2022 (12) TMI 753 - AT - Income Tax

Addition u/s 56(2) - method of valuation adopted by the assessee which is in conformity with the Rules specified under 11UA - determination of the valuation under DCF method - AO has rejected the valuation under DCF method solely on the ground that the actual performance did not match the projections - contention of the Ld. DR relying on the book value adopted by the Ld. AO cannot be accepted because as per section 56(2) of the Act, the assessee has option to use either the fair market value determined as per Net Asset Value or the value determined as per the DCF method - HELD THAT - The determination of the valuation under DCF method was carried by the valuers on the basis of information or material available on the date of valuation and the projections of the revenue provided by the management. The methodology adopted by the assessee applying the DCF method is a recognized and accepted method. In our opinion the valuation under DCF method is intrinsically based on the projections and based on the potential value of the future business. These assumptions can undergo changes for a period of time. The Ld. DR also has not demonstrated that the methodology adopted by the assessee is not correct but simply the Ld. AO rejected the valuation as it does not match with the actual results. Various Courts have held that the valuation of shares is not an exact science and therefore has to be done with some basic presumptions prevailing on the date of valuation. As decided in Cinestaan Entertainment (P) Ltd 2021 (3) TMI 239 - DELHI HIGH COURT Assessee had adopted DCF method to value its shares and the Revenue is unable to demonstrate that the methodology adopted by the assessee is not correct; AO has simply rejected the valuation of the assessee on the ground that performance did not match projections and failed to provide any alternate fair value of shares; Tribunal was therefore justified in deleting the addition made U/s. 56(2)(viib). Judicially following the above legal precedent, we are inclined to uphold the order of the Ld. CIT (A) and dismiss the appeal of the Revenue.

Summary

Issues:
Valuation of shares under section 56(2)(viib) of the Income Tax Act, 1961 based on DCF method vs. book value method.

Analysis:
The appeal pertains to the valuation of shares under section 56(2)(viib) of the Income Tax Act, 1961 for the Assessment Year 2017-18. The Assessing Officer (AO) recomputed the value of shares by adopting the Net Asset Value method, resulting in an addition of income to the assessee. The assessee challenged this before the Ld. CIT(A), relying on case laws and arguing that the valuation under the Discounted Free Cash Flow (DCF) method was correct. The Ld. CIT(A) allowed the appeal, prompting the Revenue to appeal before the Tribunal.

The Revenue raised various grounds of appeal, contesting the Ld. CIT(A)'s decision. The Departmental Representative argued that the valuation report by the Chartered Accountants could not be relied upon due to lack of due diligence and discrepancies between actual and projected results. The Authorized Representative, on the other hand, defended the DCF method, citing relevant case laws to support the valuation.

The Tribunal analyzed the contentions of both parties and the material on record. It noted that the AO rejected the DCF method solely based on performance projections not matching actual results. The Tribunal emphasized that the Assessing Officer cannot change the valuation method chosen by the assessee and that the DCF method is a recognized approach. Referring to legal precedents, including the case of Principal Commissioner of Income Tax vs. Cinestaan Entertainment (P) Ltd, the Tribunal upheld the Ld. CIT(A)'s decision to delete the addition made by the AO under section 56(2)(viib).

Ultimately, the Tribunal dismissed the Revenue's appeal, affirming the decision of the Ld. CIT(A) regarding the valuation of shares under section 56(2)(viib) for the relevant assessment year. The Cross Objection raised by the assessee was deemed infructuous due to the dismissal of the Revenue's appeal.

This comprehensive analysis highlights the key legal arguments, precedents, and the Tribunal's reasoning in deciding the appeal related to the valuation of shares under the Income Tax Act, 1961.