2022 (2) TMI 383 - AT - Income Tax

Revision u/s 263 by CIT - Incorrect valuation of shares - PCIT observed that AO had erred in accepting the invalid share valuation certificate - valuation certificate does not reflect fair market value (FMV) of the shares - eligibility of DCF valuation method - difference between Lack of enquiry and inadequate enquiry - HELD THAT - We note that projections are based on the businessman s consideration of the business prospects and his own surrounding circumstances. Such projections cannot be equated by projections of any other comparable. The report of the Chartered Accountant in the matter of DCF we note that the same is in accordance with the pronouncements of ICAI and only for mismatch with actual at later date the same cannot be rejected unless a patent defect in the method adopted is pointed out by the Revenue Authorities We may examine the method adopted by the assessee and if he does not find any error in the method so adopted then order passed by him should not be treated erroneous. We note that ld PCIT in his revision order observed that clause 11(U) Sub-clause (b) of Rules 11UA defines the word Balance Sheet. This clause again referred to the Balance Sheet as drawn on the valuation date and where such Balance Sheet is not drawn on the valuation date it will be of the date immediately preceding the valuation date. Therefore if the share was allotted in financial year 2014-15 and the Balance Sheet were not drawn on the date of the allotment the relevant Balance sheet on the basis of which the fair market value could have been determined would be the Balance sheet as on 31.03.2014. As per ld PCIT there would be no relevance of the Balance Sheet drawn on 31.03.2013. We do not agree with ld PCIT that fair market value of the shares should be determined based on Balance sheet as on 31.03.2014. The assessee made long term projections based on Balance Sheet drawn on 31.03.2013 and loan was sanctioned by the bank based on said projection. As per said projection the shares were partly issued in previous year and partly in current assessment year. Moreover the assessee had submitted before assessing officer fair market value of shares based on the Balance sheet as on 31.03.2014 and there was no significant difference noticed by the assessing officer. The Income-tax Officer is not only an adjudicator but also an investigator. As an adjudicator and investigator the assessing officer conducted further inquiry in assessee s case and framed the assessment order under section 143(3) of the Act. We note that there is difference between Lack of enquiry and inadequate enquiry . It is for the AO to decide the extent of enquiry to be made as it is his satisfaction as what is required under law. Reliance is placed on the decision of CIT v. Sunbeam Auto Ltd. 2009 (9) TMI 633 - DELHI HIGH COURT as held that if there was any inquiry even inadequate that would not by itself give occasion to the Commissioner to pass order u/s 263 of the Act merely because the Commissioner has a different opinion in the matter and that only in cases where there is no enquiry the power u/s 263 of the Act can be exercised. The ld. PCIT cannot pass the order u/s 263 of the Act on the ground that further/thorough enquiry should have been made by AO. We note that order passed by the assessing officer is sustainable in law as the assessing officer during the assessment stage examined the DCF valuation report including the latest audited balance sheet as on 31/03/2014 with reference to assessment year 2015-16, whichdoes not give a different valuation. The data used in the report of 2014 is supported by the techno-economic valuation done by independent expert for State Bank of India(The Lender Bank) with suitable modification to the projections for the reason of delay and change in the market conditions at that point of time. Hence assessing officer having examined these valuation reports took a possible view therefore we are of the view that such order passed by the assessing officer under section 143(3) dated 06.12.2017 is neither erroneous not prejudicial to the interest of revenue. none of the reasons set out by ld. PCIT for invoking the jurisdiction u/s 263 of the Act are sustainable - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the assessment order passed under section 143(3) was erroneous and prejudicial to the interest of the revenue.
2. Validity of the valuation certificate used by the assessee for determining the fair market value (FMV) of shares.
3. Applicability of Section 56(2)(viib) of the Income Tax Act, 1961 to the share premium received by the assessee.
4. Adequacy of the inquiry conducted by the Assessing Officer during the assessment proceedings.

Detailed Analysis:

1. Whether the assessment order passed under section 143(3) was erroneous and prejudicial to the interest of the revenue:
The assessee challenged the correctness of the order passed by the Principal Commissioner of Income Tax (PCIT) under section 263 of the Income Tax Act, 1961, contending that the assessment order was not erroneous or prejudicial to the interest of the revenue. The Tribunal noted that the PCIT had exercised jurisdiction under section 263, observing that the Assessing Officer (AO) had erred in accepting an invalid share valuation certificate and had not adequately examined the projections made by the assessee. However, the Tribunal found that the AO had conducted an inquiry and had taken a possible view based on the information and documents provided by the assessee. Therefore, the Tribunal concluded that the assessment order was neither erroneous nor prejudicial to the interest of the revenue.

2. Validity of the valuation certificate used by the assessee for determining the fair market value (FMV) of shares:
The PCIT observed that the assessee had used a valuation certificate based on the Discounted Cash Flow (DCF) method, dated 30.04.2013, to determine the FMV of shares, whereas the shares were allotted substantially later, and the latest audited balance sheet as on 31.03.2014 was available. The PCIT held that the valuation certificate was invalid as it did not reflect the FMV based on the latest balance sheet. However, the Tribunal noted that the assessee had also submitted a DCF valuation report with reference to the assessment year 2015-16, including the data of the latest audited balance sheet of 2013-14. The Tribunal found that the AO had examined these valuation reports and had taken a possible view, thus the valuation certificate used by the assessee was not invalid.

3. Applicability of Section 56(2)(viib) of the Income Tax Act, 1961 to the share premium received by the assessee:
The PCIT held that the provisions of Section 56(2)(viib) were applicable as the shares were issued at a premium, and the difference between the FMV and the issue price should be taxed under the head "income from other sources." The PCIT observed that the book value of shares as per the latest audited balance sheet was Rs. 22 per share, whereas the shares were issued at Rs. 50 per share, resulting in a difference of Rs. 28 per share. However, the Tribunal noted that the AO had examined the DCF valuation report and the projections made by the assessee, and had taken a possible view that the FMV of shares was correctly determined. Therefore, the Tribunal concluded that the AO's order was not erroneous in applying Section 56(2)(viib).

4. Adequacy of the inquiry conducted by the Assessing Officer during the assessment proceedings:
The PCIT observed that the AO had not called for any explanation from the assessee regarding the basis of the projections made in the DCF valuation report and had not verified the FMV of shares based on the latest balance sheet. However, the Tribunal found that the AO had issued a notice under section 142(1) and had raised relevant queries regarding the share premium and valuation of shares. The assessee had provided the required details and documents, including the DCF valuation report and the latest audited balance sheet. The Tribunal held that the AO had conducted an inquiry, and the order passed by the AO was based on a possible view after examining the information provided by the assessee. Therefore, the Tribunal concluded that the AO's order was not erroneous due to inadequate inquiry.

Conclusion:
The Tribunal quashed the order passed by the PCIT under section 263, holding that the assessment order passed by the AO under section 143(3) was neither erroneous nor prejudicial to the interest of the revenue. The Tribunal allowed the appeal filed by the assessee.