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TMI Blog2018 (5) TMI 1088X X X X Extracts X X X X X X X X Extracts X X X X ..... id not do anything reflecting their expertise, except mere applying the formula to the data provided by the assessee. We, therefore, are unable to brush aside the contention of the Revenue that the possibility of tailoring the data by applying the reverse engineering to the pre determined conclusions. There has not been any possibility of verifying the correctness or otherwise of the data supplied by the assessee to the merchant banker, in the absence of which the correctness of the result of DCF method cannot be verified. This left no option to the AO but to reject the DCF method and to go by NAV method to determine the FMV of the shares. Without such evidence, it serves no purpose even if the matter is referred to the Department’s Valuation Officer. We, therefore, do not find any illegality or irregularity in the approach of conclusions are by the authorities below. While confirming the same, we dismissed the appeal as devoid of merits. - Decided against assessee X X X X Extracts X X X X X X X X Extracts X X X X ..... this appeal stating that the AO is not justified in rejecting the valuation reports submitted before the assessee in support of the issue price of the shares to the Ld. AR and Rule 11UA(2) the Ld. AO is not supposed to ignore the option exercised by the assessee and to impose any other method than that adopted by the assessee. In this case, the assessee adopted the DCF Method and determined the FMV of the shares, as such, if it is not agreeable to the AO on the price determined by the Merchant Banker, Ld. AO could have referred the matter to the Income Tax Department Valuation Officer for a determination of price market value of such capital asset. 5. Per contra, Ld. DR submitted that the orders of the authorities below are based on sound reasoning. He submits that the assessee failed to justify their taking the risk free return at 9.04% within two years of their coming into existence and running into losses from the inception. So also the assessee is not justifying in taking the expected return from market at 15.80 which is quite unrealistic on the face of their performance for the initial two years of their business. He submits that BSE 500 return is not available to the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luer report cannot be disturbed by the AO. By not producing the evidences supporting the figures furnished by the assessee to the valuer for obtaining the report, the assessee did not leave any option to the authorities below to consider the merits of DCF method adopted by the assessee, as such, the authorities are constrained to reject the DCF method which could not be verified in the absence of material. He, therefore, submits that in the facts involved in this case there is no other go for the authorities than to adopt the NAV method. 10. We have gone through the record. As could be seen from the orders of the authorities below the fair market value of the shares was determined by M/s SPA Capital Advisors Ltd. a merchant banker by adopting the DCF method and the approach is as follows: Year 2013-14 2014-15 2015-16 2016-17 2017-18 Perpetuity Sources of Funds: Pat -1.95 32.60 34.88 36.98 39.20 Add: Depreciation 0.00 0.00 0.00 0.00 0.00 - Change in Net Working capital - 0.01 0.01 0.02 0.02 - Change in Cash Flows -1.95 32.61 34.89 37.00 39.22 Less Cash Flow from 01.04.13 - 30.09.13 -0.98 Free Cash Flow to Equity -0.98 32.61 34.8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et in general. With greater risk, as measured by a larger variability of returns (Business of operating risk), the company's should have a larger beta. And with greater leverage (higher debt to value ratio) increasing financial risk, the company's stock should also have a larger beta. In the case of the assessee the assessee being in financial sector only invest in its group companies having negligible risk and, therefore, should have taken a negative beta instead of average beta of I." 12. A notice u/s 142(1) of the Act was issued to the assessee calling for their remarks on these aspects, which reads as follows: "1. Please refer to your submission dated 07/09/2016 wherein you have submitted certificate of valuation of shares under rule 11UA. On perusal of the valuation report the following facts have been noticed. i) In its valuation report M/s SPA Capital Advisors Ltd. has given a disclaimer as under: "In preparing the Final Report, SPA has relied upon and assumed, without independent verification, the truthfulness, accuracy and completeness of the information and the financial data provided by the company, SPA has therefore relied upon all specific information as receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of shares. In view of the above you are also requested to give details of values which have been taken to arrive at a discounting figure @ 20.8% and also the basis behind such assumption for a company whose return have consistently been negative. Also, whether sector specific study has been carried out to reach the rate of return of growth. If, yes give a copy of the same. v) Further, you are requested to submit Financial statement of six months ended on September 30, 2013. In view of the above, you are requested to submit the details and explanations called for above and to explains as to why the DCF method of valuation employed by you for valuation of shares under Rule 11UA should not be rejected and, therefore, the book value method as per RULE 11UA (2)(a) should not be taken for the purpose of Section 56(2)(viib) of the I.T. Act, 1961." 13. Having received the above detailed notice, the assessee could not bring anything on record to satisfy the queries of the Ld. AO, necessitating the AO to issue another notice u/s 144/142(1), whereunder the Ld. AO calculated the fair market value by following the NAV, at ₹ 6.0 as against ₹ 50.60 adopted by the assessee. Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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