Commissioner Of Income Tax,Corporate Circle – 3,Chennai v. M/S.vva Hotels Private Limited

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 21.09.2020 CORAM : THE HON'BLE MR.JUSTICE T.S.SIVAGNANAMANDTHE HON'BLE MRS.JUSTICE V.BHAVANI SUBBAROYAN Judgment Reserved On Judgment Pronounced On 19.08.202021.09.2020 T.C.A.No.670 of 2019 Commissioner of Income Tax,Corporate Circle – 3,Chennai... Appellant/Appellant -vs- M/s.VVA Hotels Private Limited,No.2, Radisson Blue Hotel,Ethiraj Salai, C-IN Road,Egmore, Chennai-600 008.PAN: .. Respondent/Respondent Prayer:Tax Case Appeal under Section 260A of the Income Tax Act,1961 against the order dated 26.03.2019 made inI.T.A.No.2013/Chny/2018 on the file of the Income Tax AppellateTribunal 'C' Bench, Chennai for the assessment year 2013-14 andaganist the order of the Commissioner of Income Tax(Appeals)-11,Room No.222,Aayakar Bhavan main Building,II Floor, 121,Mahatma gandhi Road, Nungambakkam, chennai-34, dt.20.3.2018,made in ITA.No.219 & 240/16-17, for the assessment years 2013-14and aganist the order of the Assistant Commissioner of IncomeTax Corporate Circle-3(2),Aayakar Bhavan,Wanaparthy Block,RoomNo.414-IV floor,Nungambakkam High Road,Chennai-34,dt.31.10.2016,for the assessment year 2013-14 For Appellant:Ms.V.Pushpa, Senior Standing CounselFor Respondent :Mr.Srinath Sridevan******* JUDGMENT T.S.Sivagnanam, J. This appeal, by the Revenue filed under Section 260A of theIncome Tax Act, 1961 (hereinafter referred to as “the Act”), isdirected against the order dated 26.03.2019, made inI.T.A.No.2013/Chny/2018 on the file of the Income Tax AppellateTribunal 'C' Bench, Chennai for the assessment year 2013-14. 2.The following substantial questions of law have beenraised by the Revenue for consideration of this Court:-“1.Whether on the facts and circumstances ofthe case and in law, the Tribunal was right inholding that provisions of Section 56(2)(viib)cannot be invoked in the assessee's case? 2.Whether the Tribunal was right in holdingthat the assessee has adopted a methodprescribed by the Income Tax Act, withoutconsidering the fact that the value of sharesadopted by the assessee (under discounted caseflow method) does not reflect the true marketvalue of the shares on that date?” 3.The assessee, a Private Limited Company, filed its returnof income for the assessment year under consideration (AY 2013-14) on 25.09.2013 admitting income of Rs.12,86,360/-. The casewas selected for scrutiny and notice under Section 143(2) dated03.09.2014 was issued. During the course of assessment, it waspointed out that the assessee company had issued 2,04,594 shareswith a face value of Rs.10/- and share premium of Rs.1000/- pershare. The assessee was directed to explain the method ofvaluation to substantiate the share premium collected. Theassessee submitted that the value of shares were done byadopting the Discounted Free Cash Flow (DCF) method as per thereport of the Chartered Accountant dated 12.2.2013 andaccordingly, they allotted 1,16,278 shares to M/s.VVT HotelsPrivate Limited and 88,316 shares to Mr.Syed Irfan, Chennai, atRs.1010/- per share with a premium of Rs.1000/- per share. 4.The Assessing Officer held that the assessee has beenconverted into a three star category hotel during the assessmentyear 2013-14 and the valuation done based on DCF method is byadopting the projections of future profits. This according tothe Assessing Officer will not yield the true picture on thedate of valuation, as the assessee has made only projection ofrevenue growth. The Assessing Officer took note of the returnsfiled by the assessee from the assessment years 2014-15 to 2016-17, compared the actual sale of services as per the returns https://hcservices.ecourts.gov.in/hcservices/ 4.The Assessing Officer held that the assessee has beenconverted into a three star category hotel during the assessmentyear 2013-14 and the valuation done based on DCF method is byadopting the projections of future profits. This according tothe Assessing Officer will not yield the true picture on thedate of valuation, as the assessee has made only projection ofrevenue growth. The Assessing Officer took note of the returnsfiled by the assessee from the assessment years 2014-15 to 2016-17, compared the actual sale of services as per the returns https://hcservices.ecourts.gov.in/hcservices/ filed by the assessee with that of the projected value in theDCF valuation. Thus, the Assessing Officer came to theconclusion that the assessee has made excessive projection ofrevenue without any reasonable basis. Accordingly, applied theprovisions of Section 56(2)(viib) of the Act read with Rule 11UA(2) of the Income Tax Rules, 1957 (hereinafter referred to as“the Rules”). Ultimately, the Assessing Officer held that theNet Asset Value (NAV) method is the appropriate method, whichshould have been adopted for valuation of the shares andaccordingly, computed the value and assessed the same atRs.18,51,22,790/- as income from other sources as per Section 56(2)(viib) of the Act, as the value of the shares sold, wereunreasonable. 5.Challenging the said order dated 31.10.2016, the assesseepreferred appeal before the Commissioner of Income Tax(Appeals)-11, Chennai [CIT(A)]. The CIT(A) by an elaborateorder dated 20.03.2018 allowed the appeal. Aggrieved by thesame, the Revenue preferred appeal before the Tribunal. Thesame was dismissed by the impugned order. Challenging the saidorder, the Revenue has filed this appeal contending that twosubstantial questions of law arise for consideration in thisappeal. 6.We have elaborately heard Ms.V.Pushpa, learned SeniorStanding Counsel appearing for the appellant/Revenue andMr.Srinath Sridevan, learned counsel appearing for therespondent/assessee. 7.As noted, the CIT(A) has given elaborate reasons as to whythe assessment order calls for interference. The CIT(A) notedthe facts that the assessee company has established a new hotelin the central part of Chennai city and the construction wascompleted and the hotel was opened in the financial year 2012-13relevant to the assessment year 2013-14. It was pointed outthat considering the enterprise value of the business includingmarket value of the land, the assessee company had issued1,16,278 shares to its sister concern, M/s.VVT Hotels PrivateLimited, which had the same set of shareholders as that of theassessee company. The assessee allotted 88,316 shares toMr.Syed Irfan, brother-in-law of Managing Director and PrincipalShareholder of the assessee company, Shri Vikram Agarwal totally2,04,594 shares with a face value of Rs.10/- have been allottedunder share premium of Rs.1000/- per share. The assesseeadopted the DCF method as available to it under Rule 11UA of theRules for arriving at the value of the shares allotted and theshare premium received. The CIT(A) noted that the AssessingOfficer held that the projection made under Rule 11UA of theRules is not accurate and there is excess projection of the sale revenue. The CIT(A) noted that the assessee has an option toadopt the NAV method or DCF method to arrive at the valuation ofunquoted shares. It is relevant to point out that the CIT(A)very pertinently observed that unless the Assessing Officer isable to bring out any evidence of abuse of benevolent provisionswith an intention to defraud the revenue, the option given tothe assessee shall be held to be absolute. Further, afternoting the percentage of the allotment of shares, the CIT(A) onfacts found that the difference between the actual sales revenueover the years, i.e., from assessment year 2013-14 to 2016-17with that of the projected sales revenue adopted in the DCFmethod is very marginal. 8.On going through the figures of excess projection ofsales, as mentioned by the Assessing Officer in a tabulated formin paragraph 4.2 of the assessment order, we find that theexcess projection for 2013-14 was 10%, for 2014-15 – 4%, for2015-16 – 8% and for 2016-17 – 18%. Therefore, the findingrecorded by the CIT(A) that difference was marginal is found tobe correct, though it may be stated that the difference of 18%for assessment year 2016-17 may be little on the higher side,but still unless and until there was material available with theAssessing Officer to pin down the assessee on the ground offraud or misuse of the provisions of law, the adoption of theDCF method cannot be held to be wholly illegal. Further, theCIT(A) rightly took note of the nature of business, which wasdone by the assessee company and the vagaries of businessatmosphere in the country in general and in Chennai inparticular. Thus, on facts, the CIT(A) found that the assesseecompany has not abused the privilege of choosing the DCF methodfor arriving at the value of the shares instead of NAV method. 9.The Revenue contended before the Tribunal that the CIT(A)ignored the huge variation in value of shares to the extent often times between value adopted by the assessee company asagainst its actual value of underlying assets; the CIT(A) erredin ignoring the finding of the Assessing Officer that there isno basis for the discount factor adopted by the assessee companyas at 16%. The assessee contended before the Tribunal that theyhad adopted the DCF method as available under Rule 11UA of theRules for arriving at the value of the shares allotted and theshare premium received whereas, the Assessing Officer adoptedthe NAV method and re-valued the land owned by the assesseecompany for the purpose of determining the share value of thepremium thereof. 10.It was submitted that when the assessee has adopted aparticular method of valuation as provided under the Act andRules and in the absence of any material that such method wasadopted to defraud the Revenue, merely because the Assessing Officer is of the view that NAV method alone has to be adoptedis not a ground to reject the DCF method. The Tribunal uponconsideration of the facts pointed out that the assessee hasadopted the method of valuation as stipulated under Rule 11UA ofthe Rules and this accepted method of valuation does provide forestimation. Noting that the Assessing Officer had discarded theDCF method adopted by the assessee on the ground that the actualrevenue varied from the projected revenue for four years, theTribunal rightly noted that the projected value is an estimateand the variation in the estimate is marginal. Therefore, theTribunal came to the conclusion that there was no material tohold that the assessee's projected sales revenues are fabricatedor manipulated. Officer is of the view that NAV method alone has to be adoptedis not a ground to reject the DCF method. The Tribunal uponconsideration of the facts pointed out that the assessee hasadopted the method of valuation as stipulated under Rule 11UA ofthe Rules and this accepted method of valuation does provide forestimation. Noting that the Assessing Officer had discarded theDCF method adopted by the assessee on the ground that the actualrevenue varied from the projected revenue for four years, theTribunal rightly noted that the projected value is an estimateand the variation in the estimate is marginal. Therefore, theTribunal came to the conclusion that there was no material tohold that the assessee's projected sales revenues are fabricatedor manipulated. 11.Furthermore, it was pointed out that the AssessingOfficer did not point out any flaw in the method of calculationof the value of shares by adopting the DCF method but, outrightly rejected the same, which should not have been done. TheRevenue by relying upon the decision of the Division Bench ofthis Court in CIT vs. M/s.Vaani Estates Pvt. Ltd. [T.C.A.No.224of 2018 dated 04.04.2019], submitted that the matter may beremanded to the Assessing Officer for fresh consideration todetermine the fair market value of the shares in question asrequired in Explanation to Section 56 of the Act. 12.We find, in the said judgment, the matter was remanded tothe Assessing Officer for fresh consideration on a concessionextended by the assessee by submitting that they will seeknecessary clarification from the Central Board of Direct Taxesand they may be permitted to do so while the matter could beremanded back to the assessing authority. Therefore, adirection issued based on the concession extended by theassessee cannot be relied upon by the Revenue as a precedent. 13.Thus, we find that both the CIT(A) and the Tribunal, oncareful appreciation of the facts and circumstances, havegranted relief to the assessee and we find there is no questionof law, much less substantial question of law arise forconsideration in this appeal. 14.Accordingly, the appeal filed by the Revenue is dismissedon the ground that there is no substantial question of law arisefor consideration. No costs.Sd/-Assistant Registrar // True Copy// abr Sub Assistant Registrar https://hcservices.ecourts.gov.in/hcservices/ To 1.The Income Tax Appellate Tribunal 'C' Bench, Chennai.2.The Commissioner of Income Tax (Appeals)-11,121,Mahatma gandhi Road,Nungambakkam,Chennai-34.3.The Assistant Commissioner of IncomeTax,Corporate circle-3(2),Chennai-34 Pre-delivery Judgment made inT.C.A.No.670 of 2019 MR(CO)GS(23/10/2020)