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IN THE HIGH COURT OF DELHI
Manmohan, Sanjeev Narula, JJ.
Pr. Commissioner of Income Tax - Appellant
Versus
Cinestaan Entertainment Pvt. Ltd. - Respondent
ITA 1007 of 2019& CM Appl. 54134 of 2019
Decided On : 01-03-2021
The court upheld the valuation method utilized by the respondent for share premiums, emphasizing the importance of following statutory valuation methodologies and recognizing the commercial prudence of business decisions.
Headnote:(A) Income Tax Act, 1961 - Section 260A - Assessment Year 2015-16 - Appeal against order of ITAT regarding share premium assessment - Respondent engaged in entertainment sector allotted shares at premium, income assessed as Rs. 90,95,46,200/- by AO due to unjustified premium without substantial basis - ITAT allowed appeal, holding valuation method adopted based on DCF was appropriate - Revenue's arguments centering on projected income vs actual income questioned but lacked evidentiary basis - No substantial question of law arises, appeal dismissed. (Paras 4, 10, 12, 13, 14)
Facts of the case:
Respondent filed return declaring nil income, share premium raised under scrutiny. AO assessed income based on perceived unjustified valuation leading to deductions under Section 56(2)(viib).
Findings of Court:
ITAT concluded that AO's rejection of the valuation method lacked merit and proper consideration of valid business risks and projections.
Issues: The main issue was whether the share premium was justified and if the projections made under DCF method had adequate foundation.
Ratio Decidendi: The court recognized the authority and expertise of independent valuers in determining fair market value and rejected the AO's approach of overriding such valuations without justifiable reasoning.
Result: Appeal dismissed.
JUDGMENT
Sanjeev Narula, J. The present appeal under Section 260A of the INCOME TAX ACT , 1961 (hereinafter referred to as `the Act') is directed against the order dated 27.05.2019 (hereinafter referred to as `Impugned Order') passed by the Income Tax Appellate Tribunal (hereinafter referred to as `ITAT') in ITA No. 8113/DEL/2018, for the Assessment Year 2015-16 (hereinafter referred to as `AY').
2. The brief factual matrix giving rise to the present appeal is that M/s Cinestaan Entertainment Pvt. Ltd.(`Respondent-Assessee')was incorporated on 19.09.2013 and is engaged in the business of entertainment. During the concerned AY, the Respondent-Assessee allotted shares at a premium to various persons, as encapsulated in the assessment order. The Respondent-Assessee filed return of income for the relevant AY i.e., 2015-16 on 28.09.2015, declaring nil income. The return was processed under Section 143(1) of the Act. Thereafter, the case was selected for "Limited Scrutiny" and the reasons for scrutiny selection were (a) Large share premium received during the year [verify applicability of Section 56 (2)(vii)(b)]; (b) Low income in comparison to very high investment; and (c) Low income in comparison to very high loans/advances/investments in shares.
3. Notice under Section 143(2) of the Act was issued on 07.04.2016 and was followed by a detailed questionnaire along with the notice under Section 142(1) on 12.10.2017. In response thereto, the Respondent-Assessee filed a valuation report dated 15.12.2014. Thereafter, vide order dated 31.12.2017, assessment was framed under Section 143(3) of the Act and the total income of the Respondent-Assessee was assessed as Rs. 90,95,46,200/-. The findings of the Assessing Officer (`AO') summarized by the Appellant are as follows:
"1. No effort was made by the assessee for achieving the projections made in the report as per Section 11UA. Hence the share premium received is without any substantial basis and is contrary to the provisions of Section 56 (2)(viib) read with Section 2 (24)(xvi), in view of the show cause notice discussed in the paragraphs below.
2. During the course of the assessment proceedings, a show cause notice vide letter dated 15.12.20 17 was issued fixing the case for 15.12.2017.
3. After taking comprehensive view of the submissions made by the AR pursuant to the Show Cause Notice, the following points emerge which are summarized as under-
i. On perusal of Balance Sheet as on 31.03.2015, it is seen that the assessee raised share capital and share premium during the year and invested the same in the following-
| Sl. No. | Name of Company | Nature of Investment | Amount (Rs.) |
| 1. | Script Stories Media P. Ltd. | Equity Share | 26,000 |
| 2. | Script Stories Media P. Ltd | 0% debenture | 54,99,74,000 |
| 3. | Cinestaan Film Company P. Ltd. has become a subsidiary company wef 22.06.2015 | 0% debenture | 30,00,00,000 |
| 4. | Script Stories Media P. Ltd. subsequently allotted on 06.05.2015 | 0% debenture application money | 90,00,00,000 |
ii. It is clear that the assessee company has advanced share capital and share premium received during the year as per details given above, in debenture of associate companies on which no return will be in future, as the same is invested in 0% debenture. In order to achieve the revenue projected in the 11UA report, it is obvious that the investment should have been made to get returns/income whereas the assessee has made investments in zero percent debentures in the aforementioned companies, hence the basic substance of receiving high premium is not justified. Hence the projection made to issue the shares on premium as per Rule 11UA report is not justified with the actual working of the company.
iii. Even when specifically asked, the AR submitted the basis for projections/ estimated figure but failed to provide any scientific basis for adopting those figures. iv. On perusal of letter dated 26.12.2017, under Note 7 of Balance Sheet for the period ending 31st March 2017, it is seen that 0% unsecured compulsorily
