2020 (10) TMI 454 - AT - Income Tax

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 ... Valuation of unquoted shares under Discounted Cash Flow (DCF) method - Assessing Officer's power to scrutinize valuation report but not change valuation method - assessee's option between DCF and Net Asset Value methods under Rule 11UA - assessability of excess share premium under section 56(2)(viib) - remand to Assessing Officer for fresh valuation on DCF basisCondonation of delay - admission of appeal despite limitation - Whether the delay in filing the appeal for assessment year 2015-16 should be condoned and the appeal admitted - HELD THAT: - The Tribunal examined the assessee's petition and submissions that the assessee, being in its initial years and having incurred losses, was unaware of the full tax implications and had not been properly advised; when the identical issue arose for the subsequent year the assessee sought advice and promptly filed the delayed appeal. Having regard to these facts and the explained ignorance of legal complications, the Tribunal found reasonable cause for the delay and held that the appeal should be admitted despite being barred by 609 days. [Paras 5]Delay in filing the appeal for assessment year 2015-16 condoned and the appeal admitted.Valuation of unquoted shares under Discounted Cash Flow (DCF) method - Assessing Officer's power to scrutinize valuation report but not change valuation method - assessee's option between DCF and Net Asset Value methods under Rule 11UA - assessability of excess share premium under section 56(2)(viib) - remand to Assessing Officer for fresh valuation on DCF basis - Validity of the Assessing Officer's rejection of the assessee's DCF-based valuation and adoption of NAV method, and the consequential addition under section 56(2)(viib) - HELD THAT: - The Tribunal noted that the assessee had adopted the DCF method under Rule 11UA and furnished a valuation report; the AO rejected that method and adopted a NAV basis without properly scrutinising the DCF report. Following the coordinate-bench authorities and the principle in Vodafone M-Pesa Ltd. (as applied by the Tribunal), the AO is entitled to scrutinise the valuation report and, if dissatisfied, must record reasons and may determine a fresh valuation either himself or by obtaining a report from an independent valuer, but he cannot change the method of valuation chosen by the assessee. Scrutiny must be limited to facts and data available on the valuation date and the primary onus to prove correctness of the valuation report lies on the assessee, who must justify projections, discounting factor and terminal value by empirical or scientific data or industry norms where available. Given these legal principles and identical facts in both years, the Tribunal found that the matter was not finally adjudicated and required fresh consideration by the AO in accordance with these directions. [Paras 12, 13]Orders of the CIT(A) confirming the additions set aside; the issue remanded to the Assessing Officer for fresh adjudication in accordance with the directions that the AO must scrutinise the DCF valuation, record reasons if dissatisfied, and, if necessary, obtain or make a fresh valuation but retain DCF as the basis.Final Conclusion: The Tribunal condoned the delay and admitted the appeal for AY 2015-16; on the substantive controversy it set aside the CIT(A)'s confirmations for both AYs and restored the matter to the Assessing Officer with directions to re-examine the assessee's DCF valuation report and, if required, obtain or make a fresh valuation while retaining DCF as the basis and observing the limits and procedural safeguards indicated by the Tribunal. 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.