Case Law Details
Thinkstations Learning Private Limited Vs ACIT (ITAT Delhi)
ITAT Delhi held that rejection of Discounted Cash Flow (DCF) Method for valuation of share price unjustified as that the methodology adopted was a recognized method of valuation and the Revenue was unable to show that the assessee adopted a demonstrably wrong approach.
Facts- In the course of assessment proceedings, AO noticed that assessee allotted 1,42,856 equity shares of Rs.10/- each at a premium of Rs.130/- per share. AO noticed that the assessee followed Discounted Cash Flow (DCF) Method for valuation of share price. AO referring to the provisions of section 56(2)(viib) and the explanation he was of the view that assessee has to consider the valuation whichever is higher between (i) the valuation according to Rule 11UA of Income Tax Rules or (ii) the value of shares to the satisfaction of the Assessing Officer. AO was of the view that DCF method followed by the assessee for the valuation of shares is nothing but assumption for projected of cash flow and stated to be not only unjustified and un-related to the actual financial position of the assessee company but also without any rational basis.
Accordingly, AO himself has determined the fair market value of the share at Rs.5.80 Paise and accordingly an amount of Rs.1,85,71,280/- was added as income from other sources u/s. 56(2)(viib) of the Act. CIT(A) sustained the action of AO.
Conclusion- Hon’ble Delhi High Court in the case of Pr. CIT Vs. Cinestaan Entertainment Pvt. Ltd. held that the shares had not been subscribed to by any sister concern or closely related person but by outsider investors. It was further held that the methodology adopted was a recognized method of valuation and the Revenue was unable to show that the assessee adopted a demonstrably wrong approach or that the method of valuation was made on a wholly erroneous basis or that the method of valuation or that it committed a mistake which went to the root of the process.
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Can weighted average method be used? that is a combination of DCF and NAV?