SIS Prosegur Holdings Pvt. Ltd Vs PCIT (ITAT Kolkata)
ITAT Kolkata held that AO failed to make required enquiries to go into the question of valuation of shares given by the accountant for the purpose of assessment of income as per provisions of section 56(2)(viib). Accordingly, revisionary power under section 263 rightly invoked.
Facts- The ld. PCIT while examining assessment records found that the assessee during the year had issued 900000 equity shares of Rs. 10/- at a premium of Rs.90/- per share totalling Rs. 100/- per share. Therefore, the ld. PCIT noting that the provisions of section 56(2)(viib) of the Act was applicable and that the Assessing Officer has not examined the above aspect relating to the fair market value of the shares and that there were discrepancies in the valuation record furnished by the accountant, the ld. PCIT invoking his revision jurisdiction u/s 263 of the Act show-caused the assessee in this respect.
Being aggrieved, by the order of the ld. PCIT, the assessee has preferred the present appeal.
Conclusion- In this case, the ld. PCIT has pointed out various discrepancies as noted above, which the assessee has failed to rebut and however, the Assessing Officer did not make required enquiries to go into the question of the valuation given by the accountant for the purpose of assessment of the income of the assessee as per the provisions of section 56(2)(viib) of the Act.
Therefore, the ld. PCIT rightly held that the order of the Assessing Officer was erroneous and prejudicial to the interest of the revenue. We accordingly upheld the order of the ld. PCIT and further direct the Assessing Officer that the Assessing Officer will make the enquiries as directed by the ld. PCIT regarding the correctness of the valuation report of the accountant, may call for an independent report from an expert to confront the assessee and thereafter to pass a speaking order in accordance with law.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
The present appeal has been preferred by the assessee against the revision order dated 25.03.2021 of the Principal Commissioner of Income Tax-1, Patna [hereinafter referred to as ‘PCIT’] passed u/s 263 of the Income Tax Act (hereinafter referred to as the ‘Act’).
2. The brief facts of the case are that the ld. PCIT while examining assessment records found that the assessee during the year had issued 900000 equity shares of Rs. 10/- at a premium of Rs.90/- per share totalling Rs. 100/- per share. The ld. PCIT further observed as under:
It is to be noted that, during the year under consideration, the provisions of section 56(2)(viib) were applicable as per which if aggregate consideration for issuance of shares is more than fair market value of the shares, the difference has to be taxed as income. The fair market value can be Book Value or value determined as per discounted cash flow method (DCF). A perusal of the details filed shows that book value as per balance sheet has negative value per share whereas the value of shares as per DCF method was shown at Rs. 97/- per share. A report of valuation was submitted by the assessee during assessment proceedings. Perusal of the report indicates that certain key assumptions were made to arrive at the aforesaid valuation which reads as under:-
“….. In the course of our work, we have held discussions with the Management of the company. We have also examined and relied on information provided by them and reviewed other relevant publicly available information. We have not independently verified or sought the views of third party/ industry specialists for all such information’s provided or any representation or assurance made by them, whether written or verbal, accordingly cannot and do not warrant or accept responsibility for the accuracy or completeness of such information representation or assurance……”
A perusal of the report further shows that the free cash flow for equity was estimated arbitrarily. The Valuers have taken future cash flow as certified by the management. No verification of projections and/or assumptions adopted by management was made by the accountants, thereby producing a report which is inherently flawed. The long disclaimer qualified by the Valuers clearly establishes that no independent enquiry was caused to verify the truth or otherwise of the figures furnished by the assessee. Further, it was noted that no documentary evidence to substantiate basis of projections in cash flow was made part of valuation report nor were any produced by the assessee during the course of assessment proceedings. In view of the above facts, the Valuation report submitted suffers from grave infirmities and should not have been accepted. The assessment order made by the AO relying on the valuation report without conducting enquires/verification is erroneous and prejudicial to the interest of revenue. Accordingly, the assessment order u/s. 143(3) of the IT Act, 1961 for AY 2015-16 dated 28.12.2017 was found to be erroneous in so far as it is prejudicial to the interest of revenue within the meaning of section 263 of the Income Tax Act, 1961.
3. Therefore, the ld. PCIT noting that the provisions of section 56(2)(viib) of the Act was applicable and that the Assessing Officer has not examined the above aspect relating to the fair market value of the shares and that there were discrepancies in the valuation record furnished by the accountant, the ld. PCIT invoking his revision jurisdiction u/s 263 of the Act show-caused the assessee in this respect.
The assessee, however contested the invocation of revision jurisdiction by the PCIT u/s 263 of the Act on various ground, inter alia, that the order of the Assessing Officer was neither erroneous nor prejudicial to the interest of the revenue and that the Assessing Officer had made due enquiries at the time of framing the assessment order u/s 143(3) of the Act; that the Assessing Officer cannot question the valuation undertaken by the assessee and that the valuation report obtained by the company was binding upon the revenue and hence cannot be questioned etc.
The ld. PCIT considering the submissions of the assessee which have also been reproduced by the ld. PCIT in the impugned order, however, held that the assessment order passed by the Assessing Officer was erroneous so far as it was prejudicial to the interest of the revenue observing that the valuation of shares arrived at by the accountant as per DCF (Discounted Cash Flow Method) method at Rs.97/- per share relying on the arbitrary values, figures etc information provided by the management of the company and without independently verifying the accuracy or completeness of such information or seeking the views of third party/industry specialists for all such information provided, cannot be held to be correct market value. He, therefore, set aside the assessment order with a direction to the Assessing Officer to frame the assessment de novo while making fresh enquiries/verification regarding the accuracy or completeness of such information provided by the management of the company for the purpose of valuation of the shares as per the discounted cash flow method and finalise the assessment in accordance with law. The relevant part of the order of the PCIT is reproduced as under:
8. The contention of the assessee has been examined with reference to material on record. It is noted that the assessee/AR failed to put forth any cogent explanation with supporting documents, substantiating that the Assessing Officer has completed the assessment after making enquiries, verification with regard to valuation of share made by the valuer at Rs. 97 per share. A perusal of the details available on record shows that book value as per balance sheet has negative value per share whereas the value of shares as per DCF method was shown at Rs. 97/- per share. A report of valuation was submitted by the assessee during assessment proceedings. The relevant part of the valuation report is reproduced hereunder:
