2024 (7) TMI 1231 - AT - Income Tax

Addition under the head Other sources - Valuation of unquoted equity shares- - As per AO valuation report for valuation of unquoted shares for the purpose of section 56(2)(viib) by an independent Chartered Accountant is not accurate and is not acceptable- HELD THAT - After taking into consideration the order of the CIT(A), it comes up that in spite of the assessee taking a specific plea of being exempted as a start up from the application of clause (viib) of sub-clause (2) of section 56 of the Act, no findings was given to reject this claim. CIT(A) has only endorsed the reasoning of the AO for not accepting the valuation report. Thus, we consider it an appropriate case to allow the ground of the assessee for statistical purposes and restore the issue with regard to the claim of the assessee to be exempt from applicability of section 56(2)(viib) of the Act, as a start up to the files of the AO. The AO shall take into consideration the aforesaid findings and evidences filed and further give opportunity of hearing on this issue, to the assessee. Accordingly, the appeal is allowed for statistical purposes.

Summary

Issues:
1. Valuation of unquoted equity shares under section 56(2)(viib) of the Income Tax Act, 1961.
2. Exemption as a start-up under DIPP recognition certificate.
3. Method of valuation used by the Independent Valuer.
4. Discrepancy in the valuation report and its acceptance by the Assessing Officer.
5. Addition made under 'Other sources' by the Assessing Officer.
6. Shares issued to non-resident investors at the same price as Indian investors.

Issue 1: Valuation of unquoted equity shares under section 56(2)(viib):
The appeal concerns the valuation of shares issued by the assessee to Indian residents, specifically focusing on the application of section 56(2)(viib) of the Income Tax Act, 1961. The Assessing Officer (AO) added a substantial amount under 'Other sources' due to discrepancies in the valuation report provided by the Chartered Accountant. The AO rejected the fair market value determined through the Discounted Cash Flow (DCF) Method, opting instead for the net asset value approach. The appeal before the CIT(A) emphasized the use of intangible assets, like proprietary software with an international patent, to substantiate the fair market value of the shares. However, the CIT(A) dismissed the appeal, leading to the matter being brought before the Tribunal.

Issue 2: Exemption as a start-up under DIPP recognition certificate:
The assessee claimed exemption from section 56(2)(viib) as a start-up under the Department of Industrial Policy and Promotion (DIPP) recognition certificate. The certificate, bearing No.DIPP10923, was issued for a period of 10 years, acknowledging the assessee as a start-up. Despite this claim, the CIT(A) did not address the start-up exemption plea, only focusing on the rejection of the valuation report. Consequently, the Tribunal allowed the ground for statistical purposes, directing the Assessing Officer to reevaluate the start-up exemption claim based on the provided evidence.

Issue 3: Method of valuation used by the Independent Valuer:
The dispute also revolves around the method of valuation employed by the Independent Valuer for determining the fair market value of the unquoted equity shares. The AO disagreed with the valuation report's methodology and conclusions, leading to the addition under 'Other sources.' The assessee argued for the validity of the DCF Method and the discretion granted to choose between valuation methods under Rule 11 UA of the Act. The Tribunal's decision to reassess the start-up exemption claim implies a reevaluation of the valuation method used by the Independent Valuer.

Issue 4: Discrepancy in the valuation report and its acceptance by the Assessing Officer:
The primary contention lies in the discrepancy between the valuation report submitted by the Chartered Accountant, utilizing the DCF Method, and the Assessing Officer's rejection of the same. The AO's reasoning for disregarding the valuation report was based on the perceived outlandish provisions and significant differences between projected and actual revenues. The Tribunal's intervention to allow the appeal for statistical purposes indicates a need for a thorough review of the valuation report's accuracy and acceptance by the tax authorities.

Issue 5: Addition made under 'Other sources' by the Assessing Officer:
The substantial addition under 'Other sources' made by the Assessing Officer stemmed from the disagreement over the fair market value of the unquoted shares. The AO's decision to reject the valuation report's findings and substitute them with a different valuation method led to the significant addition to the assessee's income. The Tribunal's directive to revisit the start-up exemption claim and reassess the valuation method suggests a critical examination of the grounds for the addition under 'Other sources.'

Issue 6: Shares issued to non-resident investors at the same price as Indian investors:
An additional aspect of the appeal involves the issuance of shares to non-resident investors at the same price as Indian investors. The assessee highlighted the parity in share prices and the issuance of shares to non-residents as seed funding. The argument questioned the rationale behind non-resident investment companies investing in unrelated entities at inflated share valuations. This aspect, along with the other grounds raised in the appeal, will be subject to further review following the Tribunal's decision to allow the appeal for statistical purposes.

In conclusion, the judgment by the Appellate Tribunal ITAT DELHI addressed multiple issues concerning the valuation of unquoted equity shares, the start-up exemption under the DIPP recognition certificate, the method of valuation used, discrepancies in the valuation report, additions made by the Assessing Officer, and the issuance of shares to non-resident investors. The Tribunal's decision to allow the appeal for statistical purposes indicates a need for a comprehensive reassessment of the valuation methodology, the start-up exemption claim, and the grounds for the substantial addition under 'Other sources.'