2023 (8) TMI 763 - AT - Income Tax

Addition u/s 56(2)(vii) - calculation adopted by the assessee for calculating the fair market value be disallowed - DCF method - partner of the valuer firm has not provided any logical submission in respect of calculation of fair value of shares and on subsequent dates, none represented the valuer firm - Assessee argued share premium has been valued by an approved valuer, as per the relevant provisions of the Act, who valued the fair market value on DCF method, which is a recognized method and the AO/CITA has not pointed out any defect or error in the said method and has simply rejected the valuation report without any basis - HELD THAT - There is no dispute that the assessee has supported its valuation by a valuer s report as per the relevant provisions of the Act. It is also true that the lower authorities have not pointed out any error or infirmity or defect in the said valuation report. The said valuation report has been rejected only because there were differences between actuals and projection done by the valuer. As decided in INDIA TODAY ONLINE PVT. LTD. VERSUS ITO, WARD-12 (2) NEW DELHI 2019 (4) TMI 1646 - ITAT DELHI DCF method is a recognised method where future projections of various factors by applying hindsight view and it cannot be matched with actual performance, and what Ld. CIT (A) is trying to do is to evaluate from the actual to show that the Company was running into losses, therefore, DCF is not correct. Valuation under DCF is not exact science and can never be done with arithmetic precision, hence the valuation by a Valuer has to be accepted unless, specific discrepancy in the figures and factors taken are found. Determination of value of shares on the basis of financial statement of a Company or the book value does not have much relevance under DCF method, because it is based upon, fair expected revenue growth and fair expected cash flow for a period of five years; discount rate and terminal growth rate; and terminal value, etc. are the factors which are taken in the consideration. Therefore, to reject the valuation mainly on the basis of losses shown in the financial statement would not be correct, until and unless some discrepancy has been out either in the DCF method or in the Valuation Report furnished by an independent Valuer. No merit in the addition made by the AO. The findings of the ld. CITA are set aside - Decided in favour of assessee.

Summary

Issues involved:
The judgment involves the addition of share premium without proper justification and rejection of valuation report during assessment proceedings for Assessment Year 2016-17.

Details of the Judgment:

1. Issue of Addition of Share Premium:
- The assessee contested the addition of Rs. 1,64,62,000 as share premium, arguing that the funds were received through proper banking channels and valuation was done using the Discounted Cash Flow (DCF) method.
- The Assessing Officer noted discrepancies between actuals and projections by the valuer, leading to suspicion on the genuineness of the transaction.
- The assessee provided a valuation report by Sarvam and Associates supporting the share valuation.
- The Assessing Officer issued a show cause notice under section 56(2)(vii)b of the Act, questioning the fair market value calculation.
- Despite the valuation report, the Assessing Officer deemed the transaction as not genuine and made the addition.
- The assessee's appeal to the ld. CIT(A) was unsuccessful.

2. Valuation Report and Legal Arguments:
- The assessee argued that the valuation was done by an approved valuer using the DCF method, a recognized approach under the Act.
- The authorities did not identify any errors in the valuation report but rejected it based on differences between projections and actuals.
- Legal arguments cited decisions from coordinate benches to support the validity of the valuation method and the rejection of the addition.
- The judgment referenced cases like India Today Online Pvt Ltd and Cinestaan Entertainment Pvt Ltd to emphasize the strict interpretation of deeming provisions in fiscal statutes.

3. Judgment and Conclusion:
- The tribunal found no justification for the addition made by the Assessing Officer and set aside the findings of the ld. CIT(A).
- Relying on previous decisions, the tribunal directed the Assessing Officer to delete the impugned addition of share premium.
- Consequently, the appeal of the assessee was allowed, and the order was pronounced on 15.06.2023.

This summary provides a detailed overview of the issues, arguments, and the final judgment in the legal case concerning the addition of share premium and the rejection of the valuation report by the authorities.