Intelligrape Software Pvt. Ltd. Vs ITO (ITAT Delhi)
When the assessee Company had opted for valuation of unquoted equity shares in accordance with DCF method as prescribed under clause (b) of specific Rule 11UA(2) as applicable, the AO/CIT(A) had no power/authority to change such valuation methodology and adopt a different book value method as prescribed under clause (a) of such Rule and hence such action of the authorities below was arbitrary.
It is trite law that “when a statute requires, a thing to be done in a certain manner, it shall be done in that manner alone and not otherwise” (CIT vs. SPL’S Siddhartha Ltd. 345 ITR 223).
Unlike Explanation (a)(ii) of section 56(2)(viib), where it has been specifically provided that valuation is to be substantiated to the satisfaction of the AO, there is no such provision specified therein in Explanation (a) (i) of section 56(2)(viib) as opted for by the assessee for substantiating its valuation to the satisfaction of the AO. Hence, on the facts of assessee’s case, the AO was not empowered to disregard the DCF valuation as carried out by the valuer and such action of the authorities below of rejecting such valuation report cannot be upheld. (Rameshwaram Strong Glass P Ltd., ITAT Jaipur)
The AO was not able to pinpoint any specific inaccuracies or short comings in the DCF valuation report of the Chartered Accountant/Valuer other than stating that year-wise results as projected are not matching with the actual results declared in the final accounts. Before the ld. CIT(A), reasons for variation between projected and actuals were duly explained. The ld. CIT(A) has accepted such explanation but rejected the DCF valuation report as submitted by the assessee. Accordingly, in the absence of any defect in the valuation of shares arrived by the assessee on the basis of DCF method, impugned addition as made on the basis of net asset value method is liable to be deleted. The rejection is unjustified as the valuation report is required under Rule 11UA of The Income Tax rules is based on the future aspects of the company at the time of issuing the shares, it may vary from the actual figures depending on the market condition at the present point of the time.
Thus, keeping in view the entire facts of the case, the reports of the valuer, the comparison of the actual and projected revenues, provisions of Section 56(2)(viib) and keeping in view the order of Co-ordinate Bench of ITAT in the case of Cinestaan Entertainment Pvt. Ltd. 177 ITD 809 wherein it has been held that the Assessing Officer cannot substitute his own value in place of the value determined either on DCF method or NAV method, the appeal of the assessee is hereby allowed.
FULL TEXT OF THE ITAT JUDGEMENT
The present appeal has been filed by the assessee against the order of the ld. CIT(A)-4, New Delhi dated 15.03.2018.
2. Following grounds have been raised by the assessee:
“That the Ld. CIT(A) has erred on facts and under the law in confirming the addition of Rs.1,59,39,863/- as made by the AO under section 56(2)(vii)(b) of the Income-tax Act on account of alleged excess value of share premium over fair value as determined for the unquoted equity shares as issued at premium by the Appellant to its Holding Co.
2. That the valuation exercise for valuing unquoted equity shares of a private Co. as undertaken by the specified valuer/independent expert in accordance with Rule 11UA of Income-tax Rules as per the valuation methodology opted for by the Appellant could not be disregarded by the authorities below.
3. That the AO/CIT(A) cannot be considered as the specified valuer/independent expert as per Rule UA of Income-tax Rules and accordingly, the AO has no jurisdiction or authority to substitute his own valuation of unquoted equity shares and reject the one as undertaken by the specified valuer/independent expert.
4. That without prejudice to Ground No. 1 to 3 above, the addition of Rs.1,59,39,863/- as made u/s 56(2)(vii(b) of Income-tax Act was very excessive. Various observations made by the authorities below in their respective orders while making the above additions/disallowances are either factually incorrect or legally untenable.”
3. The assessee is a Private Limited company registered under Companies Act, 1956 with Registrar of Companies Vide CIN U72300DL2008PTC179627. The company’s main object is to provide Software Development/IT services in India and abroad. Most of the clients of assessee are based outside India. Directors of assessed company have valuable professional background from reputed educational institutions like IIT-Delhi and Amity University etc.
4. In the Assessment order, the AO has rejected the valuation report given by Chartered Accountant as per compliance procedure of Section 56(2)(viib) of Income Tax Act of by comparing EBITDA of future years with actual profit.
5. The AO has made the addition amounting to Rs.1,59,39,863/- in terms of the provisions of Section 56(2)(viib) of the Act in view that the company has issued the equity shares at a price more than the fair market value of the shares. Before the AO, the assessee company did submit a valuation report as per discounted cash flow method substantiating its fair market value of equity share being Rs. 6175/- per share. However, the AO rejected the valuation report furnished by the assessee on the ground that year-wise results projected are far from the actual results declared in the final accounts. The same has been dealt in para 5 & 6 of the assessment order. The AO, therefore, recomputed the value of the shares of assessee company by net worth method which came to be at Rs. 23.21. The AO thus made the addition of premium amount of Rs 1,59,39,863/- received in excess of net worth of shares determined at fair value of Rs 23.21 per share.
6. The ld. CIT (A) confirmed the addition holding as under:
