ROCKLAND DIAGNOSTICS SERVICES P.LTD,NEW DELHI vs. ITO, WARD-21(3), NEW DELHI

• Karmic Lab vs ITO, order dated August 10, 2010 Mum) • India Today Online (P.) Ltd. v. Income Tax Officer, Ward-12(2), New Delhi [2019] 104 taxmann.com 385 (Delhi - Trib.)

3.6 The Ld. AR also submitted that the DCF method is a recognized method but it is not an exact science and can never be done with arithmetic precision and, therefore, the valuation by a valuer has to be accepted unless, specific discrepancy in the figures and factors taken are found. The Ld. AR also submitted that future events are beyond the control of the Assessee Company, and cannot be made the basis to allege that the valuation made prior to the future events is unrealistic or incorrect.

Rockland Diagnostics Services Pvt. Ltd. vs. ITO 3.7 With reference to the disallowance of the ROC Fees, the Ld. AR submitted that the assessee had amortised the same as per law.

4.0 In response, the Ld. SR. DR placed reliance on the observations and findings of the Ld. CIT (A) and submitted that the Ld. CIT (A) has made a categorical observation that the valuation report was prepared by a Chartered Accountant on the basis of the data provided by the management of the company who had not gone into the accuracy of the information relied upon in his report and that the Chartered Accountant had not made any independent investigation, examination, analysis, etc on the reliability of the data provided by the management of the company as was evident from the disclaimer certificate by the Chartered Accountant in the valuation report.

4.1 With respect to the disallowance of ROC fees, the Ld. Sr. DR placed reliance on the observations of the Assessing Officer.

Rockland Diagnostics Services Pvt. Ltd. vs. ITO 5.0 We have heard the rival submissions and have also perused the material on record. So far as the issue of addition of Rs.1,07,82,453/- is concerned, it is seen that the Assessing Officer has disregarded the valuation report mainly on the ground that valuation of equity shares was based on projection of revenue which did not match with the actual revenue during the subsequent years. In addition, the Assessing Officer has also adopted the Fair Market Value of the shares at Rs.10/- being the price paid by the Rockland Hospital Limited to acquire shares of erstwhile shareholders in the month of November, 2014. Apparently, the Assessing Officer has proceeded on mere assumptions and surmises while disregarding the valuation report submitted by the assessee. The assessee has applied the DCF method for the purposes of valuation of shares and has relied on the valuation report of the Chartered Accountant in this regard. There is settled law on the issue that as per Sec. 56(2)(viib) of the Act read with Rule-11 UA of the Income tax Rules, 1962, every assessee has an option to do valuation of shares and determine its Fair Market Value either by DCF method or NAV method, and that the Rockland Diagnostics Services Pvt. Ltd. vs. ITO Assessing Officer cannot examine or substitute his own value in place of the value so determined. The ITAT Delhi Bench in the case of Cinestaan Entertainment (P.) Ltd. vs. ITO, reported in [2019] 106 taxmann.com 300 (Delhi Tribunal), has held as under:

“32. Section 56 (2) (viib) is a deeming provision and one cannot expand the meaning of scope of any word while interpreting such deeming provision. If the statute provides that the valuation has to be done as per the prescribed method and if one of the prescribed methods has been adopted by the assessee, then Assessing Officer has to accept the same and in case he is not satisfied, then we do not we find any express provision under the Act or rules, where Assessing Officer can adopt his own valuation in DCF method or get it valued by some different Valuer. There has to be some enabling provision under the Rule or the Act where Assessing Officer has been given a power to tinker with the valuation report obtained by an independent valuer as per the qualification given in the Rule 11U. Here, in this case, Assessing Officer has tinkered with DCF methodology and rejected hy comparing the projections with actual figures. The Rules provide for two valuation methodologies, one is assets based NAV method which is based on actual numbers as per latest audited financials of the assessee company. Whereas in a DCF method, the value is based on estimated

Rockland Diagnostics Services Pvt. Ltd. vs. ITO future projection. These projections are based on various factors and projections made by the management and the Valuer, like growth of the company, economic/market conditions, business conditions, expected demand and supply, cost of capital and host of other factors. These factors are considered based on some reasonable approach and they cannot be evaluated purely based on arithmetical precision as value is always worked out based on approximation and catena of underline facts and assumptions. Nevertheless, at the time when valuation is made, it is based on reflections of the potential value of business at that particular time and also keeping in mind underline factors that may change over the period of time and thus, the value which is relevant today may not be relevant after certain period of time. ...

5.1 Similarly, it has been held that where a valuation report is to be rejected, the authority should pinpoint any specific inaccuracies or short comings in the DCF valuation report. In the Rockland Diagnostics Services Pvt. Ltd. vs. ITO case of Intelligrape Software Pvt. Ltd., vs. ITO in 2018 (Delhi Trib.), it has been held as under:

“23. 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 Id. 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.

Rockland Diagnostics Services Pvt. Ltd. vs. ITO wherein it has been held that the Assessing Officer cannot substitute his own value in place of the value determined either on DC” method or NAV method, the appeal of the assessee is hereby allowed.”

5.2 Thus, it has been held by the Co-ordinate Bench of the Tribunal that in absence of any specific inaccuracies or short comings in the DCF valuation report other than stating that year- wise results as projected are not matching with the actual results declared in the final accounts, the Assessing Officer cannot substitute his own value in place of the value determined either on DCF method or NAV method. Therefore, we are of the considered opinion that the Lower Authorities were not justified in rejecting the valuation report as submitted by the assessee in this regard. We also note that the observation of the Ld. CIT (A) that the Chartered Accountant has relied on the data supplied by the assessee in this regard is irrelevant in as much as the Chartered Accountant has carried out the valuation in accordance with the prescribed method as per Rule-11UA of the Income Tax Rules, 1962 and, therefore, such valuation report, in absence of specific defects being pointed out, has a binding value. We note that neither the Ld. CIT (A) nor

Rockland Diagnostics Services Pvt. Ltd. vs. ITO the Assessing officer have evaluated the valuation report in light of the relevant material but have only rejected the same on assumptions and presumptions and the same cannot be upheld. In our considered view the Assessing officer should examine the issue afresh after giving due opportunity to the assessee to present its case in this regard. Thus, this ground is allowed for statistical purposes.

5.3 As far as the issue of disallowance of ROC fees is concerned, it is settled law that ROC fees paid are to be considered as preliminarily expenditure within the meaning of Section 35D of the Act. The same is directed accordingly. Accordingly, this ground stands allowed.

6.0 In the final result, the appeal of the assessee stands allowed.