2018 (8) TMI 1198 - AT - Income Tax

Additions u/s 56(2)(viib) - valuation of issue of share - AO rejected the discounted cash flow method and arrived at the value of share by Net Asset Value (NAV) method and arrived at the value of 1.17 per share and the difference of 1.64 (2.81 - 1.17) per share is added by applying section 56(2)(viib) of the Income Tax Act 1961 the Act . - Held that - order of CIT(Appeals) should be set aside and CIT(Appeals) should be directed to examine the reasons given by the assessee as to why DCF method was the most appropriate method of valuation of shares of the assessee in the facts & circumstances and the nature of industry in which the assessee operated. - Decided in favor of assessee for statistical purposes.

Summary

Issues: Valuation of shares using DCF method, addition under section 56(2)(viib) of the Income Tax Act, 1961

Valuation of Shares using DCF Method:
The appellant, a private limited company, appealed against the CIT(Appeals) order regarding the valuation of shares using the discounted cash flow (DCF) method. The company had reconstituted its equity share capital during the relevant year and made share allotments to directors and an independent entity. The Assessing Officer rejected the DCF method and valued the shares using the Net Asset Value (NAV) method, resulting in an addition under section 56(2)(viib) of the Income Tax Act, 1961. The appellant contended that the DCF method was appropriate for valuing unquoted equity shares of a service-oriented company. However, the CIT(Appeals) upheld the AO's decision, stating that the valuation was based on self-serving data and not a fair market value. The appellant's submissions supporting the DCF method were not considered by the CIT(Appeals).

Addition under Section 56(2)(viib) of the Income Tax Act, 1961:
The Assessing Officer added an amount under section 56(2)(viib) of the Income Tax Act, 1961, due to the variance in share valuation between the DCF method and the NAV method. The appellant argued that the DCF method was the most appropriate for valuing shares in their industry context. The ITAT directed the CIT(Appeals) to re-examine the reasons provided by the appellant for choosing the DCF method over the NAV method. The ITAT set aside the CIT(Appeals) order and instructed a fresh consideration of the issue, granting the appellant an opportunity to present further submissions.

Conclusion:
The ITAT allowed the appeal by the appellant for statistical purposes, emphasizing the need for a detailed review of the valuation methods used for the shares. The judgment highlighted the importance of considering industry-specific factors when determining the appropriate valuation method for unquoted equity shares. The case underscored the significance of fair market value assessment and the necessity for thorough evaluation of valuation methodologies in compliance with the Income Tax Act, 1961.