TMI Blog2022 (1) TMI 937X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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 Therefore, such an option given to the assessee cannot be withdrawn or taken away by the learned assessing officer by adopting different method of valuation i.e. net asset value method.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. AO 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case and in law, the learned CIT A erred in deleting the addition on the basis of the decision of the learned CIT (A) with respect to AY 2012-13 where the CIT (A) has granted relief to the assessee on the basis of additional evidence submitted by the assessee before CIT (A). The assessing officer should be given opportunity by the CIT (A) Under rule 46A of the income tax act before allowing assessee s appeal iii. on the facts and circumstances of the case and in law, the learned CIT (A) erred in deleting the addition made by the assessing officer u/s 56 (2) (viib) of the act without appreciating that facts that the ld AO had interfered with the taxpayer statutory right Under rule 11 UA (2) of the ITR to the method of valuation and also that the of rejecting the taxpayer s valuation, the AO had the authority to carry out its own independent valuation and adopt the NAV method for this purpose. iv. On the facts in the circumstances of the case and in law, the learned CIT (A) erred in deleting the addition made by the assessing officer u/s 56 (2) (viib) of the act without appreciating the facts that the matter of taxability cannot be decided on the basis of entries which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income u/s 56 (2) (viib) of the act. AO further noted that the assessee has made the valuation of the sale using discounted cash flow method. As the assessee has not earned any revenue for several assessment years and has incurred losses consistently, the AO asked the assessee to furnish the valuation of sale as per rule 11 U and 11 UA by using net asset method. He also asked assessee to substitute the actual figures of revenue for financial year 2012 13, 2013 14, and 2014 15 in the discounted cash flow method valuation. Assessee submitted valuation of share using net asset method which comes to Rs (-) 3241/-. Assessee did not submit the valuation of discounted cash flow method substituting the actual figures and therefore the learned assessing officer issued a notice asking assessee to justify the premium as the fair market value of the shares is negative as per net asset value method, as the discounted cash flow method is not reliable, which do not have any correlation with the actual affairs of the assessee. The assessee submitted a detailed reply that assessee is a start-up company set up by Mr. Rajeev Mehrotra who is having a strong background of investment banking invol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acy and completeness of the valuation and he has not conducted any independent audit, due diligence review or validation of such financial and other information. The valuer also categorically states that it did not express any opinion or any form of assurance thereon and it accepted no responsibility or liability and the share value has been derived and determined on the basis of information provided by the management. The learned assessing officer extracted such observation of the valuation report in his order. He therefore held that even as per the actual figures the valuation by the discounted cash flow method is negative. Accordingly, he made an addition of ₹ 69,000,000 to the total income of the assessee Under the provisions of Section 56 (2) (viib) of the act being the value exceeding the fair market value of the shares as according to him valuation of the share is in negative. 5. Accordingly assessment order was passed on 17th of March 2016 u/s 143 (3) of The Income Tax Act determining the total income of the assessee at ₹ 69,000,000/ . 6. The assessee aggrieved with the order of the learned assessing officer preferred an appeal before the learned CIT A w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e submitted that for this year, learned assessing officer has also followed the same logic and in fact relying on the order of assessment for assessment year 2012 13, disallowance has been made. He therefore submitted that the ground number 1 deserves to be dismissed. 11. Coming to the ground number 2 3, the learned authorised representative referred to the paper book containing 43 pages in the form of various replies submitted by the assessee during the course of assessment proceedings and further referred to paper book containing 15 judicial precedents. i. He referred to the valuation report dated 14th of March 2013 wherein the background of the company and the source of the information as well as the limitation and disclaimers were mentioned by the learned valuer and thereafter based on the discounted cash flow method, fair value of the equity shares of the company were determined at ₹ 75 per share. He referred to calculation as per discounted cash flow method for computation of the fair value of the shares and submitted that value as per the shares based on the Free cash flow is determined at ₹ 93 per share, however, discounted the same as assessee is bein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection do not apply. He further submitted that the fair market of the value of the shares shall l be the value as determined in accordance with the method as prescribed u/r 11 UA of the IT Rules or any method as may be substantiated by the assessee to the satisfaction of the assessing officer. However, it does not give any authority to the learned assessing officer to substitute the method of the valuation, himself value the shares by changing the method from discounted cash flow method to net asset value method, and then make an addition in the hands of the assessee company. v. He further submitted that the deviations of actual figures from the projected figures are not the ground for challenging the valuation report. The valuation must be viewed as on the date of valuation looking forward and cannot be reviewed in hindsight. For this proposition, he referred to the decision of honourable Bombay High Court in Securities and Exchange Board of India and Others (company application number 124 of 2013 in company scheme petition number 234 of 2011 and other connected matters). He extensively referred to the various propositions from that decision mentioned in paragraph number 44.6, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and limitations bound to be mentioned by an expert. He submitted that despite this the learned assessing officer has not questioned the working of the discounted cash flow of the assessee but has merely doubted in hindsight stating them to be imaginary. Thus, he is verifying the valuation report dated 14th of March 2013 in March 2016 and then saying that the figures adopted by the assessee for year 2014 and 2015 are imaginary. He therefore submitted that the learned CIT A has correctly deleted the addition made by the learned assessing officer. 12. We have carefully considered the rival contentions and perused the orders of the lower authority as well as perused the paper book filed by the assessee. 13. The ground number 1 and 2 is with respect to the disallowance deleted by the learned CIT A on account of business expenses and unabsorbed depreciation. We find that this issue is squarely covered in favour of the assessee by the decision of the coordinate bench in assessee s own case for assessment year 2012 13 in ITA number 5294/M/2017 dated 27th of March 2019. The learned assessing officer has also made the addition for this impugned assessment year based on his orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viib) of the act of the whole of the amount. The learned CIT A deleted the same. Provisions of Section 56 (2) (viib) of the act provides that where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be chargeable to tax as income in the hands of the company receiving such sum. Explanation to that subsection Section provides that Explanation. -For the purposes of this clause,- (a) the fair market value of the shares shall be the value- (i) as may be determined in accordance with such method as may be prescribed73; or (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher; 18. Thus, the fair market ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow method becomes redundant. For exercise of valuation, assumption made by the valuer and information available at the time of the valuation date are relevant. As the exercise of valuation must be viewed as on the date of the valuation looking forward and cannot be reviewed in retrospect. Further, the valuation is always made based on review of historical data and projected financial information provided by the management. Further report of expert will always include limitation and responsibilities but that does not make his report incorrect. Of course, if there are errors in the working of projected cash flow, estimating the projected revenue and projected expenditure as well as in adoption of cost of equity and discount factor, the learned assessing officer is within 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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