2024 (8) TMI 624 - AT - Income Tax

Addition u/s 56(2)(viib) - valuation of the shares done using the discounted cash flow method is far from reality - change in method for valuing the shares by AO - method changed from DCF to NAV method - AO was of the view that the valuation has been done by the valuer to achieve the desired valuation of the share i.e. Rs. 13.94 per share, which is far away from the reality - figures given in the project report did not match, which can be verified from the financial statements of the last years prepared by the assessee - HELD THAT - As transpired that option to choose the method provided under clause (a) or clause (b) is available with assessee. Admittedly, the method adopted by the assessee i.e. DCF method for determining fair market value was one of the methods prescribed under the provisions of section 56(2)(viib) read with income tax rule 11UA of Income Tax Rule. AO cannot interfere in the method selected for the valuation of the shares. AO can scrutinize the contents or working of the method adopted by the assessee so as to find out the fair valuation. In case, the AO is not satisfied with the working of the assessee, then the AO may draw fresh valuation or get fresh valuation report from independent valuer, but such fresh valuation can only be done as per the method adopted by the assessee as in the present case assessee adopted DCF method. As such the AO cannot change the method from DCF to NAV method. AO has exceeded his jurisdiction by rejecting the method adopted by the assessee and brought another method for valuing the shares of the company. The action of the AO by substituting the method for the valuation of shares which was subsequently upheld by the learned CIT(A) is contrary to the provisions of law and therefore the same is not sustainable. There was a transaction between the independent parties namely Delivery Hero and ANI Technology for transfer of the shares of the assessee company at a price of ₹ 13.94 per share. The Delivery Hero is a foreign company which transferred equity share to a resident company i.e. ANI Technology. The value of the share i.e. Rs. 13.94 per share was accepted under the provisions of FEMA and RBI requirements, the Pricing Guidelines for downstream investment. Thus, it transpired that the price at which M/s Delivery Hero transferred the equity share of assessee company to ANI Technology was in accordance with the requirement of FEMA and RBI. In such circumstances, we are of the view that the same value adopted by the assessee cannot be disturbed for issuing shares to M/s ANI Technologies. The transaction in question cannot be disturbed under the provisions of section 56(2)(viib) of the Act. Accordingly, we set aside the order of the ld. CIT-A and direct the AO to delete the addition made by him. Hence, the ground of appeal of the assessee is hereby allowed.

Summary

Issues Involved:
1. Whether the CIT(A) erred in confirming the addition of Rs. 1,86,77,17,914/- under the provisions of section 56(2)(viib) of the Act.

Detailed Analysis:

Issue 1: Confirmation of Addition under Section 56(2)(viib)
- Facts and Background: The assessee, a private limited company engaged in food delivery, issued shares to ANI Technologies Pvt. Ltd. at Rs. 13.94 per share. The valuation was conducted by Ernst and Young Merchant Banking Services Ltd. using the discounted cash flow (DCF) method. The Assessing Officer (AO) observed that the assessee had incurred persistent losses and questioned the reliability of the projections used for the DCF method. The AO determined the value per share at Rs. 1.20 using the net assets value (NAV) method and added the excess amount to the total income under section 56(2)(viib).

- Assessee's Arguments: The assessee argued that the DCF method is a recognized method under section 56(2)(viib) and the valuation was done by an independent merchant banker. The assessee contended that future growth potential should be considered, not historical losses. They also highlighted that the transaction between Delivery Hero and ANI Technologies was genuine and between unconnected parties, and the same valuation should apply.

- AO's Position: The AO rejected the DCF method, asserting that projections should be based on historical data. The AO emphasized that the assessee was not registered as a startup and had no venture capitalist investment, thus not qualifying for exceptions under section 56(2)(viib).

- CIT(A)'s Decision: The CIT(A) upheld the AO's decision, reiterating that the projections in the valuation report were unreliable and the valuation report was prepared only for the transfer of shares between Delivery Hero and ANI Technologies, not for the issuance of new shares.

- Tribunal's Analysis: The Tribunal noted that the assessee adopted the DCF method, which is one of the prescribed methods under section 56(2)(viib) read with Rule 11UA of the Income Tax Rules. The Tribunal emphasized that the AO cannot change the method selected by the assessee but can scrutinize the contents of the valuation. The Tribunal cited the Bombay High Court's decision in Vodafone M-Pesa Ltd. v. Pr. CIT, which held that the AO must base any fresh valuation on the method initially adopted by the assessee. The Tribunal also referred to the Bangalore Tribunal's decision in M/s Innoviti Payment Solution Pvt Ltd. vs. ITO, which outlined that the AO can scrutinize the valuation report but cannot change the method of valuation opted by the assessee.

- Conclusion: The Tribunal held that the AO exceeded his jurisdiction by rejecting the DCF method and substituting it with the NAV method. The Tribunal also noted that the transaction between Delivery Hero and ANI Technologies was genuine and the valuation was accepted under FEMA and RBI guidelines. Therefore, the Tribunal set aside the CIT(A)'s order and directed the AO to delete the addition of Rs. 1,86,77,17,914/-.

Final Judgment:
The appeal filed by the assessee is allowed. The order of the CIT(A) is set aside, and the AO is directed to delete the addition made under section 56(2)(viib) of the Act.