The Income Tax Appellate Tribunal (ITAT), Bangalore Bench ruled that the AO cannot interfere in the method selected for the valuation of the shares.
The tribunal opined that the option to choose the method provided under clause (a) or clause (b) is available with assessee. Admittedly, the method adopted by the assessee i.e. Discounted cash flow (DCF) method for determining fair market value was one of the methods prescribed under the provisions of section 56(2)(viib) read with income tax rule 11UA of Income Tax Rule.
However, the AO can scrutinise the contents or working of the method adopted by the assessee so as to find out the fair valuation. In case, the AO is not satisfied with the working of the assessee, then the AO may draw fresh valuation or get fresh valuation report from independent valuer, but fresh valuation can only be done as per the method adopted by the assessee as in the present case assessee adopted DCF method.
Facts
The assessee (appellant) at the start of the financial year and during the financial year was the subsidiary company of a foreign company viz., Delivery Hero based in Germany. The holding company got the share value done of the assessee company for transfer of its shareholding in the assessee company to the company viz. ANI Technologies Pvt. Ltd., the holding company of OLA Group.
The valuer viz. Ernst and Young Merchant Banking Services Ltd., valued the shares of the assessee company dated 30/11/2017 at Rs.13.94 per share based on discounted cash flow method. In the valuation exercise, while using the discounted cash flow method, the valuer has projected the sales, expenses, and the profit of the assessee company from December 2017 and the calendar years beginning from 2018 to 2023 with the compounded annual growth rate of 34% of the revenue. the holding company of the assessee transferred its entire shareholding to ANI Technologies Pvt. Ltd., at Rs. 13.94 per share having a face value of Rs.10 per share.
After the transfer of the shares, the assessee company issued 14,66,02,662 shares to ANI Technologies Pvt. Ltd., at Rs.13.94 inclusive of a face value of Rs. 10 and share premium of Rs. 3.94 per share. The assessee accordingly received share capital and share premium from ANI Technologies Pvt. Ltd.
However, the AO during the assessment proceedings observed that the assessee has been incurring losses from assessment years 2013-14 to 2019-20 persistently whereas there has been huge growth in the turnover and profit in the project report. Moreover, there was a disclaimer given by the valuer in the project report that they have not carried out due diligence procedures on the financial statements but prepared the project report based on the information as submitted by the assessee. The valuer has relied upon the information submitted by the management of the assessee company.
The AO was of the view that the valuation has been done by the valuer to achieve the desired valuation of the share i.e. Rs. 13.94 per share, which is far away from the reality. Furthermore, the figures given in the project report did not match, which can be verified from the financial statements of the last years prepared by the assessee.
According to the AO, the value per share of the company as per the net assets value method (NAV) as prescribed u/s 56(2)(viib) of the Act r.w. Rule 11U(a) of the Income-tax Rule comes out at Rs. 1.20 per share only. Thus, the AO was of the view that valuation of the shares done using the discounted cash flow method is far from reality. As such the valuation was done so as to obtain the desired valuation of the shares. Hence, the AO sought an explanation from the assessee.
The AO held that the projections can be made only after considering the historical data, which is more reliable. As the assessee has been incurring losses consistently and, therefore, the projections made by the valuer are not reliable.
The assessee preferred an appeal to the CIT(A). The assessee submitted before the CIT(A) that DCF method is one of the method for the valuation of the shares recognized under the provisions of section 56(2)(viib), complying the guidelines issued by RBI and in pursuance of the provisions of section 62(1) of the Companies Act. In the startup company, there are losses in the initial years, which turn into profit with the passage of time, therefore, it is only future prospect and growth based on which the projections are made under DCF method. The valuation report was prepared by the merchant banker after considering the growth of the food industry as projected by google, Swiggy, Zomato etc.
Arguments
The assessee argued that the provisions of section 56(2)(viib) of the Income Tax Act mandates to bring the amount of premium to the tax under the deeming provisions if it is charged more than the fair market value. Therefore, only the amount of share premium exceeding the share market value should only to be considered for the purpose of addition as provided under the deeming provisions of Section 56(2)((viib).
The assessee contended that the valuation of the shares made by the assessee was accepted under the Companies Act/ FEMA and RBI. It was also submitted that while valuing the shares under DCF method the future prospect/ growth is considered, which has been done in the instant case after referring to the data of comparable companies. Therefore, no addition is warranted under the provisions of section 56(viib).
Conclusion
ITAT set aside the order of the CIT-A and direct the AO to delete the addition made by him.
Case Details
Case Name: Pisces EServices Pvt. Ltd v/s The Dy. Commissioner of Income Tax
Citation: ITA No. 310/Bang/2023
Date of Order: 25.07.2024
Judges: Shri Waseem Ahmed, Accountant Member And Shri Soundararajan K, Judicial Member
Counsel for Assesse: Shri KR Pradeep & Ms. Girija G.P, Advocates
Counsel for Revenue: Shri Vilas Shinde, CIT (DR)
