2021 (8) TMI 1094 - AT - Income Tax

Addition of share premium u/s 56(2)(viib) - Determination of value of shares - method of valuation - DCF method - assessee furnished a valuation report in support of the share premium amount, wherein shares had been valued under discounted cash flow method (DCF) - A.O. noticed that the projections given in the valuation report prepared under DCF method do not tally with the actual, as per the return of income - HELD THAT - AO has proceeded to determine the value of shares by adopting different method without scrutinizing the valuation report furnished by the assessee under DCF method. Accordingly, we set aside the orders passed by Ld CIT(A) and restore the impugned issue to the file of the AO with the direction to examine this afresh as per the directions given by the co-ordinate bench in the case of Innoviti Payment Solutions P Ltd 2019 (1) TMI 688 - ITAT BANGALORE - Appeal of the assessee is treated as allowed.

Summary

Issues Involved:
1. Validity of the addition of share premium amount under Section 56(2)(viib) of the Income-tax Act, 1961.
2. Methodology for determining the share premium value (DCF method vs. Net Asset Value method).

Detailed Analysis:

1. Validity of the Addition of Share Premium Amount under Section 56(2)(viib) of the Income-tax Act, 1961:
The assessee challenged the order of the CIT(A) confirming the addition of ?67,09,738/- made by the AO under Section 56(2)(viib) of the Income-tax Act, 1961. The AO had assessed the excess share premium amount based on the Net Asset Value (NAV) method, while the assessee had used the Discounted Cash Flow (DCF) method for valuation. The assessee argued that DCF is a recognized method under Rule 11UA of the Income-tax Rules and cited decisions from coordinate benches in similar cases to support their stance.

2. Methodology for Determining the Share Premium Value (DCF Method vs. Net Asset Value Method):
The AO rejected the DCF method used by the assessee and instead adopted the NAV method, determining the share premium at ?7.72 per share. The assessee contended that the AO should not change the valuation method opted by the assessee but can scrutinize the valuation report and adopt a fresh valuation if necessary. The Tribunal referred to several cases, including M/s. Innoviti Payment Solutions Pvt. Ltd. vs. ITO and Vodafone M Pesa Ltd vs. PCIT, where it was held that the AO must scrutinize the valuation report prepared under the DCF method and cannot change the method of valuation. The Tribunal concluded that the AO should follow the DCF method and if not satisfied, can determine a fresh valuation either by himself or through an independent valuer, but must confront the assessee with the findings.

Conclusion:
The Tribunal set aside the orders of the CIT(A) and restored the issue to the AO for a fresh examination of the valuation report under the DCF method, following the directions given in the case of Innoviti Payment Solutions Pvt. Ltd. The AO is directed to scrutinize the valuation report and determine a fresh valuation if necessary, but must adhere to the DCF method and cannot switch to another method. The appeal of the assessee was allowed for statistical purposes.

Order Pronounced:
The order was pronounced in the open court on 25th August 2021.