2022 (12) TMI 1508 - AT - Income Tax

Addition u/s 56(2)(viib) - rejection of valuation report of the valuer - premium received on issue of equity share exceeds its Fair Market Value (FMV) and consequently the excess premium received on issue of equity share is susceptible to tax in view of provisions of Section 56(2)(viib) as deemed income of the assessee - Substitution of value of shares - valuation as per DCF method - AO proceeded to determine value based on actual figures of profits for next two years, i.e., F.Ys. 2015-16 and 2016-17 in substitution of the projected profits before tax adopted in the valuation report HELD THAT - The assessee in the instant case has proceeded to issue equity share at a premium on the basis of independent valuer report wherein DCF method was adopted for the purposes of determination of fair market value. The Assessing Officer has not disputed the DCF method adopted for valuation per se. AO however, has compared the projected figures used by the valuer with the actual figures available at the time of assessment. AO displaced the FMV determined as per DCF method based on projected figures by replacing the same by actual figures to discard the justification of share premium. We find that such action of the AO substitute the figures estimated at the time of valuation towards ensuing years by actual figures made available to AO at the later point of time is squarely in contrast to the judgment of Cinestaan Entertainment 2021 (3) TMI 239 - DELHI HIGH COURT and decision of Intelligrape Software Pvt. Ltd 2020 (10) TMI 403 - ITAT DELHI In Cinestaan 2021 (3) TMI 239 - DELHI HIGH COURT took cognizance of the identical situation, i.e., the AO had disregarded the valuation report of the assessee primarily on the ground that the projections of revenue considered for the purpose of valuation do not match with the actual revenue arose in the subsequent years - in the fact situation observed that the assessee company has adopted a recognized method of valuation and the revenue could not show that assessee has adopted demonstrably wrong approach. It was observed that valuation is not an exact science and therefore cannot be done with arithmetic precision. It is a technical and complex issue which should best be appropriately left to the consideration and wisdom of experts in the field, having regard to the imponderables which enter the process of valuation of shares. The Hon ble High Court thus upheld the action of the ITAT and consequently the additions made under the deeming provisions of Section 56(2)(viib) made by the AO were reversed. Similar view has been taken in Intelligrape Pvt. Ltd 2020 (10) TMI 403 - ITAT DELHI wherein it was observed that the valuation based on future projections at the time of issue of shares cannot be inferred as the actual figures may vary depending on the market conditions and host of other factors. Appeal of the assessee is allowed.

Issues Involved:
1. Legitimacy of the addition of Rs. 9,72,80,000/- under Section 56(2)(viib) of the Income Tax Act.
2. Validity of the valuation method used for determining the Fair Market Value (FMV) of shares.
3. Justification of the Assessing Officer's (AO) rejection of the Discounted Cash Flow (DCF) method.
4. Applicability of penalty under Section 271(1)(c).
5. Charging of interest under Sections 234A, 234B, and 234C.

Issue-wise Detailed Analysis:

1. Legitimacy of the Addition under Section 56(2)(viib):
The assessee challenged the addition of Rs. 9,72,80,000/- made by the AO, contending that the transaction was based on a valuer's report. The AO alleged that the premium received on the issue of equity shares exceeded its FMV, invoking Section 56(2)(viib) of the Income Tax Act. The AO reworked the valuations using actual figures from subsequent years, concluding that no premium was justified under the DCF method. Consequently, the AO added Rs. 9,72,80,000/- to the assessee's income. The CIT(A) upheld this addition, noting that the assessee failed to substantiate the projected cash flows used in the DCF method.

2. Validity of the Valuation Method:
The assessee adopted the DCF method for determining FMV, supported by a valuer's report. The AO, however, rejected this report, claiming it was based on unrealistic projections. The AO recalculated the FMV using actual figures from subsequent years, which significantly differed from the projections. The CIT(A) supported the AO's stance, emphasizing that the projections were not substantiated by any material evidence and were thus unreliable.

3. Justification of AO's Rejection of DCF Method:
The AO's rejection of the DCF method was based on the discrepancy between the projected and actual figures. The AO argued that the projections were exorbitant and unverified, leading to an inflated FMV. The CIT(A) concurred, noting that the valuer's report lacked independent verification and relied solely on the management's projections. The Tribunal, however, found merit in the assessee's argument that the AO's approach of using hindsight to judge the projections was flawed. The Tribunal cited the Delhi High Court's decision in Cinestaan Entertainment Pvt. Ltd., which held that valuation is not an exact science and cannot be judged with arithmetic precision.

4. Applicability of Penalty under Section 271(1)(c):
The assessee objected to the initiation of penalty proceedings under Section 271(1)(c). The CIT(A) deemed this ground premature and did not adjudicate on it.

5. Charging of Interest under Sections 234A, 234B, and 234C:
The assessee contested the charging of interest under Sections 234A, 234B, and 234C. The CIT(A) directed the AO to charge interest as per the provisions of the Act, noting that it was mandatory.

Conclusion:
The Tribunal allowed the assessee's appeal, setting aside the CIT(A)'s order and reversing the additions made by the AO. The Tribunal emphasized that the AO's approach of using actual figures to judge the projections was incorrect, aligning with the Delhi High Court's view that valuation should be left to the expertise of professionals and cannot be judged with hindsight. The Tribunal found substantial merit in the assessee's argument and ruled in their favor.

← Previous Next →