2020 (11) TMI 115 - AT - Income Tax

Addition u/s 56(2)(viib) of the Act read with rule 11UA(2)(b) - excess fair market value - AO computed value of share premium at ₹ 51.32 per share and disallowed excess share premiumand treated as excess fair market value under section 56(2)(viib) - disregarding the valuation report prepared under the Discounted Cash Flow ( DCF ) method, and adopting the Net Asset Value ( NAV ) method for computation of the fair market value ( FMV ) of shares - HELD THAT - As under Rule 11UA assessee has option to determine fair market value being NAV method or DCF method. As per observation of Hon ble Bombay High Court in case of Vodafone M-Pesa 2018 (3) TMI 530 - BOMBAY HIGH COURT . If assessee determines the fair market value in any one method as prescribed under Rule 11UA, the assessing officer can not dispute the method so adopted. In the present case, we note that assessing officer has not rejected the DCF method followed by assessee based on any discrepancy found in the valuation, but is based on the reasoning that, the valuation is based on estimates. Remand this issue back to Ld.AO for scrutinising valuation report filed by assessee by following DCF method either by himself or by calling a determination from an independent valuer and to confront the same with assessee. Ld.AO shall not reject the DCF method as it is the appropriate method prescribed under Rule 11UA. Assessee is also directed to establish the correctness of the valuation report based on documents/evidences. Assessee has to satisfy the correctness of the projection of discounting factor with the help of empirical data or industry norm. - Decided in favour of assessee for statistical purposes.

Issues Involved:
1. Addition under section 56(2)(viib) of the Income-tax Act, 1961.
2. Rejection of the Discounted Cash Flow (DCF) method.
3. Comparison of actual revenue with projections.
4. Valuation based on conjectures and surmises.
5. Computation of Fair Market Value (FMV) of preference shares.
6. Reliance on unrelated case law.
7. Adoption of values of assets and liabilities.
8. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Addition under section 56(2)(viib) of the Income-tax Act, 1961:
The assessee challenged the addition of INR 97,173,230 made by the AO to the returned loss, arguing that the valuation report prepared using the DCF method was disregarded, and the NAV method was adopted instead. The Tribunal noted that the AO computed the share premium value at INR 51.32 per share and disallowed the excess share premium, treating it as excess FMV under section 56(2)(viib).

2. Rejection of the Discounted Cash Flow (DCF) method:
The Tribunal observed that the AO rejected the DCF method due to the lack of positive cash flow from operations, an unrealistically high growth rate, and continuous losses. The CIT(A) upheld this rejection, emphasizing that the primary onus to prove the correctness of the valuation report lies with the assessee.

3. Comparison of actual revenue with projections:
The CIT(A) and AO compared the actual revenue generated with projections to reject the valuation made by the assessee. The Tribunal noted that the AO should scrutinize the valuation report and determine a fresh valuation based on the DCF method, as prescribed under Rule 11UA, without changing the method opted by the assessee.

4. Valuation based on conjectures and surmises:
The Tribunal found that the AO's rejection of the DCF method was based on conjectures and surmises, without any specific discrepancies in the valuation. The Tribunal emphasized that the AO should scrutinize the valuation report based on empirical data or industry norms.

5. Computation of Fair Market Value (FMV) of preference shares:
The assessee argued that the AO erred in computing the FMV of preference shares under the NAV method instead of the open market value as per Rule 11UA(1)(c)(c). The Tribunal remanded the issue back to the AO for reconsideration based on the DCF method.

6. Reliance on unrelated case law:
The CIT(A) placed reliance on the decision in the case of Cornerstone Property Investments Pvt. Ltd., which the assessee argued was not applicable. The Tribunal noted that the AO should follow the guidance of relevant case law, such as Vodafone M-Pesa Pvt. Ltd. vs DCIT and Innoviti Payment Solutions Pvt. Ltd. vs ITO, which support the use of the DCF method.

7. Adoption of values of assets and liabilities:
The assessee contended that the AO erred in adopting the values of assets and liabilities as of March 31, 2015, instead of March 31, 2014. The Tribunal directed the AO to reconsider the valuation report based on the correct period.

8. Initiation of penalty proceedings under section 271(1)(c):
The assessee challenged the initiation of penalty proceedings under section 271(1)(c). The Tribunal did not specifically address this issue in detail but remanded the overall valuation issue back to the AO for fresh consideration.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, remanding the matter back to the AO to scrutinize the valuation report filed by the assessee using the DCF method, either by himself or by calling for a determination from an independent valuer. The AO was directed not to reject the DCF method and to provide the assessee with an opportunity to establish the correctness of the valuation report based on empirical data or industry norms.

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