Section 56(2)(viib) share valuation remitted for fresh AO examination after DCF used and alternative method applied

ITAT BANGALORE set aside the CIT(A) orders and remitted the issue to the AO for fresh examination where the assessee had used DCF to value shares for section 56(2)(viib). The Tribunal found the AO had adopted a different valuation method without scrutinizing the DCF workings and directed re-examination in line with the co-ordinate bench's guidance. The appeals are treated as allowed for statistical purposes.

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Issues Involved:
1. Condonation of delay in filing the appeal for the assessment year 2015-16.
2. Validity of the addition of excess share premium under Section 56(2)(viib) of the Income Tax Act for assessment years 2015-16 and 2016-17.
3. Method of share valuation: Discounted Cash Flow (DCF) method vs. Net Asset Value (NAV) method.

Issue-wise Detailed Analysis:

1. Condonation of Delay in Filing the Appeal for Assessment Year 2015-16:
The appeal for the assessment year 2015-16 was delayed by 609 days. The assessee argued that the delay was due to ignorance of future tax implications and lack of proper legal advice during the initial years of the company’s formation. The Tribunal, after considering the submissions, found that there was a reasonable cause for the delay. Consequently, the delay was condoned, and the appeal was admitted for hearing.

2. Validity of the Addition of Excess Share Premium under Section 56(2)(viib) for Assessment Years 2015-16 and 2016-17:
The assessee issued shares at a premium using the DCF method for valuation, which the Assessing Officer (A.O.) rejected in favor of the NAV method. For assessment year 2015-16, the A.O. valued shares at Rs. 75 per share under the NAV method and added the excess premium of Rs. 557 per share as income under Section 56(2)(viib). Similarly, for assessment year 2016-17, the A.O. valued shares at Rs. 37 per share and added the excess premium of Rs. 595 per share as income.

3. Method of Share Valuation: DCF Method vs. NAV Method:
The Tribunal noted that the DCF method is a recognized method under Rule 11UA of the Income Tax Rules. The A.O. had rejected the DCF method without examining the valuation report. The Tribunal referred to the decision in Innoviti Payment Solutions Pvt. Ltd. vs. ITO, which emphasized that the A.O. cannot change the method of valuation opted by the assessee but can scrutinize the valuation report. The A.O. can determine a fresh valuation or call for an independent valuer’s determination but must adhere to the DCF method.

The Tribunal cited the judgment of the Hon’ble Bombay High Court in Vodafone M Pesa Ltd vs. PCIT, which held that the A.O. must scrutinize the valuation report and cannot change the method of valuation chosen by the assessee. The primary onus to prove the correctness of the valuation report lies with the assessee.

Conclusion:
The Tribunal set aside the orders of the Ld. CIT(A) and restored the issue to the A.O. for fresh examination following the DCF method. The A.O. must scrutinize the valuation report and, if necessary, determine a fresh valuation either by himself or through an independent valuer, but cannot change the method opted by the assessee. The appeals were allowed for statistical purposes.

Order Pronounced:
The order was pronounced in the open court on 9th October 2020.

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