2023 (11) TMI 863 - AT - Income Tax

Addition u/s. 56(2)(viib) - premium on issue of equity share received by the assessee-company in excess of fair market value - authenticity of the projected figures and the genuineness of the valuation arrived questioned - AO In the absence of any rational basis for adopting the projected figures, the Assessing Officer discarded the FMV reported by the assessee and determined the FMV per share at Rs. 17.18 per share on the basis of NAV recognized in Rule 11UA - assessee contends that the Revenue is not entitled to question the projections determined on a reasonable basis as such projections are in the nature of estimations which may naturally vary with the actual figures reported in the subsequent years - CIT(A) deleted addition HELD THAT - The issue is essentially factual in nature and its determination depends on the factual matrix of a given case. On perusal of the first appellate order, it is noticed that CIT(A) has adjudicated the issue in favour of the assessee based on the valuation report and on the basis of certain judicial pronouncements in an abstract manner. CIT(A) has not dealt with the factual objections of the Assessing Officer that the projections/cash flow assumed in the valuation report are without any demonstrable basis of reasonable nature. The CIT(A) has simply proceeded to return its findings on an abstract law. No doubt, the valuation is not an exact science and therefore cannot be done with arithmetic precision. However, in the same vain, the AO is entitled to scrutinise the basis of projections which resulted in such hefty valuations, more so, in the absence any significant earning capabilities in the past. CIT(A) is not expected to come to a conclusion based on abstract position of law. No inquiry has been shown to be made towards the basis for determination of projected figures assumed while applying DCF Method. The report of the valuer is also based on disclaimer. The valuer has determined the projected cash flow solely on the basis of estimations provided by the assessee. The basis for arriving at such estimations anticipated have not bee vouched by the expert valuer. CIT(A) has not examined such important factual ingredient and has also not examined as to why an investor will pay such a high premium merely on the basis of some application made by the assessee for obtaining license. The cash flow at the disposal of the assessee in the financial year when application for license has been made do not appear to support the ensuing business module of the company. While it is true that the projected figures are in the realm of estimations and thus a comparison of such estimations with actual figures would not be just and proper but however in the same token, the Assessing Officer is entitled to seek reasons for such wide variance to see the quality of the estimations used for determining FMV of shares under DCF Method else the whole process will be reduced to a farce exercise. The CIT(A) was expected to enquire into the factual aspects before adjudicating the issue. We, thus, without expressing our opinion on the propriety of the FMV determined by the assessee or by the AO, are of the opinion that the CIT(A) has not acted in the manner ordained in law. We thus set aside the order of the CIT(A) and restore the matter back to his file for re-determination of the issue afresh in accordance with law after giving proper opportunity to the assessee. Appeal of the Revenue is allowed for statistical purposes.

Summary

Issues Involved:
1. Justification of Deletion of Addition on Account of Share Premium under Section 56(2)(viib) of the Income Tax Act, 1961.

Summary:

Issue 1: Justification of Deletion of Addition on Account of Share Premium under Section 56(2)(viib) of the Income Tax Act, 1961:

The Revenue filed an appeal against the order of the CIT(A), which deleted the addition of Rs. 4,15,61,800/- made by the Assessing Officer (AO) on account of share premium received by the assessee-company in excess of the fair market value (FMV) under Section 56(2)(viib) of the Income Tax Act, 1961. The assessee-company, engaged in broadcasting and telecast of Television channels, had issued equity shares at a premium, which the AO deemed excessive based on the NAV method, contrasting with the DCF method used by the assessee.

The AO questioned the genuineness of the FMV determined by the DCF method, citing exaggerated projections and a significant deviation from actual financial performance. The AO thus adopted the NAV method, resulting in the addition under Section 56(2)(viib). The CIT(A), however, found the assessee's valuation report justifiable, emphasizing that the DCF method, chosen by the assessee, is a recognized method under Rule 11UA(2) and should not be arbitrarily replaced by the AO's preferred NAV method.

The Tribunal noted that while the DCF method is based on projections, the AO is entitled to scrutinize these projections. The CIT(A) was found to have inadequately addressed the factual objections raised by the AO regarding the basis for the projections. The Tribunal emphasized that the CIT(A) should have investigated the factual basis of the projections and the rationale behind the high premium, given the lack of significant past earnings.

The Tribunal, without expressing an opinion on the correctness of the FMV determined by either party, set aside the CIT(A)'s order and remanded the matter back to the CIT(A) for a fresh determination, ensuring a thorough examination of the factual aspects and providing the assessee a proper opportunity to justify the projections used in the DCF method.

Conclusion:
The appeal by the Revenue was allowed for statistical purposes, and the matter was remanded to the CIT(A) for a fresh determination in accordance with the law.