2018 (5) TMI 1088 - AT - Income Tax

Determine the FMV of the shares - Reliance on the report of Merchant banker with long list of disclaimer - Reference to Matter to the Income Tax Department Valuation Officer for a determination of price market value of such capital asset - Held that - It is not possible even for the Departmental Valuation Officer to conduct any exercise of verification of the acceptability of the value determine by the merchant banker. This is more particularly in view of the long disclaimer appended by the merchant banker at page no. 16 & 17 of the paper book which clearly establishes that no independent enquiry is caused by merchant banker to verify the truth or otherwise the figures furnished by the assessee at least on test basis. The merchant bankers solely relied upon an assumed without independent verification, the truthfulness accuracy and completeness of the information and the financial data provided by the company. A perusal of this long disclaimer clearly shows that the merchant banker did not do anything reflecting their expertise, except mere applying the formula to the data provided by the assessee. We, therefore, are unable to brush aside the contention of the Revenue that the possibility of tailoring the data by applying the reverse engineering to the pre determined conclusions. There has not been any possibility of verifying the correctness or otherwise of the data supplied by the assessee to the merchant banker, in the absence of which the correctness of the result of DCF method cannot be verified. This left no option to the AO but to reject the DCF method and to go by NAV method to determine the FMV of the shares. Without such evidence, it serves no purpose even if the matter is referred to the Department s Valuation Officer. We, therefore, do not find any illegality or irregularity in the approach of conclusions are by the authorities below. While confirming the same, we dismissed the appeal as devoid of merits. - Decided against assessee

Issues Involved:
1. Justification of the valuation method adopted by the assessee for determining the fair market value (FMV) of shares.
2. Validity of the rejection of the Discounted Cash Flow (DCF) method by the Assessing Officer (AO).
3. Appropriateness of the Net Asset Value (NAV) method adopted by the AO.
4. Requirement for the AO to refer the matter to the Income Tax Department Valuation Officer.

Issue-wise Detailed Analysis:

1. Justification of the valuation method adopted by the assessee for determining the FMV of shares:

The assessee, a company engaged in various investment-related activities, had allotted equity shares at a premium and determined the FMV of the shares using the DCF method. This valuation was conducted by M/s SPA Capital Advisors Ltd., a merchant banker. The assessee filed its return declaring a loss, but the AO made an addition under section 56(2)(viib) of the Income Tax Act, rejecting the valuation report and determining the share value independently. The AO calculated the FMV of the shares at ?9.60 per share, leading to an addition of ?1,27,26,000/-.

2. Validity of the rejection of the DCF method by the AO:

The AO rejected the DCF method used by the assessee, citing several reasons:
- The risk-free return rate of 9.04% and expected market return of 15.80% were deemed unrealistic given the company's negative earnings since inception.
- The beta value used was inappropriate for a financial sector company with negligible risk.
- The cash flow projections provided by the assessee were not substantiated with evidence, making the DCF method unverifiable.
- The merchant banker's disclaimer indicated reliance on unverified data provided by the assessee.

3. Appropriateness of the NAV method adopted by the AO:

Due to the lack of substantiating evidence for the DCF method, the AO adopted the NAV method to determine the FMV of the shares. The AO issued a notice under sections 144/142(1) and calculated the FMV at ?6.0 per share. The assessee failed to respond to this notice, leading the AO to conclude the assessment under the best judgment method, determining the share value at ?9.60 per share.

4. Requirement for the AO to refer the matter to the Income Tax Department Valuation Officer:

The assessee contended that the AO should have referred the matter to the Income Tax Department Valuation Officer if there were doubts about the valuation report. However, the tribunal held that without evidence to substantiate the cash flow projections, even the Valuation Officer could not verify the DCF method's correctness. The tribunal noted that the merchant banker's disclaimer showed no independent verification of the data, leading to the possibility of tailored figures.

Conclusion:

The tribunal upheld the AO's rejection of the DCF method and the adoption of the NAV method, confirming the addition made. The appeal of the assessee was dismissed as devoid of merits. The judgment emphasized the need for substantiating evidence to support the valuation method adopted and the AO's authority to reject unverifiable valuation reports. The tribunal found no illegality or irregularity in the authorities' approach and conclusions.

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