2023 (6) TMI 1282 - AT - Income Tax

Addition u/s 56(2)(viib) - share capital and premium received by the assessee - revenue dismissing the DCF method of valuation as adopted by assessee - HELD THAT - Usage of DCF method for the purpose of valuation of shares is an approved method in Rule 11U and 11UA of the Income Tax Rules. On perusal of the said Rules, an option is given to the assessee to choose either of the methods prescribed therein. Hence, the rejection of valuation report submitted by the assessee using DCF method by the lower authorities is hereby dismissed. As per DCF method of valuation, the fair market value of the shares have been arrived at Rs. 1136.92 and Rs. 992 per share by Chartered Accountant namely Sh. A.K. Agarwal and Sh. Deepak Kumar Agarwal respectively. Assessee had ultimately issued shares to the aforesaid five share holders at a price below the fair market value of shares determined by the valuers in the valuation report. Obviously, the fair market value determined in the valuation report by the valuers represent the maximum value beyond which the shares could not be issued by any company. Hence, we do not find any justification in the action of the lower authorities in dismissing the DCF method of valuation and substitute it with any of the method of valuation and making addition u/s 56(2)(viib) of the Act. Issue in hand is squarely covered by the decision of this Tribunal in the case of Cinestaan Entertainment (P.) Ltd. 2019 (6) TMI 1367 - ITAT DELHI wherein it was held as per section 56(2)(viib) of the Act read with Rule 11U and 11UA of the Rules, the assessee has an option to do valuation of shares and determine fair market value either using DCF method or NAV method and Assessing Officer cannot examine or substitute his own value in place of value determined. When shares were issued at premium based on valuation report from prescribed expert using DCF method of valuation, the said sum cannot be disregarded merely because the projection of revenues thereon did not match with actual revenues of subsequent years. We direct the Ld. AO to delete the addition made u/s 56(2)(viib) - Ground raised by the assessee is allowed.

Summary

Issues involved:
The judgment addresses the addition made under section 56(2)(viib) of the Income Tax Act, 1961 in relation to share capital and premium received by the assessee.

Issue 1: Addition made under section 56(2)(viib) of the Act
The sole ground of appeal raised by the assessee questions the addition of Rs. 48,45,000 under section 56(2)(viib) of the Income Tax Act, 1961. The dispute revolves around the timing of receipt of share application money and whether it should be considered income. The primary contention is that the money was received in the financial year 2010-11 and should not be subject to taxation.

Details of the Judgment:
The Appellate Tribunal examined the facts and circumstances of the case to determine whether the addition made under section 56(2)(viib) was justified. The assessee, a company engaged in wholesale trading of live buffalo, issued shares at a premium to investors during the relevant year. The Tribunal noted that the share application money was received in the financial year 2010-11 from specific shareholders. The assessee provided detailed information, including the identity of shareholders, their financial details, and valuation reports prepared by independent Chartered Accountants.

The Income Tax Officer directed the assessee to provide additional information regarding the share issuance, including details of shareholders, share application forms, and justification for the high premium. The assessee submitted valuation reports indicating a fair market value lower than the premium charged. The AO rejected the valuation reports, valued the shares using the Net Asset Value method, and treated the excess amount received as income from other sources under section 56(2)(viib).

The Tribunal disagreed with the AO's approach, emphasizing that the valuation reports submitted by the assessee were prepared using the Discounted Cash Flow method, an approved valuation technique. The Tribunal found that the fair market value determined by the valuers represented the maximum value for the shares. Relying on precedent, the Tribunal held that the AO cannot substitute his valuation and directed the deletion of the addition made under section 56(2)(viib).

In conclusion, the Tribunal allowed the appeal filed by the assessee, citing the legal provisions and judicial precedents supporting the valuation method chosen by the assessee. The judgment highlights the importance of following prescribed valuation methods and respecting commercial expediency in determining tax liabilities related to share issuances.