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2022 (12) TMI 1311 - AT - Income TaxAddition u/s. 56(2)(viib) - rejecting the valuation of shares adopted by the Appellant viz., Cash flow method for issuance of shares for the AY 2015-16 - CIT(A) concurred with the stand of Ld. AO that DCF valuation was not reliable since future cash flows were exaggerated and not supported by any corroborating documentation - HELD THAT - We are of the considered opinion that though DCF valuation is one of the prescribed methods, however, the valuation should be based on reasonable estimations and assumptions which is missing in the present case. As noted by lower authorities, the valuer has merely adopted the projections made by the management and there was substantial difference in cash flow projections in both the valuation reports itself. The valuation could not be substantiated by the assessee. We also concur that only excess premium exceeding face value of shares could be brought to tax u/s 56(2)(viib). Therefore, the adjudication as done by Ld. CIT(A) in the impugned order could not be faulted with. We order so.
Issues:
1. Inclusion of amount under Section 56(2)(viib) as undisclosed income 2. Rejection of valuation of shares adopted by the Appellant 3. Discrepancies in projections and actuals for valuation 4. Acceptance of valuation by qualified Chartered Accountants 5. Disallowance of projections made by the management 6. Determination of fair market value of shares at premium 7. Contrary nature of the order of the Ld. CIT(A) 8. Determination of face value of equity shares 9. Rejection of valuation under Discounted Cash Flow method Analysis: 1. The primary issue in this case was the addition of Rs.355.25 Lacs under Section 56(2)(viib) by the Ld. AO. The assessee issued shares at a premium, justifying it with valuation reports. However, the Ld. AO invoked Sec.56(2)(viib) due to inconsistencies in the valuation reports and the computed intrinsic value per share. The AO added the differential amount to the income of the assessee. 2. The assessee relied on the discounted cash flow (DCF) method for valuation, but the Ld. AO found it unreliable due to exaggerated future cash flow projections. The AO rejected the valuation, adopting a lower intrinsic value per share. The Ld. CIT(A) concurred with the AO, stating that the DCF valuation lacked reasonable estimations and assumptions, leading to unsubstantiated valuation. 3. The discrepancies in projections and actuals for valuation were highlighted during the appellate proceedings. The valuer merely adopted management's projections without independent evaluation, leading to substantial differences in cash flow projections. The Ld. CIT(A) found the valuation unsubstantiated and agreed that only excess premium exceeding face value should be taxed under Section 56(2)(viib). 4. The Ld. CIT(A) allowed relief to the assessee by determining the face value of equity shares at Rs.100 per share, rejecting the valuation under the Discounted Cash Flow method. The CIT(A) did not follow any prescribed method under the Act for valuation, leading to a contrary nature of the order. 5. Ultimately, the Tribunal dismissed both appeals, upholding the decision that the valuation should be based on reasonable estimations and assumptions. The Tribunal agreed that the valuation lacked substantiation and that only excess premium exceeding face value should be taxed. The decision of the Ld. CIT(A) was upheld, and both appeals were dismissed.
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