2020 (9) TMI 1021 - HC - Income Tax

Income from other sources u/s 56(2)(viib) - determining the share value of the premium - Method of valuation of shares - variation in value of shares to the extent of ten times between value adopted by the assessee company as against its actual value of underlying assets - assessee has adopted a method prescribed by the Income Tax Act, without considering the fact that the value of shares adopted by the assessee (under discounted case flow method) does not reflect the true market value of the shares on that date - assessee adopted the DCF method as available under Rule 11UA of the Rules for arriving at the value of the shares allotted and the share premium received - ao adopted the NAV method and re-valued the land owned by the assessee company for the purpose of determining the share value of the premium thereof - HELD THAT - Noting that the AO had discarded the DCF method adopted by the assessee on the ground that the actual revenue varied from the projected revenue for four years, the Tribunal rightly noted that the projected value is an estimate and the variation in the estimate is marginal. Tribunal came to the conclusion that there was no material to hold that the assessee's projected sales revenues are fabricated or manipulated. As pointed out that the Assessing Officer did not point out any flaw in the method of calculation of the value of shares by adopting the DCF method but, out rightly rejected the same, which should not have been done. Revenue by relying upon the decision of CIT vs. M/s.Vaani Estates Pvt. Ltd. 2019 (5) TMI 952 - MADRAS HIGH COURT submitted that the matter may be remanded to the Assessing Officer for fresh consideration to determine the fair market value of the shares in question as required in Explanation to Section 5 but said judgment, the matter was remanded to the AO for fresh consideration on a concession extended by the assessee by submitting that they will seek necessary clarification from the Central Board of Direct Taxes and they may be permitted to do so while the matter could be remanded back to the assessing authority. Therefore, a direction issued based on the concession extended by the assessee cannot be relied upon by the Revenue as a precedent. - Decided in favour of assessee.

Summary

Issues:
1. Interpretation of Section 56(2)(viib) of the Income Tax Act, 1961.
2. Validity of adopting Discounted Free Cash Flow (DCF) method for share valuation.

Analysis:
1. The appeal raised questions regarding the application of Section 56(2)(viib) of the Income Tax Act, 1961. The Assessing Officer contended that the assessee's valuation of shares using the DCF method did not reflect the true market value and invoked Section 56(2)(viib) to assess the share value at a higher amount. The CIT(A) and Tribunal, however, found that the projection discrepancies were marginal and the assessee had not abused the valuation method. The Tribunal concluded that there was no evidence of fabricated sales revenues, supporting the assessee's valuation method.

2. The second issue revolved around the validity of the DCF method for share valuation. The Assessing Officer favored the Net Asset Value (NAV) method over DCF, citing discrepancies in projected revenues. The CIT(A) highlighted the assessee's right to choose between NAV and DCF methods, emphasizing the absence of evidence indicating misuse of the DCF method. The Tribunal upheld the assessee's valuation approach under Rule 11UA of the Income Tax Rules, noting that projected values are estimations subject to marginal variations. The Tribunal rejected the Revenue's argument to remand the case for fresh valuation, as the prior judgment cited was based on a specific concession by the assessee.

In conclusion, both the CIT(A) and the Tribunal carefully analyzed the facts and circumstances, ultimately granting relief to the assessee. The High Court dismissed the Revenue's appeal, stating that no substantial questions of law arose for consideration in the case.