2025 (8) TMI 1683 - AT - Income Tax

Deletion of s.56(2)(viib) addition upheld where DCF valuation of premium share issue to group entities accepted

The Deputy Commissioner of Income Tax, Central Circle-1 (4), Ahmedabad Versus Goldmine Commodities Pvt. Ltd.

ITAT AHMEDABAD - AT dismissed the Revenue's appeal against deletion of an addition under s.56(2)(viib) where shares were issued at a premium to group ... Addition u/s 56(2)(viib) - issue of shares at premium - projections adopted for the Discounted Cash Flow (DCF) method were highly inflated and unrealistic as compared to the actual audited figures and therefore could not be relied upon for determining the fair market value of shares. HELD THAT:- Valuation is not an exact science but a technical exercise involving approximations and forecasts. Courts have repeatedly held that such exercise is best left to experts, and unless perversity or mala fides are shown in the report of the valuer, the same cannot be discarded by the AO. In the present case, the Revenue has not brought any material on record to establish that the DCF valuation furnished by the assessee was inherently flawed or manipulated. The mere fact that actual performance of the company in later years did not match projections cannot, by itself, be a ground for rejecting the valuation. We also take note of the undisputed fact that the shares were issued only to existing group entities. There is no dispute raised by the AO as to their identity or creditworthiness. Section 56(2)(viib) is a deeming provision designed to curb inflow of unaccounted money through share premium from resident investors. Taxing premium received from one’s own group shareholders, in the absence of any evidence of colourable device or infusion of unaccounted funds, would be contrary to the legislative intent and lead to anomalous results, as rightly observed by the CIT(A) relying upon coordinate bench precedents. We hold that the CIT(A) was justified in deleting the addition made under section 56(2)(viib). AO was not correct in substituting the DCF method with NAV method merely on the basis of subsequent divergence between projections and actuals. We find no infirmity in the well-reasoned order of the CIT(A) warranting our interference. Appeal filed by the Revenue is dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the appeal filed by the Revenue was maintainable where the memorandum of appeal (Form No. 36) was signed by a Revenue officer without specific material showing lack of authority. 2. Whether the Assessing Officer was justified in invoking the deeming provision under section 56(2)(viib) and substituting the assessee's chosen Discounted Cash Flow (DCF) valuation with Net Asset Value (NAV) under Rule 11UA on the ground that projections underlying the DCF were inconsistent with subsequently audited results. 3. Whether the AO could reject a valuation report prepared and certified by an independent chartered accountant on a Rule 11UA recognised method (DCF) solely because later-year audited results diverged from projections, absent demonstrable perversity, mala fides, or manipulation in the valuation. 4. Whether issuance of shares at premium to existing group entities (identity and creditworthiness undisputed) justifies invoking section 56(2)(viib) to tax the excess as income from other sources in the absence of evidence of unaccounted/colourable infusion. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Maintainability of Revenue's Appeal (authorisation of Form No. 36) Legal framework: Statutory rules require appeals to be instituted by authorised representatives; procedural requirements as to signing of appeal documents are subject to curative interpretation where authority is not controverted. Precedent treatment: The Tribunal treated defects in authorisation as procedural and curable unless specific material shows lack of authority; no binding precedent to the contrary was invoked by Revenue. Interpretation and reasoning: The record showed the memorandum of appeal was signed by a Deputy Commissioner of Income Tax, an officer of the Department, and no evidence was produced to demonstrate lack of authority. The Tribunal found no jurisdictional defect; any defect would be procedural and curable. Ratio vs. Obiter: Ratio - procedural defect in appointment/signing does not invalidate appeal absent specific proof that signer lacked authority. Conclusion: Appeal is maintainable; preliminary objection by assessee rejected. Issue 2 - Validity of AO substituting DCF valuation with NAV under Rule 11UA and invoking section 56(2)(viib) Legal framework: Section 56(2)(viib) deems consideration received in excess of fair market value (FMV) on issue of shares to be income; Rule 11UA prescribes recognised valuation methods including DCF, NAV, earnings capitalisation, etc., and allows taxpayer to adopt an accepted method substantiated by a valuation report certified by a chartered accountant (subject to disqualifications). Precedent treatment: Tribunal relied on coordinated bench and High Court authorities holding that where assessee furnishes a valuation under a recognised method certified by an independent valuer, AO cannot substitute the method merely due to later divergence between projections and actuals unless perversity, mala fides, or inherent flaw is demonstrated (citing decisions including PCIT v. Cinestaan Entertainment and coordinate Tribunal decisions). Interpretation and reasoning: The assessee submitted a DCF valuation certified by an independent firm (not the statutory auditor). The AO criticized projections as inflated because audited subsequent years differed materially from projections and replaced DCF by NAV to compute FMV at lower value. The Tribunal held valuation is an expert, approximation-based exercise dependent on forward-looking projections; divergence between projected and later actual results does not ipso facto prove the projections were unreasonable at the time they were made. In absence of material showing deliberate manipulation, perversity, or lack of commercial prudence in the inputs/assumptions, the AO had no jurisdiction to discard a recognised method chosen by the assessee and certified by an independent valuer. The Tribunal emphasised that Rule 11UA permits multiple recognised methods and that substitution requires cogent material demonstrating methodological perversity or misapplication, which was not supplied by Revenue. Ratio vs. Obiter: Ratio - AO cannot substitute an assessee's Rule 11UA-recognised valuation (here DCF) with another method (NAV) merely because later audited figures diverge from projections; substitution requires demonstrable perversity or mala fide manipulation of the valuation inputs/method. Conclusion: The AO's invocation of section 56(2)(viib) based on substituting DCF with NAV and making the addition was unjustified; the addition of Rs. 6,58,62,000 was deleted. Issue 3 - Adequacy of material to impugn DCF projections and role of subsequent audited results Legal framework: Valuation by DCF necessarily uses forecasts; fairness is judged by reasonableness of assumptions at valuation date, not by hindsight comparison with later performance. Precedent treatment: Courts and Tribunals have held valuation is not an exact science and that hindsight cannot be used to invalidate forward-looking valuations unless the original assumptions were unreasonable or contrived. Interpretation and reasoning: AO relied primarily on a comparison table showing large differences between projected PAT and audited PAT. The Tribunal found this insufficient to establish that projections were unreasonably inflated at the time of valuation. The assessee provided explanations of the assumptions and business factors; the valuer was independent; the chosen DCF employed recognised inputs and methodologies. No evidence was placed to show that inputs were fabricated or that the valuer lacked independence. Ratio vs. Obiter: Ratio - hindsight divergence alone is insufficient to impugn a DCF valuation; the AO must demonstrate that projections were perverse or the valuation was manipulated. Conclusion: Material before AO did not establish that DCF projections were improperly prepared or contrived; therefore rejection on that basis was unsustainable. Issue 4 - Relevance of share recipients being existing group entities to application of section 56(2)(viib) Legal framework: Section 56(2)(viib) targets infusion of funds by residents at premium to curb unaccounted money; where premium arises from bona fide funding by identifiable and creditworthy investors, application of the deeming provision may be contrary to legislative intent unless there is evidence of colourable device. Precedent treatment: Coordinate bench jurisprudence recognises that issuance of shares at premium to bona fide group entities without evidence of concealment or unaccounted funds should not normally attract deeming treatment. Interpretation and reasoning: AO did not dispute identity or creditworthiness of the recipients, who were existing group entities; no evidence of colourable device or infusion of unaccounted money was produced. The Tribunal observed that taxing genuine share premium from group entities absent evidence of sham transactions would lead to anomalous results inconsistent with the provision's object. Ratio vs. Obiter: Ratio - absence of any challenge to identity/creditworthiness of investors and absence of evidence of colourable funds undercuts justification for deeming addition under section 56(2)(viib). Conclusion: The fact that shares were issued to existing group entities with undisputed identity/creditworthiness negates the premise for applying section 56(2)(viib) in this case. Overall Conclusion The Tribunal upheld the appellate authority's deletion of the addition under section 56(2)(viib), dismissing Revenue's appeal: the appeal was maintainable; the AO erred in substituting the assessee's Rule 11UA-recognised DCF valuation with NAV based on hindsight divergence; no perversity or mala fide in valuation was demonstrated; and issuance of shares to identified group entities further weakened the case for invoking the deeming provision.