INCOME TAX OFFICER, WARD- 1(1)(3), BANGALORE vs. M/S. BANGALORE PAINTS LIMITED, BANGALORE

The revenue is challenging the decision of Ld. CIT(A) in deleting the addition of Rs.3.75 crores made by the A.O. u/s 56(2)(viib) of the Income-tax Act,1961 ['the Act' for short]. In the cross objection, the revenue is contesting the validity of addition made by the A.O. u/s 56(2)(viib) of the Act. However, at the time of hearing, the Ld. A.R. did not press the cross objection and accordingly the same is dismissed as not pressed.

The facts relating to the issue contested by the revenue, viz., addition made u/s 56(2)(viib) of the Act are stated in brief. The assessee is engaged in the business of manufacture of paints. During the year under consideration, the assessee issued 75,000 equity shares of Rs.100/- each at a premium of Rs.567/- per share. Accordingly, the assessee received share premium of Rs.4,25,25,000/-. The assessee submitted a valuation report obtained from a Chartered Accountant, who had computed fair market value of shares under discounted free cash flow (DCF) method. The valuer has computed the fair market value of shares at Rs.665/- per share. We have earlier noticed that the assessee has issued shares at Rs.667/- (Face value of Rs.100/- + premium of Rs.567/-).

The A.O. did not accept valuation report submitted by the assessee on the reasoning that the cash flow projected by the company in share valuation report was not supported by evidences. Accordingly, he proceeded to determine the fair market value under “Net Asset Value” (NAV) method and determined the value of share at Rs.165/- per share. Accordingly, he held that the excess share premium of Rs.3,75,00,000/- collected by the assessee is CO 11/Bang/2020 M/s. Bangalore Paints Pvt. Ltd, Bangalore Page 3 of 6 assessable u/s 56(2)(viib) of the Act. Accordingly, he assessed the above said amount in the hands of the assessee.

Before Ld. CIT(A), the assessee furnished details showing that the projected sales shown the valuation report matches with the actual sales achieved by the assessee. It was further submitted that the A.O. is not entitled to change the method of valuation of the shares adopted by the assessee. In this regard, the assessee placed reliance on the decision rendered by Tribunal in the following cases:- • Innoviti Payment Solutions (P) Ltd. v Income-tax Officer, Ward-3(1)(1), Bengaluru (2019) 102 taxmann.com 59 (Bangalore – Trib). • Rameshwaram Strong Glass (P) Ltd. Vs. ITO (2018) 96 taxmann.com 542 (Jaipur-Trib). • Deputy Commissioner of Income Tax v OzonelandAgro Pvt. Ltd. [TS-6963- ITAT-2018(Mumbai)-O], (2018) 64 ITR 6 (Mumbai). • India Today Online Pvt. Ltd. v ITO, Ward 12(2), New Delhi (TS-130-ITAT- 2019 (DEL).

We heard the parties and perused the record. We notice that the A.O. has changed the method of valuation of shares to “NAV method” as against DCF method adopted by the assessee. In the case of Innoviti Payment Solutions Pvt. Ltd. (supra) the coordinate bench has held that the A.O. is not entitled to change the method of valuation adopted by the assessee and A.O. can scrutinize the valuation report and he can determine afresh valuation offered by CO 11/Bang/2020 M/s. Bangalore Paints Pvt. Ltd, Bangalore

We notice that the Ld. CIT(A) has examined the valuation report furnished by the assessee under DCF method. However, we notice that the Ld CIT(A) has granted relief to the assessee by considering only actual sales and projected sales. He has not examined the reasonableness of discounting factor; the terminal value adopted by the assessee and other items mentioned in the projected financial statements. In our view, the entire aspects of the valuation report should have been examined by the Ld. CIT(A) before coming to the conclusion that the valuation adopted by the assessee was correct. Hence we are unable to approve the order of Ld CIT(A) passed on this issue.

We have noticed earlier that the AO has not examined the valuation report furnished by the assessee. We have also held that the AO cannot change the method of valuation adopted by the assessee. We have also noticed that the Ld CIT(A) has also not fully examined all aspects of the valuation report. Under these set of facts, we are of the view that this issue requires fresh examination at the end of the assessing officer with regard to the aspects other than the projected turnover. Accordingly, we set aside the order passed by Ld. CIT(A) and restore this issue to the file of the A.O. with the direction to examine the valuation report furnished by the assessee with regard to the discount factor and terminal value and any other items mentioned in the valuation report and take appropriate decision in accordance with law. The assessee should be provided with adequate opportunity of being heard. Since the issue is restored to the file of AO, the contention of violation of Rule 46A does not require adjudication.

In the result, the appeal filed by the revenue is treated as allowed and the cross objection filed by the assessee is dismissed.