TaxTMI 
TaxTMI 
2022 (12) TMI 1552
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....6 was filed by the assessee company declaring total income of Rs. Nil on 28/09/2015, which was duly processed u/s. 143(1) of the Act. The ld. AO observed that during the year under consideration, the assessee company issued 6250 equity shares of Rs. 100/- each at a premium of Rs. 9500/- per share. The assessee company was asked to furnish the complete details and justification for charging a premium of Rs. 9500/- per share together with calculation for the same. In response, the assessee furnished the following documents:- a) Name and address of the investor b) PAN and income tax assessment particulars of the investor c) Valuation report under Rule 11UA of the Income Tax Rules using discounted cash flow method given by an independent valuer. d) Balance sheet as on 31/03/2016 and 31/03/2017. 3.1. The ld. AO observed that in the valuation report, the valuer had considered future cash flow as certified by the management together with the projections and assumptions adopted by the management. The valuer had stated that he had not made any verification of the projections and assumptions adopted by the management. The assessee submitted that for valuing the shares using discount....
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....act Rs. 216.05 lakhs. iii. The Net Cash Flow (Actual) from Operating activities as per AS-3 was Rs. 491.89 lakhs. iv. We humbly state that the comparison between Projected and Actual cash flows from operations from activities is as below: Particulars FY 2015-16 FY 2016-17 Net Cash Flow Projected (INR. Lakh) Actual (INR. Lakh) Projected (INR.Lakh) Actual (INR. Lakh) 50.70 312.15 216.05 491.89 Therefore the Company has achieved higher Net Cash Flows in FY 201516 and FY 2016-17 in comparison to the Cash Flows (Projected). In this regard, it is further submitted as follows: a) The Cash flow statements in audited financial is prepared as per Accounting Standard mandated in Companies Act, 2013. The objective, scope and definition of cash flows and presentation and reporting methodology is prescribed in AS 3. b) The net cash flow as envisaged in AS-3 methodology and in Discounted cash flow method are on totally different basis. This is because the objective, scope and definition of cash flows and presentation and reporting methodology as prescribed in AS 3 are having different objective, scope and definition from cash flows and presentation and reporting me....
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....tal cash flow just to present a better financials. The ld. AO observed that the net cash flow projections of a company are based on operating activities along with non-operating activities like investing and financial activities. The share valuation of a company is done for the entire company as a whole entity. The assessee also submitted that the free cash flow figure of Rs. 4,242.14 lakhs projected for the year pertain to "Horizon Value" which captures the value of business beyond the projection period in a DCF analysis and is the present value of all subsequent cash flows. The assessee also submitted that the projected free cash flow for 31/03/2017 was Rs. 216.05 lakhs as against which the assessee had actually achieved cash flow from operating activities at Rs. 491.89 lakhs as on 31/03/2017. 3.5 The ld. AO however disregarded the contentions of the assessee and based on the above observations, proceeded to determine the fair market value per share based on NAV method at Rs. 2603/- per share. Since the premium amount received by the assessee was Rs. 5,93,75,000/- (6250 shares * Rs 9500 per share), the ld. AO added the sum of Rs. 4,37,31,250/- (Rs.6,00,00,000 - 1,62,68,750) by c....
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.... placed on the decision of the decision of Mumbai ITAT in the case of Madhurima International Pvt. Ltd. Vs Pr.CIT-3, (2017) ITA No. 421/Mum/2017, in the said case the AO did not looked into the aspect that explanation to the Rule IIUA(1)(c) refers to value of assets also as per clause (ii) as well method prescribed as per clause (i) of the said explanation as is contained in explanation to Section 56(2)(viib) of the 1961 Act as to the fact that manner of computing fair value of shares for the purposes of Section 56(2)(viib) of 1961 Act is provided in above explanation of being higher of the two sub-clauses in the said case, the AO merely accepted the valuation report dated 15-10-2012 of the valuer submitted by the assessee without going into all these aspects. Thus, the ITAT stated that, the ld Pr.CIT had rightly invoked the provisions of section 263 of the Act as the AO failed to make proper enquiry and verification as required for completion of the assessment u/s 143(3) of 1961 Act, which made the said assessment order dated 23-03-2016 as erroneous in so far as prejudicial to the interest of Revenue. Thus, the ITAT laid down that the valuation report cannot be accepted by the AO ....
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....hare. We find that assessee had justified its share premium of Rs. 9500/- per share by placing reliance on the independent share valuation report using DCF method. The revenue had rejected the said DCF method and had re-determined the share value at Rs. 2603/- per share using NAV method. Under NAV method, the value per share is determined based on book values reflected in the balance sheet. Under DCF method, the financials of the company are projected with various assumptions and beliefs of the management based on their business plans and business prospects and accordingly, projected free cash flows and terminal value would be considered and fair market value per share would be arrived. Hence obviously what would be relevant is the cash flow received from the operating activities, as the future operations of the company are projected. The assessee in the instant case had valued the parameters that are normally used under DCF method for arriving at the fair market value per share. It is not in dispute that DCF method is one of the prescribed methods under Rule 11UA of the Income Tax rules for arriving at the fair market value per share for the purpose of Section 56(2)(viib) of the ....
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....e Hon'ble Jurisdictional High Court in the case of Vodafone M-Pesa Ltd vs. PCIT reported in 92 Taxmann.com 73 wherein it was held that as per the Income Tax Rules, the method of valuation namely NAV method or DCF method to determine the fair market value of shares in terms of Section 56(2)(viib) of the Act has to be done or adopted at the assessee's option and that does not open to the ld. AO to change the method of valuation which the assessee has opted. These arguments were reiterated by the ld. AR before us. Per contra, the ld. DR submitted that the ld. AO has every right to examine the discrepancies in the projections used by the assessee and entitled to change the method of valuation adopted by the assessee. 3.12. At the outset, we find that the various discrepancies pointed out by the ld. AO are not discrepancies at all. It was factually incorrect appreciation of facts. As stated supra, the assessee had indeed achieved the actual figures which are much more than the projections used in the DCF method. Moreover, the DCF method is certainly one of the prescribed methods provided in Rule 11UA of the Rules and assessee is given an option either to use the DCF method or NAV metho....
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....ordinate Bench of this Tribunal in the case of DCIT vs. Credtalpha Alternative Investment Advisors (P) Ltd. reported in 134 taxmann.com 223 (Mumbai Trib.) had also addressed the issue that DCF method adopted by the assessee cannot be rejected merely on the basis of comparing projections with actuals. The relevant operative portion of the said decision is reproduced hereunder:- 18. Thus, the fair market value of the share shall be higher of the value as determined in accordance with the provisions of rule 11UA or any other method, which can be substantiated by the assessee before the Assessing Officer. For the purpose of determining 'fair market value' of unquoted shares provisions of rule 11UA (2) applies which gives an option to the assessee to either value the shares as per prescribed formula given in clause (a) or clause (b) which provides for the determination of the fair market value based on discounted cash flow method as valued by a merchant banker or a chartered accountant (till 24th of May 2018). In the present case the assessee has valued the shares according to one of the 'options' available to assessee by adopting discounted cash flow method. Therefore....
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....n his right to correct it after questioning the same to the assessee. The learned Assessing Officer can also question the basic assumptions made by the valuer. If they are unreasonable or not based on historical data coupled with the management expectation, the learned Assessing Officer has every right to question it and adjust the valuation so derived at. However, if he does not find any error in those workings, he could not have rejected the same. Further the reason given by the learned Assessing Officer that the net asset value method and the discounted cash flow method for valuation of the shares of the company gives a wide variation between them, we do not find any reason to find fault with the assessee in such cases. Both these methods have different approaches and methodologies therefore there are bound to be differences, but it does not give any authority to the learned Assessing Officer to pick and choose one of the method and make the addition. It is the assessee who has to exercise one of the options available under the provisions of the law for valuing the shares. The learned Assessing Officer needs to examine that method. Naturally, if the discounted cash flow method a....