2024 (4) TMI 318 - HC - Income Tax

Assessee may choose formula or merchant banker DCF for FMV; AO cannot substitute NAV; AO can seek independent valuation

HC set aside the appellate order and remitted the matter to the AO to determine FMV afresh. The court held the assessee may choose between the formulaic ... Valuation of the shares offered for subscription - Determination of fair market value - rejection of the Fair Market Value [FMV] evaluation as submitted by the appellant as contemplated u/s 56(2)(viib) read along with Rule 11UA of the Income Tax Rules - Consequent to the rejection of that Report, the AO independently determined the value of each share to be INR 40.40/- and thus quantified the disallowance under Section 56(2)(viib) - principal grievance of the appellant is that even if the AO had deemed it fit to reject the Valuation Report drawn on the basis of Discounted Cash Flow Method [DCF Method], it could not have substituted the means and the method of valuation of its own volition AO has chosen to depart from the DCF Method which was adopted by the assessee and has independently ascertained the face value of the shares by adopting the Net Asset Value Method [NAV Method]. HELD THAT:- The explanation placed in clause (viib) postulates that the FMV of shares shall be the value determined in accordance with the methods as may be prescribed or as may be substantiated by the company to the satisfaction of the AO, whichever be higher. A perusal of Rule 11UA(2) would indicate that the assessee is enabled to determine the FMV of the unquoted equity shares either in accordance with the formula prescribed in clause (a) or on the basis of a report drawn by a merchant banker who may have determined the FMV as per the DCF Method. In our considered opinion, the language of Rule 11UA(2) indubitably places a choice upon the assessee to either follow the route as prescribed in clause (a) or in the alternative to place for the consideration of the AO a Valuation Report drawn by a merchant banker as per the DCF method. However, and as is manifest from a conjoint reading of Section 56(2)(viib) read along with Rule 11UA(2), the option and the choice stands vested solely in the hands of the assessee. While it would be open for the AO, for reasons so recorded, to doubt or reject a valuation that may be submitted for its consideration, the statute clearly does not appear to empower it to independently evaluate the face value of the unquoted equity shares by adopting a valuation method other than the one chosen by the assessee. It is this aspect which was duly acknowledged by the Bombay High Court in Vodafone M-Pesa [2018 (3) TMI 530 - BOMBAY HIGH COURT] As decided in Sodexo Facilities Management Services [2023 (5) TMI 1317 - ITAT MUMBAI] wherein held AO has not carried out valuation by an independent valuer and merely chosen a part of the valuation report submitted by the assessee. Therefore, we restore back the issue to the AO for referring the matter to a valuation expert by way of the issue of commission and thereafter, determining the FMV of the undertaking of the food division of the assessee. Also decided in Taaq Music Pvt. Ltd. [2020 (10) TMI 28 - ITAT BANGALORE] the primary onus to prove the correctness of the valuation Report is on the assessee as he has special knowledge and he is privy to the facts of the company and only he has opted for this method. Hence, he has to satisfy about the correctness of the projections, Discounting factor and Terminal value etc. with the help of Empirical data or industry norm if any and/or Scientific Data, Scientific Method, scientific study and applicable Guidelines regarding DCF Method of Valuation. The order of ld. CIT(A) is accordingly set aside and this issue is remanded to the AO for decision afresh, after due opportunity of hearing to the Assessee Question A and C are answered in the negative and in favor of the appellant assessee. In light of the answers rendered in respect of the aforenoted two questions, the additional questions which are framed would not merit an independent examination. The matter shall in consequence stand remitted to the AO which shall undertake an exercise of valuation afresh in accordance with the DCF method. Issues Involved:1. Rejection of Valuation Report2. Conjecture or Surmise in Decision3. Substitution of Valuation Method by AO4. Revenue's Authority to Reject Expert Report5. Mandatory Reference to DVO6. Allegations of Non-CooperationSummary:1. Rejection of Valuation Report:The assessee appellant challenged the ITAT's judgment upholding the rejection of the valuation report prepared by M/s SPA Capital Advisors Ltd., which was based on figures provided by the appellant without independent verification. The Tribunal upheld the AO's rejection, citing the unrealistic valuation of shares and lack of substantiation by the appellant.2. Conjecture or Surmise in Decision:The appellant argued that the Tribunal erred in deciding the appeal based on conjecture, suggesting the possibility of data tailoring. The Tribunal found that the appellant failed to provide satisfactory explanations for the valuation figures, leading to the rejection of the DCF Method in favor of the NAV Method.3. Substitution of Valuation Method by AO:The Tribunal upheld the AO's decision to substitute the DCF Method with the NAV Method for valuing the shares. The appellant contended that the choice of valuation method u/s 56(2)(viib) and Rule 11UA is vested exclusively in the assessee. The Tribunal's decision was challenged based on the precedent set by the Bombay High Court in Vodafone M-Pesa Limited, which stated that the AO cannot change the method chosen by the assessee.4. Revenue's Authority to Reject Expert Report:The appellant argued that the Revenue cannot reject a merchant banker's report and substitute its own valuation without referring it to the DVO or an expert. The Tribunal found that the AO acted within his rights to reject the valuation report due to lack of independent verification and unrealistic assumptions.5. Mandatory Reference to DVO:The appellant contended that the Act mandates a reference to the DVO whenever a valuation report is rejected. The Tribunal did not find this argument persuasive, noting that the AO's independent valuation was justified due to the appellant's failure to substantiate the report.6. Allegations of Non-Cooperation:The appellant argued that even in cases of alleged non-cooperation, the AO should have referred the valuation to the DVO. The Tribunal upheld the AO's independent valuation, citing the appellant's failure to provide necessary information and satisfactory explanations.Judgment:The High Court allowed the appeal, setting aside the ITAT's order dated 16 May 2018. The court held that the choice of valuation method u/s 56(2)(viib) and Rule 11UA lies solely with the assessee. The AO cannot adopt a different method but can scrutinize and question the assumptions and data used in the chosen method. The matter was remitted to the AO for a fresh valuation using the DCF Method, with the option to appoint an independent valuer.