TaxTMI 
TaxTMI 
2025 (4) TMI 2164
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....)(viib) of the Act and further disallowance of Rs. 10,328/- was made by invoking the provision of section 40(a)(ia) of the Act. The assessee has made preferential allotment of equity shares on two occasions where on first occasion, the allotment was made of 10,48,666 equity shares having face value of Rs. 10/- each at a premium of Rs. 140/- each and such offer was valid for one year. On the second occasion, the preferential allotment of equity shares was made at a premium of Rs. 172/- each for the face value of per equity share at Rs. 10/-. During the course of assessment proceedings, it was explained by the assessee that in terms of the special resolution passed in EGM on 22.11. 2016, an offer was made for preferential allotment of 10,48,666 equity shares, out of which 799332 equity shares were subscribed in FY 2016-17 relevant to AY 2017-18 and balance 2,49,334 equity shares were subscribed in the previous year relevant to assessment year before us in present appeal. Such offer was valid for one year. The premium was charged in terms of the valuation report dated 20.10.2016 which is based on the audited Balance Sheet of the assessee for financial year ended on 31.03.2016 and proj....
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.... per rule 11UA submitted during assessment proceedings and also erred in confirming FMV @ Rs. 49.50 per share by drawing subjective, premeditated and preconceived inferences and the addition so made is not sustainable and is liable to be deleted. 3. The appellant craves leaves to add, alter, amend, or vary the above grounds of appeal at or before the time of hearing." 6. Before us, the ld. AR argued that the assessee has followed the due procedure as prescribed in section 56(2)(viib) of the Act according to which the fair market of the unquoted equity shares was determined by following the method prescribed i.e. the DCF method. He further submitted that section 56(2)(viib) of the Act provided that addition could only be made where the consideration was received in excess of fair market value of such shares. The fair market value of the shares is to be determined in terms of the rule 11UA(2) where the fair market value of unquoted equity shares can be determined in the manner provided however, the choice of the method is at the option of the assessee. As per rule 11UA(2)(a), the valuation could be done on the basis of Net Asset Value (NAV) method or discounted cash flow ....
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....gly. 8. On the other hand, ld. CIT-DR vehemently supported the orders of the lower authorities. Ld. CIT DR further submitted that the AO in para 4 of the assessment order has pointed out specific defects in the valuation reports submitted by the assessee wherein it is specifically observed that valuer has considered unrealistic terminal value of business as 10% of EBIDTA without any justifiable basis and also failed to disclose the discounting factor, growth rate of revenue, profit etc. Ld. DR thus prayed that additions made deserves to be confirmed. 9. We have heard the rival submissions and perused the material available on record. In the instant case, the assessee company has made preferential allotment of equity shares on two occasions, first, in FY 2016-17 where the shares were issued at a premium of Rs. 140/- each and in FY 2017-18 where the unquoted equity shares were issued at a premium of Rs. 172/- each. On both the occasions, the face value of the equity shares of Rs. 10/- each. For the purpose of determination of the fair market value, the assessee has followed the DCF method and obtained the report of an accountant as provided in rule 11UA(2) of the Income Tax Rul....
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....ance-sheet; PV=the paid up value of such equity shares; or (b)the fair market value of the unquoted equity shares determined by a merchant banker [***] [Words ] as per the Discounted Free Cash Flow method. 10. From the perusal of the above rule, it is clear that it is at the option of the assessee to get the valuation done of unquoted equity shares for the purpose of section 56(2)(viib) of the Act by using any of the method as specified in clause (a) or clause (b) of Rule 11UA(2) of Income Tax Rules. Once the assessee has opted one of the prescribed methods of valuation of unquoted equity shares, AO has no right to change the same. In this regard, the Hon'ble Jurisdictional High Court in the case of Cinestaan Entertainment Pvt. Ltd. (supra) has held as under: "13. From the aforesaid extract of the impugned order, it becomes clear that the learned ITAT has followed the dicta of the Hon'ble Supreme Court in matters relating to the commercial prudence of an assessee relating to valuation of an asset. The law requires determination of fair market values as per prescribed methodology. The Appellant-Revenue had the option to conduct its own valuation and....
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....n was made on a wholly erroneous basis, or that it committed a mistake which goes to the root of the valuation process. 14. In view of the foregoing, we find that the question of law urged by the Appellant-Revenue is purely based on facts and does not call for our consideration as a question of law." 11. In the instant case while rejecting the valuation report submitted by the assessee, the AO has not brought on record any alternate report of fair market value of shares obtained from the person authorized under rule 11UA(2) and simply proceeded to determine the fair market value on NAV method which is not permissible as has been held by the Hon'ble Jurisdictional High Court in the case of Cinestaan Entertainment (Supra). Further the Hon'ble Himachal Pradesh HC in the case of I.A. Hydro-energy Pvt. Ltd. reported in 163 taxmann.com 408 has held as under: Section 56 of the Income-tax Act, 1961, read with rule 11UA of Income Tax Rules, 1962 - Income from other sources - Chargeable as (share premium, valuation of shares) - Assessment Year 2018-19 - Whether Assessing Officer has no jurisdiction to substitute NAV method of assessing valuation of shares, once assessee ....
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....'ble jurisdictional high court in the case of Agra Portfolio (P) Ltd. Vs. PCIT reported in 464 ITR 348 (Delhi) wherein the hon'ble court has remitted back the matter of valuation of unquoted shares to the file of the AO with the directions that AO should adopt the method followed by the assessee and carry out the fresh valuation after independent examination of the facts. The relevant observations of the Hon'ble court are as under: "16. In our considered opinion, the language of Rule 11UA(2) indubitably places a choice upon the assessee to either follow the route as prescribed in clause (a) or in the alternative to place for the consideration of the AO a Valuation Report drawn by a merchant banker as per the DCF method. However, and as is manifest from a conjoint reading of Section 56(2)(viib) read along with Rule 11UA(2), the option and the choice stands vested solely in the hands of the assessee. 17. While it would be open for the AO, for reasons so recorded, to doubt or reject a valuation that may be submitted for its consideration, the statute clearly does not appear to empower it to independently evaluate the face value of the unquoted equity shares by adopti....
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.... worked out by the valuer following the PECV method, whereas the assessee has followed average value of PECV method as well as NAV method to justify the sale consideration actually received. We are of the opinion that ld Assessing Officer has not carried out valuation by an independent valuer and merely chosen a part of the valuation report submitted by the assessee. Therefore, we restore back the issue to the AO for referring the matter to a valuation expert by way of the issue of commission and thereafter, determining the FMV of the undertaking of the food division of the assessee." 19. Proceeding along similar lines, the Hyderabad Bench of the ITAT in Joint Commissioner of Income Tax vs. M/s MLR Auto Limited [IT Appeal NO. 115 (Hyd.) of 2021, dated 28-12-2023] had held as follows:- "17.1. The conjoint reading of Section 56(2)(viib) and Rule 11U and 11UA makes it abundantly clear that in case assessee exercised his option for determination of the fair market value of the shares and exercise then such decision of the assessee shall be final and binding on the assessing officer. The option was given by the Act to the assessee either to apply the DCF method or net ....
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....ase the assessee has valued the shares according to one of the "options" available to assessee by adopting discounted cash flow method. Therefore, such an option given to the assessee cannot be withdrawn or taken away by the learned Assessing Officer by adopting different method of valuation i.e., net asset value method. The method of valuation is always the option of the assessee. The learned Assessing Officer is authorised to examine whether assessee has adopted one of the available options properly or not. In the present case, the learned Assessing Officer has thrust upon the assessee, net asset value method rejecting discounted cash flow method for only reason that there is a deviation in the actual figures from the projected figures. It is an established fact that discounted cash flow method is always based on future projections adopting certain parameters such as expected generation of cash flow, the discounted rate of return and cost of capital. In hindsight, on availability of the actual figures, if the future projections are not met, it cannot be said that the projections were wrong. To prove that the projections were unreliable, the learned Assessing Officer must examine ....
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....ons of the law for valuing the shares. The learned Assessing Officer needs to examine that method. Naturally, if the discounted cash flow method and net asset value method gives the same result, where would have been the need to prescribe the two methods in the law. In view of above facts, we do not find any infirmity in the order of the learned Commissioner of Income-tax (Appeals) in deleting the addition of Rs. 69,000,000 made by the learned assessing officer u/s 56(2)(viib) of the act. Accordingly, ground Nos. 3 and 4 of the appeal of the learned Assessing Officer are dismissed." 21. We deem it apposite to lastly take note of the following pertinent observations as appearing in a decision rendered by the ITAT Bench at Bangalore in Taaq Music Pvt. Ltd. vs. Income Tax Officer [2020] SCC Online ITAT 9482:- "11. The law provides that, the fair market value may be determined with such method as may be prescribed or the fair market value can be determined to the satisfaction of the Assessing Officer. The provision provides an Assessee two choices of adopting either NAV method or DCF method. If the Assessee determines the fair market value in a method as prescribed th....
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.... set aside and this issue is remanded to the AO for decision afresh, after due opportunity of hearing to the Assessee." 22. Accordingly, and for all the aforesaid reasons, we allow the instant appeal and set aside the order of the ITAT dated 16 May 2018. The Questions of Law as framed, namely, Question A and C are answered in the negative and in favor of the appellant assessee. In light of the answers rendered in respect of the aforenoted two questions, the additional questions which are framed would not merit an independent examination. The matter shall in consequence stand remitted to the AO which shall undertake an exercise of valuation afresh in accordance with the DCF method. 23. We also accord liberty to the AO to determine the FMV of the shares bearing in mind the DCF Method by having the same independently determined by a Valuer appointed for the aforesaid purpose. 16. The Hon'ble jurisdictional high court in the case of PCIT Vs. Abhirvey Projects (P) Ltd. reported in [2024] 163 Taxmann.com 408 under identical facts has also expressed the same view and made following observations: "2. Today and before us, it is undisputed that the Assessing Off....