2019 (10) TMI 707 - AT - Income Tax

Income from other sources - Valuing the share premium on the basis of book value of shares as reasonable value instead of valuing on the basis of Discounted Cash Flow (DCF) method and accordingly adding the share premium - HELD THAT - We noted that in the case of Vodafone M-Pesa Ltd vs. PCIT 2018 (3) TMI 530 - BOMBAY HIGH COURT held that in view of the Income Tax Rules the method of valuation namely NAV method or DCF Method to determine the fair market value of share in terms of section 56(2)(viib) of the Act has to be done or adopted at the assessee s option. AO was undoubtedly entitled to scrutinize the valuation report and can tinker or determine a fresh valuation after confronting the assessee. However the basis of valuation had to be DCF method and it is not open to the AO to change the method of valuation which the assessee has duly opted. Hon ble Bombay High Court has restored the matter back to the file of the AO. We noted that firstly in the present case the valuation done by the assessee for valuing its shares is on the basis of DCF method and the AO could not have substituted it by NAV method rather he should have arrived at another value if any by applying DCF method only. We also noted that the explanation and additional evidences produced before us shows that why projection has been made in that manner and have been substantiated by filing additional evidences/ 8. We noted that this issue has been considering by the Hon ble Bombay High Court and remanded back to the file of the AO the issue regarding considering the value of shares in term of section 56(2)(viib) of the Act on the basis of DCF method. Here in this present case also we direct the AO to consider these additional evidences and then can arrive at a correct value of share for charging of share premium in term of section 56(2)(VIIB) - Appeal of assessee is allowed for statistical purposes.

Summary

Issues:
Valuation of share premium based on book value vs. Discounted Cash Flow (DCF) method. Application of section 56(2)(viib) of the Income-tax Act, 1961.

Valuation of Share Premium:
The appeal concerns the valuation of share premium by the Assessing Officer (AO) based on book value instead of the Discounted Cash Flow (DCF) method. The AO added a sum as income under section 56(2)(viib) of the Act due to the high premium. The appellant contended that the DCF method was used for valuation, providing a certified report valuing shares at a higher amount. However, the AO adopted the book value method, resulting in the addition of a substantial sum as income. The Commissioner of Income Tax (Appeals) upheld the AO's decision, leading to the appellant's appeal before the Tribunal.

Application of Section 56(2)(viib):
The issue revolves around the application of section 56(2)(viib) of the Act to shares issued to both resident and non-resident shareholders. The appellant argued that the Act exempts non-resident shareholders from the provisions of section 56(2)(viib) when the shares are valued using the DCF method. The AO, however, disregarded this exemption and valued the shares based on the book value, resulting in a disagreement between the parties.

The appellant, engaged in the beverage products business, issued shares at a high premium, prompting scrutiny by the AO. The AO, lacking basis for the projections submitted, valued the shares using the book value method, contrary to the DCF method applied by the appellant. The appellant's argument emphasized the correct valuation method and the AO's failure to consider additional evidence crucial to the case.

The Tribunal acknowledged the importance of the valuation method chosen by the appellant and the AO's obligation to adhere to it. Referring to previous decisions, including the Hon'ble Bombay High Court, the Tribunal highlighted the necessity of using the DCF method for valuation under section 56(2)(viib) of the Act. The Tribunal directed the matter back to the AO for a reevaluation based on the DCF method, considering additional evidence presented by the appellant.

In conclusion, the Tribunal allowed the appeal for statistical purposes, setting aside the assessment order and the CIT(A)'s decision. The matter was remanded to the AO for a correct valuation of shares based on the DCF method, in accordance with the appellant's chosen valuation approach.