Interim stay on Rs. 62.38 crore tax demand over disputed DCF valuation of shares; four-week window to seek stay

HC granted interim relief concerning a tax demand arising from an assessment that disputed the fair market value of shares issued at a premium. Noting the petitioner's appeal before the CIT(A) and the contested valuation (DCF method), the HC ordered a stay of the demand dated 21 Dec 2017 for four weeks to enable filing of a stay application. If such application is filed within four weeks, the demand of Rs. 62.38 crores is stayed until disposal of the stay application by the CIT(A) and for two weeks thereafter.

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Issues:
Challenge to order of Principal Commissioner of Income Tax for partial stay of demand under Section 220(6) of the Income Tax Act, 1961.

Analysis:
1. The petition challenged the order of the Principal Commissioner of Income Tax, which partially rejected the petitioner's representation seeking complete stay of a demand of Rs. 62.38 crores arising from an assessment order. The petitioner filed an appeal to the CIT (A) against the assessment order dated 21st December, 2017, and also applied for a stay under Section 220(6) of the Act. The Assessing Officer rejected the application for complete stay, directing the petitioners to pay 20% of the demand. The petitioners then approached the High Court through a Writ Petition.

2. The petitioners contended that the Assessing Officer had incorrectly substituted the Discounted Cash Flow (DCF) method with the Net Asset Value (NAV) method for determining the fair market value of shares, contrary to Rule 11UA of the Income Tax Rules. The petitioners had provided a valuation report using the DCF method, which was not accepted by the Assessing Officer. The petitioners argued that the impugned order was against statutory provisions and sought an unconditional stay of the demand.

3. The Revenue argued that the projected sales figures used for the DCF method were inflated, leading to an incorrect fair market value of shares. The Revenue contended that even if the DCF method was applied correctly, some amount of demand would still be payable. The Revenue supported the Assessing Officer's examination of the valuation report submitted by the Assessee.

4. The High Court noted that the impugned order had enhanced the payment from 20% to 50% of the disputed demand, which was beyond the Commissioner's authority. The Court observed that the Commissioner did not address the primary grievance of the petitioner regarding the change in valuation method by the Assessing Officer. The Court emphasized that the Assessing Officer must base any fresh valuation on the DCF method chosen by the Assessee.

5. The Court held that the demand needed to be stayed pending the appeal before the CIT (A) as the issue of fair market value would be considered in the appeal. The Court granted a stay of the demand for a specified period, allowing the petitioner to file a stay application with the CIT (A). The Court clarified that the CIT (A) could dispose of the appeal along with the stay application after notice to the parties.

6. In conclusion, the petition was disposed of with the direction for a stay of the demand pending the appeal, subject to the petitioner filing a stay application with the CIT (A) within a specified timeframe. The Court emphasized that the controversy was narrow and allowed the CIT (A) to decide on the matter after due notice to the parties.

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