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TMI Blog2022 (3) TMI 208X X X X Extracts X X X X X X X X Extracts X X X X ..... ific Rule 11UA(2) of Income-tax Rules could not be disregarded or rejected by the AO particularly when Explanation (a)(i) to section 56(2)(viib) does not speak of any satisfaction of the AO. 3. That without prejudice to Ground No. 2 above, the authorities below could not have rejected the valuation report of Chartered Accountant Valuer/independent expert is filed by the Appellant and hence such action of the authorities below was unjust and illegal." 3. During the financial year relevant to the Assessment year under assessment, the assessee company was engaged in the business of IT related services. 4. During the Course of assessment proceedings, the AO is noticed that the assessee company has allotted equity shares of face value of Rs. 10/- each as per chart given below to M/s Tangerine Digital Entertainment Pvt. Ltd. which is a closely held company of the assessee company: Date of allotment No. of shares Face value Security premium Fare value as per valuati Issue price per share Excess price for 56(2)(viib) 01-05-2014 2262 22,620 139,77,3 6189 6,189 NA 23-02-2015 600 6,000 49,94,00 8328 8,333 NA 30-03-2015 518 5,180 43,13,47 8328 8,337 NA Total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d cash flow (DCF) is a valuation method used to estimate the attractiveness of an investment opportunity. DCF analysis uses future free cash flow projections and discounts them to arrive at a present value estimate, which is used to evaluate the potential for investment. The excess cash is used to expand production, develop new products, make acquisitions, pay dividends and reduce debt. Specifically, FCF is calculated as: EBIT (1-tax rate) + (depreciation) + (amortization) - (change in net working capital) - (capital expenditure).In finance, discounted cash flow (DCF) analysis is a method of valuing a project, company, or asset using the concepts of the time value of money. All future cash flows are estimated and discounted by using cost of capital to give their present values (PVs). The discount rate is the rate of return used in a discounted cash flow analysis to determine the present value of future cash flows and the assessee has failed to prove the basis of discounted rate used. In a discounted cash flow analysis, the sum of all future cash flows (C) over some holding period (N), is discounted back to the present using a rate of return (r) and the assessee has failed to prove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... strong impact on the cost of equity which can influence the valuation of the shares. * While computing the Weighted Average Cost of Capital in the valuation report, the cost of debt is considered and a debt equity ratio of 30:70 has been taken for which no basis has been provided. * The Valuation Report has taken a growth rate of 3% for calculating the terminal value of business and no basis has been provided for the same. * The computation of free cash flows and the assumptions underlying the same have also not been explained in the report. * The value and has mentioned that on the financial statement and other data pertaining to the company had been provided by the management of the company and had been accepted and relied upon by the valuer without further verification including nonconformity or conformity with the generally accepted accounting principles and/or other guidelines established by the regulatory bodies. The valuer has also stated that reported facts, comments, estimates, opinions and statistical information in the valuation exercise had been obtained from sources believed to be accurate and reliable and no liability was assumed for the content or accuracy o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g buyer would expect to receive from an investment to compensate the inherent risks involved and for the time value of money. The cost of equity is calculated on the basis of Capital Asset Pricing Model (CAPM). Cost of Equity = Risk free rate + [Beta *(Market risk premium)] * Risk free rate is considered as 4 percent and market risk, premium is considered to be 7.1 percent. * Beta has been estimated at 1.23 based on our understanding of the business risk in the similar industries. On the above basis the cost of equity is arrived as follows: Cost of Equity=4 Percent +(1.23 * 7.1 percent) = 12.73 percent Further, as the privately held shares are not traded in public, the shares of these companies are not generally as liquid as those of public companies. The last of marketability increases the cost of equity also by another 1.7 percent accordingly the Cost of Equity-becomes 14.4 percent. Weighted Average cost of Capital - The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. The WACC is calculated taking into account the relative weights of each components of the capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by others, including all information and representations provided by the management. 3. No attempt has been made to verify and audit the estimates and assumptions made by the management of the company. 4. The valuation of the company is been done solely at the request of the management and in our opinion may be considered as fair value for the purpose of fair valuation under section 56 of the Income Tax Act,1961." 15. In this background, the rationale of the Assessing Officer and the figures adopted by the AO while making the disallowance is examined. The same are as under: EBITDA 13-14 14-15 15-16 16-17 17-18 Actual Profit/Loss as reported in ITR/Final Accounts Not reported 3.7 cr. 6.8 cr. 8.4 cr. 10.1cr. -33.54 lacs 95.94lacs 4.06 cr. ------ 16. The AO computed the EBITDA with actual profit in the ITR. The correct figures to be used for comparison are as under: Particulars 2013-14 2014-15 2015-16 2016-17 Sales 13 28 59 92 Expenses (Excluding Depreciation, Interest & Tax) 12 26 58 85 EBITDA 0 2 2 7 As per Valuation Certificate 4 7 8 10 17. Further, we have also gone thr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cally provided that valuation is to be substantiated to the satisfaction of the AO, there is no such provision specified therein in Explanation (a) (i) of section 56(2)(viib) as opted for by the assessee for substantiating its valuation to the satisfaction of the AO. Hence, on the facts of assessee's case, the AO was not empowered to disregard the DCF valuation as carried out by the valuer and such action of the authorities below of rejecting such valuation report cannot be upheld. (Rameshwaram Strong Glass P Ltd., ITAT Jaipur) 23. The AO was not able to pinpoint any specific inaccuracies or short comings in the DCF valuation report of the Chartered Accountant/Valuer other than stating that year-wise results as projected are not matching with the actual results declared in the final accounts. Before the ld. CIT(A), reasons for variation between projected and actuals were duly explained. The ld. CIT(A) has accepted such explanation but rejected the DCF valuation report as submitted by the assessee. Accordingly, in the absence of any defect in the valuation of shares arrived by the assessee on the basis of DCF method, impugned addition as made on the basis of net asset value metho ..... X X X X Extracts X X X X X X X X Extracts X X X X
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