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2019 (6) TMI 925 - AT - Income TaxAddition of share premium u/s 56(2)(viib) - valuation of the projected cash flow - Valuation method prescribed viz Discounted Cash Flow(DCF) method - AO as well as the CIT(A) both certainly could not understand the valuation method prescribed under the rule 11UA(2)(b) i.e. DCF method and found out various discrepancies in the valuation report submitted by the assessee which was made by an expert , Chartered Accountant - CIT(A) considered himself an expert and made his own valuation HELD THAT - AO as well as the CIT(A) observed that projected figures are not verifiable. But during the course of assessment proceedings, the assessee had provided the clarifications dated 16.12.2016 as to from where the projected figures were taken. As per the contentions of the AR, the projected cash flows were based on the various reports/data gathered by the analyst and management and after analyzing and verifying the same by the valuer. But the same was not considered either by the AO as well as by the CIT(A). From the records it can be seen that the AO as well as the CIT(A) never asked for furnishing the data from the Assessee at any point of time. Thus, they have not given any opportunity to the assessee to further clarify the projected cash flows. It is agreed that valuation is not mechanical process but, determined from market trends and other factors and after considering them, the valuer can determine the value of share. Even if the said is doubted, the AO should have given proper opportunity to the assessee for allowing the assessee to clarify the aspects of the valuation of the projected cash flow, which the AO failed to do so as well as the CIT(A) also did not take into account the submissions made by the Assessee. Thus, it will be appropriate to remand back all the issues contested herein to the file of the Assessing Officer with a direction to decide the same afresh - appeal of the assessee is partly allowed for statistical purpose.
Issues Involved:
1. Legality and factual correctness of the CIT(A)'s order. 2. Validity of the Assessing Officer's (AO) and CIT(A)'s substitution of their valuation over the expert's valuation. 3. Consideration of the second valuation report by another Chartered Accountant. 4. Projections in the valuation report versus the company's actual state of affairs. 5. Rejection of the Discounted Cash Flow (DCF) method by CIT(A) and adoption of the Net Asset Value (NAV) method. 6. Intent and application of Section 56(2)(viib) regarding accommodation entries. 7. Classification of the share issue as a right issue. 8. Application of the explanation to Section 56(2)(viib) of the Income Tax Act. 9. Jurisdictional error in applying Section 56(2)(viib) to the assessee. Issue-wise Detailed Analysis: 1. Legality and factual correctness of the CIT(A)'s order: The assessee contested that the CIT(A)'s order is "bad in law and on facts." The tribunal noted that the CIT(A) dismissed the appeal without adequately considering the explanations and data provided by the assessee, thereby failing to provide a fair opportunity for the assessee to clarify the projected cash flows. 2. Validity of the AO's and CIT(A)'s substitution of their valuation over the expert's valuation: The tribunal observed that both the AO and CIT(A) substituted their valuation methods over the expert's DCF valuation without sufficient basis. The tribunal emphasized that valuation is not a mechanical process and should be based on relevant material and rational judgment. The AO and CIT(A) failed to consider the detailed clarifications provided by the valuer and the assessee. 3. Consideration of the second valuation report by another Chartered Accountant: The assessee furnished a second valuation report addressing the AO's concerns, but the AO and CIT(A) dismissed it without proper examination. The tribunal highlighted that the second report should have been considered, especially since it was prepared to address the AO's observations. 4. Projections in the valuation report versus the company's actual state of affairs: The AO and CIT(A) argued that the projections in the valuation report were contrary to the company's actual state, citing consistent heavy losses and significant interest expenses. The tribunal noted that the assessee provided a detailed explanation and supporting data for the projections, which were not adequately considered by the AO and CIT(A). 5. Rejection of the DCF method by CIT(A) and adoption of the NAV method: The tribunal found that the CIT(A) exceeded his jurisdiction by rejecting the DCF method and adopting the NAV method. The assessee had the option to select the valuation method as per Rule 11UA(2) of the Income Tax Rules, 1962. The CIT(A)'s substitution of the valuation method was deemed "grossly illegal." 6. Intent and application of Section 56(2)(viib) regarding accommodation entries: The assessee argued that the section's intent was to check accommodation entries, which was not applicable in their case as the funds were received from the holding company. The tribunal noted that the CIT(A) failed to appreciate this context and did not consider the nature of the transactions and the source of funds. 7. Classification of the share issue as a right issue: The CIT(A) held that the issue of shares did not constitute a right issue as they were not offered proportionately to existing shareholders. The tribunal noted that the assessee offered the right shares proportionately and cited relevant case law supporting the non-applicability of Section 56(2)(viib) to right issues. 8. Application of the explanation to Section 56(2)(viib) of the Income Tax Act: The assessee argued that the share value was justifiable based on the value of the property (a mall) held by the company. The tribunal noted that the AO and CIT(A) did not adequately consider this explanation, which fell under sub-clause (ii) of the explanation to Section 56(2)(viib). 9. Jurisdictional error in applying Section 56(2)(viib) to the assessee: The assessee contended that the addition under Section 56(2)(viib) was without jurisdiction as it applies only to individuals and HUFs. The CIT(A) deemed it a typographical error curable under Section 292B. The tribunal did not explicitly address this issue in detail but remanded the case for fresh consideration. Conclusion: The tribunal remanded all issues back to the AO for fresh consideration, directing a thorough verification of the valuation method and projected cash flows. The AO was instructed to provide the assessee with a proper opportunity for hearing, adhering to principles of natural justice. The appeal was partly allowed for statistical purposes.
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