2024 (12) TMI 1059 - AT - Income Tax

Addition u/s 56(2) (viib) - method adopted for determination of FMV of the equity share by the assessee is not as per the method prescribed under Rule 11UA of the IT Rules - rejection of the valuation report by AO based on comparison with one-year actual figure - CIT(A) deleted addition - HELD THAT - Valuation was done by the assessee as per DCF method, which was backed by a report of the Chartered Accountant. If the AO was not satisfied with the correctness of the valuation report of the Chartered Accountant, he should have referred the matter to another Registered Valuer/Merchant Banker to work out the valuation on the basis of DCF method. The AO on his own was not correct in rejecting the valuation of the assessee as per DCF method, nor he was correct in adopting NAV method to determine the FMV of shares. AO can certainly scrutinize the valuation report submitted by the assessee but for determination of a fresh valuation he has to obtain a report from an independent Registered Valuer / Merchant Banker. Further, the basis had to be DCF method and he cannot change the method of valuation which was opted by the assessee. CIT(A) had, therefore, rightly held that the AO cannot adopt his own valuation unless there was an enabling provision in the Act giving powers to the AO to tinker the valuation report obtained from an independent valuer as per the prescribed method under Rule 11UA(2)(b) of the IT Rules. Hon ble Delhi High Court in the case of PCIT-2 Vs. Cinestaan Entertainment Private Limited 2021 (3) TMI 239 - DELHI HIGH COURT has categorically held that if law provides the assessee to get the valuation done from a prescribed expert as per prescribed method, then the same cannot be rejected because neither AO nor the assessee have been recognized as expert under the law . Therefore, the suo moto rejection of the valuation report of the assessee by the AO was not correct and can t be upheld. Other contention of the assessee is that the provision of Section 56(2)(viib) of the Act was not applicable in the case of issue of shares to the holding company - In the case of BLP Vayu (Project-1) Pvt. Ltd. 2023 (6) TMI 209 - ITAT DELHI has held that the provision of Section 56(2)(viib) of the Act is wholly inapplicable for transactions between the holding and its subsidiary company where no income can be said to accrue to ultimate beneficiary i.e. holding company. We are of the considered opinion that the AO was not correct in rejecting the DCF method of valuation adopted by the assessee to determine the FMV of its shares on its own without obtaining report from any other Registered Valuer/Merchant Banker. Therefore, the order of the Ld. CIT(A) deleting the addition in respect of addition u/s. 56(2)(viib) of the Act is upheld. Appeal of the Revenue is dismissed.

Summary

Issues:
1. Valuation of shares under Section 56(2)(viib) of the Income Tax Act, 1961.
2. Applicability of DCF method versus NAV method for valuation.
3. Rejection of valuation report by the Assessing Officer.
4. Interpretation of provisions of Rule 11UA of the IT Rules.
5. Application of Section 56(2)(viib) in transactions between holding and subsidiary companies.

Analysis:

The appeal before the Appellate Tribunal ITAT Ahmedabad involved a dispute regarding the valuation of shares for Assessment Year 2015-16 under Section 56(2)(viib) of the Income Tax Act, 1961. The case was selected for limited scrutiny to examine the substantial increase in share capital, share premium, and low income compared to high loans and investments. The Assessing Officer (AO) rejected the valuation report based on the discounted cash flow (DCF) method provided by the assessee, leading to an addition of Rs. 50 Crore as share premium receipt under Section 56(2)(viib).

The First Appellate Authority allowed the appeal of the assessee, leading to the Revenue's appeal before the Tribunal. The grounds of appeal questioned the deletion of the addition made under Section 56(2)(viib) and the timeline for passing appellate orders as per CBDT Circular No. 22/2019.

During the proceedings, the Revenue argued that the AO rightly rejected the DCF method due to discrepancies between projected and actual figures. The assessee contended that the valuation, done by a Chartered Accountant using the DCF method, was based on industry parameters vetted by an independent entity. The assessee also argued that the provision of Section 56(2)(viib) was inapplicable in transactions between a company and its holding company.

The Tribunal analyzed the provisions of Rule 11UA of the IT Rules, which allow the assessee to choose between DCF and NAV methods for share valuation. The Tribunal held that the AO cannot reject the valuation method chosen by the assessee unless there is an enabling provision in the Act. Referring to judicial precedents, including a decision by the Delhi High Court, the Tribunal emphasized that the AO cannot suo moto reject the valuation report without obtaining an independent valuation report.

Regarding the applicability of Section 56(2)(viib) in transactions between holding and subsidiary companies, the Tribunal relied on a decision by the Delhi Tribunal to support the assessee's argument. Ultimately, the Tribunal upheld the CIT(A)'s order, dismissing the Revenue's appeal and affirming the deletion of the addition under Section 56(2)(viib).

In conclusion, the Tribunal's decision highlighted the importance of following prescribed valuation methods and the limitations on the Assessing Officer's authority to reject valuation reports without proper justification. The judgment provided clarity on the interpretation of rules and the application of provisions concerning share valuation and deemed income in related party transactions.