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2023 (12) TMI 1302 - AT - Income TaxAddition u/s 56(2)(viib) - FMV determination of the shares issued to the assessee - AO rejecting the DCF method adopted by the assessee - As per AO assessee could not substantiate the FMV adopted as per DCM method to the satisfaction of the AO - HELD THAT - Once the assessee applied particular method of valuation (in the present case DCF method) then it is the duty of the AO / CIT(A) to scrutinize the valuation report within the four corners or parameters laid down while making the valuation report under DCF method only. It is not permissible for the AO to reject the method opted by the assessee and apply a different method of valuation and the AO can definitely reject the valuation report but not the method. In case the AO rejected the valuation report then the AO has to carry out a fresh valuation report by applying the same valuation method and determine the fair market value of the unquoted shares. Therefore in our view the AO was incorrect in concluding that the DCF method is quite unrealistic and inapplicable to the terms of the Income Tax Act. On the contrary the DCF method is quite applicable and was required to be applied by the Assessing Officer to determine the FMV of the unquoted shares. Our above conclusion is based on the bare reading of the provisions reproduced hereinabove and also on account of the decision referred by the Tribunal in the case of Innoviti Payment Solutions Pvt. Ltd. 2019 (1) TMI 688 - ITAT BANGALORE as held that AO can scrutinize the valuation report and the if the AO is not satisfied with the explanation of the assessee he has to record the reasons and basis for not accepting the valuation report submitted by the assessee and only thereafter he can go for own valuation or to obtain the fresh valuation report from an independent valuer and confront the same to the assessee. But the basis has to be DCF method and he cannot change the method of valuation which has been opted by the assessee.For scrutinizing the valuation report the facts and data available on the date of valuation only has to be considered and actual result of future cannot be a basis to decide about reliability of the projections.The primary onus to prove the correctness of the valuation Report is on the assessee as he has special knowledge and he is privy to the facts of the company and only he has opted for this method. Thus AO was incorrect in rejecting the DCF method adopted by the assessee. Whether the valuation report based on which the valuation was arrived by the assessee was in accordance with law or not? - CIT(A) instead of examining the valuation report and the fair market value of the shares by applying the DCF method had resorted to examining the functionality and working of the NAV method and thereafter came to the conclusion that FMV has to be determined by the NAV method based on the CBDT Circular dt.12.07.2017 whereby it was envisaged that the value of the shares shall be determined by the Assessing Officer by taking into account the value of the intangible asset for the purpose of working of the net value. This approach of the ld.CIT(A) was not in accordance with law. As we have held hereinabove that the option is not available to the Assessing Officer then the exercise carried out by ld.CIT(A) became futile and of no consequence. Further the determination of FMV on the basis of NAV by the Ld. CIT(A) was otherwise not sustainable and is bad in law as per Rule 11U(j) which defined valuation date and Rule 11U(b) which defined Balance Sheet. The conjoint reading of the above-mentioned Rules make it clear that the valuation of the asset as per the NAV method is required to be determined while making a valuation of the assets mentioned in the balance sheet. In any case the CBDT Circular dt.12.07.2016 cannot be made available and applied retrospectively to the facts of the case as the valuation report in the present case was prepared on 01.07.2016 i.e. one year prior to the issuance of the CBDT Circular. The valuation report is dated 01.07.2016. In that view the NAV method adopted by the ld.CIT(A) is of no help to the assessee. In light of the above the approach of the Assessing Officer as well as the ld.CIT(A) cannot be sustained. Having held that both the approach of the AO as well as the ld.CIT(A) were incorrect hence we deem it appropriate to remand back the matter to the file of the Assessing Officer with a direction to determine the FMV after exercising the power conferred under the Act and after applying DCF method on the valuation date dt.01.07.2016 based on the balance sheet or any other material as available on that day after granting due opportunity of hearing to the assessee. Accordingly appeal of the Revenue is allowed for statistical purposes.
Issues Involved:
1. Condonation of delay in filing the appeal. 2. Deletion of addition made under section 56(2)(viib) of the Income Tax Act, 1961. 3. Validity of the Discounted Cash Flow (DCF) method adopted by the assessee for share valuation. 4. Examination of the valuation report and its adherence to legal standards. Summary: Condonation of Delay: The Revenue filed the appeal with a delay of 125 days, attributing the delay to the Covid-19 pandemic and restructuring within the Income Tax Department. The Tribunal, referencing the Bombay High Court judgment in Vijay Vishin Meghani Vs. DCIT, condoned the delay, emphasizing that adjudication on merits should not be deprived due to delays caused by extraordinary circumstances like the pandemic. Deletion of Addition under Section 56(2)(viib): The Revenue challenged the deletion of the addition made by the Assessing Officer (AO) under section 56(2)(viib), arguing that the assessee failed to substantiate the Fair Market Value (FMV) adopted as per the DCF method. The AO had rejected the DCF method and instead used the Net Asset Value (NAV) method, concluding that the excess share premium should be assessed as income from other sources. Validity of the DCF Method: The Tribunal held that the option to choose the valuation method (DCF or NAV) lies with the assessee, as per Rule 11UA of the Income Tax Rules. The AO cannot reject the chosen method but can scrutinize the valuation report within the parameters of the selected method. The Tribunal cited multiple judgments supporting the validity of the DCF method, including the Bombay High Court's decision in Vodafone M-Pesa Ltd. Vs. Pr. CIT, emphasizing that the AO must base any fresh valuation on the DCF method if initially chosen by the assessee. Examination of the Valuation Report: The Tribunal found that the valuation report prepared by the assessee's auditor lacked independent verification of financial projections and industry norms, making it unsustainable. The CIT(A) had erred by not examining the valuation report thoroughly and instead focusing on the NAV method. The Tribunal remanded the matter back to the AO to determine the FMV using the DCF method, based on the balance sheet or other relevant material available on the valuation date, providing an opportunity for the assessee to present additional evidence. Conclusion: The Tribunal allowed the appeal for statistical purposes, directing the AO to re-assess the FMV using the DCF method, ensuring adherence to legal standards and providing due opportunity for the assessee to submit relevant documents.
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