TMI Blog2023 (12) TMI 702X X X X Extracts X X X X X X X X Extracts X X X X ..... Method is essentially based on projections (estimations), the projections cannot be compared with the actuals so as to expect the same figures as were projected. Accordingly, the projections under DCF method have to be scrutinised with the facts and data available on the date of valuation and not by comparison with the actuals. In that view of the matter, variation between the projections and the actual results achieved cannot be the basis for disregarding/rejecting the valuation as per DCF method. It is apparent that there is no case of application of Section 56(2)(viib) to the facts of appellant's case where pre-existing unsecured loans of partners/shareholders were converted into equity shares at premium and the facts of assessment order do not indicate any case of tax abuse involved in such share conversion. Even the AO's decision to substitute DCF method of share valuation by NAV method is not in accordance with the Rule 11UA of IT. Rules. Accordingly, addition u/s. 56(2)(viib) of the Act is hereby deleted. PCIT has observed that the Assessee had stated in its Reply that the valuation report had already been supplied to the A.O. and the fair market value of each ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i Rohit Sharma, CIT-DR ORDER PER A.D.JAIN, VICE PRESIDENT This is assessee' s appeal for assessment year 2018-19 against the order dated 13.05.2022 passed by the ld. Commissioner of Income Tax (Appeals) NFAC, Delhi [in short the CIT(A)]. The following grounds have been taken 1. The Ld CIT (A) erred in deleting the addition of Rs. 202.50 Crores under the Head Income from Other Sources u/s 56(2)(viib) of the Act on account of excess amount per share paid as premium. 2. The Ld CIT (A) eared in holding that there is no case of application of Section 56(2)(viib) to the facts of appellant's case where pre-existing unsecured loans of partners/ shareholders were converted into equity shares at premium and the facts of the assessment order do not indicate any case of tax abuse involved in such share conversion. 3. The Ld CIT (A) erred in deleting the addition as the DCF (Discounted Cash Flow) valuation used by the assessee was done with fictitious figures having no correlation with actual affairs of the assessee company. 2. The brief facts of the case are that the assessee is an Indian company engaged in the business of generation and distribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of projection of financial statements, which is baseless, unsubstantiated and far removed from the actual business and financial realities of the assessee company. 5. The ld. DR has contended that there is considerable degree of divergence between the projected figures in the valuation report and actual figures reported in audited books of accounts of assessee. Specifically, the actual Profit before Taxes (PBT) is considerably less than the projected PBT; that the major component is decrease in finance costs which is impacting (increasing) the profit before taxes in the projected P L account; that In the projected P L account, figures of projected sales of primary energy are constant at Rs. 57.72 Cr. from F.Y. 2018-19 to 2028-29. It was further contended that there is no increase in projected production capacity as block of fixed assets remains at Rs. 631.20 Cr. from F.Y. 2017-18 To F.Y. 2028-29 therefore, the scale of business of company is constant throughout the projected tenure. 6. The ld. DR has further contended that Rule 11U and 11UA of the Rules give the assessee a choice to adopt any method between (A-L)*PV/PE method or DCF method; that there is no dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. DR further contended that the AO has correctly held that the need for valuation of shares has to be taken into account. It is stated by assessee that the assessee company was incorporated on 23/03/2017 and prior to that business was carried out in the status of partnership firm namely M/s. IA Energy which was constituted on 18/06/2010. On conversion of partnership firm into company, all the partners of the firm became shareholders. Later on, unsecured loan given by the erstwhile partners was converted into equity shares which were issued at a premium. Thus, at the outset the intent behind adopting the DCF valuation method is questionable, since shares were issued to existing partners of the assessee firm which was later on converted into a company. In this regard, reliance is placed on Hon'ble Supreme Court's decision In the case of McDowell and Co. Ltd. [1985] 154 ITR 148. As regards the decisions quoted by the assessee to justify that AO cannot preclude the assessee from adopting the valuation method of its choice, it is stated that this is a undecided legal issue which has not attained finality. Therefore, in absence of valid arguments by the assessee to justify the v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the following ways: (a) Value as determined in accordance with the method prescribed under sub-rule (2) of Rule 11UA of the Rules, which provides the assessee with an option to determine the f air market value of the unquoted shares, either by: - (a) NAV method prescribed therein: or (b) obtaining valuation certificate from merchant banker or accountant as per DCF method; b) Value as may be determined by any other method, which to the satisfaction of the assessing officer, reflects the fair value (considering all assets including intangible assets) of the unquoted shares. 11.2 It was submitted that in terms of the aforesaid Rule, the assessee has an option to determine the FMV of the unquoted shares either by (a) Net Asset Value Method ( NAV method ) prescribed therein; or (b) as determined by a merchant banker or accountant as per DCF method contending that no money/consideration was actually received by the assessee on conversion of loans to shares, after a conversion of the partnership firm of the assessee company, and that thereby, the provisions of Section 56(2)(viib) of the Act are not applicable. The ld. Counsel for the assessee has submitted that Section 56( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said provisions would not, in our respectful submission, apply in case of bona-fide transaction of conversion of existing loans, accepted as genuine in the year of receipt, to share capital, that, too, related to existing shareholders refer PCIT v. Cinestaan Entertainment Pvt Ltd. : ITA No. 1007/2019 (Del H Q ; Clearview Healthcare (P.) Ltd. v. ITO: 181 ITD 141 (Del Trib.); Vaani Estates (P.) Ltd. v. ITO: 172 ITD 629 (Chennai Trib.). 29. Further, Circular No.1/2011 dated 06 April, 2011 issued by the CBDT explaining the provision of section 56(2)(vii) of the Act specifically states that the section was inserted as a counter evasion mechanism to prevent money laundering of unaccounted income. In paragraph 13.4 thereof, it is stated that the intention was not to tax transactions carried out in the normal course of business or trade, the profit of which are taxable under the specific head of income . The said circular, it is respectfully submitted, further fortifies the contention of the assessee that the provision of section 56(2)(viib) of the Act arc not applicable on genuine business transaction without there being any evidence stating otherwise. 30. In view of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt to obtain report/certificate from a technical expert in support of the valuation of shares, such report/certificate, would be binding on the Assessing Officer. 14. Reliance has been placed on the following case laws : 1. Decision of the Hon'ble Supreme Court in Hindustan Lever Employees' Union v. Hindustan Lever Ltd.: 1995 AIR (SC) 470; 2. Decision of Delhi Bench of the Tribunal in Cinestaan Entertainment (P.) Ltd. v. ITO: 170 ITD 809 3. Affirmed by the jurisdictional Delhi High Court in PCIT v. Cinestaan Entertainment Pvt Ltd.: ITA No.1007/2019) 4. Urmin Marketing Pvt. Ltd. Vs DCIT (2020) 122 taxmann.com 40 (Ahd) 5. Pramila M Desai, HUF v. DCIT: ITA No. 04/Ahd/2012 (Ahd. Trib.) - affirmed by Gujarat High Court in [2014] 221 Taxman 158 6. CIT vs. Manjulabcn M. Unadkat: 229 Taxman 53 1 (Gujarat) 7. Shri Rajendra 11 Seth v. ACIT in ITA No. 1495/Ahd/2007 (Ahd. Trib.) Sosamma Paulosc vs. JOT: 79 TTJ 573 (Coch.) 8. Rameshwaram Strong Glass (P.) Ltd v. ITO: |2018| 172 ITD 571 (Jaipur) 14.1 So far as the action of the AO in substituting the method of valuation being allegedly beyond jurisdiction, the ld. Counsel for the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Ltd. v. ACIT [2019] 108 taxmann.com 490 (Chennai - Trib.); ACIT V. Subodh Menon 175 ITD 449 (Mumbai-Trib); Milk Mantra Dairy (P.) Ltd. v. DCIT: 196 ITD 333 (Kolkata-Trib.); DCIT v. Holisol Logistrics P. Ltd.: I TA No. 4361/Del/2018 (Del.); Narang Access Pvt. Ltd. V. DCIT: ITA No. 3521/Mum/20I8 (Mum.). 16. On the issue of variation between projections and actual results, alleging that there is no basis for the AO to discard the DCF method, the ld. Counsel for the assessee has contended that for application of DCF Method, the following factors are required to be ascertained to compute the value of business: (i) Explicit forecast period and projected cash (lows in the explicit forecast period; (ii) 'Appropriate discount rate to be applied to cash flows; (iii) Sustainable growth rate and terminal value after explicit forecast period. The forecasted results usually change because of some events and circumstances that do not occur as expected or are not anticipated; market conditions are changing rapidly due to fast changing technology and also due to changing Government policies. Actual results will, therefore, always differ from the forecast and sometimes the diffe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 20.04.2017 duly prepared in accordance with the prescribed DCF method is grossly erroneous and not sustainable. It is noted that the Assessing Officer has disregarded the valuation report to be bogus and sham for the following reasons: i. comparing the estimated profits taken for DCF with actual results for FY 2017-18, 2018-19 and 2019-20, the assessing officer observed that there is wide variance and thus the estimated results are not genuine; ii. the valuer has placed high degree of reliance on the details/ estimation of the management of the company. It was submitted that the observations and actions of the assessing officer arc baseless, contrafactual and not sustainable for the following reasons: 19. While no adverse inference has been drawn in respect of discounting factor and terminal value used by the valuer for valuation as per DCF method, the assessing officer has doubted the forecasted/ estimated profits used for valuation on the ground that the same are not corroborated by the actual financial results for few years, viz., FY 2017-18, 2018-19 and 2019-20. 20. In this regard, it is submitted that profit forecast necessarily depends upon subjective jud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken for projection. Gross block of fixed assets The fixed assets were almost erected.' installed; hence the value as shown in the books were taken for projection. Current assets Projected on the basis of current assets then available in the books of account In nut shell, the financial projections were made in March 2017 when the hydcl project was almost completed; hence the sources of fund and its application were projected considering the actual facts available with the assessee. Sale of primary energy Saleable primary energy is worked out on the basis of capacity utilization reduced by auxiliary consumption, transmission loss, free electricity to be given to Govt of Himachal Pradesh. The tariff of electricity has been taken on the basis of Power Purchase Agreement executed with Knowledge Infrastructure Private Limited. Other direct income : CER (Carbon credit) On the date of assumption, carbon credit was saleable and the Hydro Plants having capacity up to 50 MW were entitled. It was traded on the basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 months and commenced production only on 26.07.2017. The production was also disrupted for 30 days in August 2017 due to the river carrying silt into the turbine. Claim for the same had been lodged with insurance company which is enclosed herewith at page 91 of Paper Book; that for these reasons, the actual generation of electricity for F.Y. 2017-18 declined from projected units of 8,87,52,686 to 8,29,04.850 units resulting into lesser revenue receipt for 58,47,836 unit and in terms of projected rate amounting to Rs 2.48 crores. There was also decline in generation of electricity in F.Y. 2018-19 to the extent of 57,40,261 units (projected units 13,58,11,509 actual units 13,00,71,248) and in terms of projected rate lesser revenue by Rs. 2.44 crores; that due to many such unforeseen calamities , events beyond control, the financial results arc-greatly affected and thereby the actuals arc likely to differ from the projected financial forecast. It does not mean that the estimations arc fictitious and meant to suit the requirement of the assessee; that the assessee company was selling electricity to Chhattisgarh State Power Distribution Company Limited (CSPDCL) during 8t h July 2017 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee as fictitious and imaginary on the sole basis that actual results do not corroborate with the projected Financials, is contrafactual, illegal, bad in law and not sustainable. 25.2 As regard the observation of the assessing officer at para 4.3.1 and para 4.3.6 of assessment order with regard to some qualifying remark of the valuer relying on data provided by the management, it was submitted that such remarks / caveat by the valuer arc common and prevalent in the industry and can usually be found in all valuation reports; that the valuer is not an auditor and cannot, therefore, own the responsibility of accuracy of the projections furnished by the assessee seeking valuation. However, before using the data provided by the management, the valuer carries necessary exercise to determine reasonableness and consistency of the estimation. Thus, no adverse inference can be drawn from the fact that data provided by management of the company has been relied by the valuer. 25.3 It was submitted that the valuer in the present case has analysed and reviewed the data and found it to be consistent and reasonable. The valuer has categorically stated that there is nothing to indicate that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 216,59,31, 882/ - 2 Shri Bajrang Energy (P) Ltd. 21 % 2,10, 00, 000 38, 55, 12, 971/ - 3 Anand Goel 1 % 10,00, 000 0 4 Ashutosh Goel 1 % 10, 00, 000 0 5 Bajrang Goel 1 % 10, 00, 000 0 6 Pawan Goel 1 % 10, 00, 000 0 7 Sandeep Goel 1 % 10, 00, 000 0 27. The loans were originally given by the partners to the erstwhile firm pursuant to respective Loan Agreements. A copy of the Loan Agreement dated 01.07.2010, entered into with Shri Bajrang Ispat Power Ltd. and Shri Bajrang Energy (P) Ltd. has been appended at pages 37 to 46 of the assessee's Paper Book ( APB for short). Post conversion of the firm into the assessee company, fresh Loan Agreement dated 23.03.2017 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions and reasons for variation (reference pages 127- 143 of PB). A copy of the Show Cause Notice, issued to the assessee by the AO, incorporating the draft assessment order dated 22.03.2021, has been annexed at APB- 113-126 and a copy of the reply dated 08.04.2021 filed by the assessee in response to the said Show Cause Notice, is at APB-127-143. 28. The AO, however, for the reasons recorded in the assessment order, made addition of Rs. 202.50 Cr, invoking the provisions of Section 56(2)(viib) of the Act, which addition, the ld. CIT(A) has deleted. 29. The ld. CIT(A) while deleting the addition made by the AO, has observed as follows : Grounds of Appeal 2 to 6: Vide these grounds, the appellant has challenged the addition of Rs. 2,02,50,00,0007- u/s. 56(2)(viib) of the Act pertaining to the share capital issued to the two existing lenders to the predecessor firm which got converted into the company during the current assessment year. The opening balance of unsecured loans as on 01.04.2017 was converted into share capital as per agreement. In the assessment order, the AO has analyzed the valuation of shares by the appellant at Rs. 106 per share by DCF method an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... absence of any consideration received in the current assessment year, the provision of Section 56(2)(viib) was not applicable to the facts of the appellant's case. The provision of S.56(2)(viib) was reproduced for ready reference as under: (viib) 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: 12 Provided that this clause shall not apply where the consideration for issue of shares (ii) The appellant has referred to the objective behind provision of Section 56(2)(viib) introduced by Finance Act, 2012 by relying on the Budget Speech 2012 and contended that section was introduced as an anti-abuse provision to arrest circulation of unaccounted y in the economy. Reference to Hon'ble Supreme Court decision in the case of K.P. Verghese Vs. lTO, 131 ITR 597 was also made wherein the Hon'ble Apex Court held that the h of Finance Minister while Introducing Finance Bill, carries conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bai ITAT held that the Assessing Officer has no authority to pick and choose the valuation method and make addition as it was the assessee who has option to choose the method of valuation. (vi) Appellant contended that the AO cannot on his ipse dixit reject the valuation report of an expert and supported this contention by referring to relevant decisions of various Courts / tribunals. The appellant relied on the decision in the case of Urmin marketing Pvt Ltd 122 Taxmann.com 40 (Aha; wherein it was held that the valuation report prepared by technical expert cannot be disturbed by the AO without taking opinion of the technical person. (vii) The appellant contended that even the observations of the AO as regards variation in projected figures and actual figures were duly explained through detailed charts and reasonable assumptions made. After considering the AO's findings in the assessment order and appellant' submission, following facts emerge i) It is undisputed fact that the appellant did not receive any consideration for allotment of shares in the previous year relevant to current assessment year. The AO has not discussed this fact neither counte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that the AO is not authorized to pick and choose a particular method of valuation of share as the option is specifically given to the assessee as per Rule 11UA(2) of IT. Rules. The AO has power to verify the method of valuation adopted by the assessee but the same cannot be substituted by NAV method once the assessee has exercised option of DCF valuation method. In the case of Creditalpha Alternatives Investment Advisors Pvt. Ltd. (supra), the Hon'ble Mumbai Tribunal held that the AO can question the basic assumptions made by the valuer and if those are unreasonable, adjust the valuation so claimed at, but cannot substitute the method of valuation as discretion was given to the assessee. In the current case, I find that the AO has not found any specific error in the assumptions of projected figures neither adjusted the same with different valuation by the DCF method itself. Rather, the AO rejected DCF method and proceeded to value shares by NAV method merely on the ground that there was huge difference in projected figures and actual results available for some years. The Courts/tri decisions have held that the rejection of appellant's method of valuation is not permitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over and above fair market value of shares determined as pe r prescribed method under Rule 11UA. In the current facts of the case, the appellant did not receive any consideration in the current assessment year and the outstanding loans of existing partners of erstwhile firm was converted into the shares of the appellant company. Thus, prima facie, there is no justification for the AO to apply Section 56(2)(viib) of the Act in the appellant's case. The said consideration in the form of unsecured loans were received from the partner of the erstwhile firm in the year 2010 (as evidenced from loan agreement) and the AO could not bring out any material facts to show that such conversion of loans to equity shares was a ploy to defraud revenue of the tax on such transaction. In fact, the loans received in earlier years also got tested through scrutiny assessments completed for assessment year 2013-14, 2014-15, 2016-17 and 2017-18 in the case of the erstwhile firm. Thus, it can be concluded that the AO has not made out any case that the share conversion by the appellant led to defrauding revenue of its due taxes. Thus, firstly ,the amount is not received in the relevant previous year m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unals have held in the decisions referred by the appellant that there is bound to have difference in projected and actual figures and valuation method cannot be rejected on this ground. 30.3 In view of the above facts and discussion, it is apparent that there is no case of application of Section 56(2)(viib) to the facts of appellant's case where pre-existing unsecured loans of partners/shareholders were converted into equity shares at premium and the facts of assessment order do not indicate any case of tax abuse involved in such share conversion. Even the AO's decision to substitute DCF method of share valuation by NAV method is not in accordance with the Rule 11UA of IT. Rules. Accordingly, addition of Rs 202,50,00,0007- u/s. 56(2)(viib) of the Act is hereby deleted. 31. The grievance of the Department is that the addition of Rs. 202.50 Cr. Was correctly made by the AO under the head of income from other sources u/s 56(2)(viib) of the Act on account of excess amount per share paid as pre mium. 32. Let us see, if the conclusion arrived at by the CIT(A) is in accordance with law. For this, it has to be ascertained as to whether the valuation got done by the Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, based on the value of its tangible and intangible assets as on the date of issue of shares. 38. For ready reference, explanation (a) to section 56(2)(viib) is reproduced hereunder: 'Section 56(2)(viib)... 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 prescribed; 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;' 39. Rule 11U of the I.T. Rules, 1962 gives the meaning of expressions used in determination of fair market value of property other than immovable property for arriving at the income to the treated as income from other sources under section 56(2)(viib) of the I.T. Act. The portion thereof which is relevant for our present purposes is reproduced as under; '11U For the purpose of this rule and rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essable by any authority of the Government for the purpose of payment of stamp duty in respect of the immovable property; L= book value of liabilities shown in the balance sheet, but not including the following amounts, namely: (i) the paid-up capital in respect of equity shares; (ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company; (iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation; (iv) any amount representing provision for taxation, other than amount of income-tax paid, if any, less the amount of income-tax claimed as refund, if any, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto; (v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities; (vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lities, other than ascertained liabilities; (vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares; PE = total amount of paid up equity share capital as shown in the balance-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 as per the Discounted Free Cash Flow method. 42. It is evident from the fact that the Id. PCIT did not raise any challenge in this regard, that sub-clause (ii) of clause (a) of the Explanation to section 56(2)(viib) is not applicable to the case of the Assessee, and the Assessee was not required to satisfy the Assessing Officer about the valuation done. The fair market value of the shares was, therefore, essentially to be as per sub-clause(i) of clause (a) of the Explanation to section 56(2)(viib), i.e., the value to be determined in accordance with the method prescribed by rule 11UA(2) of the Income Tax Rules,1962. 43. On a query as to how, in the absence of anything evincible on the record in this regard, the Assessee maintains that the Id. PCIT has computed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... excess of the rate of Rs. 450/- per share had remained from being assessed at the hands of the Assessing Officer. The Id. PCIT, however, did not venture to elaborate as to how the determination of the fair market value of the shares, as arrived at Rs. 1.087/- per share by the Assessee, on the basis of the DCF Method and certified by the Assessee's Chartered Accountants, was not acceptable, remaining oblivious to the statutory mandatory option made available to the Assessee by the provisions of rule 11UA(2) of the Rules, laying down that the fair market value of unquoted shares shall be, as provided in the said rule, the value as determined either under clause (a), or clause (b) of the rule, that is, by invoking the Book Value (NAV) Method, or the Discounted Free Cash Flow (or DCF) Method, at the option of the Assessee. 46. That the above position is the correct position of law has been recognized in various decisions. Some such decisions are being discussed infra. 47. In 'Vodafone M-Pesa Ltd. Vs. PCIT', (2018) 101 CCH 230 (Bom.), demand was raised by the AO on account of fair market value of the shares which had been issued at a premium. The AO had, for the purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ket value of the unquoted shares of the Assessee came to Rs. 32.76 only, and the Assessee was entitled to charge premium of Rs. 2.27 lakhs L Rs. 32.76 (-) Rs. 10.00 = Rs. 22.76 x 10,000 shares], against which, the Assessee had charged premium of Rs. 84 lakhs; and that thus, the excess premium of Rs. 81.72 lakhs received by the Assessee was not justified and not in accordance with the amended provisions of section 56(2)(viib). The Id. CIT(A) partly confirmed the addition by rejecting the valuation done as per the DCF method. 47.2 The Tribunal observed that there was no dispute between the parties that rule 11UA(1) was not applicable to the facts and circumstances of the case; that rule 11UA(1) is a provision of general nature, whereas rule 11UA(2) is a specific rule providing for the valuation of unquoted shares; that the matter of valuation of unquoted equity shares has been left, by rule 11UA(2), completely to the discretion of the Assessee and it is his option whether to choose the NAV Method (Book Value) under clause (a), or the DCF Method under clause (b), and the Assessing Officer cannot adopt a method of his own choice: that the Authorities cannot compel the Assessee to ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.2018, given in the case of startup companies, is useful in the context of determination of fair market value of unquoted equity shares under section 56(2)(viib) read with rule 11UA(2), which Instruction states that though startup companies invariably submit valuation reports in accordance with rule 11lUA(2)(b). in the assessments, such reports are not being accepted and are being rejected / modified by the Assessing Officers, considering the same as based on abnormal valuations, which results in additions; and that the CBD T has, accordingly, directed not to take coercive measures in such cases for recovery of demand resulting in additions, and the Commissioners (Appeals) have been directed to dispose such appeals expeditiously. 47.7 It was also observed by the Tribunal that it appeared that the taxing Authorities had ignored Explanation (a) below section 56(2)(viib); that the said Explanation provides that the fair market value of the shares shall be the value - (i) as may be determined in accordance with such method as may be prescribed, i.e., under rule 11UA, or (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial wisdom cannot be questioned; that even the prescribed rule 11UA(2) does not give any power to the Assessing Officer to examine or substitute his own value in place of the value determined, nor does it require any satisfaction on the part of the Assessing Officer to tinker with such valuation; that section 56(viib) of the Income Tax Act is a deeming provision and one cannot expand the meaning or scope of any word while interpreting such a deeming provision; that if the statute provides that the valuation has to be done as per the prescribed method, and one of the prescribed methods has been adopted by the Assessee, then the Assessing Officer has to accept the same and even in case he is not satisfied, he cannot do otherwise, as there is no express provision under the Act or the Rules, whereunder the Assessing Officer can adopt his own valuation, or get it done by some different valuer ; that there has to be some enabling provision under the Rules or the Act, giving power to the Assessing Officer to tinker with the valuation report obtained from an independent valuer, as per the qualification given in rule 11UA; that such a provision is absent; and that in any case, if the law pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per prescribed methodology; that the Appellant- Revenue had the option to conduct its own valuation and to determine the fair market value on the basis of either the DCF Method, or the NAV Method; that the Respondent-Assessee, being a start-up company, had adopted the DCF Method to value its shares; that this had been carried out on the basis of information and material available on the date of valuation and projection of future revenue; and that there was no dispute that the method adopted by the Assessee had been done applying a recognised and accepted method. 49. In 'DCIM Vs. Ozoneland Agro Pvt. Ltd.' vide order dated 2.5.2018, passed for assessment year 2013-14, in ITA No. 4854/Mum/2016, the Mumbai Tribunal held that section 56 allows the Assessees to adopt one of the methods of their choice; that however, the Assessing Officer held that the Assessee should have adopted only one method for determining the value of the shares; that it was beyond the jurisdiction of the Assessing Officer to insist upon a particular system, especially when the Act allows to choose one of the two methods; that unless and until the legislature amends the provisions of the Act and prescrib ..... X X X X Extracts X X X X X X X X Extracts X X X X
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