TaxTMI 
TaxTMI 
2022 (3) TMI 208
X X X X Extracts X X X X
X X X X Extracts X X X X
....ation methodology opted for by it in accordance with specific Rule 11UA(2) of Income-tax Rules could not be disregarded or rejected by the AO particularly when Explanation (a)(i) to section 56(2)(viib) does not speak of any satisfaction of the AO. 3. That without prejudice to Ground No. 2 above, the authorities below could not have rejected the valuation report of Chartered Accountant Valuer/independent expert is filed by the Appellant and hence such action of the authorities below was unjust and illegal." 3. During the financial year relevant to the Assessment year under assessment, the assessee company was engaged in the business of IT related services. 4. During the Course of assessment proceedings, the AO is noticed that the assessee company has allotted equity shares of face value of Rs. 10/- each as per chart given below to M/s Tangerine Digital Entertainment Pvt. Ltd. which is a closely held company of the assessee company: Date of allotment No. of shares Face value Security premium Fare value as per valuati Issue price per share Excess price for 56(2)(viib) 01-05-2014 2262 22,620 139,77,3 6189 6,189 NA 23-02-2015 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed the value of the shares through project report and the value of share has been hypothetically increased to Rs. 8328/- per equity share by the assessee company. A discounted cash flow (DCF) is a valuation method used to estimate the attractiveness of an investment opportunity. DCF analysis uses future free cash flow projections and discounts them to arrive at a present value estimate, which is used to evaluate the potential for investment. The excess cash is used to expand production, develop new products, make acquisitions, pay dividends and reduce debt. Specifically, FCF is calculated as: EBIT (1-tax rate) + (depreciation) + (amortization) - (change in net working capital) - (capital expenditure).In finance, discounted cash flow (DCF) analysis is a method of valuing a project, company, or asset using the concepts of the time value of money. All future cash flows are estimated and discounted by using cost of capital to give their present values (PVs). The discount rate is the rate of return used in a discounted cash flow analysis to determine the present value of future cash flows and the assessee has failed to prove the basis of discounted rate used. In a discounted cash flow a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f estimating beta has been stated to be the Chartered Accountants understanding of the risk in similar industries. However, the above statement has not been explained. A slight difference in beta coefficient can have a strong impact on the cost of equity which can influence the valuation of the shares. • While computing the Weighted Average Cost of Capital in the valuation report, the cost of debt is considered and a debt equity ratio of 30:70 has been taken for which no basis has been provided. • The Valuation Report has taken a growth rate of 3% for calculating the terminal value of business and no basis has been provided for the same. • The computation of free cash flows and the assumptions underlying the same have also not been explained in the report. • The value and has mentioned that on the financial statement and other data pertaining to the company had been provided by the management of the company and had been accepted and relied upon by the valuer without further verification including nonconformity or conformity with the generally accepted accounting principles and/or other guidelines established by the regulatory bodi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g expenses and taxes but prior to any payments either debt or equity holders, at the weighted average cost of capital, which is the cost of the different components of financing used by the firm, weighted by their market value proportions. Cost of Equity or the Discounting Factor: Discounting rate is the rate of return that a willing buyer would expect to receive from an investment to compensate the inherent risks involved and for the time value of money. The cost of equity is calculated on the basis of Capital Asset Pricing Model (CAPM). Cost of Equity = Risk free rate + [Beta *(Market risk premium)] • Risk free rate is considered as 4 percent and market risk, premium is considered to be 7.1 percent. • Beta has been estimated at 1.23 based on our understanding of the business risk in the similar industries. On the above basis the cost of equity is arrived as follows: Cost of Equity=4 Percent +(1.23 * 7.1 percent) = 12.73 percent Further, as the privately held shares are not traded in public, the shares of these companies are not generally as liquid as those of public companies. The last of marketability increas....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... company and we have accepted and relied on without further verification, including conformity or non-conformity with generally accepted accounting principles and/or other guidelines established by regulatory bodies. 2. All reported facts, comments, estimates, opinions and statistical information set forth in the valuation exercise have been obtained from sources believed to be accurate and reliable. No liability is assumed for the content or accuracy of the data furnished by others, including all information and representations provided by the management. 3. No attempt has been made to verify and audit the estimates and assumptions made by the management of the company. 4. The valuation of the company is been done solely at the request of the management and in our opinion may be considered as fair value for the purpose of fair valuation under section 56 of the Income Tax Act,1961." 15. In this background, the rationale of the Assessing Officer and the figures adopted by the AO while making the disallowance is examined. The same are as under: EBITDA 13-14 14-15 15-16 16-17 17-18 Actual Profit/Loss as reported in ITR/Final Acc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n accordance with DCF method as prescribed under clause (b) of specific Rule 11UA(2) as applicable, the AO/CIT(A) had no power/authority to change such valuation methodology and adopt a different book value method as prescribed under clause (a) of such Rule and hence such action of the authorities below was arbitrary. 21. It is trite law that "when a statute requires, a thing to be done in a certain manner, it shall be done in that manner alone and not otherwise" (CIT vs. SPL'S Siddhartha Ltd. 345 ITR 223). 22. Unlike Explanation (a)(ii) of section 56(2)(viib), where it has been specifically provided that valuation is to be substantiated to the satisfaction of the AO, there is no such provision specified therein in Explanation (a) (i) of section 56(2)(viib) as opted for by the assessee for substantiating its valuation to the satisfaction of the AO. Hence, on the facts of assessee's case, the AO was not empowered to disregard the DCF valuation as carried out by the valuer and such action of the authorities below of rejecting such valuation report cannot be upheld. (Rameshwaram Strong Glass P Ltd., ITAT Jaipur) 23. The AO was not able to pinpoint any specif....