Share-premium valuation remanded; DCF method must be retained; AO may verify report but cannot substitute method

ITAT, Bangalore set aside the CIT(A) order and remanded the share-premium valuation to the AO to be decided afresh, holding the DCF method must be retained. The AO may scrutinize the valuation report or obtain an independent valuer but cannot substitute the valuation method. Only facts and data available on the valuation date may be considered; actual later results are irrelevant. The assessee bears the primary onus to substantiate projections, discount rate and terminal value with empirical, industry or scientific support. Appeal allowed for statistical purposes.

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Issues Involved:

1. Validity of the addition made under Section 56(2)(viib) of the Income Tax Act, 1961 concerning share premium.
2. Appropriateness of the valuation method (DCF Method vs. NAV Method) used for determining the fair market value of shares.

Issue-wise Detailed Analysis:

1. Validity of the Addition Made Under Section 56(2)(viib) of the Income Tax Act, 1961 Concerning Share Premium:

The assessee challenged the order dated 7.2.2018 by the CIT(A)-3, Bengaluru, which partially confirmed the addition made by the AO under Section 56(2)(viib) of the Income Tax Act, 1961. The AO had noticed that the assessee issued 6,15,088 equity shares at a premium of Rs. 80 per share, collecting a total share premium of Rs. 4,92,07,040. Out of this, Rs. 1,77,77,760 was received from resident shareholders. The AO assessed this amount under Section 56(2)(viib) of the Act, as he found the share premium unjustified based on the Net Asset Value (NAV) method, which valued the shares at Rs. 6.04 each. The CIT(A) agreed with the AO but corrected the premium amount from resident shareholders to Rs. 88,88,880.

2. Appropriateness of the Valuation Method (DCF Method vs. NAV Method) Used for Determining the Fair Market Value of Shares:

The assessee provided a valuation certificate using the Discounted Cash Flow (DCF) method, valuing the shares at Rs. 87.56 each. The AO rejected the DCF method, citing that it was based on projected figures provided by the management without a clear basis for the projections. The AO insisted on using the NAV method, which resulted in a much lower valuation of Rs. 6.04 per share. The Tribunal noted that the AO did not properly examine the DCF valuation report. Referring to previous Tribunal decisions and the Bombay High Court judgment in Vodafone M-Pesa Ltd., the Tribunal highlighted that if the DCF method is chosen by the assessee, the AO must scrutinize the report but cannot change the valuation method. The AO can either re-evaluate using the DCF method or call for an independent valuation but must base it on the DCF method.

The Tribunal emphasized that the projections used in the DCF method should be scrutinized based on the data available at the time of valuation, not on actual future results. The primary onus to prove the correctness of the valuation report lies with the assessee. The Tribunal directed the AO to re-examine the valuation using the DCF method and provided the assessee an opportunity to justify the projections and assumptions used in the valuation.

Conclusion:

The Tribunal set aside the order of the CIT(A) and restored the issue to the AO for a fresh decision, following the DCF method as chosen by the assessee. The AO is to scrutinize the valuation report considering only the data available at the time of valuation and not future actual results. The appeal was allowed for statistical purposes, and the matter was remanded back to the AO with specific directions to re-evaluate the share valuation using the DCF method.

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