2022 (9) TMI 868 - AT - Income Tax

Tribunal overturns tax authority's valuation method, upholds assessee's right to choose.

The Tribunal set aside the CIT(A)'s order and directed the AO to delete the Rs. 89,51,365/- addition under Section 56(2)(viib) of the Income Tax Act, ... Addition u/s 56(2)(viib) - excess value received by the assessee company in terms of the Fair Market Value (FMV) - method of valuation and the assessee’s issuance of unquoted shares - ‘Net Asset Method’ as adopted by the assessee on the basis of the Stamp Duty Valuation - HELD THAT:- It is a fact on record that the assessee has furnished the valuation on the basis of ‘Discounted Cash Flow Method’ and on the basis of the ‘Net Asset Method’ by adopting the stamp duty valuation of the immovable property as on 15.03.2014, for which, necessary evidences have been furnished but the AO and CIT (A) are of the view that the book value of the shares has to be adopted which comes to Rs. 101.62/- per share against the value of Rs. 110/- per share and which is less than the value as per ‘Net Asset Method’ and the value as per the ‘Discounted Cash Flow Method’. CIT (A) have not been able to find any fault in the ‘Discounted Cash Flow Method’ and for the ‘Net Asset Method’, though, the Amendment came from Finance Act, 2017 for adopting the stamp duty valuation but since, it is curative and beneficial provision, it has to be given retrospective effect. We hold that the ‘Net Asset Method’ as adopted by the assessee on the basis of the Stamp Duty Valuation is in order, being beneficial provision and covered by the judgment in the case of Shiv Pal Singh Chaudhary [2018 (7) TMI 1850 - PUNJAB & HARYANA HIGH COURT] and further in the case of Kolkata Export Co. [2018 (5) TMI 356 - SUPREME COURT] - We further opine that even the valuation by the ‘Discounted Cash Flow Method’ is in order - Decided in favour of assessee. Issues Involved:1. Addition under Section 56(2)(viib) of the Income Tax Act, 1961.2. Valuation methods for unquoted equity shares.3. Application of amended rules retrospectively.4. Jurisdiction and discretion of the Assessing Officer (AO) in valuation methods.Issue-wise Detailed Analysis:1. Addition under Section 56(2)(viib) of the Income Tax Act, 1961:The primary issue in this appeal was the addition of Rs. 89,51,365/- made by the Assessing Officer (AO) under Section 56(2)(viib) of the Income Tax Act, 1961. The AO noted that the assessee company had issued shares at a premium, and the valuation provided by the assessee was not entirely certified by a Chartered Accountant. The AO calculated the Fair Market Value (FMV) of the shares as Rs. 101.62 per share, whereas the shares were issued at Rs. 110/- per share, resulting in an excess value of Rs. 8.38 per share, which was added to the income of the assessee.2. Valuation Methods for Unquoted Equity Shares:The assessee had provided two valuations: one using the Discounted Cash Flow (DCF) method and another using the Net Asset Value (NAV) method. The AO rejected these valuations, particularly questioning the DCF method's discounting factor and considering the valuation as an afterthought. The AO instead used the book value of assets and liabilities to determine the FMV. The Tribunal noted that the DCF method is an approved method under Rule 11UA(2) of the Income Tax Rules, 1962, and the assessee had the option to choose this method. The Tribunal cited several judicial precedents supporting the use of the DCF method and concluded that the AO had no discretion to discard the method chosen by the assessee.3. Application of Amended Rules Retrospectively:The Tribunal addressed the applicability of the amended rules, particularly the use of stamp duty valuation for immovable property, which was introduced by the Finance Act, 2017. The Tribunal held that this amendment is curative and beneficial in nature and should be given retrospective effect. This conclusion was supported by several judicial precedents, including judgments from the Supreme Court and High Courts, which held that curative amendments should be applied retrospectively.4. Jurisdiction and Discretion of the Assessing Officer (AO) in Valuation Methods:The Tribunal emphasized that the AO does not have the jurisdiction to change the valuation method chosen by the assessee if it is one of the methods prescribed under Rule 11UA. The Tribunal cited various judicial precedents, including decisions from the High Courts and other benches of the ITAT, which upheld the assessee's right to choose the valuation method. The Tribunal concluded that the AO and the CIT(A) were not justified in rejecting the DCF method and the NAV method based on stamp duty valuation, as these methods are recognized and permissible under the law.Conclusion:The Tribunal set aside the order of the CIT(A) and directed the AO to delete the addition of Rs. 89,51,365/-. The appeal of the assessee was allowed, with the Tribunal holding that the valuation methods chosen by the assessee were in accordance with the law and that the AO had no authority to impose a different method. The Tribunal's decision was based on a thorough analysis of the relevant legal provisions and judicial precedents, ensuring that the assessee's rights were upheld.