Tag Archives: CBDT

Fund raising and valuation: Company can choose the methodology

The recent ruling by the income tax appellate tribunal (“Appellate Tribunal”) of Jaipur dated 12 July 2018 in the case of Rameshwaram Strong Glass Private Limited v ITO has come as a significant relief for tax payers. In this matter, the Appellate Tribunal has held that the income tax laws in India gives an option to the assessee under rule 11UA of the Income Tax Rules, 1962 (“Rules”) to adopt either the break-up value method or the Discounted Free Cash Flow (“DCF”) method for valuation purposes.

Brief facts of the case: Rameshwaram Strong Glass Private Limited (the “Company”) incorporated on 31 January 2011, is a closely held company manufacturing toughened glass. There was no business conducted by the Company from assessment years 2011-2012 to 2013-2014 except for purchase of land. During the assessment year 2013-2014, the Company issued shares at a premium as per the valuation report prepared by a chartered accountant as per the DCF valuation method. The assessing officer (“AO”) claimed that the break-up value method was to be adopted by the Company instead of the DCF method for the purposes of valuation. As per the AO, since the DCF method was adopted instead of the break-up value method, the Company received additional money through the issue of these shares. Also, the AO claimed that the valuation report was incorrect and not justified and the actual premium of the shares should have been lower than what was mentioned in the valuation report. The Company submitted a revised valuation report to the commissioner of income tax, appeals (“First Appellate Authority”) in which a bona-fide error in the earlier report was corrected. The Company also contended that the amount of share premium is a commercial decision which does not require justification under law and the shareholders has the discretion to subscribe to the same. However, the First Appellate Authority directed the Company to prepare the valuation report based on the actual figures and not on estimates. Based on this revised report, the First Appellate Authority held that the earlier valuation report prepared was incorrect, based on imaginary figures and without any basis.

The Company appealed against the order of the First Appellate Authority to the Appellate Tribunal. One of the contentions of the Company was that the Rules allow the Company to choose between the DCF method or the break-up value method. The valuation method adopted by the Company cannot be challenged by the AO as long as it is a recognized method of valuation. Also, the Company contended that the requirement of the tax authority to give valuation report based on the actual figures and then comparing the same with the valuation report prepared through DCF method is not correct since the valuation under DCF method is based on future estimates based on revenue, expenses, investment, etc. The value is derived from the future profitability or cash flows of the Company. Also, since this is a newly formed company, the DCF valuation method had to be used as the capital base of the Company would be very less.

The Appellate Tribunal agreed with the contention of the Company stating that the assessee has the right to choose the method of valuation.  The Rules clearly provide an option to the assesse to follow either the DCF valuation method or the break-up value method. The only condition cast upon an assessee is that the valuation report has to be given by a merchant banker or a chartered accountant using the DCF method who have expertise in valuation of shares and securities. When a particular method of valuation is provided under law and when the assessee has chosen a particular method, directing the assessee to follow a particular method is beyond the powers of the income tax authority. The AO can scrutinize the valuation report if there are arithmetical errors and make necessary adjustments or alterations. However, if the assumptions made in the report are erroneous or contradictory, the authority may call for independent valuer’s report or invite his comments as the AO is not an expert. Also, the First Appellate Authority’s direction to the Company to give the valuation based on actual figures and then comparing such valuation report with that of the earlier report is contrary to the provisions of law since the DCF valuation method is based on future estimates. Therefore, the Appellate Tribunal held that the valuation report prepared by the chartered accountant using the DCF method was proper and the action of the AO and the First Appellate Authority was invalid.

It remains to be seen whether the judgment of the Appellate Tribunal goes up to the Supreme Court. However, as of now, this comes as a relief, in light of the many nuances that we discussed in our earlier post on Early Stage Valuations: Legislative Context and Continuing Saga of Angel Tax.

Note: The Board of Direct Taxes (CBDT) issued a notification on 24 May 2018, whereby the word “or an accountant” from Rule 11UA was omitted. Therefore, if a company is issuing equity shares to resident individuals, merchant banker valuation would be mandatory.

Author: Paul Albert

Regulatory Update: Ministry of Finance – Relaxes MAT Provisions for Companies Facing Insolvency

The Ministry of Finance vide its press release dated 6 January 2018 has informed that representations are received from the companies against whom an application for corporate insolvency resolution has been admitted by the adjudicating authority under section 7, 9 and 10 and are facing hardship due to restriction in allowance of brought forward loss for computation of book profit under section 115JB of the Income Tax Act 1961 .

In view of the above, proposed relaxations in the provisions relating to levy Minimum Alternate Tax (MAT) in case of the companies against whom an application for corporate Insolvency Resolution Process has been admitted under the insolvency and Bankruptcy Code 2016.

With effect from the assessment year 2018-19 and financial Year 2017-18, it is proposed that in case of a company, against whom an application for corporate insolvency resolution process has been admitted by the adjudicating authority, the amount of total loss brought forward (including unabsorbed depreciation) shall be allowed to be reduced from the book profit for the purposes of levy of MAT under section 115JB of the Act.


Regulatory Update: The Central Board of Direct Tax – Non-Recovery of Tax Demands From “Start-Up” Companies Issuing Shares at Premium.

The Income Tax Act, 1961 (the IT Act) mandates the taxation of premium received on issue of shares to resident Indians in excess of Fair Market Value (‘FMV’) by a company, as income u/s 56(vii) (b) of the Income Tax Act, 1961 in the hands of such company. Tax on the excess money received over and above the FMV was exempted in case if issuer is a start-up company. However, the tax authority continued raise tax demand quoting reason as the abnormal valuation projections etc. The Central Board of Direct Tax has instructed the tax authority that if additions have been made after modifying/rejecting the valuation reports submitted by start-up companies, no coercive measures to recover the tax demand be taken. Further, for all such cases which are pending before the Appellate Authority, necessary administrative steps should be taken for expeditious disposal of appeals, preferably by March 31, 2018.

Source: https://www.incometaxindia.gov.in/Lists/Latest%20News/Attachments/218/Determination-fiar-market-value-unquoted-equity-shares-Start-Up-6-2-2018.pdf


Under the provisions contained in section 9(1)(i) of the Income-tax Act, 1961 (‘Act’), all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India or through the transfer of a capital asset situate in India, shall be deemed to accrue or arise in India.

The Central Board of Direct Taxes (CBDT) has clarified that the provisions of section 9(1)(i) read with Explanation 5 shall not apply in respect of income accruing or arising to a non-resident on account of redemption or buy-back of its share or interest held indirectly in the specified funds, if such income accrues or arises from or in consequence of transfer of shares or securities held in India by the specified funds and such income is chargeable to tax in India.

Source: http://www.incometaxindia.gov.in/communications/circular/circular28_2017.pdf