2023 (1) TMI 669 - AT - Income Tax

Addition u/s. 56(2) (viib) - AO had rejected the valuation of shares as per discounted cash flow method applied by the assessee on the grounds of being unfounded and not supported by any substantive facts - CIT(A) while deleting the addition made by AO has given a finding that the reply of the assessee and the fair market value based on DCF valuation given by the assessee was rejected without any cogent material on record - HELD THAT - As noted that as per the provision of section 56(2) (viib) the fair market value shall be as per value determined in accordance with the method prescribed or as substantiated by the company based on the value of share goodwill etc. whichever is higher. He has further noted that it is at the option of the assessee to choose between the value determined on the basis of formula prescribed for determining the fair market value of the unquoted share as per rule 11UA or the Fair Market Value worked out by the merchant banker as per discounted free cash flow method. He given a finding that the assessee has opted for working of fair market value of the shares which was duly supported by the report of Chartered Accountant/valuer. AO has not brought on record any material on record to counter the submissions made by the assessee - working of fair market value by AO at Rs. 340.22 per share on the basis of the book value disregarding the market value, to be not in accordance with law. Before us no fallacy in the findings of the CIT(A) has been pointed out by Revenue. In such a situation, we find no reason interfere with the order of CIT(A), and thus the ground of Revenue dismissed.

Summary

Issues involved:
1. Valuation of shares under section 56(2) (viib) of the Income Tax Act.

Detailed Analysis:

Issue 1: Valuation of shares under section 56(2) (viib) of the Income Tax Act

The case involved an appeal by the Revenue against the order of the Ld. CIT(A) relating to the assessment year 2014-15. The assessee, a company engaged in manufacturing and trading herbal cosmetics, filed its return of income declaring total income at Rs. NIL after set off of losses and book profit. The AO framed the assessment u/s. 143(3), determining the total income at Rs. 1,68,82,680 under the normal provisions. The AO questioned the premium charged on allotment of shares and rejected the valuation based on discounted cash flow method, adding an excess premium as income u/s. 56(2) (viib).

The Ld. CIT(A) granted relief to the assessee, deleting the addition made by the AO. The CIT(A) observed that the AO had rejected the fair market value based on DCF valuation without sufficient material. The CIT(A) noted that the fair market value should be determined as per the prescribed method or substantiated by the company, whichever is higher. The CIT(A) highlighted that the assessee had chosen the DCF method supported by a valuation report, while the AO had not provided any material to counter the assessee's submissions.

The ITAT, comprising Shri Anil Chaturvedi and Shri Anubhav Sharma, upheld the CIT(A)'s decision, dismissing the Revenue's appeal. The ITAT found no fault in the CIT(A)'s findings and concluded that the AO's valuation at Rs. 340.22 per share based on book value, disregarding market value, was not in accordance with the law. Therefore, the ITAT dismissed the Revenue's appeal, affirming the deletion of the addition made by the AO under section 56(2) (viib) of the Income Tax Act.

In conclusion, the ITAT's judgment emphasized the importance of proper valuation methods for determining fair market value of shares under section 56(2) (viib) of the Income Tax Act, highlighting the need for substantiated valuations and adherence to prescribed methods to avoid additions based on arbitrary assessments.