2020 (10) TMI 28 - AT - Income Tax

Tribunal directs fresh valuation of shares under Income Tax Act

The Tribunal upheld the revenue authorities' decision regarding the applicability of Section 56(2)(viib) of the Income Tax Act, 1961 to the assessment ... Income from other sources - addition u/s 56(2)(viib) - difference between the fair market value and the issue price of shares at a premium as income of the Assessee - FMV determination - shares are issued at a premium and at a value higher than the fair market value - adoption of the fair market value as per the two methods i.e., either DCF method or fair market value of the unquoted equity shares determined by a merchant banker - HELD THAT:- Fair market value may be determined with such method as may be prescribed or the fair market value can be determined to the satisfaction of the AO. Provisions of Rule 11UA(2)(b) of the Rules provides that, the Assessee can adopt the fair market value as per the above two methods i.e., either DCF method or fair market value of the unquoted equity shares determined by a merchant banker. The choice of method is that of the Assessee. The Tribunal has followed the judgment of Vodafone M-Pesa Ltd., Vs. Pr. CIT [2018 (3) TMI 530 - BOMBAY HIGH COURT] and has taken the view that the AO can scrutinize the valuation report and he can determine a fresh valuation either by himself or by calling a determination from an independent valuer to confront the Assessee but the basis has to be DCF method and he cannot change the method of valuation which has been opted by the Assessee. Issue with regard to valuation has to be decided afresh by the AO on the lines indicated in the decision of ITAT, Bangalore in the case of VBHC Value Homes Pvt. Ltd. [2020 (6) TMI 318 - ITAT BANGALORE]i.e., (i) the AO can scrutinize the valuation report and he can determine a fresh valuation either by himself or by calling a determination from an independent valuer to confront the assessee but the basis has to be DCF method and he cannot change the method of valuation which has been opted by the assessee. (ii) For scrutinizing the valuation report, the facts and data available on the date of valuation only has to be considered and actual result of future cannot be a basis to decide about reliability of the projections. The primary onus to prove the correctness of the valuation Report is on the assessee as he has special knowledge and he is privy to the facts of the company and only he has opted for this method. Hence, he has to satisfy about the correctness of the projections, Discounting factor and Terminal value etc. with the help of Empirical data or industry norm if any and/or Scientific Data, Scientific Method, scientific study and applicable Guidelines regarding DCF Method of Valuation. The order of ld.CIT(A) is accordingly set aside and this issue is remanded to the AO for decision afresh, after due opportunity of hearing to the Assessee. - Assessee appeal is allowed for statistical purposes. Issues Involved:1. Applicability of Section 56(2)(viib) of the Income Tax Act, 1961.2. Valuation method for determining the fair market value of shares issued at a premium.Issue-wise Detailed Analysis:1. Applicability of Section 56(2)(viib) of the Income Tax Act, 1961:The primary issue in the appeal was whether the revenue authorities were justified in invoking the provisions of Section 56(2)(viib) of the Income Tax Act, 1961, and taxing the difference between the fair market value and the issue price of shares issued at a premium as income of the Assessee. Section 56(2)(viib) was introduced by the Finance Act, 2012, effective from April 1, 2013. It mandates that any consideration received by a company, not being a company in which the public are substantially interested, for the issue of shares that exceeds the fair market value (FMV) of such shares shall be taxable as income.The Assessee contended that the consideration for the issue of shares was received in the previous year relevant to AY 2012-13, and thus, the provisions of Section 56(2)(viib) were not applicable. However, the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] rejected this plea, stating that the relevant point of time for the application of Section 56(2)(viib) is when the shares are allotted, not when the share application money is received. Since the shares were issued in the previous year relevant to AY 2013-14, the provisions of Section 56(2)(viib) were applicable.The Tribunal agreed with the revenue authorities, stating that the consideration received as 'share application money pending allotment' becomes 'consideration for issue of shares' only upon the act of allotment. Therefore, the provisions of Section 56(2)(viib) were applicable to AY 2013-14.2. Valuation Method for Determining the Fair Market Value of Shares Issued at a Premium:The second issue was whether the valuation of shares at a premium was correctly determined. The Assessee used the Discounted Cash Flow (DCF) method for valuation, supported by a report from a Chartered Accountant (CA). The AO rejected this valuation, citing that the report was not independent and the projections were irrational and not based on any independent analysis. Consequently, the AO adopted the book value method and taxed the excess consideration received.The CIT(A) upheld the AO's decision, referencing the ITAT Delhi decision in Agro Portfolio (P) Ltd Vs Income Tax Officer, which supported the AO's right to reject the DCF method if the projections were not substantiated with evidence.The Tribunal, however, referred to the ITAT Bangalore decision in VBHC Value Homes Pvt. Ltd. Vs ITO, which followed the Bombay High Court's ruling in Vodafone M-Pesa Ltd Vs Pr.CIT. The Tribunal held that the AO can scrutinize the DCF valuation report and determine a fresh valuation either by himself or by calling for an independent valuer, but the basis must remain the DCF method chosen by the Assessee.The Tribunal emphasized that the AO should consider only the facts and data available on the date of valuation and not future actual results. The primary onus to prove the correctness of the valuation report lies with the Assessee, who must substantiate the projections, discounting factor, and terminal value with empirical data, industry norms, or scientific methods.Conclusion:The Tribunal set aside the order of the CIT(A) and remanded the matter back to the AO for a fresh decision, adhering to the DCF method chosen by the Assessee. The AO was directed to scrutinize the valuation report based on the data available at the time of valuation and provide the Assessee an opportunity to justify the projections and assumptions used in the DCF method. The appeal was allowed for statistical purposes.