GUJARAT FARM SEEDS PVT. LTD.,ANAND vs. THE ITO, WARD-2, ANAND

The brief facts of the case are that the assessee is a company engaged in processing of raw seeds of vegetables. It had filed return of income for A.Y. 2014-15 on 29.11.2014 declaring total income of Rs.21,06,700/-. The case was selected for scrutiny under CASS to verify the large share premium received during the year. In the course of assessment, the AO noticed that assessee had allotted 36,000 shares of face value of Rs.10/- each at a premium of Rs.240/- per share resulting into fresh share capital and share premium aggregating to Rs.90Lakhs. In the course of assessment, the AO examined the fair market value (‘FMV’) of the shares, on the basis of which, the premium was received. The assessee had furnished certificate of the Accountant with the working of FMV as per Discounted Cash Flow (DCF) method. On examination of the valuation, the AO held that the valuation as done by the assessee as per DCF was not correct and accordingly, the same was rejected. The AO worked out the FMV of the shares at Rs.65/- per share and accordingly made the addition of Rs.66,60,000/-. The assessment was completed under Section 143(3) of the Income Tax Act, 1961 (in short ‘the Act’) on 28.12.2016 at total income of Rs.88,04,200/-.

Aggrieved with the order of the AO, the assessee had filed an appeal before the First Appellate Authority, which has been decided vide the impugned order. The Ld. CIT(A) had allowed part relief to the assessee with a direction to adopt the FMV of shares at Rs.105/- per share in place of Rs.65/- as adopted by the AO.

The assessee is now in appeal before us.The following grounds of appeal have been taken in this appeal:

Shri S. N. Divatia, Ld. AR appearing for the assessee submitted that the AO was not correct in rejecting the DCF method adopted by the assessee to compute the FMV of the shares. He submitted that as per Rule 11UA of the IT Rules, the assessee had an option to adopt the FMV of shares either as per Net Asset Value (‘NAV’) method or as per DCF method and that the Revenue cannot force the assessee to adopt anyone particular method of valuation of shares. Therefore, the rejection of DCF method as adopted by the assessee was not correct. The Ld. AR further submitted that assessee had given a revised working of NAV method of valuation before the Ld. CIT(A) but the additional evidences furnished in this respect was not admitted and considered. The Ld. AR emphasized that the Ld. CIT(A) had acknowledged the mistake in the working of NAV as made by the AO and had directed that the value of shares as per NAV should be taken at Rs.105/- instead of Rs.65/- as adopted by the AO. Under the circumstances, the Ld. CIT(A) should have admitted and considered the additional evidence in respect of the working of NAV as submitted by the assessee.

Per contra, Shri R. N. Dsouza, the Ld. CIT. DR supported the order of the Ld.CIT(A).

We have carefully considered the rival submissions. The issue involved in this case is determining the FMV of the shares as per provision of Section 56(2)(viib) of the Act r.w. Rule 11U & 11UA of the IT Rules. As per Rule 11UA, an option is given to the assessee to determine the FMV of the shares either as per NAV method or as per DCF method. In the present case, the assessee had got the valuation done as per DCF method, which was not accepted by the AO. The AO has given a finding that DCF method uses estimation of future’s cash flows and the assessee had got the valuation done on the basis of business plan. The AO rejected the valuation for the reason that the valuation was done only on the basis of projection of balance sheet and P&L account for next 7 years and not on any business plan. Further, that the future cash flows as estimated for the purpose of valuation was highly exaggerated and did not match with actual cash flows. Therefore, the valuation done as per DCF method was held as bogus, sham and not connected with real figures and, therefore, the same was rejected. After rejecting the DCF method of valuation of the assessee, the AO had adopted NAV method for the valuation of shares.

The action of the AO in rejecting the DCF method and thereafter suo-moto adopting NAV method for determining fair market value of shares, cannot be held to be in accordance with the provisions of law. When the option is given to the assessee to adopt either NAV or DCF method, the AO cannot force the assessee to choose anyone particular method. If the valuation done by the assessee as per DCF method was found to be exaggerated and incorrect, the AO should have referred the matter to another Registered Valuerto determine the FMV of shares as per the DCF method afresh. Further, the valuation done by the AO on his own as per NAV method was also not correct and the Ld. CIT(A) had reworked the valuation of Rs.65/- per share as done by the AO to Rs.105/- per share. When the Ld. CIT(A) found that the FMV of shares as done by AO as per the NAV method was not correct, he should have considered the additional evidences of NAV working as filed by the assessee in the course of appeal proceedings and called for a remand report thereon from the AO. The approach of Ld. CIT(A) in reworking the NAV of shares from Rs.65/- per share to Rs.105/- per sharewithout considering the submission of the assessee and also without calling for any report from the AO also can’t be held as correct. The assessee had contended that the NAV valuation should be done as per book value of assets except for land and building, which should be taken as per jantri value. The assessee had also filed a valuation by adopting the jantri value for land and building. The Ld. CIT(A) neither took cognizance of this valuation nor any comment has been given as to why the jantri value for land and building can’t be considered for computing the FMV of shares as per NAV method.

In view of the above facts, we deem it proper to set aside the matter to the file of the AO for afresh consideration of the issue involved. The assessee had followed DCF method of valuation for determining FMV of shares and the AO had rejected the valuation as done by the assessee for the reasons as discussed in the assessment order. The AO is, therefore, directed to refer the matter to a Registered Valuer (a merchant banker or an accountant) for determining the FMV of shares as per DCF method. The value as determined by the Registered Valuer should be confronted to the assessee before taking a final decision in the matter.In case the assessee opts to adopt NAV method of valuation, the AO should consider the contention of the assessee to take the value of land and building as per jantri rate while determining the FMV of shares as per NAV method, and give his finding on adoption of jantri rate or otherwise. The matter regarding determination of FMV of the shares should be decided after allowing a proper opportunity of being heard to the assessee.

In the result, the appeal filed by the assessee is allowed for statistical purposes.