2020 (8) TMI 315 - AT - Income Tax

Income from other sources - Addition u/s.56(2)(viib) - basis of valuation of equity shares for issuing at a premium of ₹ 170/- against the face value of ₹ 10/- - following net value method as per Rule 11UA (2)(a) of the I.T.Rules, 1962 - As per AO market value of the shares was required to be determined as per Rule 11 UA(1)(c)(b) and not as per Rule 11UA(2) - HELD THAT - As per Rule 11UA(1)(c)(b) of the Rules, it is the prerogative of the assessee to estimate the fair market value of the shares issued by it adopting one method out of two methods i.e. discounted cash flow method or book value method. The revenue authorities cannot force the assessee to adopt particular method for valuing the fair market value of the share especially when Rule 11UA(1)(c)(b) provides that it is the option of the assessee to chose any method either discounted or book value method for estimating the fair market value of the shares issued by it during the relevant financial period. In this case, the assessee has adopted the discounted free cash flow method as prescribed under Rule 11UA (2)((b) of the Act. Jaipur Bench of ITAT in the case of Safe Decore Pvt Ltd. 2018 (2) TMI 1274 - ITAT JAIPUR has held that the assessee cannot be denied the benefit of discounted free cash flow method only because the consideration amount was received much before Rule 11UA(2) came into force, which is one of the method to be adopted by the assessee for valuing the fair market rate. The above decision has been followed by the ld CIT(A) in the impugned order in deleting the addition. In the present case shares have been issued by the assessee at ₹ 180/- per share as against the fair market value of ₹ 189/- determined as per discounted free cash flow method and, therefore, no addition is required to be made in the hands of the assessee u/s.56(2)(viib) - no infirmity in the impugned order of the ld CIT(A) to interfere. Accordingly, we uphold the findings of the ld CIT(A) and reject the ground of appeal of the revenue.

Summary

Issues:
- Valuation of shares for taxation under section 56(2)(viib) of the Income Tax Act, 1961.
- Applicability of Rule 11UA(2) for valuation of shares issued before and after its insertion on 29.11.2012.

Analysis:
1. Valuation of Shares for Taxation:
- The appellant issued shares at a premium, leading to a dispute with the Assessing Officer (AO) regarding the fair market value of the shares for taxation under section 56(2)(viib) of the Income Tax Act, 1961.
- The AO determined the fair market value at a lower rate, resulting in an addition to the appellant's income.
- The appellant argued that the fair market value should be calculated using the discounted free cash flow method under Rule 11UA(2)(b) and not Rule 11UA(1)(c)(b) as insisted by the AO.

2. Applicability of Rule 11UA(2) for Valuation:
- The crux of the issue was the applicability of Rule 11UA(2) for valuation of shares issued before its insertion on 29.11.2012.
- The appellant contended that since the shares were issued after the insertion of Rule 11UA(2) and a significant portion of the consideration was received post the insertion date, the discounted free cash flow method should be applied.
- The ITAT, Jaipur Bench's decision in a similar case supported the appellant's argument, emphasizing that the timing of consideration receipt should not affect the valuation method chosen by the assessee.

3. Decision and Rationale:
- The CIT(A) ruled in favor of the appellant, highlighting that a substantial amount of consideration was received after 29.11.2012, justifying the use of the discounted free cash flow method for valuation.
- The ITAT upheld the CIT(A)'s decision, emphasizing the appellant's right to choose the valuation method under Rule 11UA(1)(c)(b) and rejecting the revenue's argument to force a specific method.
- The ITAT concluded that since the shares were issued below the fair market value calculated using the discounted free cash flow method, no addition to income was warranted under section 56(2)(viib).
- Consequently, the appeal of the revenue was dismissed, affirming the CIT(A)'s order and providing a clear precedent for valuation methodology in such cases.

This comprehensive analysis covers the valuation dispute, the application of Rule 11UA(2), and the legal reasoning behind the decision, ensuring a detailed understanding of the judgment.