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TMI Blog2024 (4) TMI 318X X X X Extracts X X X X X X X X Extracts X X X X ..... e FMV of shares shall be the value determined in accordance with the methods as may be prescribed or as may be substantiated by the company to the satisfaction of the AO, whichever be higher. A perusal of Rule 11UA(2) would indicate that the assessee is enabled to determine the FMV of the unquoted equity shares either in accordance with the formula prescribed in clause (a) or on the basis of a report drawn by a merchant banker who may have determined the FMV as per the DCF Method. In our considered opinion, the language of Rule 11UA(2) indubitably places a choice upon the assessee to either follow the route as prescribed in clause (a) or in the alternative to place for the consideration of the AO a Valuation Report drawn by a merchant banker as per the DCF method. However, and as is manifest from a conjoint reading of Section 56(2)(viib) read along with Rule 11UA(2), the option and the choice stands vested solely in the hands of the assessee. While it would be open for the AO, for reasons so recorded, to doubt or reject a valuation that may be submitted for its consideration, the statute clearly does not appear to empower it to independently evaluate the face value of the unquoted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Tribunal is right in upholding the rejection of the valuation report on the ground that the same was prepared without any verification and upon only considering the figures supplied by the Appellant, while at the same time, ascribing no errors in the said figures? B. Whether in view of the facts and circumstances of the case and in law, the Tribunal has erred by deciding the appeal basis the conjecture/surmise that the possibility of tailoring of data could not be ruled out? C. Whether in view of the facts and circumstances of the case and in law, the Tribunal is right in holding that the AO was at liberty to substitute the method of valuation adopted by the Assessee (DCF Method) for his own preferred method of valuation (NAV Method)? D. Whether in view of the facts and circumstances of the case and in law, the Revenue can reject the report of an expert merchant banker and substitute its own valuation without referring it to the DVO or an expert on the subject? E. Whether in view of the facts and circumstances of the case and in law, the Tribunal erred by not considering that the Act does not give any scope for the AO to conduct his own valuation exercise, and in all cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 received and declines any responsibility should the results presented be affected by the lack of completeness or truthfulness of such information." From perusal of the report it appears that the valuation of shares is not realistic keeping in view the growth and stature of your company. Further, in the valuation report only figures have been put up without giving reasons as to how these assumptions have been made. ii) In the DCF method first step is to forecast expected cash flow based on assumptions regarding the company's revenue growth rate, net operating profit margin, income tax rate, fixed investment requirement, and incremental working capital requirement. The revenue growth rate as well as the net profit margin of your Company, since inception, is negative and you have been carrying forward business losses. Even in the subsequent years, for which data is availabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellants had failed to satisfactorily answer the queries which stood raised, the AO proceeded to issue further notices referable to Sections 144 and 142(1) of the Act. It was in terms of the aforesaid notices that the AO took the position that the shares were liable to be valued at INR 9.60/- as against INR 50.60/- which had been adopted by the assessee. 8. The decision of the AO ultimately came to be affirmed by the Commissioner of Income Tax (Appeals) [CIT(A)] and both have essentially proceeded on a perceived failure on the part of the appellant assessee to substantiate the basis of valuation as adopted in the Valuation Report. They also appear to have held against the appellant on the ground that it had failed to provide any evidence in support of the figures which formed part of the Valuation Report. The AO as well as the CIT(A) also appear to have drawn adverse inference from the disclaimers which stood introduced in the Valuation Report drawn by the merchant banker and which had clearly divulged that the Report had come to be drawn solely based on the data provided by the appellant without "independent verification" with respect to the truthfulness, accuracy and completene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and it is not open to him to change the method of valuation which has been opted for by the Assessee. If Mr. Mohanty is correct in his submission that a part of demand arising out of the assessment order dated 21st December, 2017 would on adoption of DCF Method will be sustained in part, the same is without working out the figures. This was an exercise which ought to have been done by the Assessing Officer and that has not been done by him. Infact, he has completely disregarded the DCF Method for arriving at the fair market value. Therefore, the demand in the facts need to be stayed." 12. Appearing for the respondents, Mr. Kumar, learned counsel, submitted that Section 56(2)(viib) places the assessee under an obligation to submit a report depicting the FMV of shares and which can be duly substantiated to the satisfaction of the AO. According to learned counsel, since the appellant, despite adequate opportunities having been provided failed to establish the correctness of the valuation, the AO became entitled to undertake an independent exercise for the purposes of determining the FMV of the unquoted equity shares. It is these rival submissions which fall for our determination. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or a Category II Alternative Investment Fund and is regulated under the Securities and Exchange Board of India (Alternative Investment Fund) Regulations, 2012 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992) [or regulated under the [International Financial Services Centre Authority (Fund Management) Regulations, 2022 made under the] International Financial Services Centres Authority Act, 2019]; (ab) "trust" means a trust established under the Indian Trusts Act, 1882 (2 of 1882) or under any other law for the time being in force;] (b) "venture capital company", "venture capital fund" and "venture capital undertaking" shall have the meanings respectively assigned to them in clause (a), clause (b) and clause (c) of [Explanation] to clause (23-FB) of Section 10;]" 14. As is manifest from the above, the explanation placed in clause (viib) postulates that the FMV of shares shall be the value determined in accordance with the methods as may be prescribed or as may be substantiated by the company to the satisfaction of the AO, whichever be higher. The methods for valuation stand enumerated in Rule 11UA which reads as follows: - "Determination of fair mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch shares and securities on any recognized stock exchange on a date immediately preceding the valuation date when such shares and securities were traded on such stock exchange, in cases where on the valuation date there is no trading in such shares and securities on any recognized stock exchange; [(b) the fair market value of unquoted equity shares shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner, namely:- the fair market value of unquoted equity shares = (A+B+C+D - L) X (PV)/(PE), where, A= book value of all the assets (other than jewellery, artistic work, shares, securities and immovable property) in the balance-sheet as reduced by,- (i) any amount of income-tax paid, if any, less the amount of income-tax refund claimed, if any; and (ii) any amount shown as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset; B =the price which the jewellery and artistic work would fetch if sold in the open market on the basis of the valuation report obtained from a registered valuer; C =fair market value of shares and securities as determined in the manner provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f tax claimed a refund under the Income-tax Act and any amount shown in the balance sheet as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset; L= book value of liabilities shown in the balance sheet, but not including the following amounts, namely:- (i) the paid up-capital in respect of equity shares (ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company; (iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation; (iv) any amount representing provision for taxation other than amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto; (v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities; (vi) any amount r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... particular method of the valuation, the AO cannot find fault in the said recognized method and adopting the method of his own choice. In support of this, he relied on the decision of the Hon'ble Jurisdictional High Court in the case of Vodafone M-Pesa Ltd. v PCIT (2018) 164 DTR 257/ 256 Taxman 240 (Bom)(HC). As far as the worth of food division is concerned, the Ld. Counsel for the assessee submitted that assessee has followed the method prescribed under section 50B(3) of the Act alongwith Explanation (2). He submitted that in the net worth computed by the assessee and in the AO, there is only one difference. It was submitted that the assessee following the Explanation-2 below section 50B(3) of the Act has adopted written down value of the block asset in case of the depreciable asset as per the proviso to section 43 of the Act, which the AO has omitted. 19. We have heard rival submissions on the issue in dispute and perused the material on record. We find that computation of LTCG on the transfer of undertaking as the slump sale consists of two components. First component is sale consideration and the second component is the net worth or cost of acquisition. When the net worth of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer was incorrect in concluding that the DCF method is "quite unrealistic and inapplicable" to the terms of the Income Tax Act. On the contrary, the DCF method is quite applicable and was required to be applied by the Assessing Officer to determine the FMV of the unquoted shares. " 20. A more detailed discussion on the issue which confronts us in this appeal is found in the judgment rendered by the Mumbai Bench of the ITAT in Dy. Commissioner of Income Tax 6(2)(1) vs. Credtalpha Alternative (2022) 94 ITR (Trib) 596 and the relevant parts whereof are reproduced hereunder:- "15. Thus, the fair market value of the share shall be higher of the value as determined in accordance with the provisions of rule 11 UA or any other method, which can be substantiated by the assessee before the Assessing Officer. For the purpose of determining "fair market value" of unquoted shares provisions of rule 11 UA (2) applies which gives an option to the assessee to either value the shares as per prescribed formula given in clause (a) or clause (b) which provides for the determination of the fair market value based on discounted cash flow method as valued by a merchant banker or a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e errors in the working of projected cash flow, estimating the projected revenue and projected expenditure as well as in adoption of cost of equity and discount factor, the learned Assessing Officer is within his right to correct it after questioning the same to the assessee. The learned Assessing Officer can also question the basic assumptions made by the valuer. If they are unreasonable or not based on historical data coupled with the management expectation, the learned Assessing Officer has every right to question it and adjust the valuation so derived at. However, if he does not find any error in those workings, he could not have rejected the same. Further the reason given by the learned Assessing Officer that the net asset value method and the discounted cash flow method for valuation of the shares of the company gives a wide variation between them, we do not find any reason to find fault with the assessee in such cases. Both these methods have different approaches and methodologies therefore there are bound to be differences, but it does not give any authority to the learned Assessing Officer to pick and choose one of the method and make the addition. It is the assessee who h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to valuation has to be decided afresh by the AO on the lines indicated in the decision of ITAT, Bangalore in the case of VBHC Value Homes Pvt. Ltd., Vs ITO (supra) i.e., (i) the AO can scrutinize the valuation report and he can determine a fresh valuation either by himself or by calling a determination from an independent valuer to confront the assessee but the basis has to be DCF method and he cannot change the method of valuation which has been opted by the assessee. (ii) For scrutinizing the valuation report, the facts and data available on the date of valuation only has to be considered and actual result of future cannot be a basis to decide about reliability of the projections. The primary onus to prove the correctness of the valuation Report is on the assessee as he has special knowledge and he is privy to the facts of the company and only he has opted for this method. Hence, he has to satisfy about the correctness of the projections, Discounting factor and Terminal value etc. with the help of Empirical data or industry norm if any and/or Scientific Data, Scientific Method, scientific study and applicable Guidelines regarding DCF Method of Valuation. The order of ld. CIT(A) i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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