2022 (12) TMI 430 - AT - Income Tax

Valuation of shares in terms of Sec.56(2)(viib) - method of valuation - assessee has furnished valuation report wherein valuation has been done on the basis of DCF valuation - HELD THAT - AR has submitted that the shares have been converted pursuant to investor agreement dated 23.02.2012 and at that point of time, the provisions of Sec.56(2)(viib) were not in force and therefore, no such addition could have been made. Another submission is that actual money has been received in earlier years and in this year, there is mere conversion of shares. However, both the arguments are not acceptable. CCPF issued earlier has been discharged in this year and new equity shares have been issued in this year. There is constructive payment and the money is constructively received by the assessee in this year and the provisions of Sec.56(2)(viib) are very much applicable and the assessee would be obligated to justify the valuation of the shares. AR has also submitted that the right to choose a particular method of valuation has been vested with the assessee and DCF method of valuation is one of the prescribed methods. The said argument could be accepted only if the assessee discharges the onus of furnishing an acceptable valuation report. The valuation report is not mere empty formality rather the same should be based on valid assumptions and supported by empirical data which would justify adoption of projections. In the present case, the valuation lacks all these features. The actual financials of the assessee are nowhere near to the projections made in the valuation report. Accordingly, the case laws being relied upon by assessee and placed on record would have no application. We deem it fit to provide another opportunity to the assessee to justify the valuation of shares in terms of Sec.56(2)(viib). Accordingly, the matter stand restored back to the file of Ld. AO to provide another opportunity to the assessee to justify valuation of the share and re-adjudicate the issue after affording reasonable opportunity of hearing to the assessee.

Summary

Issues:
1. Valuation of share premium under section 56(2)(viib) for Assessment Year 2015-16.
2. Applicability of Section 56(2)(viib) to the amount received in the assessment year 2012-13.
3. Justification of exorbitantly high share premium based on projections and actual financial figures.
4. Discrepancy in valuation methods adopted by the assessee and assessing officer.
5. Interpretation of provisions regarding the conversion of Compulsorily Convertible Preference Shares (CCPS) into equity shares.
6. Authority of the assessing officer to change the method of valuation adopted by the assessee.

Analysis:

1. The appeal pertains to the valuation of share premium under section 56(2)(viib) for the Assessment Year 2015-16. The assessee contested the inclusion of share premium as income, arguing that the conversion of Compulsorily Convertible Preference Shares (CCPS) into equity shares was a process completed as per the agreement entered into earlier.

2. The issue of the applicability of Section 56(2)(viib) to the amount received in the assessment year 2012-13 was raised. The assessee claimed that since the provisions were not in force when the amount was received, it could not be taxed under section 56(2)(viib) for the Assessment Year 2015-16.

3. The dispute over the exorbitantly high share premium was based on projections made during 2011-12 compared to actual financial figures post-2013-14. The assessing officer raised concerns about the validity of the projections and the justification for the premium amount, leading to the addition of Rs.65.50 Lacs in the assessee's income.

4. The assessing officer and the appellate authority differed in their valuation methods, with the former adopting the net book value method while the assessee used the Discounted Cash Flow (DCF) method. The disparity in valuation approaches contributed to the disagreement over the share premium amount.

5. The interpretation of provisions regarding the conversion of Compulsorily Convertible Preference Shares (CCPS) into equity shares was crucial. The assessee argued that existing shareholders were issued equity shares through this conversion, citing a previous judgment by the ITAT Chennai "A" Bench to support their case.

6. The assessing officer's authority to change the method of valuation adopted by the assessee was challenged. The assessee contended that the assessing officer could not alter the chosen valuation method, emphasizing the discretion given to the assessee in selecting a particular valuation approach.

In conclusion, the appellate tribunal partially allowed the appeal, providing the assessee with another opportunity to justify the valuation of shares under Section 56(2)(viib). The matter was remanded back to the assessing officer for reevaluation after affording the assessee a reasonable opportunity to be heard, highlighting the importance of substantiating valuation reports with empirical data and valid assumptions.