DCIT Vs Max Hospitals and Allied Services Limited (ITAT Mumbai)
The dispute arose from additions made by the Assessing Officer (AO) under Section 56(2)(viib) of the Income Tax Act, 1961, relating to share premium received by Max Hospitals and Allied Services Ltd. The company, a start-up in the healthcare sector, had issued shares at a premium, valued using the Discounted Cash Flow (DCF) method as permitted under Rule 11UA(2) of the Income Tax Rules. The valuation report was prepared by a Chartered Accountant, one of the prescribed experts under the law.
The AO rejected the valuation, comparing the projected financials used in the DCF model with actual results of subsequent years and concluding that the projections were unrealistic. The AO treated the fair market value (FMV) of shares as nil and made an addition of approximately ₹90.95 crore as income under Section 56(2)(viib).
Key Facts
- The company issued shares to prominent investors including Anand Mahindra, Rakesh Jhunjhunwala, and Radhakishan Damani, receiving a total share premium of over ₹90 crore.
- Valuation was based on projections of future cash flows and other business assumptions.
- The AO issued notices to investors under Section 133(6); their identity, creditworthiness, and genuineness of transactions were established and not disputed.
- AO’s main objection: actual performance did not meet projections.
ITAT’s Analysis on Valuation under Section 56(2)(viib)
The ITAT Mumbai followed the principles laid down in Cinestaan Entertainment (P) Ltd. vs. ITO [2019] 106 taxmann.com 300 (Delhi ITAT), affirmed by the Delhi High Court [2021] 433 ITR 82 (Delhi).
Key Legal Principles Reaffirmed:
1. Choice of Valuation Method
