2019 (5) TMI 836 - AT - Income Tax

Income from other sources u/s 56(2)(viib) - shares issued at premium - discounted cash flow method for valuation of shares - FMV of the shares as per Rule 11UA of the Income tax Rules, 1962 or as may be substantiated by the company to the satisfaction of the AO, based on the value on the date of issue of shares of its assets, including intangible assets being goodwill, know how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, whichever is higher - HELD THAT - Admittedly, the value of the shares was determined by the assessee as per the discounted cash flow method . In so far the adoption of the discounted cash flow method for valuation of shares by the assessee is concerned, we find that the same has been accepted by the A.O while framing the assessment u/s 143(3) in the case of the assessee for the immediately succeeding year i.e. A.Y 2014-15, wherein too the shares had been issued at a premium of ₹ 140/- per share. No infirmity does emerge from the determining of the FMV of the shares by the assessee company as per the recognized method of valuation i.e discounted cash flow method envisaged in Sec. 56(2)(viib) r.w Rule 11UA of the Income tax Rules, 1962. Apart therefrom, we are unable to comprehend that now when the revenue itself has accepted the said method of valuation of shares and the issuance of the same at a premium of ₹ 140/- per share in the assessment framed in the case of the assessee for the immediately succeeding year viz. A.Y 2014-15, then how in the absence of any distinguishing facts it could have whimsically declined to accept the same for the year under consideration. No infirmity emerges from the well reasoned order of the CIT(A), who had rightly deleted the addition made by the A.O u/s 56(2)(viib) during the year under consideration. We thus finding ourselves to be in agreement with the view and the reasoning adopted by the CIT(A) while deleting the addition of ₹ 2,80,00,000/- made by the A.O, uphold his order - Decided against revenue

Summary

Issues:
1. Valuation of shares under Sec. 56(2)(viib) of the Income Tax Act, 1961.
2. Acceptance of the discounted cash flow method for valuation.
3. Consistency in assessing valuation methods across different assessment years.

Analysis:

Issue 1: Valuation of shares under Sec. 56(2)(viib)
The appeal by the revenue challenged the deletion of an addition of ?2,80,00,000 made by the Assessing Officer (AO) under section 56(2)(viib)(a)(i) of the Income Tax Act, 1961. The AO rejected the Fair Market Value (FMV) of shares declared by the assessee due to lack of supporting evidence regarding the method of valuation. The AO calculated the FMV at ?2.36 and Nil for two different periods, which was lower than the face value of the shares. Consequently, the AO treated the entire share premium as taxable income of the assessee.

Issue 2: Acceptance of the discounted cash flow method
The Commissioner of Income Tax (Appeals) (CIT(A)) observed that the assessee opted to value shares using the discounted cash flow method, supported by a report from an accountant. The CIT(A) noted that the AO had accepted the same method in the subsequent assessment year. Rule 11UA allows two methods for valuation - book value or discounted cash flow. The CIT(A) found no justification for the AO's inconsistent view and deleted the addition based on the method chosen by the assessee.

Issue 3: Consistency in assessing valuation methods
The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO had accepted the discounted cash flow method in the following year. The Tribunal found no fault in the assessee's valuation method, as it complied with the provisions of Sec. 56(2)(viib) and Rule 11UA. Rejecting the revenue's appeal, the Tribunal dismissed it as lacking merit.

In conclusion, the judgment highlights the importance of consistency in assessing valuation methods for shares under the Income Tax Act. The Tribunal emphasized adherence to prescribed rules and recognized valuation methods, ultimately supporting the decision to delete the addition of share premium in this case.