2021 (3) TMI 17 - AT - Income Tax

Tribunal allows appeal on share valuation & ROC fees disallowance.

Rockland Diagnostics Services Pvt. Ltd. Versus Income Tax Officer, Ward-21 (3), New Delhi

The appeal was allowed by the Tribunal. The Assessing Officer's valuation of shares at a Fair Market Value of Rs. 10/- per share was deemed unjust as the ... Addition u/s 56(2)(b)(viib) - rejecting the justification of Share Premium on the basis of Discounted Cash Flow (DCF) method - Share Premium has been charged on the basis of Valuation Report by qualified Chartered Accountant following Discounted Cash Flow (DCF) method - as submitted assessee had issued new shares at a price lower than that computed as per the DCF Method i.e. at the rate of ₹ 43/- per share against DCF value of ₹ 218.49 per share arrived at in the said valuation report.Revenue disregarded the valuation report mainly on the ground that valuation of equity shares was based on projection of revenue which did not match with the actual revenue during the subsequent years - HELD THAT:- In absence of any specific inaccuracies or short comings in the DCF valuation report other than stating that yearwise results as projected are not matching with the actual results declared in the final accounts, the Assessing Officer cannot substitute his own value in place of the value determined either on DCF method or NAV method. Therefore, we are of the considered opinion that the Lower Authorities were not justified in rejecting the valuation report as submitted by the assessee in this regard. Observation of the Ld. CIT (A) that the Chartered Accountant has relied on the data supplied by the assessee in this regard is irrelevant in as much as the Chartered Accountant has carried out the valuation in accordance with the prescribed method as per Rule-11UA of the Income Tax Rules, 1962 and, therefore, such valuation report, in absence of specific defects being pointed out, has a binding value. We note that neither the Ld. CIT (A) nor the Assessing officer have evaluated the valuation report in light of the relevant material but have only rejected the same on assumptions and presumptions and the same cannot be upheld - AO should examine the issue afresh after giving due opportunity to the assessee to present its case in this regard. Thus, this ground is allowed for statistical purposes. Disallowance of ROC fees paid by the assessee company - HELD THAT:- It is settled law that ROC fees paid are to be considered as preliminarily expenditure within the meaning of Section 35D of the Act. The same is directed accordingly. Accordingly, this ground stands allowed. Issues Involved:1. Justification of Share Premium based on Discounted Cash Flow (DCF) method.2. Disallowance of ROC fees paid for enhancement of Authorized Share Capital.Issue-wise Detailed Analysis:1. Justification of Share Premium based on Discounted Cash Flow (DCF) method:The primary issue in this appeal is the addition of Rs. 1,07,82,453/- under Section 56(2)(viib) of the Income Tax Act, 1961. The assessee company, engaged in diagnostic and clinical pathology services, issued shares at a premium and justified the valuation using the DCF method. The valuation was performed by a Chartered Accountant, estimating the share value at Rs. 43/- per share based on future business prospects, against a DCF value of Rs. 218.49 per share.The Assessing Officer (AO) disregarded this valuation, arguing that the projected revenues did not match actual revenues in subsequent years and adopted a Fair Market Value of Rs. 10/- per share, the price paid by Rockland Hospital to acquire shares of erstwhile shareholders in November 2014. This decision was upheld by the CIT (A).The Tribunal noted that as per Section 56(2)(viib) read with Rule 11UA of the Income Tax Rules, 1962, the assessee has the option to determine the Fair Market Value using either the DCF method or the NAV method. The AO cannot substitute his own value for that determined by the assessee's chosen method. The Tribunal cited the case of Cinestaan Entertainment (P.) Ltd. vs. ITO, which held that the AO must accept the valuation if it follows the prescribed method unless specific discrepancies are found.Further, the Tribunal referenced the case of Intelligrape Software Pvt. Ltd. vs. ITO, where it was held that the AO cannot reject a DCF valuation report solely because actual revenues differ from projections. The Tribunal concluded that the Lower Authorities had unjustly rejected the valuation report based on assumptions and presumptions without pinpointing specific inaccuracies. Thus, the issue was remanded back to the AO for fresh examination, allowing the assessee to present its case.2. Disallowance of ROC fees paid for enhancement of Authorized Share Capital:The second issue pertains to the disallowance of Rs. 4,09,250/- paid as ROC fees for the enhancement of Authorized Share Capital. The Tribunal held that ROC fees should be considered as preliminary expenditure under Section 35D of the Act. Consequently, the disallowance was directed to be reversed, allowing this ground in favor of the assessee.Conclusion:The appeal was allowed, with the Tribunal directing the AO to re-examine the share valuation issue afresh, providing the assessee an opportunity to justify its valuation. The disallowance of ROC fees was reversed, treating it as preliminary expenditure under Section 35D.Order pronounced on 25th February, 2021.