2023 (7) TMI 1452 - AT - Income Tax

Revision u/s 263 - valuation of shares - determination of fair market value of the shares - shares are issued at premium and value at which shares were issued was higher than the value determined u/s 56(2)((viib) r.w.r 11UA of the Rules HELD THAT - Assessee has not issued and allotted shares to strangers but the shares have been issued to the existing promoters and existing shareholders. Therefore, the question of identity goes into oblivion. We understand that the valuation of an unquoted equity shares in terms of Rule 11UA of the Rules can, at the option of the assessee, be determined as per either NAV Method or as per Discounted Free Cash Flow Method, which means that the option is given to the assessee and once the assessee has exercised an option, AO is bound to follow the same unless by bringing cogent material on record, the AO established perversity in the method adopted by the assessee. A perusal of the record shows that the basis of valuation report is free cash flow projections weighted average cost of material, terminal value total company value, fair market value of the company. Method adopted by the assessee is in line with the relevant provisions and relevant rules. In our considered opinion, once the value of shares has been determined by adopting any of the two methods, i.e. NAV or DCF, then such value shall be deemed to be FMV of the assessee company and the AO cannot question the valuation per se. AO has not even considered equity and preference share capital. Further, number of convertible preference shares have been computed by the AO @ Rs. 10/- whereas the actual face value is of Rs. 100/- per share. Because of these gross mathematical errors, the AO computed the NAV as per the share as on 31.03.2014 at Rs. 2.70 as against Rs. 92.67 by the assessee. If the mathematical corrections are considered, it can be seen from the above chart that there is hardly any variation between the FMV adopted by the assessee and that of the AO, be it DCF or NAV. Considering the facts of the case in totality, in light of the decision of M/S. CINESTAAN ENTERTAINMENT PVT. LTD. 2021 (3) TMI 239 - DELHI HIGH COURT we do not find any error or infirmity in the findings of the ld. CIT(A). Therefore, the order of the ld. CIT(A) does not call for any interference. The impugned appeals by the Revenue are dismissed.

Summary

Issues Involved:
1. Withdrawal of Cross Objections by the Assessee.
2. Validity of PCIT's order under Section 263 of the Income-tax Act, 1961.
3. Determination of Fair Market Value (FMV) of shares under Section 56(2)(viib) of the Income-tax Act.
4. Methodology for valuation of shares (NAV vs. DCF method).
5. Errors in the Assessing Officer's (AO) valuation method.
6. Jurisdictional High Court's precedent in the case of PCIT Vs. Cinestaan Entertainment.

Issue-wise Detailed Analysis:

1. Withdrawal of Cross Objections by the Assessee:
At the outset, the counsel for the assessee withdrew the Cross Objections filed for A.Y 2015-16. Consequently, these Cross Objections were dismissed as withdrawn.

2. Validity of PCIT's Order under Section 263:
The appeal by the assessee challenged the order of the PCIT under Section 263 for A.Y 2014-15. The Revenue's appeal was based on the assessment order framed pursuant to the PCIT's directions under Section 263. Since the quantum addition was deleted on the merits of the case, the original assessment order for A.Y 2014-15 was neither erroneous nor prejudicial to the interest of the Revenue. Thus, the challenge to the PCIT's order became academic.

3. Determination of Fair Market Value (FMV) of Shares:
The primary issue revolved around the determination of FMV of shares under Section 56(2)(viib) of the Income-tax Act. The assessee issued shares at a premium, and the valuation was carried out by an independent Chartered Accountant using the Discounted Cash Flow (DCF) method. The AO discarded this valuation and made additions based on his assessment.

4. Methodology for Valuation of Shares (NAV vs. DCF Method):
The CIT(A) observed that Section 56(2)(viib) is a deeming provision, and the assessee has the option to choose either the Net Asset Value (NAV) method or the DCF method for valuation. The Revenue cannot decide which method should be chosen by the assessee. Once one of the prescribed methods has been adopted, the AO must accept it unless there is a demonstrably wrong approach or erroneous basis in the valuation method.

5. Errors in the Assessing Officer's Valuation Method:
The AO's valuation was found to be full of mathematical errors. The AO did not consider equity and preference share capital and computed the number of convertible preference shares at Rs. 10/- instead of the actual face value of Rs. 100/- per share. These errors led to a significant discrepancy in the FMV computed by the AO compared to the valuation by the assessee.

6. Jurisdictional High Court's Precedent:
The CIT(A) referred to the decision of the Hon'ble Delhi High Court in the case of PCIT Vs. Cinestaan Entertainment, which held that the valuation method adopted by the assessee should be accepted if it follows a recognized and accepted method. The Revenue's challenge based on the performance not matching projections was found to lack material foundation. The valuation is based on projections and various factors, and the courts have held that it cannot be done with arithmetic precision.

Conclusion:
The Tribunal found no error or infirmity in the findings of the CIT(A). The appeals by the Revenue were dismissed. The challenge to the PCIT's order under Section 263 became academic as the quantum addition was deleted on the merits of the case. The order was pronounced in the open court on 21.07.2023.