2021 (9) TMI 742 - AT - Income Tax

Tribunal directs AO to consider DCF method for share valuation, grants assessee hearing in reassessment.

M/s Him Agri Fesh Pvt. Ltd. Versus Income Tax Officer, Ward-1 (2), Jalandhar

The tribunal remanded the case back to the Assessing Officer (AO) to consider the valuation report submitted by the assessee, specifically using the ... Additions u/s 56(2)(viib) - Addition as income from other sources and taxing the same as revenue income - amount of share premium treated as income from other sources - DCF method Application - Eligibility of valuation Report from a Chartered Accountant - case of the Assessee was selected under CASS and notice u/sec 143(2) reason for selection of the case of the Assessee was 'Large share premium received during the year - valuation report of the share duly certified by the chartered accountant - case of the assessee before us that the report of the Chartered Accountant evidencing the value of shares as per Rule 11UA of the Act was duly filed before the CIT(A) but the same was not considered - HELD THAT:- Once the assessee had opted to valuation of shares under rule 11 UA by following the DCF method, then it is not open for the assessing officer or to the CIT(A) to adopt a different method of valuation, for determining the fair market value. As per rule 11 UA, the choice is given to the assessee not to the assessing officer. AO is duty bound to examine the working of the DCF method but has no right to change the method of calculating the fair market value of the shares. Once the assessee has exercised its option of opting for DCF method, then the said method is required to be applied however the assessing officer is having the power to review the calculations and correct adoption of the parameters applied by the assessee for the purpose of arriving at valuation of the shares by applying the DCF method. Report has duly been submitted vide DCF method and the Assessing Officer has applied his own method and has computed a different value of share. Explanation to S. 56(2)(viib) of the Act provides that the fair market value (FMV) of unquoted equity shares for the purpose of 56(2)(viib) of the Act shall be the value as determined in accordance with such method as may be prescribed. The prescribed methods of valuations are given under Rule 11 UA of Income Tax Rules, 1962. In the present case, it is not denied that the assessee adopted clause (b) of Rule 11UA(2) of the Rules and accordingly obtained a Valuation Report from a Chartered Accountant. Since the law has prescribed the specific method for valuation i.e Discounted Cash Flow Method (hereinafter also referred as 'DCF'), so he was free (and rather entitled) to choose this method. The method of valuation could be challenged by the AO only if it was not a recognized method of valuation (as per Rule 11UA (2) of the Rules).The very purpose of certification of DCF valuation by a merchant banker or chartered accountant is to ensure that the valuation is fair and reasonable. Lower authorities have not examined the method adopted by the assessee for the purposes of arriving at the fair market value of the shares and have made the additions on the basis of book value of the shares. The said action of the assessing officer as well as of the CIT(A) cannot be approved as once the assessee has opted for DCF method, then it is not open for the assessing officer/CIT appeal to change the method of valuation the shares. Remand back the matter to the file of the assessing officer with a direction to consider the valuation report dated 6 January 2014 forming part of the paper book based on DCF method and determine the fair market value of the shares allotted by the assessee. Appeal of the assessee is allowed for statistical purposes. Issues Involved:1. Addition of Rs. 80,33,892 as income from other sources.2. Treatment of share premium as income from other sources.3. Non-consideration of details provided by the assessee.4. Confirmation of addition against the facts and circumstances of the case.5. Right to amend grounds of appeal.Issue-wise Detailed Analysis:1. Addition of Rs. 80,33,892 as Income from Other Sources:The assessee filed its return of income declaring Rs. 62,070. The case was selected for scrutiny due to 'Large share premium received during the year.' The Assessing Officer (AO) questioned the issuance of 2,12,200 shares at a premium of Rs. 40 per share, resulting in a total premium of Rs. 84,88,000. The AO, citing non-compliance with Rule 11UA, calculated the fair market value of shares at Rs. 12.14 per share, leading to an addition of Rs. 80,33,892 under section 56(2)(viib) of the Income Tax Act.2. Treatment of Share Premium as Income from Other Sources:The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO’s decision, reiterating that the share premium received exceeded the fair market value as per Rule 11UA. The assessee argued that the share premium was based on the goodwill of the directors and the specialized nature of the business, referencing the case of Green Infra Ltd. Vs ITO. However, CIT(A) noted that the cited case pertained to a period before the introduction of section 56(2)(viib), which was applicable in the current assessment year.3. Non-consideration of Details Provided by the Assessee:The assessee contended that details of the parties from whom the share premium was received were provided, including their identities, bank statements, and ITR returns. However, CIT(A) dismissed the appeal, stating that no such details were submitted. The assessee also claimed that a Chartered Accountant's valuation report per Rule 11UA was submitted to CIT(A) but was not considered.4. Confirmation of Addition Against the Facts and Circumstances of the Case:The assessee argued that the addition was confirmed without considering the facts and circumstances, specifically the valuation report using the Discounted Cash Flow (DCF) method, which valued the shares at Rs. 50.06 per share. The assessee cited multiple judicial precedents supporting the use of the DCF method, asserting that the AO should have scrutinized the valuation report rather than adopting a different valuation method.5. Right to Amend Grounds of Appeal:The assessee reserved the right to add or amend the grounds of appeal before the final hearing or disposal of the appeal.Conclusion:The tribunal found that the CIT(A) failed to consider the valuation report submitted by the assessee and held that once the assessee opted for the DCF method under Rule 11UA, the AO or CIT(A) could not change the valuation method. The tribunal remanded the matter back to the AO to consider the valuation report and determine the fair market value of the shares as per the DCF method, directing the AO to adhere to the decision in M/s Innoviti Payment Solutions Pvt. Ltd. Vs ITO and provide the assessee an opportunity for a hearing. The assessee was also directed to cooperate in the reassessment proceedings. The appeal was allowed for statistical purposes.