AO cannot reject DCF valuation method chosen by assessee for unquoted shares FMV under section 56(2)(viib)

ITAT Hyderabad held that AO cannot reject the DCF valuation method chosen by assessee for determining FMV of unquoted shares under section 56(2)(viib). AO must scrutinize the valuation report within DCF method parameters and can reject the report but not the method itself. If rejecting the report, AO must conduct fresh valuation using same DCF method. CIT(A) erred in applying NAV method instead of examining DCF report. CBDT Circular dated 12.07.2017 cannot be applied retrospectively to valuation dated 01.07.2016. Matter remanded to AO to determine FMV using DCF method based on valuation date materials. Revenue appeal allowed for statistical purposes.

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Issues Involved:
1. Condonation of delay in filing the appeal.
2. Deletion of addition made under section 56(2)(viib) of the Income Tax Act, 1961.
3. Validity of the Discounted Cash Flow (DCF) method adopted by the assessee for share valuation.
4. Examination of the valuation report and its adherence to legal standards.

Summary:

Condonation of Delay:
The Revenue filed the appeal with a delay of 125 days, attributing the delay to the Covid-19 pandemic and restructuring within the Income Tax Department. The Tribunal, referencing the Bombay High Court judgment in Vijay Vishin Meghani Vs. DCIT, condoned the delay, emphasizing that adjudication on merits should not be deprived due to delays caused by extraordinary circumstances like the pandemic.

Deletion of Addition under Section 56(2)(viib):
The Revenue challenged the deletion of the addition made by the Assessing Officer (AO) under section 56(2)(viib), arguing that the assessee failed to substantiate the Fair Market Value (FMV) adopted as per the DCF method. The AO had rejected the DCF method and instead used the Net Asset Value (NAV) method, concluding that the excess share premium should be assessed as income from other sources.

Validity of the DCF Method:
The Tribunal held that the option to choose the valuation method (DCF or NAV) lies with the assessee, as per Rule 11UA of the Income Tax Rules. The AO cannot reject the chosen method but can scrutinize the valuation report within the parameters of the selected method. The Tribunal cited multiple judgments supporting the validity of the DCF method, including the Bombay High Court's decision in Vodafone M-Pesa Ltd. Vs. Pr. CIT, emphasizing that the AO must base any fresh valuation on the DCF method if initially chosen by the assessee.

Examination of the Valuation Report:
The Tribunal found that the valuation report prepared by the assessee's auditor lacked independent verification of financial projections and industry norms, making it unsustainable. The CIT(A) had erred by not examining the valuation report thoroughly and instead focusing on the NAV method. The Tribunal remanded the matter back to the AO to determine the FMV using the DCF method, based on the balance sheet or other relevant material available on the valuation date, providing an opportunity for the assessee to present additional evidence.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, directing the AO to re-assess the FMV using the DCF method, ensuring adherence to legal standards and providing due opportunity for the assessee to submit relevant documents.

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