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2022 (11) TMI 577 - AT - Income TaxAddition u/s 56(2)(viib) - Method of FMV determination - A.O. has not accepted the valuation made under DCF method by the assessee and adopted the formula as per Rule 11UA and valued the Fair Market Value of shares at Rs. 10/- per share and treated the premium as excess consideration on issue of share premium received which is covered u/s. 56(2)(viib) of the Act and added the same as income from other sources of the assessee company - HELD THAT - Rule 11UA provides for Determination of Fair Market Value . As per Rule 11UA(2), FMV of unquoted equity shares for the purposes of Section 56(2)(viib) shall be the value of unquoted shares as determined under Clause (a) namely as per prescribed formula or Clause (b) as per Discounted Free Cash Flow method, at the option of the assessee. Thus DFCF method is a prescribed method for determining the FMV of shares as per Rule 11UA(2). As per Rule 11UA(2) Fair Market Value of unquoted equity shares for the purpose of Section 56(2)(viib) shall be the value determined under prescribed formula or as per DCF method which is at the option of the assessee. Thus the DCF method adopted by the assessee for determining the Fair Market Value of shares as per Rule 11UA does not requires any interference. Therefore the additions made u/s. 56(2)(viib) are not sustainable in law and the Ld. CIT(A) correctly deleted the same. Thus the Grounds of Appeal raised by the Revenue are devoid of merits and the same are hereby rejected.
Issues involved:
1. Valuation of unquoted equity shares under Section 56(2)(viib) of the Income Tax Act, 1961. 2. Admissibility of additional evidence in the form of a Valuation Report. 3. Choice of valuation method - DCF method vs. Rule 11UA. 4. Appeal against the deletion of the addition of share premium under Section 56(2)(viib) by the CIT(A). Analysis: Issue 1: Valuation of unquoted equity shares under Section 56(2)(viib) of the Income Tax Act, 1961: The case involved the valuation of unquoted equity shares for the Assessment Year 2013-14. The Assessing Officer valued the shares at Rs. 10 per share as per Rule 11UA, while the assessee valued them using the Discounted Cash Flow (DCF) method. The dispute arose over the premium received on the shares, leading to an addition of Rs. 4,70,25,000 under Section 56(2)(viib). The CIT(A) admitted additional evidence in the form of a Valuation Report and ultimately deleted the addition based on the valuation done by a Chartered Accountant using the DCF method. Various judgments were cited to support the assessee's choice of valuation method, emphasizing the right of the assessee to adopt a method of their choice under Section 56 of the Act. Issue 2: Admissibility of additional evidence in the form of a Valuation Report: The assessee submitted a Valuation Report prepared by Shri Kanhaiyalal Salawat as additional evidence before the CIT(A). The Assessing Officer had rejected a previous Valuation Report submitted by the Chartered Accountant, citing it was not prepared by a Merchant Banker. However, the CIT(A) found that the Valuation Report by Shri Kanhaiyalal Salawat was essential in deciding the issue and admitted it as additional evidence. The report was prepared following the method prescribed by the Institute of Chartered Accountants of India (ICAI), and after considering it, the CIT(A) deleted the addition made by the Assessing Officer. Issue 3: Choice of valuation method - DCF method vs. Rule 11UA: The dispute also centered around the choice of valuation method - DCF method adopted by the assessee versus the Rule 11UA prescribed method. The CIT(A) upheld the DCF method chosen by the assessee for determining the Fair Market Value of shares, emphasizing that the method chosen by the assessee was permissible under Rule 11UA(2). The CIT(A) found no justification for rejecting the declared valuation of shares and deleted the addition made under Section 56(2)(viib) by the Assessing Officer. Issue 4: Appeal against the deletion of the addition of share premium under Section 56(2)(viib) by the CIT(A): The Revenue appealed against the CIT(A)'s order deleting the addition of Rs. 4,70,25,000 made in respect of share premium under Section 56(2)(viib) of the Income Tax Act, 1961. The Revenue contended that the CIT(A) erred in law by upholding the DCF method of valuation over Rule 11UA applied by the Assessing Officer. However, after considering all arguments and evidence presented, the Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to delete the addition of share premium. This detailed analysis provides a comprehensive overview of the judgment, covering the key issues involved and the reasoning behind the decisions taken at each stage of the legal proceedings.
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