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

per share arrived at in the said valuation report.

3.1 It was submitted by the Ld. AR that the Assessing Officer

(AO) disregarded the valuation report mainly on ground that

valuation of equity shares was based on a projection of revenue

which did not match with actual revenues of subsequent years. It

was further submitted that in addition to the above, the AO adopted

the Fair Market Value of such shares at Rs. 10/- being the price

paid by the Rockland Hospital to acquire shares of the erstwhile

shareholders in the month of November, 2014 and this action of the

AO was confirmed by Learned Commissioner of Income Tax

(Appeals).

6 ITA No.316/Del/2019 Rockland Diagnostics Services Pvt. Ltd. vs. ITO

3.2 The Ld. AR further submitted that the entire

amount received on issuance of fresh shares was invested in

Capital Work in Progress, which at 31, March 2015, stood at Rs.

1.44 crores in the books of accounts which would clearly show that

the requirement of fresh share capital at a premium was used for

bona fide purposes and in furtherance of the objective to start the

diagnostic centre.

3.3 The Ld. AR submitted that the main issue

arising in the appeal is whether the valuation as per this method

prescribed under section 56 (2)(viib) of the Act could be disregarded

on mere assumptions/surmises on the ground that the valuation of

equity shares was based on projection of revenue which did not

match with the actual revenues of subsequent years.

3.4 The Ld. AR submitted that the shareholder

who invested in the shares is “Rockland Hospital” who has a good

track record and has been successfully running ‘three hospitals’ in

Delhi and NCR under the brand name of “Rockland”. The footfall of

patients from many segments of society is very high i.e.

ECHS/CGHS/Public sector companies. Being a company engaged

7 ITA No.316/Del/2019 Rockland Diagnostics Services Pvt. Ltd. vs. ITO

in healthcare business having exceptional growth prospects in

future and promoters being themselves of reputed health services

provider, the estimates of future revenue were in line with the

industry growth and prospects and accordingly, the application of

the DCF method is the most appropriate method and is recognized

in Rule 11UA of the Income Tax Rules, 1962 by the legislature

itself.

3.5 The Ld. AR submitted that there are numerous

judicial Precedents wherein the Tribunal has held that as per

section 56(2)(viib) read with Rule 11UA of the Rules, every assessee

has an option to do valuation of shares and determine fair market

value either by DCF method or NAV method and that the assessing

officer cannot examine or substitute his own value in place of value

so determined. It was further argued that the Tribunal, in

numerous decisions, had specifically rejected the contention of the

Revenue to rely of comparison with actual revenues in future with

estimated future revenue disclosed in the valuation report. Reliance

was placed on the following orders passed by the Delhi Benches of

the Tribunal:

8 ITA No.316/Del/2019 Rockland Diagnostics Services Pvt. Ltd. vs. ITO

• Cinestaan Entertainment (P.) Ltd. v. Income Tax Officer, Ward- 6(‘2), New Delhi [2019] 106 taxmann.com 300 (Delhi - Trib.)

• Intelligrape Software Pvt. Ltd., v. ITO, ITA No. 3925/Del/2018(Delhi - Trib.)

• Karmic Lab vs ITO, ITA No. 3955/MUIT1/2018, 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.

9 ITA No.316/Del/2019 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.

10 ITA No.316/Del/2019 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

11 ITA No.316/Del/2019 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

12 ITA No.316/Del/2019 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

13 ITA No.316/Del/2019 Rockland Diagnostics Services Pvt. Ltd. vs. ITO

case of Intelligrape Software Pvt. Ltd., vs. ITO in ITA No.3925-Del-

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.

14 ITA No.316/Del/2019 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

15 ITA No.316/Del/2019 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.

Order pronounced on 25th February, 2021. Sd/- Sd/- (N.K. BILLAIYA) (SUDHANSHU SRIVASTAVA) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 25/02/2021 PK/Ps

16 ITA No.316/Del/2019 Rockland Diagnostics Services Pvt. Ltd. vs. ITO