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TMI Blog2022 (12) TMI 1552X X X X Extracts X X X X X X X X Extracts X X X X ..... ed out by the AO which have been duly met by the assessee are hereby dismissed as factually incorrect. Whether the ld. AO could change the method of share valuation was subject matter of consideration in the case of Vodafone M-Pesa Ltd. [ 2018 (3) TMI 530 - BOMBAY HIGH COURT] as held AO is undoubtedly entitled to scrutinise the valuation report and determine a fresh valuation either by himself or by calling for a final determination from an independent valuer to confront the petitioner. However, the basis has to be the DCF Method and it is not open to him to change the method of valuation which has been opted for by the Assessee. Also in Credtalpha Alternative Investment Advisors (P) Ltd. [ 2022 (1) TMI 937 - ITAT MUMBAI] addressed the issue that DCF method adopted by the assessee cannot be rejected merely on the basis of comparing projections with actuals. Thus, we direct the ld. AO to delete the addition made u/s. 56(2)(viib). Seeking set off of unabsorbed depreciation with the addition made by the AO - This has to be factually verified by the ld. AO. But in view of our decision given for ground Nos. 1-3 hereinabove, this unabsorbed depreciation figure if found to be correct, has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied by the management of the assessee company as ultimately it is the assessee company s management who would be knowing the future prospects of the business of the company. Hence, it was submitted that there was nothing wrong in the independent Chartered Accountant mentioning in his valuation report that he had not made any verification of assumptions and projections adopted by the management. The ld. AO on verification of the share valuation report observed that the projected net cash flow used in share valuation report did not come even near to the actual cash flow for financial years 2015-16 and 2016-17 and accordingly, concluded that the share valuation report using DCF method is not reliable and hence, rejected the same. The variance brought out by the ld. AO on the net cash flow between projections and actuals are tabulated as under:- FY 2015-16 FY 2016-17 Net Cash Flow Projected Actual Projected Actual 50.70 -18.06 4242.14 3.1 All figures in Rs. lacs 3.2. The value per share determined using DCF method by the independent valuer was Rs. 9,600/- per share. The workings of the DCF method of share valuation is reproduced in page 7 of the assessment order. The assessee in respon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... explained the legal provisions of Section 56(2)(viib) together with 11UA of the Income Tax Rules and submitted that the aforesaid provisions recognize Discounted Cash Flow Method (DCF Method) as one of the methods approved for doing the share valuation. Accordingly, it was submitted that the fair value of Rs. 9600/- per share using DCF method was reliable value and assessee had allotted shares at a premium of Rs. 9500/- per share by relying on the said valuation report and hence, the provisions of Section 56(2)(viib) of the Act had been duly complied with by the assessee. The ld. AO in para 5.6 of his assessment order observed that though the assessee had followed one of the prescribed methods (DCF method), however, just following the prescribed method of valuation of a share will not make the premium justified and explained. The ld. AO arrived at the book value per share using Net Asset Value (NAV) method and arrived the fair market value at Rs. 2603/- per share as against Rs. 9600/- per share arrived by the assessee using DCF method. The ld. AO reproduced the entire cash flow statement for the year ended 31/03/2017 in page 8 of his assessment order. From the said cash flow state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on DCF method. The real picture is far beyond the projections and therefore, the valuation of share price is not correct. (ii)To substantiate the above, the assessee filed the internal valuation report which was obtained prior to issuance of equity shares on premium, however, the premium charged on allotment of shares is not justified. (iii) The assessee company wishfully compared the net increase or decrease in the cash flow from operating activities with the projected change in the total cash flow just to present a better financials. It is important to mention that net cash flow projections of a company are based on operating activities along with non-operating activities like investing activities and financial activities. iv) In its three page valuation report, assessee company has not provided the projections for future profit and loss account and in page one there is a mention that for the purpose of valuation the valuer had relied upon financial projections provided by the company from 31.03.2014 to 31.03.2018. But, surprisingly, the same doesn't forms part of the valuation report. The same were also not provided during the assessment proceedings. Assessee in its valua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Commissioner of Income Tax Vs. Durga Prasad More 82 ITR 540. It is to state that there is reason to believe that the apparent is not real then taxing authorities are entitled to look into surrounding circumstances to find out the reality and the matter has to be considered by applying the test of human probability. ix). Reliance is also placed on the decision of Hon'ble Supreme Court in the case Sumati Dayal Vs. Commissioner of Income Tax 214 ITR 801. x) Further, the Hon'ble Supreme Court in the case of Sreelekha Banerjee Others Vs. Commissioner of Income Tax held that if explanation is unconvincing and one which deserves to be rejected, the Department can reject and draw the inference that the amount represents income either from the source already disclosed by the assessee or from some undisclosed source. 3.7. The ld. AO determined the taxable income of the assessee at Rs. 4,37,31,250/- without giving the set off of unabsorbed depreciation which was available in the return itself in the sum of Rs. 3,75,61,475/- and completed the assessment. The action of the ld. AO was upheld by the ld. CIT(A) in respect of the addition made u/s. 56(2)(viib) of the Act and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ojections for future profit and loss account. It was submitted by the assessee that the ld. AO had not sought for these details during the course of assessment and whatever the details that were called for by the ld. AO had been duly submitted by the assessee. In support of this contention, the assessee drew the attention of the ld. CIT(A) to the various notices issued by the ld. AO and the replies filed by the assessee in response thereto. It was also submitted that assessee had an option to chose either NAV method or DCF method for the purpose of arriving at the fair market value of an equity share as per law. The assessee also pointed out that the provisions of Section 56(2)(viib) of the Act and Rule 11UA of the Rules gives an option to the assessee either to use the book value of shares as on the date of valuation or the fair market value as determined by the independent valuer as per the discounted cash flow method, whichever is higher. The assessee also submitted before the ld. CIT(A) that the ld. AO failed to appreciate that the projected net profit before tax for 31/03/2016, 31/03/2017, 31/03/2018 and the audited net profit before tax for the same period fully justified the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons had indeed become true and assessee could achieve more than the projections in the subsequent years. Hence, so called non-existing discrepancies pointed out by the ld. AO which have been duly met by the assessee are hereby dismissed as factually incorrect. 3.13. The question whether the ld. AO could change the method of share valuation was subject matter of consideration by the Hon ble Jurisdictional High Court in the case of Vodafone M-Pesa Ltd. vs. Principal Commissioner of Income Tax reported in 92 taxmann.com 73 wherein it was held as under:- 9. We note that, the Commissioner of Income-Tax in the impugned order dated 23rd February, 2018 does not deal with the primary grievance of the petitioner. This, even after he concedes with the method of valuation namely, NAV Method or the DCF Method to determine the fair market value of shares has to be done/adopted at the Assessee's option. Nevertheless, he does not deal with the change in the method of valuation by the Assessing Officer which has resulted in the demand. There is certainly no immunity from scrutiny of the valuation report submitted by the Assessee. Therefore, the Assessing Officer is undoubtedly entitled to scrut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vailable options properly or not. In the present case, the learned Assessing Officer has thrust upon the assessee, net asset value method rejecting discounted cash flow method for only reason that there is a deviation in the actual figures from the projected figures. It is an established fact that discounted cash flow method is always based on future projections adopting certain parameters such as expected generation of cash flow, the discounted rate of return and cost of capital. In hindsight, on availability of the actual figures, if the future projections are not met, it cannot be said that the projections were wrong. To prove that the projections were unreliable, the learned Assessing Officer must examine how the valuation has been done. In a case future cash flow projections do not meet the actual figures, rejection of discounted cash flow method is not proper. If projected future cash flow and actual result matches, such situation would always be rare. For projecting the future cash flow certain assumptions are required to be made, there needs to be tested and then such exemptions becomes the base of estimation of such projected future cash flows. If there are no assumptions, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground numbers 3 and 4 of the appeal of the learned Assessing Officer are dismissed. (Emphasis supplied by us) 3.15. The assessee s case herein stands at a much better footing than the facts prevailing in the case of Credtalpha Alternative Investment Advisors (P) Ltd. referred to supra. 3.16. In view of the aforesaid observations and respectfully following the aforesaid judisical precedents, we direct the ld. AO to delete the addition made u/s. 56(2)(viib) of the Act. Accordingly, the ground Nos. 1-3 raised by the assessee are allowed. 4. The ground No.4 raised by the assessee is only seeking set off of unabsorbed depreciation of Rs. 3,75,61,475/- with the addition made by the ld. AO. This has to be factually verified by the ld. AO. But in view of our decision given for ground Nos. 1-3 hereinabove, this unabsorbed depreciation figure of Rs. 3,75,61,475/-, if found to be correct, has to be carried forward to subsequent years as per law. 5. The ground Nos. 5 6 are general in nature and does not require any specific adjudication. 6. In the result, appeal of the assessee is allowed. Order pronounced on 23/12/2022 by way of proper mentioning in the notice board. - - TaxTMI - TMITax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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