DCIT v. Credtalpha Alternative Investment Advisors Pvt. Ltd.

Case snapshot

Sections / provisions: 56(2)(viib)

Questions before the Court / Tribunal

• Sec. 56(2)(viib)-Discounted cash flow method adopted by assessee -cannot be changed by AO without cogent reason – Projections employed in the DCF valuation cannot be compared with actual results to discard the valuation. Assessing Officer cannot challenge the method of valuation adopted by the assessee for the purpose of sec. 56(2)(viib) once the Assessee adopts one of the prescribed method. The method of valuation is always the option of the assessee. The learned assessing officer is authorised to examine whether assessee has adopted one of the available options properly or not. It is an established fact that discounted cash flow method is always based on future projections adopting certain parameters such as expected generation of cash flow, the discounted rate of return and cost of capital. In hindsight, on availability of the actual figures, if the future projections are not met, it…
• Which factual, statutory and procedural conditions controlled the requested relief?
• How did the forum apply the governing provisions to the evidence and procedural history recorded in this case?

Material facts and procedural background

Vs. Credtalpha Alternative Investment Advisors Pvt Ltd 8th Floor, Ashford Centre, Shankar Rao Narayan Marg , Lower Parel , Mumbai -400 013 PAN No. AAECC6357K Appellant .. Respondent Revenue by : Shri Ashish Kumar DR Assessee by : Shri Rahul Sarda Advocate Date of hearing : 16.12.2021 Date of Pronouncement: 19.01.2022

ORDER PER PRASHANT MAHARISHI, AM: 1. This appeal is filed by the Asst Commissioner of income tax – 6 (2) (1), Mumbai (the learned assessing officer against the order passed by the Commissioner of income tax (appeals) – 12, Mumbai dated 21 st of

August 2019 for assessment year 2013 – 14 raising the following grounds of appeal as Under:- i. on the facts and circumstances of the case and in law, the learned CIT – A erred in deleting the addition made by the assessing officer on account of business expenses and unabsorbed depreciation even though the pre -commencement expenses to setting up of the plant for business purposes, such in come is required to be capitalized ii. On the facts and circumstances of the case and in law, the learned CIT – A erred in deleting the addition on the basis of the decision of the learned CIT (A) with respect to AY 2012-13 where the CIT (A) has granted relief to the assessee on the basis of additional evidence submitted by the assessee before CIT (A) .

The assessing officer should be given opportunity by the CIT (A) Under rule 46A of the income tax act before allowing assessee’s appeal iii. on the facts and circumstances of the case and in law, the learned CIT (A) erred in deleting the addition made by the assessing officer u/s 56 (2) (viib) of the act without appreciating that facts that the ld AO had interfered with the taxpayer statutory right Under rule 11 UA (2) of the ITR to the method of valuation and also that the of rejecting the taxpayer’s valuation, the AO had the authority to carry out its own independent valuation and adopt the NAV method for this purpose. iv.

On the facts in the circumstances of the ca se and in law, the learned CIT (A) erred in deleting the addition made by the assessing officer u/s 56 (2) (viib) of the act without appreciating the facts that the matter of taxability cannot be decided on the basis of entries which the assessee may choos e to make his account but has to be decided in accordance with the provisions of law.

Appellant / petitioner / assessee submissions

As no revenue has been generated for the last two years he issued a show cause notice for disallowance of the entire claim of expenditure . The assessee submitted that it has incurred expenses for profitable future and to establish itself in the businesses and the expenses were of such a nature that had to be compulsorily incurred either by way of remuneration or by way of complying with various legal requirements. It was further stated that considering the nature of the business of equity activity, assessee’s success depend completely on the fund managers and credit required a lot of travelling . Assessee stated that a venture capital fund and a nonbanking financial company was established showing the motive of the asses see however during the year due to bad global conditions investment could not be raised and therefore there is no revenue generation .

Assessee also submitted that the failure to generate revenue was only due to the inability of the assessee in accumulating funds due to bad global financial condition and mere absence of revenue shall not be conclusive evidence that the expenses were not incurred for the purposes of the business. The learned assessing officer after considering the submission of the assessee followed his own order for assessment year 2012 -13 and disallowed the entire business expenditure/loss claimed by the assessee of Rs 2, 60,37,039.

Assessee submitted valuation of share using net asset method which comes to Rs ( -) 3241/-. Assessee did not submit the valuation of discounted cash flow method s ubstituting the actual figures and therefore the learned assessing officer issued a notice asking assessee to justify the premium as the fair market value of the shares is negative as per net asset value method , as the discounted cash flow method is not reliable, which do not have any correlation with the actual affairs of the assessee . The assessee submitted a detailed reply that assessee is a start -up company set up by Mr. Rajeev Mehrotra who is having a strong background of investment banking involved e xperience in the field of financial service act having a working experience of 9 years in Edelweiss financial services Ltd .

During the year domestic venture capital fund approved by Securities and Exchange Board of India namely, Credit alpha alternative fund was set up by the assessee to act as a manager and raise investments domestically . However, due to the bad global financial conditions the assessee could not raise investments through the fund . To substantiate it, assessee also submitted the registra tion certificate and return filed with the SEBI. It was further submitted that provisions of Section 56 (2) (viib) exempts the venture capital fund from complying with the valuation norms of the provisions of the above Section. The assessee also explained the various

Revenue / respondent submissions

situations due to which the assessee could not generate any revenue for past years however, for financial year 2014 – 15 it submitted that it has started generating revenue . Assessee submitted the details of shares allotment made along with the valuation report adopting discounted cash flow method where the valuation of the share is derived at ₹ 75 per share. It further submitted that the discounted cash loan method is the only method of valuation assessee could have adopted, as the book value method is redundant for such business model and will defeat the purpose. The learned assessing officer examined the explanation of the assessee and looking at the wide variation between the valuations of the shares adopting two differen t methods , he once again directed the assessee to substitute the actual figures of performance in the discounted cash flow method valuation .

Court / Tribunal analysis and reasoning

Assessee did not furnish such computation, therefore , he held that the discounted cash flow method valuation used by the assessee is bogus and sham and has no connection with the real figures . The valuation was done with fictitious figures having no correlation with the actual affairs of the assessee . The valuation was done using imaginary figures to arrive at a pre -mediated value of ₹ 75 per share and therefore he rejected the same . The learned assessing officer further examined the valuation report and stated that the valuer has purely relied on the projected figures given by the management of the company . He als o referred to the fact that the valuer reports in the valuation report that it was not responsible for accuracy and completeness of the valuation and he has not conducted any independent audit, due diligence review or validation of such financial and other information.

The valuer also categorically states that it did not express any opinion or any form of assurance thereon and it accepted no responsibility or liability and the share value has been derived and determined on the basis of information provided by the management. The learned assessing officer extracted such observation of the valuation report in his order . He therefore held that even as per

With respect to the disallowance of the business expenditure of Rs 2 39,70,421 and unabsorbed depreciation of ₹ 2,066,618/– the learned CIT – A allowed the claim of the assessee following the order of his predecessor for assessment year 2012 – 13 as the learned assessing officer has also made disallowance based for that reasons. Therefore, both the disallowance/additi on made by the learned assessing officer were deleted. 7. Therefore, the learned assessing officer is aggrieved with that order and is in appeal before us as per the grounds of appeal stated above. 8. The learned departmental representative vehemently supported the orders of the learned assessing officer and submitted on ground no 3 & 4 that i.

Assessee has supported the valuation of the shares for issue stating that the discounted cash flow method has been adopted , however according to the actual performance there is a consistent loss incurred by the assessee. ii. He further submitted that the learned assessing officer asked the assessee to substitute the actual performance figures in the discounted cash flow method va luation report which assessee did not do . Therefore, the assessing officer asked the assessee to

submit the report as per th e net asset value method, which has negative valuation. iii. He further submitted that the valuation report submitted by the assessee even on the discounted cash flow method was suffering from severe infirmities and therefore such a valuation report could not have been accepted by the learned CIT – A. iv. He submitted that the learned CIT – A has deleted the addition relying upon the several judicial precedents; however, he failed to look at the actual valuation done by the assessee, which is devoid of any merit. 9. On ground, no 1 & 2, with respect to the disallowance of business expenses and losses , he relied upon the order of the learned ass essing officer.

10. The learned authorised representative submitted that ground number 1 – 2 of the appeal are covered in favour of the assessee by the decision of the coordinate bench in assessee’s own case for assessment year 2012 – 13 wherein the coordinate bench has deleted the identical disallowance/addition made by the learned assessing officer . He submitted that for this year , learned assessing officer has also followed the same logic and in fact relying on the order of assessment for assessment year 2012 – 13, disallowance has been made . He therefore submitted that the ground number 1 deserves to be dismissed. 11. Coming to the ground number 2 & 3, the learned authorised representative referred to the paper book containing 43 pages in the form of various r eplies submitted by the assessee during the course of assessment proceedings and further referred to paper book containing 15 judicial precedents. i.

Operative decision and relief

As the issue for assessment year 2012 – 13 has been decided in favour of the assessee, we do not find any reason to deviate from the same . In view of this ground number 1 and two of the appeal of the learned assessing officer are dismissed. 14. Ground number 3 and 4 are with respect to the addition of ₹ 69,000,000 on account of the provisions of Section 56 (2) (viib) of the act . Assessee has issued share capital at ₹ 75 per share being face value of Rs 10/ - each at a premium of Rs 65/ - per share to Cumulative Alternative Advisors Private Limited.

cash flow method for valuation of the shares of the company gives a wide variation between them, we do not find any reason to find fault with the assessee in such cases . Both th ese methods have different approaches and methodologies therefore there are bound to be differences, but it does not give any authority to the learned assessing officer to pick and choose one of the method and make the addition . It is the assessee who has to exercise one of the options available under the provisions of the law for valuing the shares . The learned assessing officer needs to examine that method . Naturally, if the discounted cash flow method and net asset value method gives the same result , where would have been the need to prescribe the two methods in the law. In view of above facts, we do not find any infirmity in the order of the learned CIT – An in deleting the addition of ₹ 69,000,000 made by the learned assessing officer u/s 56 (2) (viib) of the act. Accordingly, ground number 3 and 4 of the appeal of the learned assessing officer are dismissed. 19. In the result, appeal of the learned assessing officer is dismissed. Order pronounced in the open court on 19/01/2022

Ratio and legal principle

The narrow proposition associated with DCIT v. Credtalpha Alternative Investment Advisors Pvt. Ltd. concerns sec. 56(2)(viib)-discounted cash flow method adopted by assessee -cannot be changed by ao without cogent reason – projections employed in the dcf valuation cannot be compared with actual results to discard the valuation. assessing officer cannot challenge the method of valuation adopted by the assessee for the purpose of sec. 56(2)(viib) once the assessee adopts one of the prescribed method. the method of valuation is always the option of the assessee. the learned assessing officer is authorised to examine whether assessee has adopted one of the available options properly or not. it is an established fact that discounted cash flow method is always based on future projections adopting certain parameters such as expected generation of cash flow, the discounted rate of return and cost of capital. in hindsight, on availability of the actual figures, if the future projections are not met, it… The proposition cannot be separated from the judgment’s facts, the governing statutory version, the forum’s jurisdiction, and the exact relief recorded in ITA No. 7056/Mum/2019.

For working-paper purposes, the decision should be cited only after matching the material facts and reading the passages under the judgment-grounded record above. The editorial outcome label “Dismissed” is a navigation aid; it does not replace the operative order or explain every issue in a multi-issue case.

Why this judgment matters

This decision is relevant when a file raises the same central question identified in the source headnote: Sec. 56(2)(viib)-Discounted cash flow method adopted by assessee -cannot be changed by AO without cogent reason – Projections employed in the DCF valuation cannot be compared with actual results to discard the valuation. Assessing Officer cannot challenge the method of valuation adopted by the assessee for the purpose of sec. 56(2)(viib) once the Assessee adopts one of the prescribed method. The method of valuation is always the option of the assessee. The learned assessing officer is authorised to examine whether assessee has adopted one of the available options properly or not. It is an established fact that discounted cash flow method is always based on future projections adopting certain parameters such as expected generation of cash flow, the discounted rate of return and cost of capital. In hindsight, on availability of the actual figures, if the future projections are not met, it… Its practical value lies in the way the ITAT Mumbai connected the governing provisions—56(2)(viib)—to the procedural posture and evidence before it.

The authority level is ITAT / Tribunal. That affects persuasive or binding weight, but authority level alone is never enough. Territorial jurisdiction, statutory period, the identity of the challenged order, and later appellate treatment must all be checked before the case is used in advice, a submission, or litigation strategy.

Practitioner action points

• Begin with the complete judgment and mark the paragraphs supporting the exact proposition relied upon.
• Match the statutory version of 56(2)(viib) and the decision date 2022-01-19; do not assume the current text is identical.
• Compare the notice, assessment, appeal or other procedural sequence with the chronology recorded in this case.
• Verify the stated later-history status and any review, appeal, SLP, curative or rectification proceedings before citation.
• Record why the client’s evidence is materially similar, and also record any fact capable of distinguishing the result.

Does this case match your facts?

Detailed reliance and distinction analysis

Identity check. Confirm that the cited cause title is DCIT v. Credtalpha Alternative Investment Advisors Pvt. Ltd., the proceeding is ITA No. 7056/Mum/2019, and the decision is dated 2022-01-19. These fields are taken from the judgment record and should appear exactly in the citation note.

Bench check. The judgment identifies the coram as MS SUCHITRA KAMBLE, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER. A later order by another bench, a larger bench, or a higher forum may alter the weight or interpretation of the proposition.

Provision check. The source associates the dispute with 56(2)(viib). The practitioner should place the historical statutory text next to the current text and identify every amendment, proviso, explanation, rule or notification that could change the analysis.

Fact check. The source issue is not a free-standing abstract rule. It arises from the concrete record summarized above. A reliable application note should list the common facts, the different facts, and whether each difference affects jurisdiction, admissibility, limitation, burden, computation or relief.

Remedy check. The recorded result is Dismissed. Where a matter is remanded, set aside, partly allowed, or disposed with directions, the exact operative language is more important than a binary winner/loser label.

History check. The current closure state is RECTIFICATION_HIGH_COURT_APPEAL_SLP_CHECK_PENDING. If that state is pending, the page does not assert that no later case exists. It means the check remains open and must be completed at the point of professional reliance.

Section / provision impact

• 56(2)(viib) — apply the exact version considered in the judgment.

Case network

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