DCIT Vs HolisolLogistrics P. Ltd. (ITAT Delhi)
ITAT Delhi held that assessee has option to choose any of the method i.e., ‘book value method’ or ‘discounted cash flow method’ to the Assessee for determining the value of its shares. The valuation so arrived by the expert under Discounted Cash Flow Method providing necessary basis of computation of projection needs to be accepted.
Facts-
The Assessee adopted the DCF method on the basis of report determining the fair market value by Accountant as per the discounted free cash flow method. While perusing the said report, the Assessing Officer observed that in the said report, the figures adopted for the F.Y. 2014-15 and 2015-16 do not match with the actual performance of the company and therefore, the said report cannot be relied upon. The premium in excess to the book value has been brought to tax by the AO, as income u/s. 56(2)(viib). AO further held that there is huge mismatch between the PAT adopted as per the report and the actual. Even the non-cash cost adopted by the Accountant for determining the fair market value is also not acceptable. The Commissioner on appeal allowed the contention raised by the Assessee and deleted the addition. Being aggrieved, revenue has preferred the present appeal.
Conclusion-
Held that ‘Discounted Cash Flow Method’ DCF analysis is an important tool or method to value a project and the statute itself gives an option to choose either of the two method, i.e., ‘book value method’ or ‘discounted cash flow method’ to the Assessee for determining the value of its shares.
Therefore, we are in agreement with the findings of the ld. Commissioner that there is no infirmity in the valuation report, as the same is appropriate, detailed and provide the necessary basis of computation of projection and growth factors etc. The valuation arrived at by the expert under the scheme allowed under the IT Act needs to be accepted. We observe that Hyderabad Bench of Tribunal in the case of Social Media India Ltd. (supra) has held that the Assessee’s valuation has to be accepted as it was supported by an independent valuer.
FULL TEXT OF THE ORDER OF ITAT DELHI
This appeal has been preferred by the Revenue against the order dated 28.03.2018, impugned herein, passed by the learned Commissioner of Income-tax (Appeals)-4, New Delhi (in short “Ld. Commissioner”) u/s. 250 of the Income-tax Act, 1961 (in short ‘the Act’) for the assessment year 2014-15.
2. The Revenue Department has raised the following grounds of appeal:
“1. Whether on the facts and the circumstances of the case, Ld. CIT(A) was correct in deleting the addition made of Rs. 6,25,44,292/- u/s 56(2)(vii)(b) of the Act?
2. Whether on the facts and the circumstances of the case, Ld. CIT(A) is correct in holding the DCF method in place which was rejected being not backed by scientific method or by any data?
3. Whether on the facts and the circumstances of the case, Ld. CIT(A) was correct in admitting additional evidence u/s 46A without affording the proper opportunity to AO?
4. Whether the CIT(A) has not correct on facts and circumstances on deleting the addition made by the AO on account late deposit of employees’ contribution towards PF under Section 36(l)(va) of the Income Tax Act, 1961?
5. Whether the CIT(A) has not erred in deleting the addition made by the AO on account of interest on delay payments of indirect tax liabilities without appreciating the fact that the same is penal in nature?
6. The appellant craves leave, to add, alter or amend any ground of appeal raised / above at the time of the hearing.”
3. For the sake of brevity, we are deciding this appeal ground-wise.
4. Ground No. 1& 2 relates todeletion of the addition of Rs. 6,25,44,292/- made u/s 56(2)(vii)(b) of the Act by the Ld. Commissioner by holding the DCF method is in place, which was rejected by the AO being not backed by scientific method or by any data.
4.1 The Assessee in the instant case adopted DCF method on the basis of report determining the fair market value by Accountant as per the discounted free cash flow method. While perusing the said report, the Assessing Officer observed that in the said report, the figures adopted for the F.Y. 2014-15 and 2015-16 do not match with the actual performance of the company and therefore, the said report cannot be relied upon. As such the entire premium in excess to the book value has been brought to tax by the Assessing Officer, as income of the Assessee on the ground that during the F.Y. 201415, profits after tax was Rs.45,15,921/- whereas as per the report, the said profits was adopted at Rs.3,52,86,156/-. Likewise, the profits after tax for financial year 2015-16 was adopted at Rs.1,84,45,627/- whereas as per the actual, there was a loss of Rs.63,23,036/-. The Assessing Officer further held that there is huge mismatch between the PAT adopted as per the report and the actual. Even the non-cash cost adopted by the Accountant for determining the fair market value is also not acceptable. Total share premium received during the year on account of equity shares was Rs.3,50,19,744/- and the total preference share premium was Rs.3,47,88,600/-. Thus, the total of Rs.6,98,08,344/- was received by the assessee. The book value was Rs.345.48, implies a premium of Rs.335.48 on the face value of Rs.10 per share and the premium charged was Rs.3224/- Therefore, the premium to the extent of Rs.335.48/Rs.3224=0.10405×69808344=7264051 is allowed as per the book value and the balance being Rs.6,25,44,292/- is considered as the income of the Assessee u/s. 56(2)(viib) as per the explanation to the section which gives the power to the Assessing Officer to adopt the value after taking due substantiation from the company and accordingly, the Assessing Officer while holding the method adopted by the Assessee is incorrect, considered the sum of Rs.6,25,44,292/- as income u/s. 56(2)(viib) of the Act and added the said amount in the income of the Assessee.
4.2 The ld. Commissioner on appeal, while taking into consideration the claim of the Assesseeand analysing the issue under consideration allowed the contention raised by the Assessee and deleted the addition in hand by concluding as under:
“6.3. Having regard to the aforesaid valuation, it is apparent that one of the methods prescribed for valuation for determining the fair market value of unquoted shares is the fair market value determined by a merchant banker or an accountant as per the Discounted Free Cash Flow method. The assessee in accordance with the aforesaid provision has placed on record the report of an accountant determining the fair market value of unquoted equity shares as per the discounted free cash flow method. The Assessing Officer to that extent has not disputed the compliance of condition of furnishing a report determining the fair market value by Accountant as per the discounted free cash flow method.
6.4 The whole case made out is based on the analysis of the said report in as much as that as per the said report, the figures adopted in the financial year 2014-15, 2015-16 do not match with the actual performance of the company and therefore, the Assessing Officer was of the opinion that the said report cannot be relied upon and as such, the entire premium in excess to the book value has been brought to tax as income of the assessee According to the Assessing Officer, during the financial year 2014-15, profits after tax was Rs. 45,15,921/- whereas as per the report, the said profits was adopted at Rs. 3,52,86,156/-. Likewise, the profits after tax for financial year 2015-16 was adopted at Rs. 1,84,45,627/- whereas as per the actual, there was a loss of Rs. 63,23,036/-. It was thus held that there is huge mismatch between the PAT adopted as per the report and actual. It was held that even the non-cash cost adopted by the Accountant for determining the fair market value is also not acceptable.
6.5 The appellant on the other hand has contended that valuation report certified by the Chartered Accountant is based on scientific valuation and are based on financial position for next seven years under the normal market/business scenario. It was contended that the actual results may vary upwards or down wards depending on various marketing/economic/social conditions and therefore, such valuation cannot be reviewed or compared with actual figures at a later date. It was thus submitted that the share valuation report has to be accepted as it was supported by an independent valuer which cannot be tinkered at a later point of time by substituting it with actual results if such report has been prepared in accordance with the prescribed Rules. Reliance was placed on the Hyderabad Bench in the case of DQ (international) Limited v ACIT reported in 72 taxmann.com 142 and also in the case of Social Media India Ltd vs. ACIT reported in ITA No. 1711/Hyd./2012. Similar view has been taken in the case of Tally Solutions (p) Ltd v DCIT (2011) 14 Taxmann.com 19 (Bang).
6.6 Further, before me the appellant has submitted the same report of accountant. The basis of the report was further called for. From the perusal of the detailed backup, it is discernable that the projections on the basis of which the valuation is determined is not arbitrary and have been computed keeping in consideration the historical performance of the company, the performance of the industry and on another scientific basis. Further, the appellant company has submitted detailed industry analysis and the basis of determination of growth factor of revenue studying the trend of revenue in the past and future projections made by the industry. Thus, in such a scenario, wherein the basis of projections was scientific and the appellant has the basis of justifying each and every number with proper reasoning and basis of figure appearing in the projected income statement and balance sheet, rejecting the valuation ground on the basis that the actual does not match with the projection would not be justified.
6.7 DCF method takes into account future business prospect of the company. It uses the concept of the time value of money. All cash flows expected at a particular point of time are estimated and discounted by using cost of capital to determine the present value.
6.8 To an investing company, investing in shares of a company at a particular cost must be a good business idea and for it, DCF analysis can be done by it.
6.9 The actual performance may be varied because of many extraneous factors which may not be present at the time of the valuation date. Thus, an onus cannot be cast upon the appellant to justify the difference which has resulted post the valuation date. What is important is the basis of projection and the macro and micro factors as appearing on the date of valuation.
6.10 The DCW relies on the market, which may change, sometimes, dramatically and small changes in inputs can result into large charges in the value of a company but the important thing here is that inspite of its inbuilt shortcomings, it is used as an important tool or method widely used to value a project or a company and the very fact that IT Act gives an option to assessee to determine the value of its shares u/s 56(2)(viib), the same cannot be rejected merely on the ground that actual result or profit does not tally with the projected result and without identifying specific serious defect in the report of the accountant.
6.11 Thus, since, in the instant matter, the report of the valuer is placed on record as on the date of valuation which is based on projections properly computed keeping in mind past performance, ratio analysis, and other scientific basis, rejecting the same only on the basis that actual performance was not matched is not justified.
6.12 Further, it is also important to note that turnover of the assessee for the financial year 2014-15 had doubled to 44.18 crores from 22.70 crores in financial year 2013-14 and was at Rs. 44.28 crores in financial year 2015-16. Thus despite the PAT not matching with the actual, there is an increase in the turnover also. Subsequently, turnover of the assessee in the financial years 2016-17 and 2017- 18 has also been provided in the course of appellate proceedings which also show that there is a growth of the company as would be evident from chart hereunder:
