TaxTMI 
TaxTMI 
2026 (5) TMI 1067
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....n confirming that the share premium received by the appellant company was unjustified, ignoring that the valuation was duly carried out by a qualified Chartered Accountant as per the Discounted Cash Flow ('DCF') method prescribed under Rule 11UA of the Income-tax Rules, 1962; 3. Failed to appreciate that as per Explanation to section 56(2)(viib) of the Act read with 11UA of the Income-tax Rules, 1962 ('the Rules'), once the assessee has exercised its option and adopted a prescribed method of valuation (DCF method), supported by a valuation report from a qualified accountant, the AO has no jurisdiction to disregard such valuation merely based on his subjective perceptions or by substituting his own valuation methodology; 4. Erred in disregarding the DCF valuation on irrelevant and extraneous grounds such as projections, assumptions, financial performance and liquidity position, without demonstrating any specific infirmity or inconsistency in the valuation report and then carrying out the valuation by considering actual results of the Appellant company; 5. Failed to appreciate that the shares were issued to an unrelated party who was a strat....
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....se the provisions of section 56(2)(viib) will made applicable. 4. In response, the assessee furnishedits submissions before the AO stating that, as per the provisions of section 56(viib) the assessee has the option to choose either the NAV or the DCF method to value its shares. Accordingly, the assessee had obtained a valuation report from Singhal Gupta and Co. Chartered Accountants, having sufficient experience, who had valued the share on DCF method. The assignment was specific as valuation was to be done for acquisition of share by the strategic investor. It is submitted that the future prospects and projections of revenues and expenses are taken assuming that the management of company would be able to initiate step to achieve the projected results. Valuation is based on estimates of future financial performance. It is rebutted that it is not correct to comment that the valuer has not done any research work without examining the valuer and recording his statement as to the basis of his valuation and methods and data used. The assessee company has engaged the services of a professional as mandated by law and adopted the valuation accordingly. The assessee placed reliance on th....
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....mitted that the value under DCF method can only be determined using projected revenues and since the AO has replaced the projected revenues with actual revenues, the value arrived at by Ld. AO was not in accordance with DCF method and as such the Ld. AO had not followed any prescribed method for determining the value of shares. It is submitted that on this account itself, the addition made by Ld. AO ought to be deleted. Regarding deference in Profit Before Tax (PBT) under the projected valuation and actual PBT, Ld. AR clarified that for financial year 2015-16, the projected Profit Before Tax of Rs. 3.1 crore turned into a Loss Before Tax (LBT) of Rs. (27.78) crore because of one time correction by writing off of certain items totaling to Rs. 17.26 crores, which was given effected to in consultation with a big four accounting firm. 8. To substantiate the said fact, it is further submitted that as per Board of Directors report of the assessee for financial year 2015-16, which is furnished before us during the hearing, such adjustments are apparent which are extracted as under: "The Company in consultation with a Big Four Accounting Firm decided to make the following one-t....
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.... complicated plant and machinery which would require heavy investment in capital assets. On the contrary, the assessee company gains its brand value, goodwill with intrinsic market reach and satisfied customers which being a self-generated asset that could not be recognized in the balance-sheet. Ld. AR also submitted that certain external factors also contributed to the variations between projected PBT and actual PBT, such as demonetization of currency notes on 8th November, 2016, which adversely impacted business nation-wide including the business of assessee. As a result, a reduced customer spending led to sales falling short of projections. The second factor was the introduction of Goods and Service Tax regime from 1st July, 2017, requiring significant adjustment to existing business practices which temporarily affected the cash flows and profitability of assessee. Thirdly, the rapid growth of ecommerce platforms intensified pricing pressures on offline retailers like the assessee, so heavy discounts were necessary to remain competitive impacting the profitability. It is also submitted that the AO had computed the value of shares under NAV method at Rs. 133.84/- per shares, howe....
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....ective of tax evasion by laundering its own unaccounted money. It further held that where the Act provides that valuation must be carried out as per the prescribed method, and the assessee has adopted one of the prescribed methods, the Assessing Officer has to accept the same. If the AO is not satisfied, there is no express provision under the Act or the Rules permitting him to adopt his own valuation in the DCF method or to obtain a valuation from some different Valuer. An AO can interfere only where there is an enabling provision empowering him to tinker with the valuation report issued by an independent valuer qualified under Rule 11U. The Rules specifically provide two valuation methodologies-the asset-based NAV method, grounded in actual numbers from the latest audited financials, and the DCF method, which is based on estimated future projections. Such projections necessarily depend on multiple factors considered by the management and the valuer-growth prospects, economic and market conditions, business conditions, expected demand and supply, cost of capital, and various other assumptions. These elements, by nature, cannot be evaluated with arithmetical precision, as valuation....
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.... other alternate fair value and rather computed the actual value itself. 34. The appellant further relies on the decision of Hon'ble Jaipur Tribunal in case of Rameshwaram Strong Glass Put. Ltd. v. ITO [2018] 96 taxmann.com 542, wherein the shares of the assessee was valued under DCF method. The Department rejected the valuation relied by the assessee by citing huge variance between the actual revenue and the projected revenue. The AO made addition u/s. 56(2) (viib) of the Act, by determining the fair value under NAV method. The Hon'ble ITAT deleted the addition by holding that valuation under the DCF method is inherently based on projections, which cannot be compared with later actual results, as forecasts depend on several factors and cannot be estimated with precision. Even where a company has little or no business history, its shares may still command a premium especially in start-up-type situations, which the Income-tax Act itself recognises and encourages. [The copy of the decision is enclosed hereby from Pg. No. 268 to 285 of the Paper Book.] 35. Similar view was taken in the decisions of Hon'ble Delhi Tribunal in cases of JUS Scriptum Magnus (P....
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....d determined fair value of the share in accordance with true intent of the statute. The addition made, therefore, deserves to be sustained. 14. We have considered the rival submissions, perused the material available on record and jurisprudence relied upon by the assessee. On perusal of the facts on record, admittedly the assessee has issued 7,05,387/- number of equity shares during the year on a face value of Rs. 10/- + a premium of Rs. 518.08 to a third party, namely, M/s. Sara Soule Pvt. Ltd. (SSPL). Before issue of shares, valuation is obtained by the assessee from a Chartered Accountant Firm "Singhal Gupta and Co." on 21st March, 2016, wherein the valuation was completed at Rs. 536.17/- per share, using the projected financials for financial year 2015-16 to 2019-20. Ld. AO doubting the transaction, has called the information from assessee to justify the huge premium charged in allotment of shares, in terms of provisions of section 56(2)(viib) of the Act. In response, the Assessee furnished valuation report, which is analyzed by the Ld. AO with the actual financials of the assessee for subsequent years i.e. from FY 2015-16 to 2018-19 and found a huge difference in the projec....
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....n'ble High Court of Delhi in ITA No.1007/2019, which is disposed of vide order dated 1st March, 2021 wherein the findings of Tribunal are upheld by the Hon'ble High Court which reads as under: "12. In this factual background, the learned ITAT then proceeded to examine whether the AO after invoking the deeming provision under Section 56(2)(viib), could have determined the FMV of the premium on the shares issued at nil after rejecting the valuation report given by the Chartered Accountant based on one of the prescribed methods under the Rules adopted by the valuer. On this aspect, after examining the statutory provisions and the factual position, the ITAT inter-alia observed as under: "32. What is seen here is that, both the authorities have questioned the assessee's commercial wisdom for making the investment of funds raised in 0% compulsorily convertible debentures of group companies. They are trying to suggest that assessee should have made investment in some instrument which could have yielded return/profit in the revenue projection made at the time of issuance of shares, without understanding that strategic investments and risks are undertaken for appreciat....
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....res. The Rules provide for two valuation methodologies, one is assets based NAV method which is based on actual numbers as per latest audited financials of the assessee company. Whereas in a DCF method, the value is based on estimated future projection. These projections are based on various factors and projections made by the management and the Valuer, like growth of the company, economic/market conditions, business conditions, expected demand and supply, cost of capital and host of other factors. These factors are considered based on some reasonable approach and they cannot be evaluated purely based on arithmetical precision as value is always worked out based on approximation and catena of underline facts and assumptions. Nevertheless, at the time when valuation is made, it is based on reflections of the potential value of business at that particular time and also keeping in mind underline factors that may change over the period of time and thus, the value which is relevant today may not be relevant after certain period of time. Precisely, these factors have been judicially appreciated in various judgments some of which have been relied upon by the Id. Counsel, for instance: ....
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....hod, then the same cannot be rejected because neither the Assessing Officer. nor the assessee have been recognized as expert under the law. 35. There is another very important angle to view such cases, is that, here the shares have not been subscribed by any sister concern or closely related person, but by an outside investors like, Anand Mahindra, Rakesh Jhunjhunwala, and Radhakishan Damania, who are one of the top investors and businessman of the country and if they have seen certain potential and accepted this valuation, then how AO or ta. CIT(A) can question their wisdom. It is only when they have seen future potentials that they have invested around Rs. 91 crore in the current year and also huge sums in the subsequent years as informed by the ld. counsel. The investors like these persons will not make any investment merely to give dole or carry out any charity to a startup company like, albeit their decision is guided by business and commercial prudence to evaluate a startup company like assessee, what they can achieve in future. It has been informed that these investors are now the major shareholder of the assessee company and they cannot become such a huge equity st....
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...., and therefore cannot be done with arithmetic precision. It is a technical and complex problem which can be appropriately left to the consideration and wisdom of experts in the field of accountancy, having regard to the imponderables which enter the process of valuation of shares. The Appellant-Revenue is unable to demonstrate that the methodology adopted by the Respondent Assessee is not correct. The AO has simply rejected the valuation of the Respondent-Assessee and failed to provide any alternate fair value of shares. Furthermore, as noted in the impugned order and as also pointed out by Mr. Vohra, the shares in the present scenario have not been subscribed to by any sister concern or closely related person, but by outside investors. Indeed, if they have seen certain potential and accepted this valuation, then Appellant-Revenue cannot question their wisdom. The valuation is a question of fact which would depend upon appreciation of material or evidence. The methodology adopted by the Respondent- Assessee, accepted by the learned ITAT, is a conclusion of fact drawn on the basis of material and facts available. The test laid down by the Courts for interfering with the findings of....
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....ng shareholders, holding and subsidiary companies etc. (iv) Once the assessee has exercised an option for valuation of an unquoted equity share, in terms of Rule 11UA either as per NAV Method or as per DCF Method, the AO is bound to follow the valuation unless the AO brings in cogent material on record to establish perversity in the method adopted by the assessee. 19. In the present case, the assessee adopted DCF method which cannot be discarded only for the reason that the valuation was made on the basis of projections and the actuals in subsequent years are not matching with those of projections or having a huge difference therein. While the differences are explained by the Ld. AR before us, which are acceptable and can be trusted, the legal contentions raised by the Ld. AR also goes to the root of controversy before us, as to whether the DCF method which is permitted under the provisions of section 56(2)(viib) adopted by the assessee can be changed by the AO during the course of assessment without finding any substantive reason to do so. The answer is "No" following the jurisprudence referred to (supra). Further, the AO in the present case has adopted DCF method, but....