2020 (7) TMI 128 - AT - Income Tax

Addition u/s. 56 2 viib - method for valuation of the shares - equity and preference shares allotted by assessee to various residents at a premium of ₹ 800 per share - Discounted Cash Flow DCF method for valuation of the shares as per assessee v/s net asset method prescribed under Rule 11UA(1)(c)(b) as per revenue - HELD THAT - As decided in M/S. VBHC VALUE HOMES PVT. LTD., M/S. VBHC VALUE HOMES PVT. LTD. 2020 (6) TMI 318 - ITAT BANGALORE it is seen that the Tribunal has followed the judgment of Hon ble Bombay High Court rendered in the case of VODAFONE M-PESA LIMITED VERSUS PRINCIPAL COMMISSIONER OF INCOME-TAX AND 6 OTHERS 2018 (3) TMI 530 - BOMBAY HIGH COURT and restored the matter back to the file of the AO for a fresh decision with some directions that AO should follow DCF method only and he cannot change the method opted by the assessee as has been held by the Hon ble Bombay High Court. Grounds raised by the assessee are allowed for statistical purposes.

Issues Involved:
1. Justification of addition made under Section 56(2)(viib) of the Income Tax Act, 1961.
2. Validity of the valuation method adopted by the assessee.
3. Rejection of the Chartered Accountant's valuation report by the Assessing Officer (AO).
4. Adoption of the fair market value of shares by the AO.
5. Application of interest under Sections 234A, 234B, and 234D of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Justification of Addition under Section 56(2)(viib):
The primary issue in the appeal was the addition of ?30,99,600/- under Section 56(2)(viib) of the Income Tax Act, 1961. The AO alleged that the consideration received for the allotment of shares exceeded the fair market value. The assessee contended that the valuation was based on the Discounted Cash Flow (DCF) method, which is recognized under the relevant rules and guidelines.

2. Validity of the Valuation Method Adopted by the Assessee:
The assessee adopted the DCF method for share valuation, as supported by a Chartered Accountant's report. The DCF method is recognized under Rule 11UA(2)(c) of the Income Tax Rules and other relevant regulations. The Tribunal noted that the AO cannot change the valuation method opted by the assessee but can scrutinize the valuation report and determine a fresh valuation using the same method.

3. Rejection of the Chartered Accountant's Valuation Report:
The CIT(A) upheld the AO's rejection of the Chartered Accountant's valuation report, labeling it as an afterthought and based on reverse engineering. The Tribunal, however, referenced the judgment of the Hon'ble Bombay High Court in the case of Vodafone M-Pesa Ltd. vs. PCIT, which stated that the AO can scrutinize the valuation report but must use the DCF method for any fresh valuation.

4. Adoption of Fair Market Value by the AO:
The AO adopted the net asset method instead of the DCF method, leading to the valuation of shares at NIL. The Tribunal reiterated that the AO must use the DCF method as chosen by the assessee and cannot change the valuation method. The AO should scrutinize the projections and assumptions made in the DCF method and determine a fresh valuation if necessary, but the basis must remain the DCF method.

5. Application of Interest under Sections 234A, 234B, and 234D:
The assessee denied liability for interest under Sections 234A, 234B, and 234D of the Income Tax Act. The Tribunal did not specifically address this issue in the detailed analysis but allowed the appeal for statistical purposes, indicating that the matter requires further examination by the AO.

Conclusion:
The Tribunal set aside the order of the CIT(A) and restored the matter to the AO for a fresh decision, directing the AO to follow the DCF method for valuation and scrutinize the valuation report accordingly. The appeal was allowed for statistical purposes, and the AO was instructed to comply with the directions as per the judgment of the Hon'ble Bombay High Court in the case of Vodafone M-Pesa Ltd. vs. PCIT.

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