2024 (6) TMI 465 - AT - Income Tax

Addition u/s 56(2)(viib) - issue of shares premium - valuation of preference share - Assessee was unable to furnish the valuation report supporting his method adopted for determining the value of preference shares - HELD THAT - As agreed between the assessee and investor the said preference shares will be redeemed at premium of Rs. 55 each after a period of 20 years. There is no doubt in mind of the bench that the AO had primarily erred in invoking Rule 11UA(1)(c)(b) as unquoted redeemable preference shares being in the nature of was quasi-debt have to be valued as per Rule 11UA(1)(c)(c) for which the merchant banker or an accountant s report is mandatory. The same deserves to be given status of statutory evidence with burden upon the AO to rebut the same with evidences establishing either the report is based on incorrect facts and figures or otherwise the valuation method lacks the sanctity to be considered as statutory evidence. As valuation of shares is a technical and complex issue for which the AO has limited authority to tinker the valuation of methodology applied. As we observed at beginning it being statutory evidence is required to be given presumption of correctness under law as prepared by an expert. It cannot be assailed unless it is shown that valuation was made on the fundamentally erroneous basis or apparent mistake is pointed out and demonstrated. Resting an additional onus of proof on the assessee apart from tendering the valuation report to substantiate the report also cannot be sustained. In the case at hand where the CIT(A) has co-terminus power to examine the issue threadbare and after admitting the additional evidences has drawn the conclusion that the valuation report as submitted was good enough to explain the valuation the grounds as raised by the revenue have no substance. Consequently appeal of the Revenue is dismissed.

Summary

Issues Involved:

1. Applicability of Section 56(2)(viib) of the Income Tax Act, 1961.
2. Validity of the valuation method for determining the Fair Market Value (FMV) of preference shares.
3. Rebuttal of the valuation report by the Assessing Officer (AO).

Issue-wise Detailed Analysis:

1. Applicability of Section 56(2)(viib) of the Income Tax Act, 1961:

The Revenue appealed against the deletion of the addition of Rs. 2,21,50,906/- made by the AO under Section 56(2)(viib) of the Income Tax Act, 1961. The AO had added back the amount to the income of the assessee, arguing that the assessee failed to furnish a valuation report from a merchant banker to justify the share price. The CIT(A) deleted this addition, noting that there was no allegation of unaccounted money introduction through shell companies and that the prescribed methodology for valuing preference shares differs from that for equity shares.

2. Validity of the valuation method for determining the Fair Market Value (FMV) of preference shares:

The AO had used a method prescribed for equity shares to determine the FMV of preference shares, which was found inappropriate by the CIT(A). The CIT(A) observed that the AO did not provide figures used in the working formula in the assessment order. The assessee submitted a valuation report from an independent chartered accountant, which was based on the Dividend Discount Valuation Model (DDVM). The CIT(A) upheld the DDVM as an appropriate methodology for valuing redeemable preference shares, noting that the AO failed to present any credible material to negate the valuation method used by the independent valuer.

3. Rebuttal of the valuation report by the Assessing Officer (AO):

The AO questioned the DDVM used in the valuation report, specifically the discount factor of 7.67%. The CIT(A) noted that the AO did not provide any alternate rate or arrange an alternate report to counter the discounting rate used. The CIT(A) emphasized that the valuation report, prepared by an expert, should be given the status of statutory evidence, and the AO failed to demonstrate any fundamental errors or discrepancies in the report. The CIT(A) also highlighted that the past performance of the company in terms of dividend payments cannot be used to doubt the future projections used in the DDVM.

Conclusion:

The Tribunal concluded that the valuation of shares is a technical and complex issue, and the AO has limited authority to challenge the methodology applied by an expert. The Tribunal upheld the CIT(A)'s decision, noting that the valuation report was good enough to explain the valuation and that the grounds raised by the Revenue had no substance. Consequently, the appeal of the Revenue was dismissed.

Order Pronouncement:

The order was pronounced in the Open Court on 10.06.2024.