THE ASSESSING OFFICER CANNOT INTERFERE IN THE METHOD SELECTED FOR VALUATION OF SHARES

[Mr. M. GOVINDARAJAN]

In PISCES ESERVICES PVT. LTD. VERSUS THE DY. COMMISSIONER OF INCOME TAX, CIRCLE-3 (1) (1) , BANGALORE - 2024 (8) TMI 624 - ITAT BANGALORE, the appellant is running the business of food delivery. It was a subsidiary company of ‘Delivery hero’ German company. The holding company arranged for the valuation of the appellant company for transfer of its shareholding in the appellant company to the Company ‘ANZ Technologies Private Limited’ as subsidiary company of OLA Group.

Ernst and Young Merchant Banking Services Limited is the valuer in this case. The Valuer valued the appellant share company at Rs.13.94 based on ‘Discount Cash Method’. the valuer has projected the sales, expenses, and the profit of the appellant company from December 2017 and the calendar years beginning from 2018 to 2023 with the compounded annual growth rate of 34% of the revenue. Therefore, the holding company transferred its entire shares, 1446026600 to ANI Technologies Limited @ Rs.13.90 per share.

The valuer gave a disclaimer in the project report that they have not carried out due diligence procedures on the financial statements but prepared the project report based on the information as submitted by the appellant.

The Assessing Officer was of the view that the rate Rs.13.94 per share is far away from realty. The value has been done in the method so as to achieve the rate Rs.13.94. The figures given in the project report did not match, which can be verified from the financial statements of the last years prepared by the appellant. The view of the Assessing Officer is that the value per share of the company as per the net assets value method (‘NAV’ for short) as prescribed under section 56(2) (viib) of the Act read with Rule 11U(a) of the Income-tax Rule comes out at Rs. 1.20 per share only. Therefore, the Assessing Officer sought an explanation from the appellant company.

The appellant company gave reply to the notice to the Assessing Officer in which it submitted the following-

• the provisions of law and after considering the growth of the comparable companies such as Swiggi, Zomoto etc.
• the historical data cannot be made a basis for predicting the projections.
• it is the future prospect and growth potential that should be used while valuing the shares under a discounted cash flow method.
• The ‘Delivery Hero’ transferred its shares to ANI Technologies Limited @ Rs.13.94 per share. The same has been adopted in the present share transfer.
• the provisions of section 56(2)(viib) of the Act mandates to bring the amount of premium to the tax under the deeming provisions if it is charged more than the fair market value.
• only the amount of share premium exceeding the share market value should only to be considered for the purpose of addition as provided under the deeming provisions of section 56(2)((viib) of the Act.

The Assessing Officer was not agreeable to reply filed by the appellant. According to him the appellant has not registered with a startup company and, there was also no investment from venture capitalist, therefore, the appellant company does not fall under the exception of the startup companies. The Assessing Officer treated the share capital issued more than the valuation determined under NAV method amounting to Rs. 1,86,77,17,914/- as income of the appellant and added to the total income.

The appellant filed an appeal before the Commissioner of Income Tax (Appeals). The appellant contended before the Commissioner of Income Tax (Appeals) that-

• DCF method is one of the methods for the valuation of the shares recognized under the provisions of sec. 56(2) (viib) of the Act, complying the guidelines issued by RBI and in pursuance of the provisions of Section 62(1) of the Companies Act.
• There are losses in the initial years in the Start up company and alter it turned into profit.
• It is only future prospect and growth based on which the projections are made under DCF method. 
• The valuation report was prepared by the merchant banker after considering the growth of the food industry as projected by google, Swiggy, Zomato etc.
• The projections in the valuation report were not achieved since the appellant changed its business model from the financial year 2018-19 from food delivery to food sale business through cloud kitchen. 
• The method for valuing the shares is the domain of an expert. Neither the assessee nor the Assessing Officer can question the valuation report prepared by an expert until and unless there is some arithmetical or fundamental error pointed out by the Assessing Officer. Likewise, the Assessing Officer does not have any jurisdiction to change the method adopted by the assessee.
• It is only share premium which can be made subject to the addition under the deeming provisions of sec. 56(2)(viib) of the Act.

The Commissioner of Income Tax (Appeals) confirmed the order of the Assessing Officer. The Commissioner of Income Tax (Appeals) observed that the project report in dispute was prepared only for the transfer of shares by Delivery Hero to ANI Technologies Private Limited., and, therefore, the same cannot be adopted for the issuance of shares by the appellant company to ANI Technologies Private Limited.

The appellant filed the present appeal before the ITAT against the order of Commissioner of Income Tax (Appeals). The appellant reiterated the arguments put forth before the Assessing Officer as well as Commissioner of Income Tax (Appeals). The appellant prayed that no addition is warranted in the given facts and circumstances under the provisions of sec. 56(viib) of the Act. The Revenue supported the order of Assessing Officer and confirmed by the Commissioner of Income Tax (Appeals).

The ITAT considered the contentions of both the parties. The ITAT analyzed the entire facts of the case along with the available records. The ITAT observed that he Assessing Officer pointed out certain infirmities in the valuation report and rejected the same. Thereafter, the Assessing Officer determined the value of the share of the appellant company at Rs. 1.20 considering the NAV method. 

The ITAT considered the question as to whether the AO can substitute with the valuation method adopted by the appellant for computation of Fair Market Value. Then ITAT analyzed the provisions of Rule 11UA(2). According to this Rule the option to choose the method provided under clause (a) or clause (b) is available with assessee. The method adopted by the appellant 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.

The ITAT observed that the Assessing Officer cannot interfere in the method selected for the valuation of the shares. However, the Assessing Officer can scrutinize the contents or working of the method adopted by the appellant so as to find out the fair valuation. As such the Assessing Officer cannot change the method from DCF to NAV method. The ITAT was of the view that the Assessing Officer has exceeded his jurisdiction by rejecting the method adopted by the appellant and brought another method for valuing the shares of the company. In view of the above we hold that the action of the Assessing Officer by substituting the method for the valuation of shares which was subsequently upheld by the Commissioner of Income Tax(Appeals) is contrary to the provisions of law and therefore the same is not sustainable.

The ITAT set aside the order of the Commissioner of Income Tax and directed the Assessing Officer to delete the addition made by him. The ITAT allowed the appeal filed by the appellant.