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2023 (3) TMI 769 - AT - Income TaxAddition u/s 56(2)(viib) - consideration received by the assessee towards premium on issue of equity share represents the fair market value or exceeds the fair market value - AO discarded the FMV method as per DCF method and replaced the same with the NAV method - addition with respect to change in the method of valuation - AO rejected the DCF methodology adopted by the appellant company for the purpose of arriving at the FMV of equity shares - Whether AO has rightly applied NAV methodology for determining the FMV of equity shares? - HELD THAT - The legal fiction inserted by Section 56(2)(viib) seeks to deem premium received from subscribers being Indian entities in excess of Fair Market Value as the chargeable income in the hands closely held company issuing such share at premium in excess of its Fair Market Value. The assessee-company adopted DCF method for determination of Fair Market Value as per valuation report of the independent valuer filed to support and vindicate the share premium on issue of equity share. AO however found fallacy in the quantification of FMV so determined by DCF method and observed that the FMV determined as per DCF method is without any sound factual basis and the projected figures of the ensuing years widely vary with the actual figures reported and presently available at the time of assessment for Financial Years 2016-17 and 2017-18. The assessee company in the instant case has proceeded to issue equity shares at a premium to none other than its wholly owned holding company and that too on the basis of independent valuer report where FMV was determined as per DCF method which is one of the prescribed method for determination of valuation under Rule 11UA r.w. Section 56(2)(viib) - AO has disputed the DCF method on account of variation in the projected figures used by the valuer with the actual figures available subsequently at the time of assessment. The Assessing Officer discarded the FMV method as per DCF method and replaced the same with the NAV method which action runs totally contrary to the ratio laid down in Cinestaan Entertainment 2021 (3) TMI 239 - DELHI HIGH COURT wherein the additions made under the deeming provisions of Section 56(2)(viib) made by the Assessing Officer were reversed. Section 56(2)(viib) creates a legal fiction whereby the scope and ambit of expression income has been enlarged to artificially tax a capital receipt earned by way of premium as taxable revenue receipt. Hence, such a deeming fiction ordinarily requires to be read to meet its purpose of taxing unaccounted money and thus needs to be seen in context of peculiar facts of present case. The legal fiction has been created for definite purpose and its application need not be extended beyond the purpose for which it has been created. Bringing the premium received from holding company to tax net under these deeming fictions would tantamount to stretching provision to an illogical length and will lead to some kind of absurdity in taxing own money of shareholders without any corresponding benefit. In totality, governed by the view taken by the Hon ble Delhi High Court as well as the Co-ordinate Bench in similar fact situation coupled with the fact of the issue of shares to its holding company, we are unable to see any infirmity in the first appellate order on the point under determination - Decided against revenue.
Issues Involved:
1. Deletion of addition under Section 56(2)(viib) due to change in the method of valuation. 2. Rejection of DCF methodology by the Assessing Officer. 3. Application of NAV methodology by the Assessing Officer. Summary: 1. Deletion of Addition under Section 56(2)(viib): The Revenue challenged the deletion of an addition of Rs.36,03,10,674/- made by the Assessing Officer under Section 56(2)(viib) of the Income Tax Act, 1961. The CIT(A) found merit in the assessee's submissions and reversed the action of the Assessing Officer, concluding that the addition with respect to the change in the method of valuation was not in accordance with law. 2. Rejection of DCF Methodology: The Assessing Officer rejected the valuation report submitted by the assessee, which used the Discounted Cash Flow (DCF) method to determine the Fair Market Value (FMV) of equity shares at Rs.22.21 per share. The Assessing Officer found discrepancies between the projected growth figures and the actual figures for the financial years 2016-17 and 2017-18, leading to the rejection of the DCF method. The CIT(A), however, upheld the DCF method, stating that it was a recognized method under Rule 11UA and supported by an independent valuer's report. 3. Application of NAV Methodology: The Assessing Officer applied the Net Asset Value (NAV) methodology, determining the FMV at Rs.11.54 per share, and made an addition of Rs.36,03,10,674/- by applying the difference of Rs.10.67 per share as excess premium received. The CIT(A) found that the Assessing Officer did not provide sound reasoning or material to counter the DCF method and emphasized that projections are estimates and cannot be matched with actual performance. The CIT(A) concluded that the appellant is entitled to use the DCF method, which was higher than the NAV method, and directed the deletion of the addition. Tribunal's Decision: The Tribunal upheld the CIT(A)'s decision, noting that the assessee issued shares at a premium to its holding company based on an independent valuer's report using the DCF method. The Tribunal found that the Assessing Officer's rejection of the DCF method and substitution with the NAV method was contrary to the legal precedents set by the Delhi High Court and ITAT in similar cases. The Tribunal emphasized that Section 56(2)(viib) is an anti-abuse provision intended to curb unaccounted money, and its application should not extend to genuine transactions supported by valid valuation reports. Consequently, the Tribunal dismissed the Revenue's appeal and upheld the relief granted by the CIT(A). Conclusion: The Tribunal confirmed that the CIT(A) was correct in deleting the addition made under Section 56(2)(viib) and in accepting the DCF method for valuation, as it was supported by an independent valuer's report and aligned with legal precedents. The appeal by the Revenue was dismissed.
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