Case Law Details
ACIT Vs Etawah Chakeri (ITAT Delhi)
ITAT Delhi held that rejection of valuation merely on the ground that on the date of issue of shares, DCF method was not there in Rule 11UA of the ITAT Rules is unjustified in as much as AO failed to demonstrate that methodology adopted by the assessee was not correct.
Facts- The present appeal is preferred by the revenue contesting that CIT(A) has erred in deleting the addition of Rs.90 crores made by the Assessing Officer u/s 56(2)(viib) r.w.s 2(24)(xvi) of the Income-tax Act, 1961.
Notably, AO found that the assessee has issued 51 lakh shares on 29.8.2012 for a consideration of Rs.51 crores to Oriental Structural Engineers Projects Private Limited and 49 lakh shares for a consideration of Rs.49 crores to Oriental Tollways Ltd. Drawing support from the relevant provisions of the Act, AO was of the opinion that the relevant provisions provides for determination of fair market value of shares in accordance with sections 11 U and 11 UA of the Act and as per Rule 11 UA of the Act prevailing as on 01.04.2012. As regards valuation of unquoted equity shares NAV method was to be used. However, the CBDT, vide Notification No. 52/2012 dated 29.11.2012, amended Rule 11 UA and inserted an option to the assessee either to choose NAV or DCF method for determination of fair market value.
AO noted that since the assessee has issued shares on 29.08.2012, prior to the date of notification and insertion of DCF method, the assessee ought to have valued the fair market value of the shares by applying NAV method as, on the date of issue of shares, Rule 11 UA did not provide for computation of fair market value as per DCF method.
Discarding the method adopted by the assessee, AO adopted NAV method and re-computed the fair market value and concluded by holding that fair market value of assessee’s shares as on the valuation date comes to Rs.10/- per share and since the assessee has issued each share at Rs. 100/-, therefore, excess of the rate at which the assessee has issued shares over the fair market value was treated as assessee’s income u/s 56(2)(viib) r.w.s 2(24)(xvi) of the Act and, accordingly, made the addition of Rs.90 crores. CIT(A) allowed the appeal.
Conclusion- The Assessing Officer has not pointed out any flaw, infirmity or error in the valuation of the fair market value determined by DCF method and has simply rejected because on the date of issue of shares, DCF method was not there in Rule 11 UA of the Act, but was subsequently introduced. In our considered opinion, this cannot be a valid reason for discarding the valuation.
Held that the basis of valuation can be on the basis of a method which was subsequently recognized by the It cannot be said that the valuation is to be made only by the method that prevailed as on the date of issue and allotment of shares. Basis of valuation by DCF method, which was one of the recognized methods during the previous year relevant to A.Y 2013-14, ought to have been examined by the Assessing Officer and ought not to have been rejected on a technical reason.
FULL TEXT OF THE ORDER OF ITAT DELHI
This appeal by the Revenue is preferred against the order of the ld. CIT(A) – 34, New Delhi dated 30.04.2019 pertaining to Assessment Year 2013-14.
2. The solitary grievance of the revenue is that the ld. CIT(A) erred in deleting the addition of Rs.90 crores made by the Assessing Officer u/s 56(2)(viib) r.w.s 2(24)(xvi) of the Income-tax Act, 1961 [the Act, for short].
3. Representatives of both the sides were heard at length. Case records carefully perused. Relevant documentary evidence brought on record duly considered in light of Rule 18(6) of the ITAT Rules.
4. Briefly stated, the facts of the case are that the assessee company was incorporated on 15.12.2011 and was awarded a Toll Road contract by NHAI for construction of six lane Etawah-Chakeri, Kanpur, section of National Highway -2 in the state of Uttar Pradesh, on design, build, finance, operate and transfer basis.
5. During the year under consideration, the assessee has allotted to its parent company Oriental Structure Engineers Projects Ltd and Oriental Tollways Ltd 1 crore shares of Rs. 10/- each, at a premium of Rs.90 per share.
6. On the issue of consideration received by the assessee for issuing of shares being more than the fair market value of such shares in terms of section u/s 56(2)(viib) r.w.s 2(24)(xvi) of the Act, directions under section 144A of the Act have been received from the Additional Commissioner of income tax.
7. The Assessing Officer found that the assessee has issued 51 lakh shares on 29.8.2012 for a consideration of Rs.51 crores to Oriental Structural Engineers Projects Private Limited and 49 lakh shares for a consideration of Rs.49 crores to Oriental Tollways Ltd. Drawing support from the relevant provisions of the Act, the Assessing Officer was of the opinion that the relevant provisions provides for determination of fair market value of shares in accordance with sections 11 U and 11 UA of the Act and as per Rule 11 UA of the Act prevailing as on 01 .04.2012.
8. As regards valuation of unquoted equity shares NAV method was to be used. However, the CBDT, vide notification No 52/2012, dated 29.11.2012, amended Rule 11 UA and inserted an option to the assessee either to choose NAV or DCF method for determination of fair market value.
9. The Assessing Officer noted that since the assessee has issued shares on 29.08.2012, prior to the date of notification and insertion of DCF method, the assessee ought to have valued the fair market value of the shares by applying NAV method as, on the date of issue of shares, Rule 11 UA did not provide for computation of fair market value as per DCF method.
10. Discarding the method adopted by the assessee, the Assessing Officer adopted NAV method and re-computed the fair market value and concluded by holding that fair market value of assessee’s shares as on the valuation date comes to Rs.10/- per share and since the assessee has issued each share at Rs. 100/-, therefore, excess of the rate at which the assessee has issued shares over the fair market value was treated as assessee’s income u/s 56(2)(viib) r.w.s 2(24)(xvi) of the Act and, accordingly, made the addition of Rs.90 crores.
11. The assessee challenged the assessment before the ld. CIT(A) and explained that award was given to Oriental Structural Engineers Private Limited with an understanding that Oriental Structural Engineers was to incorporate a SPV for execution of contract and accordingly, the appellant was incorporated promoters/share holders being Oriental Sstructural Engineers Pvt Ltd and Oriental Tollways Pvt Ltd. It was further explained that in order to meet the requirement of the bankers for financing the project, promoter shareholders were to infuse equity and, therefore, the assessee company issued 1 crore equity shares of Rs.10/- at a premium of Rs.90/- and entire capital was subscribed by promoters shareholders only.
12. In support, of valuation of shares at a premium of Rs.90/- per share, valuation report of M/s M. Mehta & Co. Chartered Accountants dated 31.05.2012 was submitted, who valued the shares by applying DCF method as prescribed in Rule 11 U and 11 UA. It was strongly contended that there is no provision which enables the Assessing Officer to substitute any other value or to modify the value determined by a Chartered Accountant, as per the provisions of Sub-rule (b) of Rule 11 UA(2) of the Rules.
13. After considering the facts and submissions, the ld. CIT(A) observed that the only reason for rejecting the fair market value determined by the assessee is that on the date of issue of shares, DCF was not there in Rule 11 U and 11 UA and, therefore, the Assessing Officer has computed the fair market value of shares as per NAV method.
14. Drawing support from the speech of the Hon’ble Finance Minister, the ld. CIT(A) was convinced that the fair market value determined as per DCF method cannot be faulted with and allowed the appeal.
15. Before us, the ld. DR has strongly supported the findings of the Assessing Officer and the ld counsel for the assessee reiterated what has been stated before the lower authorities.
16. It is true that on the date of issue of shares by the assessee, DCF method was not prescribed u/r 11 UA but subsequently, it was introduced vide Notification No. 52/2012 dated 29.11.2012. The Assessing Officer has not pointed out any flaw, infirmity or error in the valuation of the fair market value determined by DCF method and has simply rejected because on the date of issue of shares, DCF method was not there in Rule 11 UA of the Act, but was subsequently introduced. In our considered opinion, this cannot be a valid reason for discarding the valuation.
17. We are of the considered view that the basis of valuation can be on the basis of a method which was subsequently recognized by the It cannot be said that the valuation is to be made only by the method that prevailed as on the date of issue and allotment of shares. Basis of valuation by DCF method, which was one of the recognized methods during the previous year relevant to A.Y 2013-14, ought to have been examined by the Assessing Officer and ought not to have been rejected on a technical reason.
18. It is an undisputed fact that the share premium has been received from promoter companies only and no outside party is involved in transactions and the Assessing Officer has not doubted the genuineness of the transactions and capacity of the investors. It is equally true that the assessee being a start-up company, has adopted DCF method to value its shares because it does not have any previous data to determine the net asset value. There is no dispute that the methodology adopted by the assessee has been done applying a recognized and accepted method.
19. Hon’ble Courts have repeatedly held that valuation is not an exact science and, therefore, cannot be done with arithmetic precision. It is a technical and complex problem which can be appropriately left to the consideration and wisdom of experts in the field of accountancy, having regard to the imponderables which enter the process of valuation of shares.
20. The Assessing Officer has nowhere demonstrated that the methodology adopted by the assessee is not correct. The Assessing officer has simply rejected the valuation of the assessee on the ground that on the date of issue of shares, DCF method was not there in Rule 11 UA.
21. Considering the facts of the case in totality, we do not find any error or infirmity in the findings of the ld. CIT(A).
22. In the result the appeal of the Revenue in ITA No. 5906/DEL/2019 is dismissed.
The order is pronounced in the open court on 12.09.2023.
Author Bio
