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Facts
The assessee's appeal was filed with a significant delay of 1,678 days due to the unavailability of the CIT(A)'s order on the portal. The primary issue concerns the addition of INR 3,04,42,500/- as share premium, which the Assessing Officer (AO) rejected in favor of the Net Asset Value (NAV) method over the assessee's Discounted Cash Flow (DCF) valuation.
Held
The Tribunal condoned the delay, noting that the Revenue did not file a counter-affidavit and the NFAC order confirmed the unavailability of the CIT(A)'s order. Regarding the main issue, the Tribunal held that the AO's adoption of the NAV method over the DCF method lacked substantiation. The Tribunal cited judicial precedents, including a Delhi High Court judgment, which upheld the DCF method when it meets Rule 11UA criteria and stated that the AO cannot change the method but can scrutinize its working.
Key Issues
1. Condonation of delay in filing the appeal. 2. Whether the AO was justified in rejecting the DCF method for share valuation in favor of the NAV method. 3. Failure to permit setoff of declared losses against the income determined by the AO.
Sections Cited
56(2)(viib), 68, 71, 143(3), 11UA
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘C’ BENCH, BANGALORE
Before: SHRI WASEEM AHMED & SHRI KESHAV DUBEY
PER WASEEM AHMED, ACCOUNTANT MEMBER:
This is an appeal filed by the assessee against the order passed by the ld. CIT (Appeal) – 3, Bengaluru dated 25/09/2019 in for the assessment year 2016-17.
At the outset, it is pertinent to note that this appeal was filed with a delay of 1,678 days. In justifying the delay, the appellant has moved a petition for condonation, substantiated by an affidavit asserting that the order from the CIT(A) was neither served upon the appellant nor accessible on the income tax portal. The Authorized Representative (AR) referenced the National Faceless Assessment Centre (NFAC) order under Section 154 read with Section 250 of the Income Tax Act, dated 21.03.2024, confirming that the appellate order dated 25-09-2019 was not available on the portal. Consequently, the ld. AR argued that circumstances beyond the appellant's control precluded timely filing the appeal. The ld. AR also emphasized that the merits of the case substantiate a favorable consideration, thus warranting leniency on procedural grounds.
On the other hand, the ld. Departmental Representative (DR) submitted that the delay was excessive and argued that such a substantial lapse should not be condoned without compelling justification.
We have duly considered the rival contentions and perused the materials evidence available on record. The delay, although considerable, is not the determinative factor; rather, the sufficiency of the cause for such delay holds paramount importance, in line with established judicial precedents. The Hon’ble Supreme Court in Collector, Land Acquisition v. Mst. Katiji (167 ITR 471) underlined that condonation of delay serves to prevent meritorious claims from being dismissed on procedural technicalities. Further, we also note that the Hon’ble Gujarat High Court in the case of Vareli textile industry versus CIT reported in 154 Taxman 33 has held as under:
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Page 3 of 8
It is equally well-settled that where a cause is consciously abandoned (as in the present case) the party seeking condonation has to show by cogent evidence sufficient cause in support of its claim of condonation. The onus is greater. One of the propositions of settled legal position is to ensure that a meritorious case is not thrown out on the ground of limitation. Therefore, it is necessary to examine, at least prima facie, whether the assessee has or has not a case on merits.
4.1 In view of above, the principle is laid down that delays attributable to genuine, uncontrollable circumstances warrant condonation to uphold substantive justice.
4.2 In the instant matter, it is pertinent to note that the Revenue has not filed any counter-affidavit opposing the delay, and the NFAC order expressly confirms that the CIT(A)’s order was unavailable on the portal. This substantiates a reasonable cause, satisfying the requisite threshold for condonation. Therefore, in the interests of substantial justice, the delay in filing the appeal is hereby condoned and proceed to adjudicate the issue on merit.
4.3 At the outset, the ld. AR submitted that the amount involved in dispute in ground No. 3 is miniscule and therefore, he has been instructed by the assessee such a ground of appeal raised in the memo of appeal. Accordingly, we dismiss the same as not pressed.
5. The primary issue under appeal pertains to the CIT(A)’s affirmation of an addition of INR 3,04,42,500/- under Section 56(2)(viib) of the Act, relating to a share premium received by the appellant.
5.1 The appellant operates within the Agri-trade sector, primarily sourcing agricultural produce, vegetables, and fruits directly from . farmers and wholesalers for B2B transactions. During the assessment year, the appellant issued 3,38,250 shares to its holding entity, Grama Suchana Solution Pvt. Ltd., at a premium of INR 90 per share. To substantiate this premium, the appellant submitted a valuation report based on the Discounted Cash Flow (DCF) method, which is a recognized method under Rule 11UA of Income Tax Rule. The DCF valuation projected future earnings over a five-year horizon, considering growth data and market share from Karnataka, Tamil Nadu, and Andhra Pradesh.
5.2 However, the AO questioned the reliability of the DCF-based valuation, identifying certain issues as detailed below: i. The valuer’s disclaimer regarding verification of management’s financial projections. ii. Inclusion of anticipated share capital and premium projections for FY 2017-2020. iii. Revenue projections for FY 2017 doubling without substantive justification. iv. Absence of Weighted Average Cost of Capital (WACC) in the projected cost calculation.
5.3 Based on these concerns, the AO rejected the DCF valuation in favor of the Net Asset Value (NAV) method, as prescribed under Section 56(2)(viib) of the Act read with Rule 11UA of Income Tax Rules, ultimately assigning a nil fair market value to the shares and disallowing the share premium of INR 3,04,42,500/- only treating as unexplained cash credit under section 68 of the Act.
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5.4 On appeal, the ld. CIT(A) upheld the AO’s position, reasoning that the valuer's reliance on unverified projections, furnished by the assessee, compromised the integrity of the valuation. The ld. CIT(A) referenced the ITAT’s decision in Agro Portfolio Pvt. Ltd. v. ITO (94 Taxmann.com 112), which had similarly supported NAV over DCF in cases of unverifiable projections.
Being aggrieved by the order of ld. CIT(A), the assessee is in appeal before us.
The ld. AR before us contended that the reliance placed by the ld. CIT(A) in the order of ITAT in the case of Agro Tech Fertilizers Pvt. Ltd., Vs. ITO (supra) was reversed by the judgment of Hon’ble High Court of Delhi in the case of Agro Portfolio Pvt. Ltd. Vs. PCIT in ITA 1385 of 2018 vide order dated 04/04/2024 reported in 161 taxmann.com 303.
7.1 The ld. AR further contended that the revenue cannot fault with the method adopted for valuing the shares. According to the ld. AR, the assessee has adopted one of the methods prescribed under Rule 11UA of Income-tax Rule. The ld. AR in support of his contention relied on the order of this Tribunal in the case of Pisces Services Pvt. Ltd. 165 Taxmann.com 840 [2024] (Bang. Trib.].
On the other hand, ld. DR vehemently supported the order of the authorities below.
We have heard the rival contentions of both the parties and perused the materials available on record. The facts involved in the case on hand .
Page 6 of 8 are not in dispute and the same have already been elaborated in the preceding paragraphs. Therefore, for the sake of brevity and convenience, we are not inclined to repeat the same. Upon review, it is apparent that the CIT(A) relied on an ITAT decision in the case of Agro Portfolio Pvt. Ltd. (supra), which was subsequently overturned by the Hon’ble Delhi High Court (supra), in which the Hon’ble High Court directed the AO to reconsider valuation based on the DCF method. This reversal reaffirms the DCF method as an accepted approach, provided it meets criteria under Rule 11UA of Income Tax Rules. The relevant extracts of the judgment of Hon’ble Delhi High Court is reproduced as under: “22. Accordingly and for all the aforesaid reasons, we allow the instant appeal and set aside the order of the ITAT dated 16 May 2018. The Questions of Law as framed, namely, Question A and C are answered in the negative and in favor of the appellant assessee. In light of the answers rendered in respect of the aforenoted two questions, the additional questions which are framed would not merit an independent examination. The matter shall in consequence stand remitted to the AO which shall undertake an exercise of valuation afresh in accordance with the DCF method.
We also accord liberty to the AO to determine the FMV of the shares bearing in mind the DCF Method by having the same independently determined by a Valuer appointed for the aforesaid Purpose.”
9.1 Considering these developments, the AO’s adoption of the NAV method over DCF lacks substantiation in the given facts and circumstances. Furthermore, we also note that this Tribunal in the case of M/s Pisces Services Pvt. Ltd. 165 Taxmann.com 840 [2024] (Bang. Trib.] has observed as under: 20.2 From the perusal of the above rule, it is transpired that option to choose the method provided under clause (a) or clause (b) is available with assessee. Admittedly, the method adopted by the assessee i.e. DCF method for determining fair market value was one of the methods prescribed under the provisions of section 56(2)(viib) read with income tax rule 11UA of Income Tax Rule. The AO cannot interfere in the method selected for the valuation of the shares. However, the AO can scrutinize the contents or working of the method adopted by the assessee so as to find out the fair valuation. In case, the AO is .
Page 7 of 8 not satisfied with the working of the assessee, then the AO may draw fresh valuation or get fresh valuation report from independent valuer, but such fresh valuation can only be done as per the method adopted by the assessee as in the present case assessee adopted DCF method. As such the AO cannot change the method from DCF to NAV method. In holding so, we draw support and guidance from the judgment of Hon'ble Bombay High Court in the case of Vodafone M-Pesa Ltd. v. Pr. CIT [2018] 92 taxmann.com 73/256 Taxman 240 (Bombay), 9.2 In view of the above, we set aside the order of the learned CIT-A and remit the issue to the file of the AO for fresh adjudication after considering the aforesaid discussion as per the provisions of law. Hence the ground of appeal of the assessee is hereby allowed for statistical purposes.
In the next issue, the appellant also contested the CIT(A)’s 10. failure to permit setoff of declared losses against the income determined by the AO under Section 143(3), arguing that such setoff is a statutory right under Section 71 of the Act. The AR requested that this issue be remanded to the AO for a comprehensive review, which the DR did not contest.
10.1 At the outset, we note that there is no finding given by the authorities below for not allowing the set off the loss declared by the assessee in the return of income against the income determined by the AO in the assessment framed u/s 143(3) of the Act vide order dated 28/12/2018. Furthermore, given the appellant’s arguments and the absence of opposing evidence from the Revenue, this issue of setoff is remanded to the AO, in the interest of justice and fair play, for fresh adjudication as per statutory provisions. Hence, the ground of appeal of the assessee is allowed for statistical purposes.
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In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in court on 26th day of November, 2024 Sd/- Sd/- (KESHAV DUBEY) (WASEEM AHMED) Judicial Member Accountant Member Bangalore Dated, 26th November, 2024 / vms / Copy to:
1. 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore.
6. Guard file By order Asst. Registrar, ITAT, Bangalore .