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TMI Blog2023 (12) TMI 1302X X X X Extracts X X X X X X X X Extracts X X X X ..... of Income Tax Department and merger of erstwhile Circle - 16(2), Hyderabad with Circle - 5(1), Hyderabad, the appeal could not be filed on or before the due date. The appeal is being filed now with a delay of 125 days. Hence, it is requested that the delay in filing the appeal may kindly be condoned and appeal may kindly be admitted." 2.1. On the other hand, ld.AR reported no objection. 2.2. We have heard both the parties on this preliminary issue. There is no dispute that under section 253(5) of the Act, the Tribunal may admit an appeal filed beyond the period of limitation where it is satisfied that there exists a sufficient cause on the part of the assessee / Revenue for not presenting the appeal within the prescribed time. The moot point is as to whether such a long delay deserves condonation. In the letter Revenue has mentioned that it was failed to appear due to Covid - Pandemic situations prevailing in the country. At this stage, it is relevant to note the judgment of the Hon'ble Bombay High Court in Vijay Vishin Meghani Vs. DCIT & Anr (2017) 398 ITR 250 (Bom) holding that none should be deprived of an adjudication on merits unless it is found that the litigant deliberate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in share premium along with confirmation from the investors, ITRs, bank statements reflecting the transactions, MoUs, Shares Valuation Report etc vide show cause notice dt.04.12.2019. In response, assessee company filed the documents as called for. Thereafter, Assessing Officer also issued show notice dt.13.12.2019 questioning as to why DCF method adopted should not be rejected. The contentions of the assessee company are examined and found untenable by the Assessing Officer as he found that the assessee Company has issued 35,00,000 shares of face value of Rs 10/- at the price of Rs19.90 per share thus receiving share premium of Rs. 3,46,50,000/-. Hence, the AO rejected the DCF method opted by the assessee. The AO used the NAV method and computed the fair market value of the share of the Company as Rs 10.87/-. Thus, the AO concluded that provisions of section 56(2)(viib) are attracted and he assessed the excess share premium of Rs.3,16,05,000/- received by the assessee company as its income from other sources. The AO also found that the employees' contribution to ESI of Rs 18,79,427/- were deposited after the due date and therefore, added the same as income of the assessee com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arding macro-economic conditions, technological factors, government policies, state of competition, demand factors, supply of raw materials, efficiency of the management etc. How close a projection comes to actual performance is dependent on various factors and a DCF valuation cannot be merely rejected based on the observation that projections were below actuals. In the appellant's case, the AO has failed to point out any outlandish assumption made by the valuer in the DCF computation which has given an absurd DCF value far removed from the FMV of the share. The AO has relied on the decision of Hon'ble ITAT, Delhi in case of Agro Portfolio Private Ltd vs. ITO, ITS-7311-ITAT- 2018(Delhi)-O] wherein it was held that in case the valuation under DCF is done on the projections provided by the Company management and the valuer who is doing the DCF valuation has categorically mentioned in the report as a disclaimer that the truthfulness, accuracy and completeness of the information and financial data has been provided by the Company and the valuer has relied on the same, the assessing officer can reject the DCF method and go by NAV method to determine the FMV of the shares. Howeve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the correct fair market of the lands owned by a Company. In the instant case, the appellant Company was running a manufacturing facility at IDA Balanagar, Hyderabad, and a new plant was constructed in 2015 in 25 acres of land at Toopran which is approximately 35 kms from Hyderabad. The circle rates of these areas were revised upwards in the FY 2016-17 itself by the Sub-Registrar Office. In addition, the appellant Company has since the year 2002, when it launched its brand name `Teja', invested significantly in the development of a brand name and the value of the intangible asset thus created is not included in the balance sheet at all. Hence, the price at which the Company agrees to issue its shares to the equity investor is a decision based on numerous factors and the NAV method of computation is too simple a mathematical formula to cover all relevant concerns of a prudent business decision-maker. Therefore, the use of NAV method for valuing the share equity of the appellant Company was correctly found unsuitable by the appellant Company. The AO while computing the NAV of the shares of the appellant Company would have failed to do anything to overcome the above-mentioned limit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the I.T. Act. 5. While granting relief to the assessee, Ld. CIT(A) at Para-5.1 erred in holding that addition u/s 56(2)(viib) is not sustainable unless the AO establishes that the share premium received by the assessee was out of its own unaccounted money which was laundered and received back by it in form of share premium. 6. The department submits that the requirement to establish that the share premium was out of unaccounted money is nowhere stipulated in the Finance Bill, 2012. 7. A requirement on the AO, during the course of scrutiny, to first prove the existence of unaccounted money, and then only go on to apply provisions of Section 56(2)(viib), will only render the statute inoperative, futile and defunct. 8. The department prays to draw the attention of the Hon'ble ITAT to the ratio laid down by the Hon'ble Supreme Court in H.S. Vankani vs. the state of Gujarat, wherein the Hon'ble Court noted that: "It is a well-settled principle of interpretation of statutes that construction should not be put on a statutory provision that would lead to manifest absurdity, futility, palpable injustice, and absurd inconvenience or anomaly." 9. The department submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions from actuals raises pertinent questions with regard to the assumptions made by the valuer and representations made by the management, on basis of which the projections were arrived at. 10. The department prays to draw the attention of the Hon'ble Bench to Pg. 13 of the material paper book, where the valuer states that: Assumptions for valuation 1. The Turnover of the company considered based on the Expected Market Prices as per available information with the company." "Future Projections We have made the future projections for a period of 5 years from 2016 based on through discussions with the management of the MLR Auto Limited. We have not carried out any feasibility study on the projects to substantiate these projections. We do not give any assurance on the achievability of these projections." 11. Further on Pg-14 material paper book, the valuer goes on to say that: "In analysing information provided to us by the management, we have not carried out any tests to establish the accuracy of the statements and information provided by them. The statements and opinions included in this report are given in good faith and in the belief that such statements and opini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ils miserably in establishing the reasonableness and fairness of share valuation and hence ought to be rejected. III. On decision of Hon'ble ITAT, Delhi Bench in case of Agro Portfolio vs. ITO. 1. The department submits that the AO at Para-3.1 of his order, had placed strong reliance on the judgement in case of M/s Agro Portfolio vs. ITO, wherein the Hon'ble Bench had upheld the stance of the AO in rejecting the valuation based on DCF and re-computing the FMV using NAV method. 2. The department prays to draw the attention of the Hon'ble Bench to the similarities between the instant case and the case of M/s Agro Portfolio vs. ITO: * No independent enquiry caused to verify the truth or otherwise for the figures furnished by the assessee. * No evidences furnished to substantiate the basis of projections in cash flow * No reasonable connectivity between the projections and reality evidenced by material. * The valuer solely relied upon assumptions without independent verification with regards to the truthfulness, accuracy and completeness of information and financial data provided by the company. * The valuer did not do anything reflecting their expertise, e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port prepared by the auditor, was not in accordance with the law and he has drawn our attention to the valuation report dt.01.07.2016, which is to the following effect : "Valuation of equity shares : Selection of Valuation Methodology It is our opinion that the DCF approach would be an extremely appropriate valuation methodology for the Auto and Motor Industry as it captures the revenue streams based on the actual output and hence revenue streams of the company and linked costs (both variable and fixed) taking into consideration the future estimated demand and prices. Further, the project is under implementation and yet to commence commercial operations, we have adopted discounted cash flow method for the valuations of shares of M.L.R. Auto Limited. Future projections: We have projected the revenue streams and cash flow requirements for the purpose of the valuation 6 years Projections considered based on in-depth and thorough research with the company. * Discussions with the management of MLR Auto Limited. * Publicly available prices for raw material and demand supply position of power generation industry and market research on the outlook of the industry." 11. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irical data of the industry or growth trend of the assessee was considered. * Report was based on prices for raw material, demand and supply position of power generation industry and comparable industry, industrial growth that was examined by the auditor. 14. Therefore, in the absence of these data, it is not possible to accept the valuation report prepared by the assessee. It was submitted that the Assessing Officer rightly rejected the valuation report prepared by the assessee. Once the Assessing Officer rejected the valuation report prepared by the assessee, then the only option left with the Assessing Officer was to follow the NAV method as per 11U r.w. 11UA. The ld. DR submitted that the appeal of the revenue is required to be allowed. 14.1 Per contra, ld. AR has drawn our attention to the order passed by the ld.CIT(A). It was submitted that the ld.CIT(A) has rightly held that as per the scheme of the Act, the assessee was given the option to do valuation either by DCF method or NAV method. Once the assessee has opted for DCF method then the revenue authorities have no authority to twinkle or challenge the method applied by the assessee. In fact, in the present case, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, was issued and served on the Respondent. In response to notices issued by the learned Assessing Officer, the Respondent submitted information and explanation through ITBA portal. 3. After examining the information and details furnished by the Respondent, the learned Assessing Officer completed the assessment and .passed the order under Particulars Amount (Rs.) Returned income NIL Additions i) Excess premium treated as income from other sources u/s 56(2)(viib) of the Act. 3,16,05,000 ii) Employee PF Contribution disallowed u/s 2(24)(x) of the Act 18,79,427 Total additions 3,34,84,427 Losses of current year to be carried forward (14,32,93,314) Loss assessed (10,98,08,887) 4. The Respondent aggrieved by the order of the learned Assessing Officer preferred an appeal before the Honorable Commissioner of Income-tax (Appeals) - 4, Hyderabad, (hereinafter referred to as Honorable CIT(A)'s). The Honorable CIT(A)'s, partly allowed the appeal preferred by the Respondent and disposed of the order vide Appeal No. 10650/19-20/DCIT, Cir-16[2]/CIT[Aj-4/Hyd/20-21, dated 14/08/2020. 5. Aggrieved by the order passed by the Honorable CIT(A)'s, Revenue has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e value of share at Rs. 10.18/- per share. The difference in the value of Rs. 9.03/7 (i.e.) Rs. 19.90 - Rs. 10.87/-, was charged by the learned assessing officer as income under the head other sources by invoking the provisions of section 56[2][viib] of the Act. The learned Assessing Officer justified-the, disallowance. by observing that: "The contentions of the assessee company are examined and found- untenable as the DCF method it has adopted is quite unrealistic and inapplicable to the terms and provisions of the Income 'Tax Act and Rules, the same can be envisaged from the working results of .sales it has projected for future years as already discussed above. Hence, I deem fit to discard the DCF method adopted by, the assessee company as per Explanation (a),(ii) to section 56(2)(viib) on the grounds ,that the method is totally impracticable, inapplicable, unreliable and unrealistic to the present case basing on the ground reality of its financial and that , the assessee-Company has presently incurred losses. Accordingly, the FMV has to be calculated as per the provisions of Section 56(2)(viib) of the Act read with Rule 11UA(2)." (Emphasis Supplied) 7.4 'The learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has discarded the valuation report of, the - Chartered Accountant mainly On the ground that valuation of the equity, shares carried out by the Responded was based on projection of revenue which did not match With the actual-revenues of the subsequent years. The learned Assessing Officer further held that the Respondent could not provide any satisfactory explanation for allowing excess share premium received under the year consideration over and above the FMV other than submitting the certificate issued by the Chartered Accountant. 7.8 The learned Assessing Officer is trying to evaluate the accuracy of the valuation at the time of assessment, this is hot proper and also the factual is based on so many facts subsequent to adoption of projections and valuation. 7.9 The Respondent had submitted before the learned Assessing Officer all the details of the shares issued such as confirmation, information and documents pertaining to transaction, of issuance of shares. The investors made the investment after they have gone by the projections and satisfied with the potentials and credentials of future growth of the Respondent company, based on the potentials and credentials the investors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es as determined in the following manner under clause (a) or clause (b) at the option of the assessee, namely:- (a)......... (b) the fair market value of the unquoted equity shares determined by a merchant banker or an accountant as per the Discounted Free Cash Flow method.] 7.13. Section 56[2][viib] of the Act, is a deeming provision and one cannot expand the meaning of scope of any word while interpreting such deeming provision. The statute provides that the valuation has to be done as per the prescribed method and if one of the 'prescribed methods has been adopted by the Respondent, then the learned Assessing Officer has to accept the same, and in a case he is not satisfied, then there is no express. Provision under the Act or Rules, where the learned Assessing Officer can adopt his own valuation. There has to be some enabling provision under the Rule or the Act where the learned Assessing Officer has been given a power to tinker with the valuation report obtained from anindependent valuer as per the qualification given in the Rule 11U. 7.14 In the Respondents case, the learned Assessing Officer has disapproved the DCF method and rejected by comparing the projections ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce with Rute,11UA(a) of the Income Tax Rules, 1962 and no fault has been found in the method applied by the assessee and the lower authorities .have made the addition under section 56(2)(viib) purely on presumptions and surmises. Therefore, in my considered opinion, Such action of the .lower authorities, being not in accordance with law is unsustainable I, therefore; set' aside the order. of the Commissioner (Appeals) and direct the assessing, officer to delete the addition. The grounds raised by the assessee are accordingly allowed. 18. In the result, the appeal filed by the assessees is allowed." (Emphasis Supplied) 7.18 Reliance is. placed on the judgment of the Honorable Income Tax-Appellate Tribunal, Mumbai Bench, in the case of Vodafone MPese Limited Vs. DCIT [2020] 181 ITD 242, where it was held that: "20. Corning to the findings of. learned Commissioner (Appeals), We notice that learned Commissioner (Appeals) has accepted the DCF method adopted by the assessee and he analyzed the factual performance of the assessee subsequent to issue of shares. The valuation of shares are for that matter any Valuation is itself is a projection of future events or activitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where, there is no commencement of production or of the business, does not mean that its share cannot command any premium. 'For such cases, the concept of startup is a good example and as submitted, the Income Tax Act has also recognized and is encouraging the startups for which, a separate deduction under section 80IAC has been provided." (Emphasis Supplied). 7.20 Reliance is placed on the judgment of the Honorable jurisdictional Tribunal in the case of DQ (International) Ltd. Vs. 'ACTT 2016 Tax Pub (DT) 3650, where it was held that: "10. In our considered view, for valuation of an intangible asset, only the future projections along can be adopted and such valuation cannot be reviewed with actuals after 3 or 4 years down the line. Accordingly, the grounds raised by the assessee are allowed." (Emphasis Supplied) 7.21 It is further submitted that the Respondent had during the impugned assessment year 2017-18 issued 35,00,000 shares of face value of Rs.10/- at Rs.19.90/- per share which include premium of Rs.9.90/- per share. The fair market value as per valuation in accordance with Rule 11UA(2)(b) was Rs.19.90/- per share and the Respondent had issued shares at Rs.19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted / purchased on 30/06/2011, for a total consideration of Rs. 2,87,48,985/-, the fair market value as per the Government circle, rate is Rs.5,000/- per square meter the total cost of land came to Rs.50.58 crores and, therefore, the value per share comes to Rs.25.16, the details of which are tabulated as under: Particulars Amount in (Rs.) FMV of the assessment (land at Toopran) 50,58,55,000 Other assets 69,18,62,249 Total assets 119,77,17,249 Total liabilities 31,27,16,662 Net assets 88,20,01,587 Equity Shares 3,65,00,000 Value of shares 24.16 7.24 The Respondent further submits that as against the fair market value of shares' at Rs. 24.16 per share, the respondent has issued the shares at Rs. 19.90 per share, Which 'include share value at par of Rs. 10/- per Share and a premium of Rs. 9.9.0 per share. Therefore, no addition under section 56[2][viib] Of the Act, is called for. The Explanation to provisions of section 56[2][viib] reads as under:- "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 su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per the book value., 7.28 It is humbly submitted that the substantiation of the fair market value of the shares has to be first decided on the basis of the valuation done by the Appellant; and it cannot foe decided from the lens of section 11.11A which can be applied in case subclause [1] has been exercised, It has been held that fair market value can be determined in either of the two manners whichever is higher so as 'to demonstrate that the value of shares does 'not exceed the fair market value and then the learned Assessing Officer cannot insist upon to follow-only one particular method. 7.29 Reliance is placed on the judgment of the 'Honorable Income Tax Appellate Tribunal, Delhi bench, in the case of M/s. India Convention and Cultural Centre Private Limited Vs ITO in ITA No. 7262/Del/2017, dated 27/09/2019, where it was held that: "We, therefore, find merit in the argument of the Id. counsel for the assessee that the valuation of the shares should be made on the basis of various factors and not merely on the basis of financials and the 'substantiation of the fair market value on the basis of the valuation done by the assessee simply cannot be rejecte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than the fair market value derived by NAV method, hence, the addition of Rs. 3,16,05,000/-, by invoking the provisions of section 56[2][viib] of the Act, is bad in law and needs to be deleted. 9. The appellant craves leave of this Hon'ble Tribunal to file the details and -documents in .support of the case of the appellant at the time of hearing of the appeal by this Hon'ble Tribunal in the interest of justice and equity." 16. In support of the case of assessee, the ld. AR has relied on the following decisions : 1. Mantram Commodities (P) Ltd Vs. ITO - (2021) 188 ITD 687. 2. Vodafone M-Pese Limited Vs. DCIT - (2020) 181 ITD 242. 3. Rameshwaram Strong Glass Private Limited Vs. ITO - 2018 Tax Pub (DT) 5780 (Jaipur Tribunal) 4. DQ (International) Ltd. Vs. ACIT - 2016 TaxPub (DT) 3650. 5. ITO Vs. Ashoka Industries Limited - (2020) 185 ITD 629. 6. India Convention and Cultural Centre Private Limited Vs. ITO (ITA No.7262/Del/2017) 17. We have heard the rival submissions and perused the material on record. The present case determines the FMV of the shares issued to the assessee. The relevant provision of section 56(2)(viib) and Rule 11U and 11UA of Income Tax Rules ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of valuation, (in the present case DCF method), then it is the duty of the Assessing Officer / ld.CIT(A) to scrutinize the valuation report within the four corners or parameters laid down while making the valuation report under DCF method only. It is not permissible for the Assessing Officer to reject the method opted by the assessee and apply a different method of valuation and the Assessing Officer can definitely reject the valuation report but not the method. In case, the AO rejected the valuation report, then the AO has to carry out a fresh valuation report by applying the same valuation method and determine the fair market value of the unquoted shares. 18. Therefore, in our view, the Assessing Officer was incorrect in concluding that the DCF method is "quite unrealistic and inapplicable" to the terms of the Income Tax Act. On the contrary, the DCF method is quite applicable and was required to be applied by the Assessing Officer to determine the FMV of the unquoted shares. Our above conclusion is based on the bare reading of the provisions reproduced hereinabove and also on account of the decision referred by the Tribunal in the case of Innoviti Payment Solutions Pvt. Ltd. V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se value' may be suitably modified for the special purpose for which the valuation is done. The factors affecting that value with reference to the special purpose must be judged and brought into final assessment in a sound arid reasonable manner. 1.4 Valuation, being a complex subject, is limited to experts and is surrounded by a number of myths. Some of the very common generalities about valuation are discussed below: (a) Valuation models are quantitative and focus on earnings, assets, etc. However, it does not necessarily imply that valuation is free from the subjectivity and bias of a valuer. The fact is that valuation models are driven by the inputs that are prone to subjective judgments and the bias of a valuer. For instance, a target company may typically tend to overvalue itself while valuing. (b) Valuation is riddled with a commonplace notion that a detailed valuation exercise will provide a precise estimate of value. The truth is that any valuation is as good as its underlying assumptions, which, in turn, are the function of a number of present arid forward-looking factors. A careful valuation exercise, at best, can give an indicative range of value subject to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther techniques/approaches since it is based on cash flows rather than accounting profits. (d) It is appropriate for valuing green-field or start-up projects, as these projects have little or no asset base or earnings which render the net asset or multiple approaches inappropriate. However, it is important that valuation must recognise the additional risks in such a case (e.g. project execution risk, lack of past track record, etc.) by using an appropriate discount rate. 2.8 Though the Discounted Cash Flow model is one of the widely used models for valuation because of its inherent benefits, it still has its share of drawbacks. Major shortcomings of this model are as follows: (a) It is only as good as its input assumptions. Following the "garbage in, garbage out" principle, if the inputs - Cash Flow Projections, Discount Rate, and Terminal Value - are wide off the mark, then the value generated by using this model does not reflect the fair value. (b) It does not take into account several other factors, such as investment risk associated with opportunity cost, i.e. investments that could return greater cash flow yields would add an unrealised element of risk, unforeseen vari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ust be undertaken before a valuer accepts management's claims that in future the company will earn profits. If necessary, reports of technical or other consultants should be called for. (f) In case of companies witnessing cyclical fluctuations, care should be taken to select the forecast period, which should necessarily cover the entire business cycle of a company. (g) Effects of change in the policy of the company may be taken into account if such changes are known in advance and the effects are capable of being quantified. Changes in the utilisation of the productive capacity, changes in the organisational set-up, changes in the product-mix, changes in the financing policy are some examples of the situation that may have to be faced by a valuer. Their treatment in the projection of future profits will depend entirely upon the effect which in the opinion of the valuer, such changes will have on such future profits. (h) An appropriate allowance must be made for capital expenditure in projections. They should not include capital expenditure only for capacity expansion or growth but also for maintenance of the existing capacity. (i) Working capital requirement forms anoth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... project-specific risks. (c) The rate estimated by using the above will provide the discount rate, assuming only equity financing or the cost of equity. For a leveraged company, discount rate should be adjusted for leveraging. Practically speaking, discount rate for a leveraged company is the weighted average cost of capital with appropriate weightages to cost of equity and post-tax cost of debt, considering existing or targeted debt-equity ratio, industry standards and other parameters. (d) In the case of a company carrying on two or more different businesses, their cash flow projections should be estimated separately, and apply the discount rates appropriate to the individual businesses. Terminal Value 2.12 Since a business is valued as a going concern, its value should account for the cash flows over the entire life of a company, which can be assumed to be infinite. Because the cash flows are estimated only for the forecast period, a terminal value is estimated to reflect the value of the cash flows arising after the forecast period. Terminal value can be computed in a number of ways; some prominent ones are discussed below: (a) Perpetual growth model assumes that a bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ditions, etc. (b) The caliber of managerial personnel A business managed by professional managers allied to people with similar ability would command a premium when compared to another which is crucially dependent for its success on a single executive, however outstanding he might be. (c) Prospects of expansion A case in point would be that of ancillary small-scale units, which have the potential for growth as they can supply inputs to large companies that are dependent on their products. (d) Competition A business may prosper when nurtured under sheltered circumstances (e.g. import restrictions), but may flounder under 'open market' conditions. (e) Government policy Government policy in general and in relation to particular industry (as with restriction or banning of manufacture of alcohol in the case of alcohol based chemical industries). (f) Prevailing political climate Political climate in an area can affect the prosperity of a business, e.g. tourism trade is directly affected due to breakdown in the law and order situation in a state. (g) Risk of obsolescence of items manufactured In case the products manufactured by an enterprise face a higher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... included in the report are: (i) Discussion on the financial projections of a company, highlighting main assumptions and management representations. (ii) Discussion on discount rate, growth rate used for computing terminal value considered in the valuation, including the methodology for arriving at the discount rate, sources of information, etc. (iii) Any adjustment on account of accumulated losses/unabsorbed depreciation. (iv) Any adjustment for valuing a controlling or minority stake, discount for illiquidity, etc. (v) Brief analysis of the peer set companies used in relative valuation. (vi) Adjustments to the multiples based on the peer set company, including rationale for the same. (vii) Details of the surplus assets and treatment thereof in the valuation. (viii) Any other special factors, such as government subsidy, tax breaks, etc. (h) Fair Value This paragraph should deal with the valuation of shares on the basis of discussion in the preceding part of the Report (and in case of amalgamation, also the exchange ratio). This paragraph should also offer justification for the approaches actually adopted. It could also deal with the justification of adjustments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;ble apex court rendered in the case of Bharat earth Movers v. CIT [2000] 112 Taxman 61/245 ITR 428 and in the case of Rotork Controls India (P.) Ltd. v. CIT [2009] 180 Taxman 422/314 ITR 62. In the first case, the issue in dispute was regarding estimation of future liability of leave encashment and it was held by Hon'ble apex court in this case that the liability should be capable of being estimated with reasonable certainty though the actual quantification may not be possible. It was held that if this is satisfied than the liability is not a contingent liability. In the second case, the issue in dispute was about provision of warranty expenses to be incurred in future. Para 10 of this judgment is very relevant and therefore, it is reproduced herein below:- "10. What is a provision ? This is the question which needs to be answered. A provision is a liability which can be measured only by using a substantial degree of estimation. A provision is recognized when : (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation; and (c) a reliable estimate can be made of the amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ethod to determine the fair market value of shares has to be done/adopted at the Assessee's option. Nevertheless, he does not deal with the change in the method of valuation by the Assessing Officer which has resulted in the demand. There is certainly no immunity from scrutiny of the valuation report submitted by the Assessee. Therefore, the Assessing Officer is undoubtedly entitled to scrutinise the valuation report and determine a fresh valuation either by himself or by calling for a final determination from an independent valuer to confront the petitioner. However, the basis has to be the DCF Method and it is not open to him to change the method of valuation which has been opted for by the Assessee. If Mr. Mohanty is correct in his submission that a part of demand arising out of the assessment order dated 21st December, 2017 would on adoption of DCF Method will be sustained in part, the same is without working out the figures. This was an exercise which ought to have been done by the Assessing Officer and that has not been done by him. In fact, he has completely disregarded the DCF Method for arriving at the fair market value. Therefore, the demand in the facts need to be st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dering various macro and micro economic factors affecting the business. 14. In nutshell, our conclusions are as under:- (1) The AO can scrutinize the valuation report and the if the AO is not satisfied with the explanation of the assessee, he has to record the reasons and basis for not accepting the valuation report submitted by the assessee and only thereafter, he can go for own valuation or to obtain the fresh valuation report from an independent valuer and confront the same to the assessee. But the basis has to be DCF method and he cannot change the method of valuation which has been opted by the assessee. (2) For scrutinizing the valuation report, the facts and data available on the date of valuation only has to be considered and actual result of future cannot be a basis to decide about reliability of the projections. (3) The primary onus to prove the correctness of the valuation Report is on the assessee as he has special knowledge and he is privy to the facts of the company and only he has opted for this method. Hence, he has to satisfy about the correctness of the projections, Discounting factor and Terminal value etc. with the help of Empirical data or industry norm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and thereafter, came to the conclusion that FMV has to be determined by the NAV method based on the CBDT Circular dt.12.07.2017 whereby it was envisaged that the value of the shares shall be determined by the Assessing Officer by taking into account the value of the intangible asset for the purpose of working of the net value. 23. In our considered opinion, this approach of the ld.CIT(A) was not in accordance with law. As we have held hereinabove that the option is not available to the Assessing Officer, then the exercise carried out by ld.CIT(A) became futile and of no consequence. Further, the determination of FMV on the basis of NAV by the Ld. CIT(A) was otherwise not sustainable and is bad in law as per Rule 11U(j), which defined valuation date and Rule 11U(b), which defined Balance Sheet. The conjoint reading of the above-mentioned Rules make it clear that the valuation of the asset as per the NAV method is required to be determined while making a valuation of the assets mentioned in the balance sheet. 24. In any case, the CBDT Circular dt.12.07.2016 cannot be made available and applied retrospectively to the facts of the case as the valuation report in the present case was ..... X X X X Extracts X X X X X X X X Extracts X X X X
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