2020 (7) TMI 71 - AT - Income Tax

Addition u/s 56(2)(viib) - taxing the share premium received during the previous year as income of the Assessee - DCF Method of Valuation - HELD THAT - AO has erred in considering the actuals of revenue and profits declared in the future years as a basis to dispute the projections. At the time of valuing the shares as on 16.04.2012, the actual results of the later years would not be available. What is required for arriving at the fair market value by following the DCF method are the expected and projected revenues. Accordingly the valuation is on the basis of estimates of future income contemplated at the point of time when the valuation was made. It has been clarified by the Assessee that the product which was being developed by the Assessee has substantial value and the Assessee was able to raise funds to the tune of ₹ 50.13 crores from international market With regard to valuation has to be decided afresh by the AO on the lines indicated in the decision of ITAT, Bangalore in the case of VBHC Value Homes Pvt.Ltd., Vs ITO 2020 (6) TMI 318 - ITAT BANGALORE i.e., (i) the AO can scrutinize the valuation report and he can determine a fresh valuation either by himself or by calling a 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. (ii) 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. The order of ld.CIT(A) is accordingly set aside for deciding the issue afresh after due opportunity of hearing to the Assessee. Appeal is allowed for statistical purpose.

Issues Involved:
1. Invoking provisions of section 56(2)(viib) of the Income Tax Act, 1961.
2. Taxation of share premium received as income.
3. Valuation method for determining fair market value of shares.
4. Application of DCF (Discounted Cash Flow) method.
5. Consideration received in non-cash form.

Detailed Analysis:

Issue 1: Invoking provisions of section 56(2)(viib) of the Income Tax Act, 1961
The Assessing Officer (AO) invoked section 56(2)(viib) to tax the share premium of ?2,29,31,200/- received by the Assessee as income. This section applies when a company receives consideration for issuing shares that exceeds the fair market value (FMV) of such shares.

Issue 2: Taxation of Share Premium Received as Income
The AO concluded that the share premium collected was taxable as income under section 56(2)(viib). The Commissioner of Income Tax (Appeals) [CIT(A)] partly confirmed this addition, deleting the portion related to shares issued to non-residents, as section 56(2)(viib) does not apply to premiums received from non-residents.

Issue 3: Valuation Method for Determining Fair Market Value of Shares
The Assessee issued shares at ?156.17 per share (?10 face value + ?146.17 premium). The AO disputed the valuation method used by the Assessee, which was based on the DCF method, and instead calculated the FMV using the Net Asset Value (NAV) method, determining the book value per share to be ?9.52.

Issue 4: Application of DCF (Discounted Cash Flow) Method
The Assessee's valuation was supported by a report from M/s. Sharma Goel & Co., Chartered Accountants, using the DCF method as per Rule 11UA(2). The AO rejected this valuation, citing discrepancies in growth rate, WACC, and projected versus actual financial results. The Tribunal emphasized that the AO can scrutinize the DCF valuation but cannot change the method opted by the Assessee. The AO must either validate the DCF valuation or obtain a fresh valuation from an independent valuer.

Issue 5: Consideration Received in Non-Cash Form
The Assessee argued that shares issued to promoters in lieu of Intellectual Property Rights (IPR) should not invoke section 56(2)(viib) as the premium was not received in cash. The CIT(A) rejected this argument, stating that the section applies to any consideration received, not just cash. The Tribunal agreed but noted that the value of the IPR should be considered in the share valuation.

Conclusion:
The Tribunal set aside the CIT(A)'s order and directed the AO to re-evaluate the valuation using the DCF method, considering only the facts and data available at the valuation date. The Assessee must prove the correctness of the projections, discounting factor, and terminal value. The appeal was allowed for statistical purposes, and the issue was remanded for fresh consideration.

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