Tribunal allows appeal on share valuation & ROC fees disallowance.

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 AO cannot substitute the value determined by the assessee's chosen method. The case was remanded for fresh examination of the share valuation issue. Additionally, the disallowance of ROC fees for the enhancement of Authorized Share Capital was reversed, treating it as preliminary expenditure under Section 35D of the Income Tax Act.

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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.

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