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2021 (7) TMI 18 - AT - Income TaxIncome from other sources - DCF method applicability for shares - bringing to tax the difference between the fair market value and the issue price of shares at a premium as income of the Assessee - plea of the Assessee was that the valuation of shares at a premium was based on a valuation report in which Discounted Cash Flow (DCF) method of valuation of shares was adopted - According to the Assessee the DCF method was a permitted method of valuation in terms of Rule 11UA(2)(b) of the Income Tax Rules, 1962 (Rules) read with Sec.56(2)(viib) - whether the DCF method was applicable for shares issued on 4.8.2012? - 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. Delay in filing the appeal. 2. Applicability of Section 56(2)(viib) of the Income Tax Act, 1961. 3. Method of valuation of shares (DCF method vs. NAV method). Issue-wise Detailed Analysis: 1. Delay in Filing the Appeal: The Assessee's appeal was delayed by 132 days due to the failure of the group CFO and director to notify the Group Chairman about the impugned order. The CFO resigned and stopped attending the office since April 2019. The delay was discovered by the Chartered Accountant in a meeting on 30.9.2019, who then filed the appeal. The Tribunal considered the circumstances and condoned the delay. 2. Applicability of Section 56(2)(viib) of the Income Tax Act, 1961: The core issue was whether the revenue authorities were justified in invoking Section 56(2)(viib) of the Income Tax Act, which taxes 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 any consideration received by a company, not substantially held by the public, in excess of the FMV of shares shall be taxable. The FMV can be determined either by prescribed methods (Rule 11UA) or substantiated by the company to the satisfaction of the Assessing Officer based on asset values. 3. Method of Valuation of Shares (DCF Method vs. NAV Method): The Assessee, engaged in the hospitality business, issued shares on 14.8.2012 at a premium based on the Discounted Cash Flow (DCF) method. The Assessing Officer (AO) rejected this method, stating that the DCF method was permissible only after the amendment of Rule 11UA on 29.11.2012. The AO applied the Net Asset Value (NAV) method, resulting in a tax liability of ?2,74,51,952. The CIT(A) upheld this decision. The Tribunal held that the DCF method, recognized during the relevant assessment year (AY 2013-14), should have been considered. The valuation should be based on methods recognized by the legislature, even if introduced post the date of share issue. The AO and CIT(A) should have examined the DCF method instead of rejecting it on technical grounds. The Tribunal referred to the ITAT, Bangalore Bench's decision in VBHC Value Homes Pvt. Ltd. vs. ITO and the Hon’ble Bombay High Court's decision in Vodafone M-Pesa Ltd. vs. Pr.CIT, which emphasized that the AO can scrutinize the valuation report but must adhere to the DCF method if opted by the Assessee. The AO cannot change the method but can challenge the methodology and assumptions if not satisfied. Conclusion and Directions: The Tribunal concluded that the valuation issue needs to be re-examined by the AO following the DCF method. The AO should scrutinize the valuation report, and if unsatisfied, determine a fresh valuation either by himself or through an independent valuer, but the basis must remain the DCF method. The primary onus to prove the correctness of the valuation report lies with the Assessee. The Tribunal set aside the CIT(A)'s order and remanded the issue to the AO for a fresh decision, providing the Assessee an opportunity for a hearing. Result: The appeal was allowed for statistical purposes, and the matter was remanded to the AO for a fresh decision based on the DCF method.
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