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2020 (1) TMI 684 - AT - Income TaxAddition u/s 56(2)(viib) - Method of valuation of share - valuation method i.e. based on net asset or based on DCF method - Assessee has issued rights shares to its shareholders with share premium after duly valuing the shares based on DCF method and the valuation was done by a merchant banker - CIT(A) rejected the valuation report submitted by the assessee as erroneous by adopting the DCF method, but accepted the DCF valuation only to the extent of actual performance in the subsequent years and accordingly, partly allowed the ground raised by the assessee - HELD THAT - Since AO has rejected the valuation report, he himself proceeded to value the fair market value of the shares based on net assets method. Since AO has rejected the valuation report even though it was done by valuer, which is independent entity. We observe that the reason for rejecting the valuation report by the AO was well answered by Ld. CIT(A) and also Ld. CIT(A) has appreciated the fact that assessee has option to choose one of the method i.e. net asset method or DCF method, whichever is favourable to them. Since Ld. CIT(A) has already addressed the issue of method of valuation which has to be adopted, therefore we do not intend to go into which method has to be adopted and accordingly, we notice that the department is in appeal against Ld. CIT(A) and in our considered view, Ld. CIT(A) has properly rejected the method adopted by the AO and proceeded to accept the DCF method adopted by the assessee. Therefore, we are inclined to dismiss the ground raised by the department. CIT(A) has accepted the DCF method adopted by the assessee and he analyzed the factual performance of the assessee subsequent to issue of shares. The valuation of shares are for that matter any valuation is itself is a projection of future events or activities and no doubt it has to be done with some accuracy, however no person in the world at the time of projecting events or result to project with 100% of accuracy and actual events are highly volatile and highly dependent on so many factors. Assessee has projected based on the fact that software of wallet and association of ICICI bank will increase the market share and accordingly, they have projected the figures and further the valuer has adopted the projection figures provided by the assessee and it is left to the wisdom of valuer to accept or reject or to carry out independent investigation raised with the valuer and legislature in more than one place depends on the skills of the professionals like merchant banker only to value the valuation of shares or other volatile securities. Since, Ld. CIT(A) has compared the factuals with projections and assessee has achieved 40% of the actual results is too harsh to the assessee and the valuation is done in order to carry out certain activities by the management. In this case, the valuation was used to issue of rights shares. The AO or Ld. CIT(A) is trying to evaluate the accuracy of the valuation at the time of assessment, this is not proper and also the factuals are based on so many factors subsequent to adoption of projection and valuation. Accordingly, we are not in a position to accept the method adopted by Ld. CIT(A). - Decided in favour of assessee.
Issues Involved:
1. Validity of the assessment order and principles of natural justice. 2. Addition of excess consideration received on the issue of shares under Section 56(2)(viib) of the Income Tax Act. 3. Levy and computation of interest under Section 234B of the Act. 4. Levy of penalty under Section 271(1)(c) of the Act. Issue-wise Analysis: 1. Validity of the Assessment Order and Principles of Natural Justice: The appellant contended that the assessment order was bad in law and void since it was perverse on facts and in law. They argued that no show-cause notice was issued before invoking the provisions of Section 56(2)(viib), violating principles of natural justice. Additionally, the appellant claimed that the recomputation of enterprise value by the CIT(A) without giving the appellant an opportunity to confront the valuation violated principles of natural justice. 2. Addition of Excess Consideration Received on Issue of Shares: The primary issue revolved around the addition made under Section 56(2)(viib) of the Income Tax Act concerning the issuance of shares by the appellant to its holding company at a premium. The AO rejected the valuation report submitted by the appellant, which was based on the Discounted Cash Flow (DCF) method, and instead used the net asset value method to determine the fair market value of the shares. The AO concluded that the projections provided by the appellant were unreliable and not based on any scientific calculation, leading to an addition of ?207,99,59,372/- to the total income of the appellant. The CIT(A) partially accepted the appellant's contentions, acknowledging that the DCF method is an accepted method under Rule 11UA of the Income Tax Rules. However, the CIT(A) adjusted the enterprise value to 40% of the projected value based on actual performance, resulting in a taxable amount of ?136,94,33,105/- under Section 56(2)(viib). The Tribunal observed that the AO's rejection of the valuation report was not justified as the valuer had followed the DCF method, which is a prescribed method under Rule 11UA. The Tribunal emphasized that projections are inherently uncertain and subject to various factors, and actual results may differ from projections. The Tribunal concluded that the CIT(A)'s approach of adjusting the valuation based on actual performance was not appropriate and allowed the appeal in favor of the appellant. 3. Levy and Computation of Interest under Section 234B: The appellant contested the levy of interest under Section 234B, which was consequential to the addition made under Section 56(2)(viib). Since the Tribunal allowed the appeal on the primary issue, the levy of interest under Section 234B was also set aside. 4. Levy of Penalty under Section 271(1)(c): The appellant argued against the initiation of penalty proceedings under Section 271(1)(c), which the CIT(A) dismissed as not being an appealable matter. The Tribunal did not specifically address this issue, as it was consequential to the primary issue of addition under Section 56(2)(viib). Conclusion: The Tribunal allowed the appeal filed by the appellant, setting aside the addition made under Section 56(2)(viib) and the consequential levy of interest under Section 234B. The appeal filed by the revenue was dismissed. The Tribunal emphasized the validity of the DCF method for valuation and rejected the approach of adjusting the valuation based on actual performance.
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