Assessing Officer cannot reject the chosen method (DCF) and adopt a different one (NAV) Method for Unquoted Equity Shares

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES “A”, HYDERABAD

BEFORE

SHRI MANJUNATHA G., ACCOUNTANT MEMBER

&

SHRI K.NARASIMHA CHARY, JUDICIAL MEMBER

आ. अपी. सं / ITA No.152/Hyd/2024 (निर्धारण वर्ष / Assessment Year: 2015-16)

Grene Robotics (India)

Private Limited

Hyderabad

[PAN: AAKCS1013J]

अपीलार्थी / Appellant

Income Tax Officer

Vs.

Ward-2(2)

Hyderabad

प्रत्यर्थी / Respondent

निर्धारिती द्वारा/Assessee by: Ms CS Sree Lekha and

Shri MV Anil Kumar, AR

राजस्व द्वारा/Revenue by: Shri Srinath Sadanala, DR

सुनवाई की तारीख/Date of hearing: 20/11/2024 घोषणा की तारीख/Pronouncement on: 02/01/2025

आदेश / ORDER

PER K. NARASIMHA CHARY, J.M:

Aggrieved by the order dated 16/10/2023 passed by the learned Commissioner of Income Tax (Appeals) (“Ld. CIT(A)′′), National Faceless Appeal Centre (NFAC), Delhi in the case of Grene Robotics (India) Private Limited (“the assessee”) for the assessment year 2015-16, the assessee preferred this appeal.

2.  Brief facts of the case are that the assessee is engaged in the business of software development applications. It filed its original return of income for the relevant A.Y 2015-16 on 21/11/2015 claiming a loss of Rs.6,49,325/-. It was processed $u/s$ 143(1) of the Act on 09/01/2016 accepting the returned loss. Subsequently certain information was received by the learned Assessing Officer from the DIT (I&CI) to the effect that the assessee issued 3,42,500 shares at a premium of Rs.190/- per share of face value Rs.10/- and that the assessee has introduced an amount of Rs.6,85,00,000/- as share capital, which includes share premium of Rs.6,50,75,000 in its business. Further according to the learned Assessing Officer provisions of section 56(2) (viib) of the Act are applicable, wherein when the consideration received for the issue of shares exceeds the fair market value (FMV) of the shares issued, and such an excess is required to be brought to tax as Income from other sources. Learned Assessing Officer, therefore, opined that there was escapement of income. He accordingly reopened the assessment by issuing notice under section 148 of the Act.

3. Assessee, in support of the FMV determined at Rs,200/-per share adopting the DCF method, filed the valuation report of the chartered accountant as prescribed under Rule 11UA r.w.s.56(2)(viib) of the Act. Learned Assessing Officer, however rejected the DCF method chosen by the assessee and consequently rejected the FMV of Rs.200/-. Learned Assessing Officer adopted the NAV method mentioned under Rule 11UA read with section 56(2)(viib) of the Act. Learned Assessing Officer computed the FMV of the shares at Rs.51.50/- per share as per the NAV method and consequently worked out the excess consideration received per share at Rs.148.50/-. For 3,42,500 shares issued, the amount worked out to Rs.5,08,61,250/-. It was brought to tax under the head ‘income from other sources’ u/s 56(2) (viib) of the Act, by way of order dated 18.12.2019 passed under section 143(3) read with section 147 of the Act.

4.  In the appeal preferred by the assessee, learned CIT(A) found that the projected Revenue figures are very weak under impossible, and consequently do not carry any weight to support the valuation at 200/- per equity share for the shares of 10/-each. He concurred with the findings of the learned Assessing Officer in rejecting the valuation holding that such a valuation was based upon totally unrealistic projections which are just given by the company and not vouched by the value of, by arranging and re-engineering the facts and figures as provided by the assessee in the form or format and formally so as to suit the prescription of the Act/Rules. Hence this appeal by the assessee.

5.  The main plank of argument advanced on behalf of the assessee in this appeal is that rule 11 UA (2) of the Income Tax Rules1962 (“the Rules”) enables the assessee to determine the fair market value of the unquoted equity shares either in accordance with the formula prescribed in clause (a) or on the basis of a report drawn by a merchant banker who may have determine the FMV as per the DCF method. While placing reliance on many decisions including the decision of the Hon’ble Delhi High Court in the case of Agra Portfolio Private Limited private Ltd vs. PCIT ITA 1385/2018 order dated 4/4/2024, PCIT vs. $M/s$ Cinestaan entertainment Pvt. Ltd in ITA No. 1007/2019 by order dated $1/3/2021$ followed by the Tribunal in its decisions, learned AR submitted that the fair market value may be determined with such method as may be prescribed or the fair market value can be determined to the satisfaction of the learned Assessing Officer, but the method of valuation prescribed in rule 11 UA (2) of the rules is solely the prerogative of the assessee.

6. Per contra, learned DR submitted that it is always open for the learned Assessing Officer, for the reasons to be recorded, to doubt or reject the valuation that may be submitted for consideration and since the assessee failed to submit the material to the satisfaction of the learned Assessing Officer, the learned Assessing Officer was justified in taking the view that DCF method was not at all best suited method in this case and it was rightly held by the learned $CIT(A).$ Learned DR, in the alternative submitted that at any rate the assessee is bound to clarify the doubts of the learned Assessing Officer when he conducts his own valuation and determine the fair market value on the basis of the method adopted by the assessee, the DCF method in this case, the learned Assessing Officer may be permitted to conduct his own valuation and determine the FMV by requiring the assessee to furnish such other material as will be required by the learned Assessing Officer.

7.  We have gone through the record in the light of the submissions made on either side. Law is well settled now and the consistent view taken by the Hon’ble Delhi High Court in the cases referred to above is that while it is open for the learned Assessing Officer to doubt or reject a valuation that he submitted for his consideration by the assessee, is not open for the learned Assessing Officer to reject the matter of valuation adopted by the assessee and to evaluate the face value of the unquoted equity shares independently by adopting a valuation method other than the one chosen by the assessee. Hon’ble Bombay High Court in the case of Vodafone M- Pesa Ltd vs. PCIT (2018) 92 Taxmann.com 73 (Bombay) held in unequivocal terms that the learned Assessing Officer is undoubtedly entitled to scrutinise the valuation report and determine the fresh valuation, either by himself or by calling for a final determination from an independent valuer to confront the same to the assessee, but at the same time the basis has to be the DCF or NAV method as adopted by the assessee, and it is not open for the learned Assessing Officer to change the method of valuation to a different one that was adopted by the assessee.

8. We, therefore, respectfully following the view taken by the Hon’ble Delhi and Bombay High Court’s in the above cases hold that the change of method by the learned Assessing Officer in this case from DCF method as adopted by the assessee to the NAV method is bad under law and cannot be accepted.

9. In Taaq  Music Pvt. Ltd. vs. Income Tax Officer 2020 SCC OnLine ITAT 9482 a coordinate Bench of Bangalore Tribunal while referring to its view taken in the case of VBHC value homes Pvt. Ltd vs. ITO 206 TTJ 595 (Bang.)(Trib.), in a situation where the valuation method adopted by the learned Assessing Officer has to be disapproved, held that the matter needs to be decided afresh by the learned Assessing Officer on the lines indicated in the decision in VBHC homes Pvt. Ltd. Hon’ble Delhi High Court referred to this decision in the case of Agra portfolio private limited (supra). Relevant observations in this regard are that,-   

   “12. In view of the above legal position, we are of view that the issue with regard to valuation has to be decided afresh by the AO on the lines indicated in the decision of ITAT, Bangalore in the case of VBHC Value Homes Pvt. Ltd, Vs ITO (supra) ie., (i) the AO can scrutinize the valuation report and he can determine a fresh valuation. either by himself or by calling a determination from an independent valuer to confront 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. (ii) 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. 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 if any and/or Scientific Data, Scientific Method, scientific study and applicable Guidelines regarding DCF Method of Valuation. The order of Id. $CIT(A)$ is accordingly set aside and this issue is remanded to the AO for decision afresh, after due opportunity of hearing to the Assessee.”

   10. In our considered opinion the same cause could be followed in this matter also. We, therefore, while setting aside the orders of the authorities below, restore the issue to the file of the learned Assessing Officer to decide the same afresh on the lines indicated in the decision rendered in VBHC Value Homes Private Limited (supra) and extracted above. Grounds are answered accordingly.  

   11. In the result, appeal of the assessee allowed for statistical purpose.

   Order pronounced in the open court on this the 2nd January, 2025.

   Sd/-

   (MANJUNATHA G.)

   ACCOUNTANT MEMBER

   Hyderabad,

   Dated: 02/01/2025

   L.Rama, SPS

   Copy forwarded to:

   Sd/-

   (K. NARASIMHA CHARY) JUDICIAL MEMBER