NAVKAR WOLLENS PRIVATE LIMITED,BIKANER vs. ACIT CIRCLE-3, BIKANER

The method of valuation adopted by AO was wrong as per rule 11UA 3. No affordable or reasonable opportunity was given to assessee before passing the order u/s 144 of the Income Tax Act.

The assessee reserves the right to add, alter or amend any ground of appeal as and when the need arises.

The learned CIT(A) has rejected the contention of the appellant assessee by observing that the valuation report submitted by the appellant, which was based on discounted cash flow (DCF) method and prepared by a Chartered Accountant is legally untenable. Rule 11UA(c)(b) mandates that the DSF valuation must be certified by a Category-I merchant banker and not by a Chartered Accountant. He has further observed that the appellant’s reliance on the case of CIT Vs. VVA Hotels Private Ltd. (2020) is misplaced as that case involves a merchant banker certified valuation which is absent here. The ld. CIT(A) has further observed that appellant had advanced arguments that company incurred business losses on account of depreciation on solar plant is irrelevant. Section 56(2)(viib) specifically deals with the premium received over FMV on the issuance of shares and treats such excess as taxable income regardless of the company’s overall profitability or losses. The learned CIT (A) has held that appellant has not succeeded in discharging its burden to proof to justify the DCF valuation Method adopted.

In the present case, Assessee has chosen the method of valuation i.e. the value substantiated by the Assessee to the satisfaction of the AO which was taken by the Assessee as per computation fair market value of the shares

Ld. CIT DR on the other hand relied on the order of the CIT (A).

We have heard the rival submissions and perused the material on record and case laws cited before us. Admittedly the Assessee Company has computed the fair market value of the shares each by over valuing assets, alleged land, in compliance to Rule 11UA of the Income Tax Rules. The AO has alleged that the computation of fair market value of the shares has been taken by the appellant at the market value of land at Rs. 2,45,50,000/- instead of book value of Rs. 66,87,650/- as recorded in the balance sheet on 31.03.2013 and it has been held as over estimate of FMV by Rs. 44 per share and consequently the income amounting to Rs. 2,34,04,480/- was assessed as income from other sources. The Ld. CIT (A) has merely confirmed the finding of the AO without addressing the contentions raised by the appellant even though the assessee’s reply is produced in the impugned order. It is noted that Asst. Year: 2014-15 learned CIT (A) has mentioned that the reliance of the learned AR on the judgment delivered in the case of CIT Vs. VVA Hotels Pvt. Ltd. was misplaced without distinguishing the fact that how it was misplaced.

We find that the appellant had valued its land at market/ stamp value of Rs. 2,45,50,000/- instead of book value of Rs. 66,87,650/- as mentioned in the balance sheet dated 31.03.2013. The Ld. AR has placed reliance on Clause D of the Formula in Rule 11UA to justify using the higher stamp duty value/fair market value of the land by substantiating to the satisfaction of the AO.

It is noted that the value of property taken by the assessee at Rs. 2,45,50,000/- represents the stamp duty value and that property as per the prevailing DLC rates. Further the difference of market value of the land as at the IGC Khara and book value of land was considered for arriving at the fair market value of the shares. Thus, in our view, the assessee’s approach has been very conservative in determining the fair market value of the shares and the shares so issued by the assessee are not by any stretch or imagination treated as an excess of the fair market value of the shares and share premium was thus found to be in order.

In the present case, the fair market value adopted by the assessee company is also supported by the certificate issued un Rule 11UA of the

In the case of CIT Vs. VVA Hotels Pvt. Ltd. (supra), the Hon’ble Madras High Court has observed that the AO was not justified in adopting NAV method and making addition u/s 56(2)(viib) when the assessee company has used the privilege of choosing the DCF method for arriving at the value of shares instead of NAV method. In conclusion, the Hon’ble Court has observed that AO was not justified in adopting NAV method and making addition u/s 56(2)(viib) when the assessee submitted that value of shares were done by adopting a discounted free cash flow (DSF Method) as per the report of CA.

In another case of Idana Pet Industries Pvt. Ltd. Vs. ITO (supra), the coordinated Jodhpur Bench has upheld DCF method of valuation adopted by assessee by observing that the assessee has taken the DCF method for valuation of shares and explained to the satisfaction of Assessing Officer under Rule 11UA of Income Tax Rules. Further going through the relevant Sections and Rules, Tribunal hold that the matter of valuation to value equity shares has been completely left to the discretion of the assessee and that it was his option whether to choose NAV method, Book Value Method under Clause A or to choose DCF method under Clause B and the Ld. Assessing Officer cannot

Meaning thereby that the option is given to the assessee and that once the assessee has exercised an option and substantiated to the satisfaction of the AO, the AO is bound to accept the same unless disproved the claim by bringing the cogent material evidence on record, to establish that the method of valuation adopted by the assessee, was perverse to the facts on record, and not found satisfactory in the given factual matrix of the case.

Considering the factual matrix and following judicial pronouncement cited supra, we hold that the decision passed by Ld. CIT(A) suffers from

We, therefore, set aside the impugned order and as such, delete the addition of Rs. 2,34,04,480/-.

In the result, the appeal of the assessee is allowed.