2020 (8) TMI 90 - AT - Income Tax

Tribunal Overturns AO's Decision on Share Valuation Method

Karmic Labs Pvt. Ltd. Versus ITO, Ward-15 (2) (1), Mumbai

The Tribunal allowed the Assessee's appeal, directing the AO to delete the additions made under Section 56(2)(viib) of the Income-tax Act, 1961. The ... Income from other sources u/s 56(2)(viib) - premium received from shareholders via-a-vis issue of equity shares and preference shares - AO has the power to change the method adopted by the assessee from one method to another method provided under Rule 11UA - HELD THAT:- In order to ascertain the market value of the shares, the assessee adopted DCF method, as prescribed under Rule 11UA r.w.s 56(2) of the Act and accordingly, the shares were issued at a premium. According to the Ld. AO, the valuation report furnished by the assessee is not realistic as the projections shown by the assessee in the valuation report were not realistic and were not achieved in actuality in the subsequent years. Whereas on the other hand the assessee has tried to justify the valuation with reference to orders book of ₹ 18.01 crores. We have perused the decisions relied upon by the assessee and are of the considered view that the issue is settled in the following cases, where it has been held that it is beyond the jurisdiction of the AO to change the method of valuation. Bombay High court, in the case of Vodafone M-Pesa Ltd. [2018 (3) TMI 530 - BOMBAY HIGH COURT] has held that the Ld. AO cannot change the method adopted by the assessee for valuing the market value of the shares from discounted cash flow method to net asset value method, which was violation of Rule 11UA and accordingly, the impugned order was to be set aside. Similarly, the co-ordinate bench in the case of Vodafone M-Pesa Ltd vs PCIT (supra) has held that the Ld. AO cannot change the method of valuation adopted by the assessee by merely relying on the actual results in the subsequent years and arbitrarily coming to the conclusion that projections were not achieved. We, therefore respectfully following the decisions as discussed above, set aside the order the Ld.CIT(A) and direct the Ld. AO to delete the additions. - Decided in favour of assessee. Issues Involved:1. Considering the premium received from shareholders on the issue of equity shares and preference shares as income under Section 56(2)(viib) of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Considering the premium received from shareholders on the issue of equity shares and preference shares as income under Section 56(2)(viib) of the Income-tax Act, 1961:The Assessee challenged the order of the Commissioner of Income-Tax (Appeals) [CIT(A)], which confirmed the Assessing Officer's (AO) decision to treat the share premium received as income under Section 56(2)(viib) of the Income-tax Act, 1961. The Assessee argued that the premium on the issue of equity shares and preference shares should not be considered as income.The AO observed that the Assessee issued shares at a premium and questioned the basis of the valuation. The Assessee provided a valuation report using the Discounted Free Cash Flow (DCF) Method, which the AO rejected, stating that the projections were unrealistic and not achieved in subsequent years. The AO recalculated the share value using Rule 11UA(2)(a), resulting in a negative fair market value, and added the share premium of Rs. 3,96,54,531 to the Assessee's total income under Section 56(2)(viib).In the appellate proceedings, the CIT(A) upheld the AO's decision, noting that the Assessee's projections did not match past and future growth, and the AO correctly applied Rule 11UA(2)(a) instead of the DCF Method.The Assessee argued that the AO was not authorized to change the valuation method from DCF to Net Asset Value (NAV) and cited various judicial precedents supporting the use of DCF Method. The Assessee emphasized that the valuation was based on valid future revenue projections, and subsequent non-achievement of projections should not invalidate the method used.The Tribunal reviewed the facts and the legal position, noting that the AO's rejection of the DCF Method was based on subsequent non-achievement of projections, which is not a valid reason to disregard the method. The Tribunal referenced several cases, including Vodafone M-Pesa Ltd. vs PCIT and DCIT vs Ozoneland Agro Pvt. Ltd., where it was held that the AO cannot arbitrarily change the valuation method adopted by the Assessee if it is one of the prescribed methods under Rule 11UA.The Tribunal concluded that the AO exceeded his jurisdiction by insisting on a particular method and disregarding the DCF Method chosen by the Assessee. The Tribunal set aside the CIT(A)'s order and directed the AO to delete the additions made under Section 56(2)(viib).Conclusion:The appeal filed by the Assessee was allowed, and the Tribunal directed the AO to delete the additions made under Section 56(2)(viib) of the Income-tax Act, 1961, respecting the Assessee's choice of the DCF Method for share valuation.