2018 (9) TMI 403 - AT - Income Tax

Rule 11UA(2) valuation must be adopted; AO cannot reject without Explanation(a)(ii) satisfaction under s.56(2)(viib); DCF rejection unjustified

ITAT allowed the assessee's appeal partly, deleting the addition made by the AO for alleged under-valuation of shares. The Tribunal held that valuation ... Valuation of the shares - valuation method provided in Rule 11UA(2)(a) - addition by rejecting the valuation done as per Discounted Cash Flow Method - The AO observed that the assessee raised loans from the above associate concerns and has converted them into shares application/premium money. - Held that:- there cannot be any scope of introduction of assessee’s unaccounted income through allotment of shares at unreasonably high priced shares. Therefore, such observations is not relevant and a mere suspicion. It appears that the authorities below have ignored Explanation (a) below S. 56(2)(viib). The said Explanation provides that the fair market value of the shares shall be the value-(i) as may be determined in accordance with such method as may be prescribed i.e. u/r 11UA; or (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher. Accordingly, the value computed under the Rule at ₹ 95.90 per share is higher than ₹ 65.31 or ₹ 32.76 per share and therefore, the higher valuation has to be adopted. Moreover, it is only the Explanation (a)(ii) speaks of the satisfaction of the AO but there appears no such condition in the Explanation (a)(i) which therefore AO is not permitted to interfere in the valuation, once done in accordance with the method prescribed in the Rule 11UA(2). No justification behind rejecting the declared valuation of the shares and in the impugned addition made by the AO but partly sustained by the CIT(A), which is hereby deleted.- Appeal of the assessee is partly allowed Issues Involved:1. Valuation of Share Premium2. Consideration of Written Submissions3. Project Delays and Impact on Valuation4. Legality of Orders by Lower AuthoritiesDetailed Analysis:1. Valuation of Share Premium:The primary issue revolves around the valuation of the share premium. The assessee contended that the CIT(A) erred in maintaining the value of share premium at Rs. 22.76 per share as decided by the AO under Rule 11UA(2)(a), without considering the discounted free cash flow (DCF) method under Rule 11UA(2)(b). The AO had computed the fair market value (FMV) of the shares based on the book value, concluding that the premium of Rs. 60 per share was unjustified. The AO added the excess premium of Rs. 81,72,400 to the total income of the assessee as income from other sources under Section 56(2)(viib) of the Income Tax Act, 1961. The CIT(A) rejected the DCF valuation reports submitted by the assessee, finding them based on imaginary and incorrect figures. However, the tribunal held that the assessee has the right to choose the DCF method under Rule 11UA(2)(b), and the AO cannot impose a different method. The tribunal found the DCF valuation by the Chartered Accountant (CA) to be reasonable and in accordance with the law, thus rejecting the AO's and CIT(A)'s valuations based on the book value method.2. Consideration of Written Submissions:The assessee argued that the CIT(A) did not consider their written submissions at length, including the jurisdictional point regarding the notice issued under Section 143(2). The tribunal noted that the ground was not pressed by the assessee during the hearing, and hence, it was dismissed.3. Project Delays and Impact on Valuation:The assessee highlighted that the project was delayed due to non-receipt of an electricity connection, affecting the valuation based on actual figures for FY 2015-16. The CIT(A) had asked for a valuation based on actual figures, which showed discrepancies when compared to the projections. The tribunal observed that the DCF method inherently involves projections and estimations, which cannot be expected to match actual figures precisely. The tribunal found the projections made by the CA to be reasonable, considering the plant capacity, industry conditions, and other relevant factors, and thus upheld the DCF valuation.4. Legality of Orders by Lower Authorities:The assessee contended that the orders of the lower authorities were bad in law. The tribunal found that the AO and CIT(A) had incorrectly imposed the NAV method of valuation, disregarding the legislative intent that allows the assessee to choose the DCF method. The tribunal emphasized that the AO can scrutinize the valuation report for arithmetical mistakes but cannot change the method of valuation chosen by the assessee. The tribunal concluded that the assessee's DCF valuation was fair and reasonable, and the additions made by the AO were unjustified.Conclusion:The tribunal allowed the appeal of the assessee, holding that the DCF method chosen by the assessee for share valuation was valid and reasonable. The tribunal directed the AO to accept the DCF valuation and delete the additions made under Section 56(2)(viib). The tribunal's decision underscores the assessee's right to choose the method of valuation prescribed under the law and limits the AO's discretion to challenge or change the chosen method.