pizzakraft (Overseas) Pvt. Ltd.
Expected Return (Ra) = Risk-Free Rate (Rrf) + [Beta (Ba) × Expected Return of the Market (Rm) - Risk-Free Rate (Rrf)] i.e. Ra = Rrf + [Ba × (Rm-Rrf)]
46. Thus, we find that the query of the AO with regard to CAPM to the valuer is irrelevant and does not castigate the DCF method resorted by the valuer.
47. The provisions of Rule 11UA are as under:
(2) Notwithstanding anything contained in sub-
clause (b) of clause (c) of sub-rule (1), 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:--
48. The Rule 11UA prescribes FMV of the unquoted equity shares as determined as per DCF method determined by a Chartered Accountant (subsequently by a merchant banker) or by the formula of (A-L) ×(PV) (PE)
49. Thus, we find that the assessee has option of DCF method and the formula given under Rule 11UA. The option given to the assessee cannot be read as the option given to the Assessing Officer. Hence, the Assessing Officer has no right to change the 31 ITA No. 1309/Del/2020 Gamma Pizzakraft (Overseas) Pvt. Ltd.
method of valuation. The AO can refuse the method of valuation after proving that the methodology resorted by the assessee is incorrect or not as per the standards laid down. The courts have held this view as is evident from the following observations of Hon'ble High Court of Delhi in Pr. Commissioner of Income Tax Vs. M/s Cinestaan Entertainment Pvt. Ltd. in ITA 1007/2019 dated 01.03.2021.
"... ...... Th e r e i s n o d isp u t e t h at m et h od ol og y a d o p t ed b y t h e R e sp on d en t - A s s es s e e h as b e en d on e ap p l yin g a r e c og n iz e d an d a cc e p t e d m et h od . S in c e the p e r f or m an c e d id n ot m at ch the p r oj ec t i on s, R e v en u e s ou g h t to ch al l en g e the v alu at i on , on t h at f oo t in g . Th i s ap p ro ac h la ck m at e ri al f ou n d a t i on an d i s i r rat io n al sin c e t h e valu at i on i s in t rin si cal ly b a s ed on p r oj e ct i on s wh i ch c an b e a f f ec t ed b y v ari ou s fa ct o rs . W e c an n o t l o s e s ig h t o f t h e fa ct t h at t h e val u er m ak e s f o r e ca st o r ap p r oxi m a t ion , b a s ed on p ot en t ial va lu e of b u sin e s s. H o w ev e r , t h e u n d e r lin e f a ct s a n d as su m p t i on s can u n d e r g o ch a n g e ov e r a p er i od of t im e. Th e C ou rt s h av e r ep ea t ed l y h el d t h at va lu at i on is n o t an e xa ct s ci e n c e, an d t he r e f o r e can n ot b e d on e wit h a r it h m et ic p r ec isi on . I t i s a t e ch n i cal an d c om p l e x p r o b le m wh i ch can b e a p p r op ria t ely l e ft t o t h e c on sid e r a t ion an d wi sd o m o f ex p e rt s i n t h e fi eld of a c co u n t an c y, h a vin g r e g a rd t o t h e i m p on d e ra b l e s wh i ch e n t e r t h e p r o c e ss of valu at i on of sh a r e s. "
50. The above decision of the Hon'ble jurisdictional High Court has also been followed in Abhirvey Projects Pvt. Ltd. Vs. ACIT, Circle-1 (2) in I.T.A. No. 9400/DEL/2019.
51. With regard to the actual performance, we also find that the actual performance did not fall short of the projections as duly submitted before the AO vide letter dated 06.12.2018 which was reproduced in his order by the ld. CIT(A).
52. With regard to the contents of the Valuation Report, we find that the same is prepared by covering all the required 32 ITA No. 1309/Del/2020 Gamma Pizzakraft (Overseas) Pvt. Ltd.
points as per the valuation methodology prescribed under DCF method. The Valuer has approached the valuation in a systematic manner. He has included at Para-4 of his report a detailed list of source of information relied upon by him that includes Five years' financial projections, provisional Financial Statements etc. as well the different topics which he discussed with the Management. Thereafter he has discussed the methodology of valuation approached by him describing therein the different methods of valuation available and why he has adopted the DCF method. Further he has given very detailed step-wise process of Valuation done as per DCF method. From the same it would be seen that the Valuer has not only given details of the Formulae in the DCF method but also explained and the figures adopted by him, hence, it cannot be said that there is lack of application of mind by the valuer.
53. He was examined by the AO u/s 131 of the Act wherein he had given clear cut answers to all the questions relating to the DCF method and justified his stand on each and every aspect of the Valuation Report prepared by him. He had submitted that there were different templates of the valuation report and various attributes like market situation etc have been duly considered by him for compilation of the said report. He had explained in detail the meaning of and the methodology of DCF method of valuation of shares how the same was carried out by him including the meaning of different terms used in the DCF method. Hence, it can be said that the valuer being a Chartered Accountant is authorized to do the valuation as per the provisions of the Act.
33 ITA No. 1309/Del/2020Gamma Pizzakraft (Overseas) Pvt. Ltd.
54. The transaction has been cleared by the Competition Commission of India (CCI) and the investor in the company namely Sapphire Foods Pvt. Ltd. is a venture capitalist and the investment in the assessee company was part of overall acquisition of Pizza Hut and KFC outlets in India and Sri Lanka. The buyer is an entity promoted by venture capitalist, namely, Goldman Sachs Investments Holding (Asia) Limited and it holds 34.36% of the equity capital in the subscriber company.
55. Further, reliance is being placed on the order of the Co- ordinate Bench of ITAT in the case of Intelligrape Software Pvt. Ltd. Vs. ITO in ITA No.3925/Del/2018 wherein the assessee had issued equity shares of face value Rs.10/- at a premium of Rs.6,165/- per share to its own group company. It had also got the valuation certificate from the Chartered Accountant who had valued the shares under DCF Method as provided under Rule 1 lUA(2)(b). The AO as well as the CIT(A) had rejected the valuation on the ground that year wise results projected were far from the actual results declared in the final accounts. The AO therefore adopted Networth Method and arrived at a value of Rs.23.21/- per share and made an addition of about Rs.1.59 Crore under section 56(2)(viib) of the Act towards excess premium charged being more than the FMV. 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.
34 ITA No. 1309/Del/2020Gamma Pizzakraft (Overseas) Pvt. Ltd.
56. 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).
57. In the result, the appeal of the Revenue is dismissed. Order Pronounced in the Open Court on 12/05/2023.
Sd/- Sd/-
(C. M. Garg) (Dr. B. R. R. Kumar)
Judicial Member Accountant Member
Dated: 12/05/2023
*Subodh Kumar, Sr. PS*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR