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2019 (1) TMI 688 - AT - Income TaxIncome from other sources - share premium collected is above fair market value and thereby liable to tax in pursuance to section 56(2)(viib) by adopting Rule 11UA(a) - Determination of fair market value - note of the guidelines issued by research committee of The Institute of Chartered Accountants of India (ICAI) - Basis of Valuation - following of DCF method - Held that - As decided in Vodafone M-Pesa case 2018 (3) TMI 530 - BOMBAY HIGH COURT AO can scrutinize the valuation report and he can determine a fresh valuation either by himself or by calling a final determination from an independent valuer to confront the assessee. But the basis has to be DCF method and he cannot change the method of valuation which has been opted by the assessee. Hence we set aside the order of CIT (A) and restore the matter to AO for a fresh decision in the light of this judgment of Hon ble Bombay High Court. The AO should scrutinize the valuation report and he should determine a fresh valuation either by himself or by calling a final determination from an independent valuer and confront the same to the assessee. But the basis has to be DCF method and he cannot change the method of valuation which has been opted by the assessee. AO can scrutinize the valuation report and the if the AO is not satisfied with the explanation of the assessee, he has to record the reasons and basis for not accepting the valuation report submitted by the assessee and only thereafter, he can go for own valuation or to obtain the fresh valuation report from an independent valuer and confront the same to the assessee.For scrutinizing the valuation report, the facts and data available on the date of valuation only has to be considered and actual result of future cannot be a basis to decide about reliability of the projections The primary onus to prove the correctness of the valuation Report is on the assessee as he has special knowledge and he is privy to the facts of the company and only he has opted for this method. Hence, he has to satisfy about the correctness of the projections, Discounting factor and Terminal value etc. with the help of Empirical data or industry norm if any and/or Scientific Data, Scientific Method, scientific study and applicable Guidelines regarding DCF Method of Valuation. - Appeal of the assessee is allowed for statistical purposes.
Issues Involved:
1. Natural Justice 2. Rejection of Equity Shares Valuation Report Issue-wise Detailed Analysis: 1. Natural Justice: The assessee contended that the Income Tax Officer (ITO) and the Commissioner of Income Tax (Appeals) [CIT(A)] erred in passing the order without considering all submissions or properly appreciating the facts and circumstances of the case and the applicable law. The tribunal did not delve into this issue in detail, as the primary contention revolved around the valuation method adopted for equity shares. 2. Rejection of Equity Shares Valuation Report: The primary issue in this case was the valuation of equity shares issued by the assessee at a premium. The Assessing Officer (AO) had rejected the valuation report provided by an independent Chartered Accountant (CA), which used the Discounted Cash Flow (DCF) method, and instead adopted the Net Asset Value (NAV) method. - Valuation Report Details: - The assessee collected a premium of ?24,502,463 as securities premium and issued shares at ?23.50 per share, with a face value of ?10 per share. - The AO noted that the provisions of section 56(2)(viib) of the Income Tax Act, 1961, were applicable, which required the share premium to be taxed if it exceeded the fair market value (FMV) of the shares. - The assessee provided a CA certificate dated 10.11.2013, valuing the shares using the DCF method, projecting future revenues and cash flows. - AO's Observations: - The AO found that the projections used in the DCF method were not based on scientific data or reliable estimates. - The AO compared the projected sales and profits with actual figures and found significant discrepancies. - The AO concluded that the valuation report did not have a scientific basis and adopted the NAV method, resulting in the addition of ?11,221,109 to the assessee's income. - Tribunal's Analysis: - The tribunal noted that the DCF method is widely accepted but emphasized that the projections must be based on reliable estimates achievable with reasonable certainty. - The tribunal referred to the guidelines issued by the Institute of Chartered Accountants of India (ICAI), which highlight the importance of accurate cash flow projections in the DCF method. - The tribunal cited judgments from the Hon’ble Supreme Court, emphasizing the need for reliable estimates in financial projections. - Legal Precedents: - The tribunal referred to the judgment of the Hon’ble Bombay High Court in the case of Vodafone M-Pesa Ltd. vs. PCIT, which held that the AO can scrutinize the valuation report but must adhere to the DCF method if opted by the assessee. - The tribunal also noted that the AO could determine a fresh valuation or obtain an independent valuation but must confront the assessee with the findings. Conclusion: The tribunal set aside the order of the CIT(A) and restored the matter to the AO for a fresh decision. The AO was directed to scrutinize the valuation report and determine a fresh valuation using the DCF method, either by himself or through an independent valuer, and confront the assessee with the findings. The primary onus to prove the correctness of the valuation report lies with the assessee, who must substantiate the projections, discounting factor, and terminal value with empirical data, industry norms, scientific methods, and applicable guidelines. Final Judgment: The appeal of the assessee was allowed for statistical purposes, and the AO was instructed to re-evaluate the valuation report using the DCF method, ensuring that the projections are based on reliable estimates achievable with reasonable certainty.
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