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2022 (1) TMI 937 - AT - Income TaxDisallowance on account of business expenses and unabsorbed depreciation - HELD THAT - This issue is squarely covered in favour of the assessee by the decision of the coordinate bench in assessee s own case for assessment year 2012 13 2019 (3) TMI 1951 - ITAT MUMBAI The learned assessing officer has also made the addition for this impugned assessment year based on his order for assessment year 2012 13. In view of this ground number 1 and two of the appeal of the learned assessing officer are dismissed. Addition u/s 56 (2) (viib) - issue of shares that exceeds the face value - Assessee has issued share capital at 75 per share being face value of 10/- each at a premium of 65/- per share - HELD THAT - For the purpose of determining fair market value of unquoted shares provisions of rule 11 UA (2) applies which gives an option to the assessee to either value the shares as per prescribed formula given in clause (a) or clause (b) which provides for the determination of the fair market value based on discounted cash flow method as valued by a merchant banker or a chartered accountant (till 24th of May 2018). In the present case the assessee has valued the shares according to one of the options available to assessee by adopting discounted cash flow method. Therefore such an option given to the assessee cannot be withdrawn or taken away by the learned assessing officer by adopting different method of valuation i.e. net asset value method. The method of valuation is always the option of the assessee. AO is authorised to examine whether assessee has adopted one of the available options properly or not. In the present case the learned assessing officer has thrust upon the assessee net asset value method rejecting discounted cash flow method for only reason that there is a deviation in the actual figures from the projected figures. It is an established fact that discounted cash flow method is always based on future projections adopting certain parameters such as expected generation of cash flow the discounted rate of return and cost of capital. In hindsight on availability of the actual figures if the future projections are not met it cannot be said that the projections were wrong. To prove that the projections were unreliable the learned assessing officer must examine how the valuation has been done. In a case future cash flow projections do not meet the actual figures rejection of discounted cash flow method is not proper. Reason given by the learned assessing officer that the net asset value method and the discounted cash flow method for valuation of the shares of the company gives a wide variation between them we do not find any reason to find fault with the assessee in such cases. Both these methods have different approaches and methodologies therefore there are bound to be differences but it does not give any authority to the learned assessing officer to pick and choose one of the method and make the addition. It is the assessee who has to exercise one of the options available under the provisions of the law for valuing the shares. The learned assessing officer needs to examine that method. Naturally if the discounted cash flow method and net asset value method gives the same result where would have been the need to prescribe the two methods in the law. In view of above facts we do not find any infirmity in the order of the learned CIT An in deleting the addition made by the learned assessing officer u/s 56 (2) (viib) of the act. Accordingly ground number 3 and 4 of the appeal of the learned assessing officer are dismissed.
Issues Involved:
1. Deletion of addition on account of business expenses and unabsorbed depreciation. 2. Deletion of addition made under Section 56(2)(viib) of the Income Tax Act. Issue-wise Detailed Analysis: 1. Deletion of Addition on Account of Business Expenses and Unabsorbed Depreciation: The appeal was filed by the Assistant Commissioner of Income Tax against the order of the Commissioner of Income Tax (Appeals) for the assessment year 2013-14. The primary issue was the deletion of the addition made by the Assessing Officer on account of business expenses and unabsorbed depreciation. The CIT(A) had allowed the claim of the assessee following the order of the predecessor for the assessment year 2012-13. The Assessing Officer had disallowed the entire business expenditure/loss claimed by the assessee of ?26,037,039, asserting that the expenses should be capitalized as they were pre-commencement expenses for setting up the plant for business purposes. The assessee argued that the expenses were incurred to establish itself in the business and were necessary for future profitability. The CIT(A) had deleted the disallowance based on the previous year's order. The ITAT upheld the CIT(A)'s decision, noting that the issue was covered in favor of the assessee by the decision of the coordinate bench in the assessee’s own case for the assessment year 2012-13. Consequently, the ITAT dismissed the grounds of appeal related to business expenses and unabsorbed depreciation. 2. Deletion of Addition Made Under Section 56(2)(viib) of the Income Tax Act: The second issue involved the deletion of the addition made by the Assessing Officer under Section 56(2)(viib) of the Income Tax Act. The assessee had issued shares at a premium, supported by a valuation report using the discounted cash flow (DCF) method. The Assessing Officer rejected this valuation, asserting that the actual performance of the company showed consistent losses, which was not in line with the projected figures used in the DCF method. The AO adopted the net asset value (NAV) method, which resulted in a negative valuation, and made an addition of ?69,000,000 to the total income of the assessee. The CIT(A) deleted this addition, and the ITAT upheld this decision. The ITAT noted that the provisions of Section 56(2)(viib) allow the assessee to choose the method of valuation, and the DCF method is a valid option. The AO does not have the authority to substitute the method chosen by the assessee with another method. The ITAT emphasized that the DCF method is based on future projections and assumptions, and deviations from actual performance do not invalidate the valuation. The ITAT found no infirmity in the CIT(A)'s order and dismissed the grounds of appeal related to the addition under Section 56(2)(viib). Conclusion: The ITAT dismissed the appeal of the Assessing Officer, upholding the CIT(A)'s decision to delete the additions related to business expenses, unabsorbed depreciation, and the addition made under Section 56(2)(viib) of the Income Tax Act. The ITAT emphasized the validity of the DCF method for valuation and the lack of authority of the AO to substitute the chosen method with another. The order was pronounced in the open court on 19/01/2022.
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