2023 (1) TMI 468 - AT - Income Tax

Addition u/s.56(2)(vii)(b) - excess amount received by the Assessee company as share premium - difference between the issue price and the actual share price determined by the Assessing Officer as income of the Assessee - AO changed the method of valuation from DCF Method to Net Asset Value Method - sole basis for the AO to reject the DCF Method is that there is a huge difference between the projected financials and the actual financials for the relevant period considered by the Assessee for the DCF Method and thus, he was of the opinion that the DCF Method cannot give a true or a correct share price - HELD THAT - AO has exceeded his powers and determined the share price of Rs.18.97 by changing the valuation method from DCF Method to NAV Method, even though as per law, the Assessing Officer cannot change the method followed by the Assessee for valuation of the shares as it is optional for the Assessee to choose a particular method for determining the share price. In this case, AO has changed the method of valuation from DCF Method to NAV Method without their being any observation with regard to the DCF Method followed by the Assessee. Therefore, we are of the considered view that the AO has erred in changing the method of valuation of the shares from DCF Method to NAV Method. No substance in the findings of AO for the simple reason that the Assessee has explained the difference between the projected operating profits and the actual financials for the financial years 2014 2015 to financial year 2018 2019 - Although there is a difference in the projected financials when compared with the actual financials, but projected financial figures is always a projection based on certain degree of estimation and which may not be equivalent to the actual. But, as long as there is a minor difference in the projected financials and the actual financials, there is no reason for the AO to reject the DCF Method adopted by the Assessee by stating that there is a difference in the projected financials considered by the Assessee. Assessee has justified the premium charged on the issuance of shares and thus, we direct the Assessing Officer to delete the additions made towards the difference between the issue price and the actual share price determined by the Assessing Officer as income of the Assessee u/s.56(2)(vii)(b) - Appeal of assessee allowed.

Summary

Issues:
1. Valuation of shares using Discounted Cash-Flow Method vs. Net Asset Value Method.
2. Treatment of excess share premium as undisclosed income under section 56(2)(vii)(b) of the Income Tax Act, 1961.
3. Compliance with Companies Act, 2013 regarding issuance of shares at a premium.
4. Justification of share price determination and premium charged by the Assessee.

Valuation of Shares:
The Assessee issued equity shares with a premium based on the Discounted Cash-Flow (DCF) Method, valuing them at Rs.107.95 per share. However, the Assessing Officer rejected this method, opting for the Net Asset Value (NAV) Method, setting the share price at Rs.18.97 per share. The Tribunal held that the Assessing Officer overstepped by changing the valuation method without valid reasons, as the choice of method lies with the Assessee. The Tribunal found no discrepancy in the DCF Method used by the Assessee and directed the deletion of additions made based on the Assessing Officer's valuation.

Treatment of Excess Share Premium:
The Assessing Officer treated the excess share premium received by the Assessee as undisclosed income under section 56(2)(vii)(b) of the Income Tax Act, 1961. The Assessee justified the premium based on the valuation report, but the Commissioner of Income Tax (Appeals) upheld the additions, citing discrepancies between projected and actual financials. The Tribunal disagreed, stating that minor variations in projections are normal and do not warrant rejection of the DCF Method. Consequently, the Tribunal directed the Assessing Officer to delete the additions towards the difference in share price determination.

Compliance with Companies Act, 2013:
The Assessee issued shares at Rs.108 per share, including a premium of Rs.8 per share, justifying it with a registered valuation certificate. The Tribunal highlighted that as per the Companies Act, 2013, shares cannot be issued below face value, which was Rs.100 per share in this case. The Tribunal emphasized that the Assessee's justification for the premium was valid and directed the deletion of additions made by the Assessing Officer.

Justification of Share Price Determination:
The Assessee defended the share price determination and premium charged, arguing that projections were based on surplus earnings, aligning with actual share prices. The Tribunal agreed with the Assessee's justification, emphasizing that the Assessing Officer's rejection of the DCF Method was unfounded. Consequently, the Tribunal allowed the Assessee's appeal, directing the deletion of additions made by the Assessing Officer.

This detailed analysis of the judgment covers the issues involved comprehensively, outlining the arguments presented, decisions made, and the reasoning behind the Tribunal's final ruling.