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2024 (9) TMI 1130 - HC - Income TaxValidity of the valuation u/s 56(2)(viib) - AO while rejecting the valuation report which had been submitted by assessee had proceeded to frame the order on the basis of actual figures which had obtained - HELD THAT - It was the aforesaid procedure adopted which fell for adverse comment of the CIT(A) as well as ITAT. It becomes pertinent to observe that an estimation would to some extent be based on an approximate evaluation. That estimation would not be liable to be questioned on the basis of actual facts or figures. Ultimately, the correctness of an estimation would have to be tested on the basis of a legitimate and valid assessment. 3. In our considered opinion, while the ITAT was therefore justified in upholding the view taken by the CIT(A), it would have been appropriate for it to have remitted the matter to the AO for the purposes of examining the issue afresh and in light of Section 56(2)(viib). We set aside the impugned order of the ITAT 2022 (12) TMI 1508 - ITAT DELHI and remit the matter to the desk of the AO who shall proceed to undertake a valuation afresh bearing in mind the provisions made in Section 56(2)(viib) and ensuring that while the DCF Method is adhered to, if in case the data which has been provided by the respondent assessee is found to warrant further examination, it would be open to the AO to enlist the services of an appropriate valuer.
Issues Involved:
1. Validity of the valuation methodology under Section 56(2)(viib) of the Income Tax Act, 1961. 2. Whether the Assessing Officer (AO) could reject the valuation report based on actual figures. 3. The necessity of remitting the matter back to the AO for fresh valuation. Issue-wise Detailed Analysis: 1. Validity of the valuation methodology under Section 56(2)(viib) of the Income Tax Act, 1961: The ITAT concluded that actual figures could not be considered for purposes of Section 56(2)(viib) of the Act. This position aligns with the judgment in Pr.CIT vs. Cinestaan Entertainment Pvt. Ltd., which emphasized that commercial wisdom and risks undertaken by a businessman should not be questioned by the Income Tax Department. The statutory provisions require valuation to be done as per prescribed methods, and if one of these methods is adopted, the AO must accept it. The AO lacks the authority to substitute or reject the valuation without an express provision under the Act or Rules. The Court reiterated that valuation is not an exact science and cannot be done with arithmetic precision, as endorsed by several judicial precedents. 2. Whether the Assessing Officer (AO) could reject the valuation report based on actual figures: The AO's rejection of the valuation report based on actual figures was criticized by the CIT(A) and ITAT. The Court observed that estimations are inherently approximate and should not be questioned based on actual outcomes. The AO failed to provide an alternative fair value and did not demonstrate that the methodology adopted by the respondent-assessee was incorrect. The Court highlighted that the valuation was accepted by outside investors, indicating its validity. The valuation is a factual determination based on material evidence, and the AO's rejection lacked a material foundation. 3. The necessity of remitting the matter back to the AO for fresh valuation: The Court found that while the ITAT was justified in upholding the CIT(A)'s view, it should have remitted the matter to the AO for re-examination. The Court set aside the ITAT's order and directed the AO to undertake a fresh valuation in accordance with Section 56(2)(viib), adhering to the DCF Method. If the data provided by the respondent-assessee warrants further examination, the AO may enlist an appropriate valuer. All rights and contentions of the parties regarding any subsequent exercise or assessment are kept open. The appeal and pending application were disposed of on these terms. Conclusion: The Court upheld the ITAT's decision that the AO's rejection of the valuation report based on actual figures was incorrect. However, it remitted the matter back to the AO for fresh valuation in line with Section 56(2)(viib) and the DCF Method, allowing for further examination if necessary.
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