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2023 (7) TMI 336 - AT - Income TaxAddition u/s 56(2)(viib) - income from other sources - share premium received by the assessee - discarding the DCF method of valuation of shares adopted by the assessee - Whether the valuation report is fair and reasonable and the assessee has failed to justify the premium of Rs. 130/- per share charged on allotment of un-quoted equity share? - HELD THAT - Hon ble Delhi High Court in the case of Pr. CIT Vs. Cinestaan Entertainment Pvt. Ltd. 2021 (3) TMI 239 - DELHI HIGH COURT in an identical issue held that the shares had not been subscribed to by any sister concern or closely related person but by outsider investors. It was further held that the methodology adopted was a recognized method of valuation and the Revenue was unable to show that the assessee adopted a demonstrably wrong approach or that the method of valuation was made on a wholly erroneous basis or that the method of valuation or that it committed a mistake which went to the root of the process AO erred in discarding the DCF method of valuation of shares adopted by the assessee. Thus, we reverse the order of the ld. CIT (A) and direct the AO to delete the addition made u/s 56(2)(viib) - Decided in favour of assessee.
Issues Involved:
1. Validity of share premium valuation under section 56(2)(viib) of the Income Tax Act, 1961. 2. Adoption of Discounted Cash Flow (DCF) method for share valuation. 3. Assessing Officer's authority to reject the DCF method and adopt an alternative method. Summary: Issue 1: Validity of Share Premium Valuation under Section 56(2)(viib) The assessee filed appeals against the orders of the CIT (Appeals) for the assessment years 2015-16 and 2016-17, challenging the addition made by the Assessing Officer (AO) under section 56(2)(viib) of the Income Tax Act, 1961, concerning the share premium received. The AO had determined the fair market value of the shares at Rs. 5.80 per share, adding Rs. 1,85,71,280/- as income from other sources. Issue 2: Adoption of Discounted Cash Flow (DCF) Method for Share Valuation The assessee, a private limited company, adopted the DCF method for valuing its shares, resulting in a premium of Rs. 130/- per share. The AO rejected this method, stating it was based on assumptions and not related to the actual financial position of the company. The CIT (Appeals) upheld the AO's decision, asserting that the AO has the authority to evaluate the fairness and reasonableness of the valuation report. Issue 3: Assessing Officer's Authority to Reject the DCF Method and Adopt an Alternative Method The assessee contended that the DCF method is a recognized method under Rule 11UA of the Income Tax Rules and that once adopted, the AO cannot discard it in favor of a different method. The assessee relied on the decision of the Hon'ble Delhi High Court in Pr. CIT Vs. Cinestaan Entertainment Pvt. Ltd., which upheld the DCF method as a recognized valuation method and restricted the AO from substituting his valuation. Tribunal's Findings: The Tribunal observed that the Hon'ble Delhi High Court in Pr. CIT Vs. Cinestaan Entertainment Pvt. Ltd. had ruled that the DCF method is a recognized valuation method and that the AO cannot reject it based on subsequent actual revenues not matching projections. The Tribunal noted that the AO did not provide an alternative fair value of shares and merely rejected the DCF method without substantial justification. The investors in the assessee company were not related parties, and their commercial prudence in accepting the valuation could not be questioned by the Revenue. Conclusion: The Tribunal held that the AO erred in discarding the DCF method of valuation adopted by the assessee. Consequently, the Tribunal reversed the order of the CIT (Appeals) and directed the AO to delete the addition made under section 56(2)(viib) of the Act. The appeals for both assessment years 2015-16 and 2016-17 were allowed in favor of the assessee.
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