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2021 (7) TMI 17 - AT - Income TaxIncome from other sources - difference between the fair market value and the issue price of shares at a premium as income of the Assessee - correctness of the valuation Report - adoption of the fair market value as per the above two methods i.e., either DCF method or fair market value of the unquoted equity shares determined by a merchant banker - CIT(A) held that the Assessing Officer is well within his powers to disturb the valuation of the chartered accountant furnished by the Assessee substantiating the fair market value - HELD THAT - Law contemplates invoking provisions of section 56(2)(viib) of the Act only in situations where the shares are issued at a premium and at a value higher than the fair market value. The law provides that, the fair market value may be determined with such method as may be prescribed or the fair market value can be determined to the satisfaction of the Assessing Officer. The provision provides an Assessee two choices of adopting either NAV method or DCF method. If the Assessee determines the fair market value in a method as prescribed the Assessing Officer does not have a choice to dispute the justification. The methods of valuation are prescribed in Rule 11UA(2) of the Rules. The provisions of Rule 11UA(2)(b) of the Rules provides that, the Assessee can adopt the fair market value as per the above two methods i.e., either DCF method or fair market value of the unquoted equity shares determined by a merchant banker. The choice of method is that of the Assessee. The Tribunal has followed the judgment of Hon'ble Bombay High Court rendered in the case of Vodafone M-Pesa Ltd. 2018 (3) TMI 530 - BOMBAY HIGH COURT and has taken the view that the AO can scrutinize the valuation report and he can determine a fresh valuation either by himself or by calling a determination from an independent valuer to confront the Assessee but the basis has to be DCF method and he cannot change the method of valuation which has been opted by the Assessee. We are of view that the issue with regard to valuation has to be decided afresh by the AO on the lines indicated in the decision of ITAT, Bangalore in the case of VBHC Value Homes Pvt. Ltd. 2020 (6) TMI 318 - ITAT BANGALORE i.e., (i) the AO can scrutinize the valuation report and he can determine a fresh valuation either by himself or by calling a determination from an independent valuer to confront the assessee but the basis has to be DCF method and he cannot change the method of valuation which has been opted by the assessee. (ii) For scrutinizing the valuation report, the facts and data available on the date of valuation only has to be considered and actual result of future cannot be a basis to decide about reliability of the projections. Primary onus to prove the correctness of the valuation Report is on the assessee as he has special knowledge and he is privy to the facts of the company and only he has opted for this method. Hence, he has to satisfy about the correctness of the projections, Discounting factor and Terminal value etc. with the help of Empirical data or industry norm if any and/or Scientific Data, Scientific Method, scientific study and applicable Guidelines regarding DCF Method of Valuation. The order of ld.CIT(A) is accordingly set aside and this issue is remanded to the AO for decision afresh, after due opportunity of hearing to the Assessee. Assessee's appeal is allowed for statistical purposes.
Issues Involved:
1. Justification of invoking provisions of section 56(2)(viib) of the Income Tax Act, 1961. 2. Validity of the valuation method adopted by the Assessee. 3. Authority of the Assessing Officer (AO) to reject the Assessee's valuation method and adopt a different one. Issue-wise Detailed Analysis: 1. Justification of Invoking Provisions of Section 56(2)(viib) of the Income Tax Act, 1961: The core issue in the appeal was whether the revenue authorities were justified in invoking Section 56(2)(viib) of the Income Tax Act, 1961, and taxing the difference between the fair market value (FMV) and the issue price of shares issued at a premium. Section 56(2)(viib) was introduced by the Finance Act, 2012, effective from April 1, 2013. It mandates that if a company, not being a public company, receives consideration for shares in excess of the FMV, the excess amount is taxable. The FMV can be determined by prescribed methods or substantiated by the company to the satisfaction of the Assessing Officer (AO). 2. Validity of the Valuation Method Adopted by the Assessee: The Assessee, engaged in trading, issued 304,897 equity shares at a premium and claimed the valuation was based on a valuation report using the Discounted Cash Flow (DCF) method. The AO, however, rejected this report, stating it lacked methodology and calculations, and instead valued the shares using the Net Assets Value (NAV) method, determining a lower FMV. The AO's rejection was based on the absence of projections in the DCF method and thus taxed the excess amount received over the NAV-determined FMV. 3. Authority of the Assessing Officer (AO) to Reject the Assessee's Valuation Method and Adopt a Different One: The first appellate authority upheld the AO's decision, referencing the ITAT, Delhi case (Agro Portfolio (P) Ltd vs. Income Tax Officer), which allowed the AO to reject the DCF method if it lacked substantiation and adopt the NAV method. The Tribunal, however, referred to the ITAT, Bangalore Bench decision in VBHC Value Homes Pvt. Ltd. vs. ITO and the Bombay High Court decision in Vodafone MPesa Ltd vs. Pr.CIT, which emphasized that while the AO can scrutinize the valuation report, they must adhere to the DCF method if chosen by the Assessee. The AO can only determine a fresh valuation or call for an independent valuer's determination but cannot change the valuation method opted by the Assessee. Conclusion and Remand: The Tribunal concluded that the AO must scrutinize the valuation report using the DCF method, as chosen by the Assessee, and cannot change the method. The AO can determine a fresh valuation or call for an independent valuer's determination. The Tribunal remanded the case back to the AO for a fresh decision, directing the AO to follow the DCF method and consider only the data available on the valuation date. The Assessee must prove the correctness of the projections and other valuation factors with empirical or scientific data. Final Order: The appeal was allowed for statistical purposes, and the issue was remanded to the AO for a fresh decision, ensuring adherence to the DCF method and providing the Assessee an opportunity for a hearing. The order of the Commissioner of Income Tax (Appeals) was set aside. Pronouncement: The judgment was pronounced in the open court on June 30, 2021.
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