2020 (8) TMI 365 - AT - Income Tax

Addition u/s 56(2)(viib) relating to share premium - AO rejected DCF method of valuation - Valuation of shares - HELD THAT - 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. As 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 We are of view that the issue 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) 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.

Summary

Issues Involved:

1. Validity of the addition made under Section 56(2)(viib) of the Income Tax Act, 1961 concerning share premium.
2. Appropriateness of the valuation method (DCF Method vs. NAV Method) used for determining the fair market value of shares.

Issue-wise Detailed Analysis:

1. Validity of the Addition Made Under Section 56(2)(viib) of the Income Tax Act, 1961 Concerning Share Premium:

The assessee challenged the order dated 7.2.2018 by the CIT(A)-3, Bengaluru, which partially confirmed the addition made by the AO under Section 56(2)(viib) of the Income Tax Act, 1961. The AO had noticed that the assessee issued 6,15,088 equity shares at a premium of ?80 per share, collecting a total share premium of ?4,92,07,040. Out of this, ?1,77,77,760 was received from resident shareholders. The AO assessed this amount under Section 56(2)(viib) of the Act, as he found the share premium unjustified based on the Net Asset Value (NAV) method, which valued the shares at ?6.04 each. The CIT(A) agreed with the AO but corrected the premium amount from resident shareholders to ?88,88,880.

2. Appropriateness of the Valuation Method (DCF Method vs. NAV Method) Used for Determining the Fair Market Value of Shares:

The assessee provided a valuation certificate using the Discounted Cash Flow (DCF) method, valuing the shares at ?87.56 each. The AO rejected the DCF method, citing that it was based on projected figures provided by the management without a clear basis for the projections. The AO insisted on using the NAV method, which resulted in a much lower valuation of ?6.04 per share. The Tribunal noted that the AO did not properly examine the DCF valuation report. Referring to previous Tribunal decisions and the Bombay High Court judgment in Vodafone M-Pesa Ltd., the Tribunal highlighted that if the DCF method is chosen by the assessee, the AO must scrutinize the report but cannot change the valuation method. The AO can either re-evaluate using the DCF method or call for an independent valuation but must base it on the DCF method.

The Tribunal emphasized that the projections used in the DCF method should be scrutinized based on the data available at the time of valuation, not on actual future results. The primary onus to prove the correctness of the valuation report lies with the assessee. The Tribunal directed the AO to re-examine the valuation using the DCF method and provided the assessee an opportunity to justify the projections and assumptions used in the valuation.

Conclusion:

The Tribunal set aside the order of the CIT(A) and restored the issue to the AO for a fresh decision, following the DCF method as chosen by the assessee. The AO is to scrutinize the valuation report considering only the data available at the time of valuation and not future actual results. The appeal was allowed for statistical purposes, and the matter was remanded back to the AO with specific directions to re-evaluate the share valuation using the DCF method.