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2020 (10) TMI 403 - AT - Income TaxAddition u/s 56 (2)(vii)(b) - alleged excess value of share premium over fair value as determined for the unquoted equity shares as issued at premium by the Appellant to its Holding Co. - Value determined either on DCF method or NAV method - assessee had opted for clause (b) of Rule 11UA(2) of I.T. Rules by applying DCF method and obtained valuation report form a chartered accountant thereby fulfilling both the requirements of such specific Rule - HELD THAT - Unlike Explanation (a)(ii) of section 56 (2)(viib), where it has been specifically provided that valuation is to be substantiated to the satisfaction of the AO, there is no such provision specified therein in Explanation (a) (i) of section 56(2)(viib) as opted for by the assessee for substantiating its valuation to the satisfaction of the AO. Hence AO was not empowered to disregard the DCF valuation as carried out by the valuer and such action of the authorities below of rejecting such valuation report cannot be upheld. AO was not able to pinpoint any specific inaccuracies or short comings in the DCF valuation report of the Chartered Accountant/Valuer other than stating that year- wise results as projected are not matching with the actual results declared in the final accounts. Before the ld. CIT(A), reasons for variation between projected and actuals were duly explained. CIT(A) has accepted such explanation but rejected the DCF valuation report as submitted by the assessee. Accordingly, in the absence of any defect in the valuation of shares arrived by the assessee on the basis of DCF method, impugned addition as made on the basis of net asset value method is liable to be deleted. The rejection is unjustified as the valuation report is required under Rule 11UA of The Income Tax rules is based on the future aspects of the company at the time of issuing the shares, it may vary from the actual figures depending on the market condition at the present point of the time. Thus, keeping in view the entire facts of the case, the reports of the valuer, the comparison of the actual and projected revenues, provisions of Section 56(2)(viib) and keeping in view the order of Co-ordinate Bench of ITAT in the case of Cinestaan Entertainment Pvt. Ltd. 2019 (6) TMI 1367 - ITAT DELHI wherein it has been held that the Assessing Officer cannot substitute his own value in place of the value determined either on DCF method or NAV method, the appeal of the assessee is hereby allowed.
Issues Involved:
1. Confirmation of addition under Section 56(2)(vii)(b) of the Income-tax Act. 2. Validity of the valuation exercise conducted by the specified valuer/independent expert. 3. Authority of the AO/CIT(A) to substitute their own valuation for the one provided by the specified valuer. 4. Excessiveness of the addition made under Section 56(2)(vii)(b) of the Income-tax Act. Issue-wise Detailed Analysis: 1. Confirmation of Addition under Section 56(2)(vii)(b): The assessee challenged the confirmation of an addition of ?1,59,39,863 made by the AO under Section 56(2)(vii)(b) of the Income-tax Act. The AO had rejected the valuation report provided by the Chartered Accountant, which used the Discounted Cash Flow (DCF) method, and instead computed the value of the shares using the net worth method, resulting in a lower valuation of ?23.21 per share. The CIT(A) upheld this addition, citing various deficiencies in the valuation report, such as the absence of a valuation date, an unexplained Beta coefficient, and assumptions made without basis. 2. Validity of the Valuation Exercise: The assessee contended that the valuation exercise was conducted by a specified valuer/independent expert in accordance with Rule 11UA of the Income-tax Rules. The valuation report was based on the DCF method, which the assessee argued was a valid and prescribed method under the rules. The CIT(A) had rejected this valuation on multiple grounds, including the lack of a valuation date, unexplained assumptions in the Beta coefficient, and discrepancies in the cost of equity and debt ratios. 3. Authority of AO/CIT(A) to Substitute Valuation: The assessee argued that the AO and CIT(A) did not have the jurisdiction or authority to substitute their own valuation for that of the specified valuer. According to the assessee, the valuation method chosen (DCF) was in compliance with Rule 11UA(2) of the Income-tax Rules, and the authorities below were not empowered to adopt a different method. The Tribunal agreed, citing that the statute requires a thing to be done in a certain manner, and it should be done in that manner alone (CIT vs. SPL’s Siddhartha Ltd. 345 ITR 223). 4. Excessiveness of the Addition: The assessee also argued that the addition of ?1,59,39,863 was excessive and based on incorrect or legally untenable observations. The Tribunal found that the actual revenues of the company were far more than the projected revenues, validating the DCF method used by the valuer. The Tribunal noted that the AO could not pinpoint any specific inaccuracies in the DCF valuation report other than the year-wise results not matching the actual results. The Tribunal held that the AO’s rejection of the DCF valuation was unjustified and that the addition made on the basis of the net asset value method was liable to be deleted. Conclusion: The Tribunal allowed the appeal of the assessee, holding that the AO and CIT(A) were not justified in rejecting the DCF valuation report and substituting their own valuation. The Tribunal emphasized that the valuation method prescribed under Rule 11UA(2) should be adhered to and that the authorities below had acted arbitrarily. The appeal was allowed in favor of the assessee, and the addition of ?1,59,39,863 was deleted.
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