2024 (11) TMI 697 - HC - Income Tax

Reopening of assessment u/s 147 - applicability of the DCF method vis-a-vis Net Asset Value Method prescribed under Rule 11UA of the Rules - huge difference between the two methods of valuation - computation of the fair market value - choice of valuation method under Rule 11UA (2) of the Income Tax Rules, 1962 - HELD THAT - Clause (a) and (b) of the Rule 11UA (2) of the Rule prescribes the method of Net Asset Value method and the discounted cash flow method for which, the assessee is entitled to exercise the option for computation of the fair market value for the applicability of section 56 (2) (viib) of the Act. So far as the applicability of the method prescribed in Rule 11UA (2) of the Rules is concerned, the same is as per the option to be exercised by the assessee and once the assessee has exercised the option, the Assessing Officer even during the regular course of assessment, could not have questioned the applicability and computation of the fair market value as per either of the methods and therefore, there is no question of forming a reason to believe that as the valuation is less in one method and the assessee has adopted the method having higher valuation method, then there is escapement of income. We are of the opinion that the Assessing Officer could not have assumed the jurisdiction to reopen the assessment on the ground that to verify the veracity and the computation as per the DCF method adopted by the assessee on the ground that the assessee did not fulfill the projected growth as per the discounted cash flow method in the subsequent year because at the time of making projection, no assessee would be in a position to predict the future growth as per the projection. The impugned notice is accordingly quashed and set aside.

Summary

Issues Involved:

1. Validity of the notice issued under Section 148 of the Income Tax Act for reopening the assessment.
2. Applicability and choice of valuation method under Rule 11UA (2) of the Income Tax Rules, 1962.
3. Jurisdiction of the Assessing Officer to question the valuation method adopted by the assessee.

Detailed Analysis:

1. Validity of the Notice Issued Under Section 148 of the Income Tax Act:

The petitioner challenged the notice issued under Section 148 of the Income Tax Act, arguing that the reasons for reopening did not reflect any income escaping assessment. The petitioner contended that the valuation of shares was correctly done using the Discounted Cash Flow (DCF) method, as per the valuation report at the time of issuance. The court noted that the basis for reopening was the difference in valuation between the Net Asset Value and the DCF method, amounting to Rs. 80/- per share, leading to an alleged escapement of income of Rs. 2,87,60,000/-. However, the court found that the Assessing Officer's basis for reopening was contrary to the provisions of the Act and the Rules, as the petitioner had the option to choose the valuation method as prescribed.

2. Applicability and Choice of Valuation Method Under Rule 11UA (2) of the Income Tax Rules, 1962:

The petitioner argued that as per Rule 11UA (2), they had the option to choose the DCF method for valuation, and the Assessing Officer could not question this choice. The court referred to precedents where it was held that if the assessee determines the fair market value using a prescribed method, the Assessing Officer does not have the choice to dispute it. The court emphasized that the choice of method is that of the assessee, and once chosen, the Assessing Officer cannot substitute it with another method, such as the Net Asset Value method.

3. Jurisdiction of the Assessing Officer to Question the Valuation Method Adopted by the Assessee:

The court highlighted that the Assessing Officer's jurisdiction is limited to verifying the method of valuation adopted by the assessee. The Assessing Officer cannot question the applicability and computation of the fair market value once the assessee has exercised the option to choose a valuation method. The court cited judgments where it was held that the Assessing Officer could not reject the DCF method based on deviations between projected and actual figures, as projections are inherently uncertain and based on assumptions. The court concluded that the Assessing Officer could not assume jurisdiction to reopen the assessment on the ground of verifying the DCF method's veracity and computation, as the petitioner had legitimately exercised their option under the law.

Conclusion:

The court quashed the impugned notice issued under Section 148, ruling that the Assessing Officer's reasons for reopening were not justified under the provisions of the Act and the Rules. The court reiterated that the choice of valuation method lies with the assessee, and the Assessing Officer's role is limited to verifying the method, not substituting it. The rule was made absolute, and no costs were ordered.