AO cannot substitute qualified valuer's DCF method valuation under section 56(2)(viib) Rule 11U

The ITAT Bangalore ruled in favor of the assessee in a case involving addition under section 56(2)(viib) for shares issued above fair market value. The AO had rejected the independent valuer's DCF method valuation of Rs. 185.92 per share and substituted it with Rs. 36.76 per share. The ITAT held that the AO lacks power to substitute valuations done by qualified valuers under Rule 11U. The Tribunal emphasized that DCF methodology involves future projections based on various factors and cannot be evaluated with arithmetical precision. Following precedent from Cinestaan Entertainment P. Ltd., the ITAT confirmed that when law permits valuation by prescribed experts using prescribed methods, the AO cannot reject such valuations.

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Issues Involved:
1. Valuation of Fair Market Value (FMV) of Shares.
2. Invocation of Section 56(2)(viib) of the Income Tax Act.
3. Delay in Filing the Appeal by the Revenue.

Summary:

1. Valuation of Fair Market Value (FMV) of Shares:
The core issue was whether the CIT(A) was correct in rejecting the AO's valuation of shares at Rs. 36.76 per share and accepting the assessee's valuation at Rs. 185.92 per share using the DCF method, thus deleting the addition of Rs. 3,63,91,076/-. The AO contended that the DCF method used by the assessee was based on future projections, which did not match actual figures, and thus recalculated the FMV at Rs. 36.76 using Rule 11UA(2)(a). The NFAC observed that Section 56(2)(viib) allows the assessee to choose between DCF and NAV methods for valuation, and the AO cannot substitute his own valuation if the prescribed method is used by the assessee. The NFAC relied on several judgments, including the ITAT Delhi Bench in the case of Cinestaan Entertainment P. Ltd., which held that the AO must accept the valuation method chosen by the assessee if it complies with the rules.

2. Invocation of Section 56(2)(viib) of the Income Tax Act:
The assessee argued that the AO erred in invoking Section 56(2)(viib) without appreciating that the share issue price was consistent with independent third-party transactions. The AO's rejection of the DCF method was deemed incorrect as it failed to consider that projections are inherently based on estimates and various factors. The NFAC and the Tribunal emphasized that the AO cannot question the commercial prudence of the investors or the valuation method adopted by the assessee if it is one of the prescribed methods under the Act. The Tribunal cited the Delhi High Court's affirmation in the Cinestaan Entertainment case, which underscored that valuation is not an exact science and must be based on reasonable projections.

3. Delay in Filing the Appeal by the Revenue:
There was a delay of 302 days in filing the appeal by the revenue, attributed to the backlog of judicial work due to the Covid pandemic and subsequent administrative pressures. The Tribunal found the reason for the delay reasonable and condoned it, admitting the appeal for adjudication.

Conclusion:
The Tribunal dismissed the revenue's appeal, upholding the NFAC's decision that the AO must accept the valuation method chosen by the assessee if it complies with the prescribed rules. The CO filed by the assessee was dismissed as infructuous since the appeal of the revenue was dismissed.

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