2024 (2) TMI 882 - AT - Income Tax

Addition u/s 56(2)(viib) - issue of shares at premium - huge variations of the projection with that of the actual figures has been found by the AO - working of fair market value as per 11UA(2)(a) - HELD THAT - As decided by M/s. Cinestaan Entertainment Pvt. Ltd 2021 (3) TMI 239 - DELHI HIGH COURT when the assessee respondent has adopted a recognized method of valuation and further Revenue was unable to show that the assessee adopted a demonstrably wrong approach, or that the method of valuation was made on a wholly erroneous basis, or that it committed a mistake which goes to the root of the valuation process, interfering with the finding of the valuer by the Ld. AO, is found to be not permissible. As we find in the instant case that the assessee determined the fair market value of the unquoted equity shares following the manner and method laid down under Clause (b) of Rule 11UA(2) and particularly when no verification into the correctness of the projected figures had been made by the Ld. AO, the order impugned passed by the Ld. CIT(A) deleting the addition made by the Ld. AO is found to be just and proper so as to warrant interference. Revenue s appeal is found to be devoid of any merit, therefore, dismissed.

Summary

Issues Involved:
1. Validity of share premium valuation under Rule 11UA.
2. Authority of the AO to reject the valuation method chosen by the assessee.
3. Comparison of projected figures with actual performance.

Summary:

1. Validity of Share Premium Valuation under Rule 11UA:
The assessee filed an e-return declaring a total loss and issued equity shares at a premium based on a valuation certificate from a Chartered Accountant using the Discounted Cash Flow (DCF) method as per Rule 11UA(2)(b). The AO issued a notice questioning the valuation method and proposed using Rule 11UA(2)(a) instead, leading to an addition of Rs.2,04,10,016/- under Section 56(2)(viib) of the Income Tax Act. The CIT(A) deleted this addition, affirming the assessee's choice of valuation method.

2. Authority of the AO to Reject the Valuation Method Chosen by the Assessee:
The ITAT upheld that Rule 11UA(2) provides the assessee the option to choose between methods (a) and (b) for valuation. The AO's rejection of the DCF method in favor of the Net Asset Value (NAV) method was found impermissible. The ITAT cited the case of Rameshwaram Strong Glass Pvt. Ltd., emphasizing that the AO cannot compel the assessee to adopt a different valuation method once a recognized method is chosen.

3. Comparison of Projected Figures with Actual Performance:
The AO's rejection of the DCF method was partly based on the steep difference between projected and actual figures. The ITAT noted that projections are inherently uncertain and influenced by various factors, and thus, cannot be compared with actuals to determine valuation accuracy. The ITAT referenced the judgment in PCIT vs. M/s. Cinestaan Entertainment Pvt. Ltd., where it was held that the AO cannot question the commercial prudence of the assessee or its chosen valuation method if it is based on recognized principles.

Conclusion:
The ITAT concluded that the AO's rejection of the DCF method and adoption of the NAV method was not justified. The CIT(A)'s order deleting the addition was upheld, and the appeal by the Revenue was dismissed. The judgment reaffirmed the assessee's right to choose a valuation method under Rule 11UA(2) and emphasized that valuation based on projections cannot be invalidated by comparing them with actual performance.