2022 (3) TMI 208 - AT - Income Tax

Addition u/s 56(2)(vii)(b) - alleged excess value of unquoted equity shares as issued by the Appellant at a premium over fair market value as determined by the AO - HELD THAT - As decided in INTELLIGRAPE SOFTWARE PVT. LTD. VERSUS INCOME TAX OFFICER, WARD-12 (3) , NEW DELHI 2020 (10) TMI 403 - ITAT DELHI AO was not able to pinpoint any specific inaccuracies or short comings in the DCF valuation report of the Chartered Accountant/Valuer other than stating that year-wise results as projected are not matching with the actual results declared in the final accounts. Before the ld. CIT(A), reasons for variation between projected and actuals were duly explained. The ld. CIT(A) has accepted such explanation but rejected the DCF valuation report as submitted by the assessee. Accordingly, in the absence of any defect in the valuation of shares arrived by the assessee on the basis of DCF method, impugned addition as made on the basis of net asset value method is liable to be deleted. The rejection is unjustified as the valuation report is required under Rule 11UA of The Income Tax rules is based on the future aspects of the company at the time of issuing the shares, it may vary from the actual figures depending on the market condition at the present point of the time. Thus keeping in view the entire facts of the case, the reports of the valuer, the comparison of the actual and projected revenues, provisions of Section 56(2)(viib) and keeping in view the order of Cinestaan Entertainment Pvt. Ltd. 2019 (6) TMI 1367 - ITAT DELHI wherein it has been held that the Assessing Officer cannot substitute his own value in place of the value determined either on DCF method or NAV method, the appeal of the assessee is hereby allowed.

Summary

Issues Involved:
1. Addition under section 56(2)(vii)(b) of the Income-tax Act.
2. Rejection of the valuation report by the Chartered Accountant Valuer.

Issue-wise Detailed Analysis:

1. Addition under section 56(2)(vii)(b) of the Income-tax Act:

The assessee challenged the addition of ?2,11,01,363/- under section 56(2)(vii)(b) on the grounds that the AO determined the excess value of unquoted equity shares issued at a premium over their fair market value. The assessee argued that the valuation report prepared by an independent Chartered Accountant Valuer using the Discounted Cash Flow (DCF) method, as per Rule 11UA(2) of the Income-tax Rules, should not have been disregarded by the AO.

During the assessment proceedings, the AO observed that the shares were issued on different dates, but the valuation report was dated 11.12.2014, leading to a discrepancy in valuation dates. The AO also noted that the assessee admitted a decline in its PAT due to exceptional bad debts and high employee costs, which affected the projected PAT. The AO concluded that the company inflated the share value through the project report and rejected the DCF method valuation, instead calculating the fair market value using the Net Asset Value (NAV) method, resulting in an addition of ?2,11,01,363/-.

2. Rejection of the Valuation Report by the Chartered Accountant Valuer:

The AO and the CIT(A) rejected the valuation report, citing that it did not provide the date of valuation, which is crucial under the DCF method. The CIT(A) further noted that the report lacked explanations for the beta coefficient, debt-equity ratio, growth rate, and assumptions underlying the free cash flows. The CIT(A) confirmed the addition made by the AO, emphasizing that the valuation report relied on information provided by the management without further verification.

The Tribunal, however, referred to a similar issue adjudicated in the case of the same assessee for A.Y. 2014-15, where it was held that the AO and CIT(A) had no authority to change the valuation methodology opted by the assessee under Rule 11UA(2). The Tribunal emphasized that the AO could not disregard the DCF valuation report unless specific inaccuracies or defects were pinpointed. It was noted that the actual revenues exceeded the projected revenues, supporting the valuation. The Tribunal concluded that the rejection of the DCF valuation report was unjustified and allowed the appeal of the assessee, deleting the addition made by the AO.

Conclusion:

The Tribunal allowed the appeal of the assessee, holding that the AO and CIT(A) were not justified in rejecting the DCF valuation report and making an addition under section 56(2)(vii)(b). The Tribunal emphasized that the valuation method chosen by the assessee, as per Rule 11UA(2), should be respected unless specific defects are identified. The appeal was allowed, and the addition was deleted.