2021 (1) TMI 91 - AT - Income Tax

Tribunal Upholds Assessee's Valuation Method Choice

The Tribunal upheld the assessee's choice of the Discounted Cash Flow (DCF) method for valuing shares, rejecting the Assessing Officer's use of the net ... Excess premium charged on issue of shares u/s.56(2)(viib) - value adopted by the Assessing Officer under net asset value method - HELD THAT:- Fair market value of shares considered by the assessee under DCF method is one of the accepted method of valuation of shares under Rule 11UA and such value of shares is supported by necessary supporting evidences including valuation report as on the date of issue of shares. The value adopted by the Assessing Officer under net asset value method even though a prescribed method does not give correct value of shares in the given facts and circumstances of the case, because amended provisions of Rule 11UA by the Finance Act, 2017 w.e.f 01.04.2018 has permitted valuation of immovable property as per guidance value for the purpose of valuation of shares. In this case, if stock in trade held by the assessee in the form of immovable property has been valued as per guidance value, then value of one equity share works out to ₹ 1,00,380/-, which is almost equal or nearer to value arrived at by the assessee under DCF method. Therefore, value of shares arrived at by Assessing Officer under net asset value method cannot be accepted. Therefore, we are of the considered view that the learned CIT(A), after considering the relevant facts has rightly deleted the additions made by the Assessing Officer towards excess premium charged on issue of shares u/s.56(2)(viib) of the Act. Hence, we are inclined to uphold the findings of the learned CIT(A) and dismiss the appeal filed by the Revenue. Issues Involved:1. Valuation method for calculating Fair Market Value (FMV) of shares.2. Applicability of Section 56(2)(viib) of the Income Tax Act, 1961.3. Authority of the Assessing Officer (AO) to choose or reject valuation methods.4. Relevance of judicial precedents in valuation disputes.Issue-Wise Detailed Analysis:1. Valuation Method for Calculating Fair Market Value (FMV) of Shares:The primary issue revolves around the appropriate method for calculating the FMV of shares. The assessee issued shares at a premium based on the Discounted Cash Flow (DCF) method, a recognized method under Rule 11UA of the Income Tax Rules, 1962. The AO, however, rejected the DCF method, arguing it was inappropriate for the assessee's circumstances and instead used the net asset value method, resulting in a significantly lower valuation. The Tribunal upheld the assessee's choice of the DCF method, emphasizing that once a method is chosen by the assessee, the AO cannot substitute it with another method.2. Applicability of Section 56(2)(viib) of the Income Tax Act, 1961:Section 56(2)(viib) deals with the taxation of income when shares are issued at a premium exceeding their FMV. The AO contended that the premium charged by the assessee was excessive and should be taxed as income. The Tribunal, however, noted that the valuation method chosen by the assessee (DCF) is valid under the law, and the AO's rejection of this method was not justified. The Tribunal emphasized that the chosen method should be respected unless there are substantial reasons to doubt its correctness.3. Authority of the Assessing Officer (AO) to Choose or Reject Valuation Methods:The Tribunal addressed the AO's authority in selecting or rejecting valuation methods. It clarified that the AO does not have the power to change the method chosen by the assessee if it is a recognized method under the law. The AO can only verify the correctness of the method and the supporting documents. The Tribunal cited judicial precedents, including the Bombay High Court's decision in Vodafone Mpesa Ltd. vs. PCIT, which supports the view that the AO cannot arbitrarily change the valuation method.4. Relevance of Judicial Precedents in Valuation Disputes:The Tribunal referred to several judicial precedents to support its decision. The case of DCIT Vs. Ozoneland Agro P. Ltd. was cited to emphasize that the AO must respect the method chosen by the assessee. Additionally, the Tribunal mentioned the ITAT Mumbai Bench's decision in Karmic Labs Pvt. Ltd. vs. ITO, which reiterated that the AO cannot switch valuation methods. These precedents reinforced the Tribunal's stance that the DCF method chosen by the assessee should be upheld.Conclusion:The Tribunal concluded that the DCF method chosen by the assessee for valuing its shares is valid under Rule 11UA and should not be rejected by the AO. The AO's decision to adopt the net asset value method was deemed incorrect. The Tribunal upheld the CIT(A)'s order, which had deleted the additions made by the AO under Section 56(2)(viib) of the Act. The appeal filed by the Revenue was dismissed, affirming the assessee's right to choose a recognized valuation method and the limitations on the AO's authority to alter it.