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2025 (6) TMI 245 - HC - Income TaxAddition u/s 56 (2) (viib) - FMV of the Assessee s equity by any acceptable method - AO proceeded to determine the FMV of the shares issued by the Assessee at its book value and concluded that the same was in negative - there were certain disclaimers in the valuation report furnished by the Chartered Accountant which AO found rendered the determination of FMV unreliable - ITAT deleted addition - HELD THAT - The Assessee had valued the unquoted equity shares held by the Assessee in SAFL by DCF method. The same is permissible under Rule 11UA (2) of the Rules. Assessee had also drawn our attention to the ICAI Valuation Standard 301 Business Valuation which also indicates that investment in a subsidiary could also be valued using the DCF method as was done in the present case. ITAT had found that the disclaimers set out by the expert in the valuation report were general disclaimers and are common in all such reports furnished by experts as they are founded on the data as provided by the entity. The expert report could not be rejected on the ground of such disclaimers without the AO pointing out any material error in the data as used by the expert. No substantial questions of law.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Court relate to the determination of the Fair Market Value (FMV) of shares issued by the Assessee under Section 56(2)(viib) of the Income Tax Act, 1961. Specifically, the issues include:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of ITAT's deletion of addition under Section 56(2)(viib) Legal Framework and Precedents: Section 56(2)(viib) mandates that if a closely held company issues shares at a consideration exceeding the face value, the excess over FMV is taxable as income from other sources. Explanation (a) to this clause clarifies that FMV shall be either the value determined in accordance with the prescribed method (Rule 11UA) or substantiated by the company to the satisfaction of the AO, whichever is higher. Court's Interpretation and Reasoning: The Court noted that the Assessee had furnished an expert valuation report determining FMV at Rs. 2771.65 per share using the DCF method. The AO rejected this report due to disclaimers and instead valued the shares at book value, which was negative, leading to an addition of over Rs. 30 crores under Section 56(2)(viib). The ITAT accepted the Assessee's valuation, finding no error in the methodology or data and faulted the AO for not discharging the onus to prove the expert report unreliable. Key Evidence and Findings: The expert report by J.N. Sharma & Co. was unchallenged on the accuracy of data or valuation methodology. The AO's reliance on disclaimers without pointing out material errors was found insufficient to reject the report. The RBI had also not objected to the subscription price of SAFL shares, which formed the basis of the Assessee's investment valuation. Application of Law to Facts: Since the FMV determined by the Assessee was substantiated by an expert report and the AO's valuation was negative (lower), the higher value as per the Explanation to Section 56(2)(viib) had to be accepted. Treatment of Competing Arguments: The Revenue's contention that the AO's valuation under Rule 11UA should prevail was rejected as the AO's valuation was negative and the Assessee's valuation was substantiated. The Court observed that the question of method under Rule 11UA did not arise since the AO's valuation was lower and the Assessee's valuation was accepted. Conclusion: The ITAT correctly deleted the addition under Section 56(2)(viib) as the Assessee's valuation was substantiated and higher than the AO's valuation. Issue 2: Validity of Assessee's valuation methodology (DCF method and NAV) Legal Framework and Precedents: Rule 11UA(2)(b) permits the use of the Discounted Cash Flow (DCF) method for valuation of unquoted equity shares. ICAI Valuation Standard 301 also recognizes DCF as a valid method, including for investments in subsidiaries. Court's Interpretation and Reasoning: The Assessee valued its 20% stake in SAFL using the DCF method, which is permissible. The AO contended that the Assessee had combined DCF and Net Asset Value (NAV) methods, which was improper. The Court rejected this contention, holding that the Assessee's valuation of SAFL shares by DCF was legitimate and accepted practice. Key Evidence and Findings: The valuation report of SAFL by Chartered Accountant Mr. K.V. Sriram, using DCF, was undisputed. The Assessee's valuation of its own shares was based on this valuation of its investment in SAFL. The ICAI Valuation Standard 301 was cited to support the use of DCF for investments in subsidiaries. Application of Law to Facts: Since the Assessee's valuation was based on a recognized method and supported by an expert report, the AO's objection on methodology was unfounded. Treatment of Competing Arguments: The Revenue's argument that the Assessee had invented its own method was rejected. The Court emphasized that the Assessee's approach was consistent with accepted valuation standards. Conclusion: The Assessee's use of the DCF method to value its investment in SAFL was valid and acceptable for FMV determination. Issue 3: Allegation of overvaluation and mala fide intention Legal Framework and Precedents: Section 56(2)(viib) aims to prevent companies from issuing shares at inflated values to avoid tax. However, bona fide expert valuations substantiated by data are acceptable. Court's Interpretation and Reasoning: There was no allegation or evidence of mala fide or that the shares were issued to route unaccounted funds. The valuation was supported by expert reports and consistent with the valuation of SAFL shares. Key Evidence and Findings: The RBI's non-objection to the subscription price of SAFL shares and the expert valuation reports negated any suspicion of overvaluation or tax evasion. Application of Law to Facts: Without any proof of mala fide or manipulation, the AO's addition on the ground of overvaluation was unsustainable. Treatment of Competing Arguments: The Revenue's suggestion of overvaluation was not supported by any material evidence and was rejected. Conclusion: The valuation was bona fide and the ITAT rightly rejected the AO's addition on this ground. Issue 4: Reliance on disclaimers in the valuation report and typographical errors Legal Framework and Precedents: Disclaimers in valuation reports are common and do not invalidate the valuation unless material errors are demonstrated. Section 292B covers typographical or clerical mistakes. Court's Interpretation and Reasoning: The disclaimers were general and customary. The AO failed to identify any material inaccuracies or errors in data. The ITAT held that disclaimers alone cannot discredit the valuation report. Key Evidence and Findings: No material errors were pointed out by the AO. The typographical or clerical mistakes, if any, were covered under Section 292B and did not affect the valuation. Application of Law to Facts: The disclaimers did not justify rejection of the valuation report. Treatment of Competing Arguments: The Revenue's reliance on disclaimers and clerical mistakes was found insufficient to reject the valuation. Conclusion: The ITAT correctly accepted the valuation report despite disclaimers and minor errors. Issue 5: Applicability of Rule 11UA and AO's valuation under the Rules Legal Framework and Precedents: Rule 11UA prescribes methods for determining FMV of unquoted shares. The Explanation to Section 56(2)(viib) requires FMV to be the higher of the value determined under Rule 11UA or substantiated by the company. Court's Interpretation and Reasoning: The AO's valuation under Rule 11UA was negative. The Assessee's substantiated valuation was higher. The Court held that where the AO's valuation is lower, the substantiated valuation must be accepted. Key Evidence and Findings: The AO's valuation was based on book value and liabilities, resulting in negative net worth. The Assessee's valuation was based on enterprise value using DCF method. Application of Law to Facts: The Court concluded that the FMV as substantiated by the Assessee's expert report must be accepted as per the Explanation to Section 56(2)(viib). Treatment of Competing Arguments: The Revenue's argument that FMV under Rule 11UA must be determined first was rejected as the AO's valuation was negative and lower. Conclusion: The Assessee's valuation was correctly accepted over the AO's valuation under Rule 11UA. Issue 6: Whether the ITAT's order was perverse and non-speaking Court's Interpretation and Reasoning: The Court found the ITAT's order to be reasoned, detailed, and based on appreciation of evidence and law. It addressed the AO's objections and explained why the valuation report was accepted. Conclusion: The ITAT's order was neither perverse nor non-speaking. 3. SIGNIFICANT HOLDINGS "The onus to find fault in the data or the method for calculating the value of the shares as computed in terms of the expert's report furnished by the Assessee rested on the AO and he had not discharged its onus to do so." "The disclaimers set out by the expert in the valuation report were general disclaimers and are common in all such reports furnished by experts as they are founded on the data as provided by the entity. The expert report could not be rejected on the ground of such disclaimers without the AO pointing out any material error in the data as used by the expert." "Where the FMV as determined under Rule 11UA is negative and the Assessee has substantiated a higher FMV by an expert report, the higher value must be accepted in terms of Explanation (a) to Section 56(2)(viib)." "The Assessee's valuation of its shares by the DCF method based on its investment in SAFL is permissible under Rule 11UA(2)(b) and ICAI Valuation Standard 301." "No substantial questions of law arise for consideration in the present case." Final determinations:
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