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Facts
The assessee issued 6,00,000 equity shares at a premium of Rs. 190 per share. The Assessing Officer (AO) rejected the assessee's Fair Market Value (FMV) valuation based on the Discounted Cash Flow (DCF) method under Rule 11UA, citing significant divergence between projected and actual profits. The AO substituted the FMV using the Net Asset Value (NAV) method and made an addition of Rs. 6,58,62,000 under Section 56(2)(viib).
Held
The CIT(A) and subsequently the Tribunal held that the AO was not justified in substituting the DCF method with the NAV method merely due to a subsequent divergence between projections and actuals. Valuation is an exercise by experts, and their report cannot be discarded without proving perversity or mala fides, especially when shares were issued to existing group entities without doubt on their identity or creditworthiness. The addition made by the AO was deleted.
Key Issues
Whether the Assessing Officer can reject the assessee's Discounted Cash Flow (DCF) valuation of shares issued at a premium under Rule 11UA and substitute it with the Net Asset Value (NAV) method solely based on a divergence between projected and actual profits, thereby making an addition under Section 56(2)(viib).
Sections Cited
250, 143(3), 115JB, 56(2)(viib), 271(1)(c), 274
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “ C ” BENCH, AHMEDABAD
Before: Ms SUCHITRA KAMBLE & SHRI MAKARAND V. MAHADEOKAR
O R D E R PER MAKARAND V. MAHADEOKAR, AM: ] ] This appeal by the Revenue is directed against the order dated 25.04.2024 of the Commissioner of Income-tax (Appeals) [hereinafter referred to as “the CIT(A)”] passed under section 250 of the Income-tax Act, 1961 [hereinafter referred to as “the Act”] for Assessment Year 2016-17. The ACIT, Circle-2(1)(1), Ahmedabad [hereinafter referred to as “Assessing Officer or AO”], DCIT Vs. Goldmine Commodities Pvt. Ltd. Assessment Year 2016-17 2 had framed the assessment under section 143(3) vide his order dated 15.12.2018. Facts of the Case
The assessee filed its return of income on 05.10.2016 declaring total income of Rs. 3,26,60,820. The book profit under section 115JB was declared at Rs. 3,34,20,417. The case was selected through CASS for complete scrutiny. The assessment was completed under section 143(3). During the relevant previous year the assessee issued 6,00,000 equity shares of face value Rs. 10 per share at a premium of Rs. 190 per share, as under: - Shri Kirit Vassa 1,00,000 shares - M/s Goldmine Stocks Pvt. Ltd. 5,00,000 shares.
The assessee thus received share capital of Rs. 60,00,000/- and share premium of Rs. 11,40,00,000/-.
To verify the fair market value (FMV), the AO called for valuation under Rule 11UA. The assessee furnished a certificate signed by M/s Bhadresh Shah & Associates, Chartered Accountants (M. No. 033086). The AO noted that the said accountant was also the assessee’s statutory/tax auditor and proposed that this was in violation of Rule 11UA; the assessee was accordingly show-caused why such working should not be treated as invalid and FMV be recomputed as per Rule 11UA. The material on record shows that the assessee computed FMV using three recognised approaches, namely, Net Asset Value DCIT Vs. Goldmine Commodities Pvt. Ltd. Assessment Year 2016-17 3 method at Rs. 90.23 per share, Earnings Capitalisation method at Rs. 151.55 per share and Discounted Cash Flow (DCF) method at Rs. 214.47 per share; the certificate itself stated that NAV is the most conservative and that, for valuation of the assessee’s shares, the DCF method had been considered.
The AO examined the DCF working and recorded that no basis was furnished for figures used in projections. Five years’ numbers were considered for valuation for F.Y. 2014-15 to F.Y. 2018-19 and the per-share value was worked out at Rs. 214.47; however, for years where audited results were available, the projections varied widely from the actual audited figures. The AO concluded that projections were inordinately inflated to arrive at a higher value, observing that actual revenue and profits for A.Ys. 2016-17 to 2018-19 were lower by a factor of about 2 to 15 compared to the projections. The AO also recorded that FMV as on 31.03.2015 as per Rule 11UA was only Rs. 90.23 per share.
The AO reproduced the comparative statement of “Profit After Tax (PAT) as per projected method” vis-à-vis “PAT as per audited financials” for certain years, which highlighted the wide divergence between projections and actual results. The details are as under:
Financial PAT as per Projected Method PAT as per Audited Year (Rs. in lacs) Financials (Rs. in lacs) DCIT Vs. Goldmine Commodities Pvt. Ltd. Assessment Year 2016-17 4 2014-15 199.85 193.37 2015-16 465.82 228.52 2016-17 536.10 82.97 2017-18 616.90 42.35
The Assessing Officer observed from the above that the projections adopted for the Discounted Cash Flow (DCF) method were highly inflated and unrealistic as compared to the actual audited figures and therefore could not be relied upon for determining the fair market value of shares.
On these premises, the AO invoked section 56(2)(viib). The AO determined the excess over FMV at Rs. 109.70 per share and, applying it to 6,00,000 shares, quantified the addition at Rs. 6,58,62,000 as “income from other sources”. A show-cause notice dated 09.12.2018 was issued proposing the addition. The assessee did not file any reply, therefore, the AO proceeded to add Rs. 6,58,62,000/- and also initiated penalty under section 271(1)(c) read with section 274. The assessed income was computed at Rs. 9,85,22,820/-.
The assessee preferred an appeal before CIT(A). The CIT(A) noted that - the valuation report on DCF was signed and certified by Apaji Amin & Co. LLP, an independent chartered accountant who was not the statutory auditor; DCIT Vs. Goldmine Commodities Pvt. Ltd. Assessment Year 2016-17 5 - such report and supporting submissions were tendered during assessment and again at appellate stage; - the projections and reasons for variances had been explained in detail; and - DCF is a recognised method under Rule 11UA and cannot be substituted by NAV in the absence of cogent material showing perversity in the method or its application.
After considering the rival positions, the CIT(A) recorded that it is undisputed that the assessee obtained a valuation report from an independent chartered accountant adopting DCF, which is one of the recognised methods under Rule 11UA; that such method is necessarily based on projections which, in turn, depend on multiple factors like growth of the company, general economic and market conditions, demand and supply, cost of capital and other variables explained by the assessee in its letter dated 14.12.2018; and that valuation is inherently an exercise based on approximation and cannot be rejected merely because actual performance later diverges from projections.
In support, the CIT(A) relied upon judicial precedents and reproduced extracts, including the judgement of Hon’ble Delhi High Court in case of PCIT v. Cinestaan Entertainment Pvt. Ltd. (Del HC) and CM Appeal No. 54134/2019 [TS- 5099-HC-2021(Delhi)-O], stating that the AO could have determined FMV after invoking section 56(2)(viib) only by rejecting the valuer’s report based on one of the prescribed methods and conducting his own valuation; that “Courts have repeatedly held DCIT Vs. Goldmine Commodities Pvt. Ltd. Assessment Year 2016-17 6 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”; and that the Revenue had not demonstrated any perversity in the methodology adopted. The CIT(A) also referred to decisions of the Delhi Bench of the Tribunal in DCIT v. Homtrail Buildtech (P.) Ltd. [2023] 155 taxmann.com 578, DCIT v. Kissandhan Agri Financial Services (P.) Ltd.[2023] 150 taxmann.com 390, and BLP Vayu (Project-1) (P.) Ltd. v. PCIT [2023 151 taxmann.com 47, while observing that the shares in the present case were issued to existing group entities and that the AO had not doubted their identity or creditworthiness.
On the totality of the facts and the judicial pronouncements noted, the CIT(A) held that the AO was not justified in changing the method from DCF to NAV merely on the ground that the projected figures did not match later actuals. The CIT(A) concluded that the FMV determined as per DCF could not be substituted by NAV when the option to choose an accepted method under Rule 11UA vested with the assessee and there was no perversity shown. The addition of Rs. 6,58,62,000 made under section 56(2)(viib) was deleted and the corresponding grounds were allowed.
Aggrieved, the Revenue is in appeal before us, raising the following grounds: DCIT Vs. Goldmine Commodities Pvt. Ltd. Assessment Year 2016-17 7 1) In the facts and on the circumstances of the case and in law, the ld. CIT(A) has erred in deleting the addition of Rs. 6,58,62,000/- made by A.O. on account of excess amount received as security premium u/s. 56(2)(viib) of the Act, ignoring the facts of the case that assessee has incorrectly valued the shares at much higher value than the FMV of shares. 2) The Revenue craves leave to add/alter/amend and /or substitute any or all of the grounds of appeal.
The learned Departmental Representative (DR), supporting the grounds raised by the Revenue, relied heavily upon the order of the Assessing Officer.
Per contra, the learned Authorised Representative (AR) for the assessee raised preliminary objections regarding the very maintainability of the present appeal filed by the Revenue. It was contended that the memorandum of appeal in Form No. 36 has not been signed by a person duly authorised in law to institute such proceedings on behalf of the Revenue. According to the AR, the appeal is therefore defective and invalid.
We have carefully considered the rival submissions and perused the orders of the authorities below as well as the material placed on record. The preliminary objection raised by the learned Authorised Representative regarding the validity of the appeal on the ground of defective authorisation in Form No. 36 has been examined. The record shows that the memorandum of appeal has been signed on behalf of the Revenue by Dy.Commissioner of DCIT Vs. Goldmine Commodities Pvt. Ltd. Assessment Year 2016-17 8 Income Tax, Central Circle, 1(4), Ahmedabad who is an officer of the Income Tax Department. In the absence of any specific material demonstrating that the officer concerned lacked authority under law or instructions issued by the Central Board of Direct Taxes (CBDT), we are unable to accept the contention of the Ld.AR that the appeal is defective and invalid. At best, such a defect, if any, is procedural and curable, and does not go to the root of our jurisdiction to entertain the appeal. But in the present appeal filed by Revenue there is no such defect. The objection is therefore rejected.
Coming to the merits, it is an undisputed fact that the assessee issued 6,00,000 shares during the year under consideration at a premium of Rs. 190 per share, thereby receiving share capital of Rs. 60,00,000 and share premium of Rs. 11,40,00,000. The Assessing Officer invoked section 56(2)(viib) of the Act on the reasoning that the fair market value as per Rule 11UA was only Rs. 90.23 per share (NAV method), whereas the assessee had adopted the Discounted Cash Flow (DCF) method showing a much higher value of Rs. 214.47 per share. The AO observed that the projections furnished in the DCF valuation were inflated and unrealistic, as evident from the wide divergence between the projected PAT and the actual audited PAT for the same years. On this premise, the AO substituted the DCF method with NAV method and made the impugned addition of Rs. 6,58,62,000 under section 56(2)(viib). DCIT Vs. Goldmine Commodities Pvt. Ltd. Assessment Year 2016-17
The CIT(A), however, found merit in the assessee’s contention that the DCF valuation had been prepared by an independent chartered accountant, namely Apaji Amin & Co. LLP, and that such method is specifically recognised under Rule 11UA of the Income-tax Rules. The CIT(A) observed that valuation under the DCF method is inherently dependent on future projections, which are to be made on the basis of commercial prudence and professional expertise, and cannot be rejected merely because actual figures in subsequent years turn out differently. The CIT(A) also relied upon binding judicial precedents, including the judgment of the Hon’ble Delhi High Court in PCIT v. Cinestaan Entertainment Pvt. Ltd.(supra) and the decisions of the coordinate Benches in DCIT v. Homtrail Buildtech (P.) Ltd. (supra), DCIT v. Kissandhan Agri Financial Services (P.) Ltd. (supra) and BLP Vayu Project-1 (P.) Ltd. v. PCIT(supra), wherein it has been consistently held that once the assessee has opted for DCF and furnished a duly certified valuation report, the AO has no jurisdiction to disregard the method and substitute NAV merely on the ground of subsequent variations between projections and actuals.
We find ourselves in agreement with the reasoning adopted by the CIT(A). Valuation is not an exact science but a technical exercise involving approximations and forecasts. Courts have repeatedly held that such exercise is best left to experts, and unless perversity or mala fides are shown in the report of the valuer, the same cannot be discarded by the AO. In the present DCIT Vs. Goldmine Commodities Pvt. Ltd. Assessment Year 2016-17 10 case, the Revenue has not brought any material on record to establish that the DCF valuation furnished by the assessee was inherently flawed or manipulated. The mere fact that actual performance of the company in later years did not match projections cannot, by itself, be a ground for rejecting the valuation.
We also take note of the undisputed fact that the shares were issued only to existing group entities, namely, Shri Kirit Vassa and M/s Goldmine Stocks Pvt. Ltd. There is no dispute raised by the AO as to their identity or creditworthiness. Section 56(2)(viib) is a deeming provision designed to curb inflow of unaccounted money through share premium from resident investors. Taxing premium received from one’s own group shareholders, in the absence of any evidence of colourable device or infusion of unaccounted funds, would be contrary to the legislative intent and lead to anomalous results, as rightly observed by the CIT(A) relying upon coordinate bench precedents.
In light of the above discussion, we hold that the CIT(A) was justified in deleting the addition of Rs. 6,58,62,000 made under section 56(2)(viib). The Assessing Officer was not correct in substituting the DCF method with NAV method merely on the basis of subsequent divergence between projections and actuals. We find no infirmity in the well-reasoned order of the CIT(A) warranting our interference. DCIT Vs. Goldmine Commodities Pvt. Ltd. Assessment Year 2016-17
In the result, the appeal filed by the Revenue is dismissed.