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2023 (6) TMI 426 - AT - Income TaxMethod of valuation of shares - Addition u/s 56(2)(viib) - AO Rejected the DCF method of valuation on the ground that the same is not based on any scientific method and that since the assessee is making a loss, there is no possibility of valuing the shares of the assessee at a premium - CIT(A) upheld the addition made by the AO on the ground that the assessee has not employed any scientific method for determining the valuation of shares and the valuation is done solely with an intention to arrive at the higher value of issue of shares at the premium. HELD THAT - Lower authorities have not gone into the details used by the assessee under DCF method to arrive at the valuation and rejected the entire methodology as adopted by the assessee - one of the reasons as quoted by the AO for not considering the valuation report is that the Director during the survey proceedings has stated that there is no valuation report. We are unable appreciate this reason for rejection as the satisfaction to be recorded by the AO should not be objective satisfaction exercised at his discretion, but a subjective satisfaction based on the facts of the case. The lower authorities have not examined the basis on which the valuation is done and from the perusal of facts, no details in this regard have been called for by the lower authorities. The valuation report is rejected based on the objective satisfaction and not based on detailed examination. As respectfully following case of Town Essential Private Limited Ltd. 2021 (7) TMI 17 - ITAT BANGALORE we hold that the valuation done by the assessee cannot be rejected without recording any finding to the contrary by the lower authorities and therefore we delete the addition made in this regard. Disallowance u/s. 40(a)(i)/(ia) - tax deduction u/s. 194J should have been made on the payments of Management Fees,Outsourcing Expenses and License Fees - AR submitted that the details and evidence with regard to applicability of TDS provisions are already submitted before the lower authorities which have not been examined and payees have included these payments as their income and paid taxes on the same - HELD THAT - We are of the view that the issue needs to be verified factually based on evidence submitted by the assessee and also whether the payees have included the payments as their income and paid taxes on the same. We therefore remit the issue back to the AO to look at the issue afresh and decide after examining the evidences submitted by the assessee with regard to the applicability of TDS provisions on the impugned payment and wherever TDS provisions are applicable to verify whether the payees have included the said amount in their income and paid tax on the same. The assessee is directed to produce the necessary details before the AO and cooperate in the proceedings before the AO.
Issues Involved:
1. Method of valuation of shares. 2. Disallowance under Section 40(a)(i)/(ia) of the Income Tax Act. Issue-wise Detailed Analysis: 1. Method of Valuation of Shares: The primary issue revolves around the method of valuation of shares. The assessee issued shares at a premium based on the Discounted Cash Flow (DCF) method, certified by a Chartered Accountant. The Assessing Officer (AO) rejected this method, citing various reasons, and instead used the Fair Market Value (FMV) method based on the book value of assets and liabilities, leading to an addition of Rs. 33,71,77,500 under Section 56(2)(viib). The AO's rejection was based on: - Lack of basis and justification for the 10-year projections used in the DCF method. - The valuation report was not obtained before issuing the shares at a premium. - Continuous losses by the assessee for five years, making the premium valuation unacceptable. - A statement during a survey indicating no prior valuation. - Shares were issued to related parties. - The Joint Development Agreement (JDA) submitted by the assessee was deemed uncertain. The CIT(A) upheld the AO's decision, asserting that the valuation was not scientifically determined and was aimed at inflating the share value. The CIT(A) relied on the Kerala High Court's decision in Sunrise Academy of Medical Specialties India P. Ltd. The Tribunal noted that the AO did not share the statement from the survey with the assessee for rebuttal and emphasized that DCF is a recognized method of valuation. The Tribunal referenced the ITAT Bangalore's decision in Town Essential Private Limited Ltd., which followed the Bombay High Court's ruling in Vodafone MPesa Ltd., stating that the AO cannot change the valuation method chosen by the assessee but can scrutinize the methodology and assumptions used. The Tribunal concluded that the AO must scrutinize the DCF method used by the assessee, considering only the facts and data available at the valuation date, and cannot base the rejection on future actual results. The Tribunal set aside the CIT(A)'s order and remanded the issue back to the AO for a fresh decision, directing that the AO must follow the DCF method and not change the valuation method chosen by the assessee. 2. Disallowance Under Section 40(a)(i)/(ia): The AO disallowed certain payments made by the assessee without deducting tax at source, including management fees, outsourcing expenses, and license fees, totaling Rs. 58,65,244. The CIT(A) upheld the disallowance, stating that the assessee failed to substantiate claims that TDS was not applicable. For management fees, the CIT(A) directed the AO to verify the TDS compliance and disallow the amount on which TDS was not made. For outsourcing expenses, the CIT(A) found the payments liable for TDS. For license fees, the CIT(A) concluded that the payments were not statutory but were made to a liquor license holder, thus attracting TDS. The Tribunal noted that the assessee had submitted details and evidence regarding the applicability of TDS provisions, which were not examined by the lower authorities. The Tribunal remitted the issue back to the AO to verify the evidence and determine whether the payees included the payments in their income and paid taxes. The assessee was directed to cooperate and provide necessary details to the AO. Conclusion: The appeal by the assessee was allowed for statistical purposes, with the Tribunal directing a fresh examination of both the valuation of shares and the disallowance under Section 40(a)(i)/(ia).
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