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TMI Blog2023 (2) TMI 966X X X X Extracts X X X X X X X X Extracts X X X X ..... of DCF method and method followed by the assessee to arrive at a free cash flow and relevant ratios considered for arriving at projected revenue and expenditure. In this case, the AO has failed to carry out necessary enquiries to ascertain correctness of DCF method followed by the assessee, but simply went on to reject the method only on one ground that there was a difference in two financial years when compared to projected free cash flow and actual cash flow. Therefore, we are of the considered view that the issue needs to go back to the file of the AO to re-examine method followed by the assessee to arrive at fair market value of equity shares and this view is supported by the decision of ITAT, Chennai Benches in the case of S.A. Metro Plots (P) Ltd [ 2022 (12) TMI 430 - ITAT CHENNAI] We set aside the issue to the file of the AO and direct the AO to re-consider the issue of addition towards share premium u/s. 56(2)(viib) of the Act, in light of various arguments made by the assessee, including valuation report submitted under DCF method. The AO is free to examine method followed by the assessee, however, he does not have power to change method followed by the assessee from D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppreciated that the valuation of share premium would get fortified while vitiate the applicability of the provisions in section 56(2)(viib) of the Act. 6. The CIT (Appeals) further should have appreciated that the rejection of the valuation report by the Assessing Officer based on the actual performance while the said report was prepared on the projected performance inasmuch as ought to have appreciated that the said approach of the Revenue in rejecting the valuation report to apply the provisions of section 56(2)(viib) of the Act should be reckoned as bad in law while there was no such power/reason for rejecting the valuation report, thereby vitaiting the consequential additon made in the computation of taxable total income. 7. The CIT (Appeals) failed to appreciate that the rejection of the valuation report by the Assessing Officer should be reckoned as excessive use of jurisdiction within the scope of Rule 11UA of the Income tax Rules, 1962 while the said rule provided the option on the method of valuation, thereby vitiating the value adopted based on the book value method and consequently vitiating the addition made on various facets. 8. The CIT (Appeals) failed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n received over and above face value of Rs. 22/- per share has been treated as income of the assessee in terms of provisions of section 56(2)(viib) of the Act and made additions of Rs.2,07,15,240/-. 4. Being aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the CIT(A), the assessee reiterated its arguments made before the AO and submitted that the assessee is a venture capital company and has received share capital from venture capital funds and thus, provisions of section 56(2)(viib) of the Act does not apply. Therefore, no addition can be made towards excess consideration over and above the face value u/s. 56(2)(viib) of the Act. The assessee, further contended that the AO is erred in determining share price under NAV method even though, the assessee has followed DCF method for determining share price, without appreciating fact that it is for the assessee to choose a particular method at his discretion and method selected by the assessee is one of the permissible method. The AO, on the basis of financials of actual for next two financial years came to the conclusion that projections has not been met by the assessee and thus, valuatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the value shown by the appellant under DCF method. He has only stated that the value adopted under DCF method is not correct and cannot be relied upon. He has only adopted the face value of the share as the fair market value o! the shares and added the difference. Hence, the decision relied on by the appellant would not help its case. Considering the above facts, I hold that the AO was justified in adding Rs.2,07,15,240/- being excess premium received for allotment of shares as come from other sources under section 56(2)(viib) of the Act. The addition is confirmed and the grounds are dismissed. 6. The Ld. Counsel for the assessee, submitted that the ld. AO and the CIT(A) erred in sustaining additions made towards share premium u/s. 56(2)(viib) of the Act, without appreciating fact that the assessee has justified premium charged on issue of shares with the help of valuation report issued by an independent auditor. The ld. Counsel for the assessee, referring to valuation report submitted that the assessee has followed DCF method for valuation of shares and has considered certain projections. The AO, rejected DCF method followed by the assessee only on the ground that actual perf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ged premium over and above fair value of equity shares, excess consideration received over and above the face value has been added as income of the assessee. 9. We have given out thoughtful consideration to the reasons given by the AO in light of various arguments advanced by the ld. Counsel for the assessee, and we ourselves do not subscribe to the reasons given by the AO for the simple reason that, the DCF method followed by the assessee is one of the permissible method of valuation of shares in terms of rule 11UA of IT Rules, 1962 and said method is based on free cash flow of future years on the basis of projected financial statements. Further, the projected financials under DCF method need not be equal to the actual performance of the company in subsequent years. However, there should be some degree or fair estimation and assumption while arriving at projected free cash flow. In this case, the AO has not accepted method adopted by the assessee and projected free cash flow considered for arriving at fair value of equity shares, but he has rejected valuation report submitted by the assessee only on the ground that there is a vast difference between projected financials and act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y based on surmises and guesswork only and the valuation was far from realty. The Ld. CIT(A) also noted that the premium was exorbitantly high. The valuation report was not supported by technical report, revenue and cost projection, cash flow justification, historical data, management plan, details of orders from potential customers etc. The projections were not justified and it did not contain empirical data which should be the basis for projected future financials. The relevant economic factors and basis for making assumptions were not discussed in the valuation report. It could thus be seen that both the authorities have questioned the valuation made by valuer. In our considered opinion, it was the onus of the assessee to justify the valuation by furnishing an acceptable valuation report which is duly corroborated by relevant material. This onus, in our opinion, has remained undischarged by the assessee. 7. The Ld. AR has submitted that the shares have been converted pursuant to investor agreement dated 23.02.2012 and at that point of time, the provisions of Sec.56(2)(viib) were not in force and therefore, no such addition could have been made. Another submission is that ac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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