AI-YASEEN TRADING CO.P.LTD,MEERUT vs. ITO, WARD-1(1), MEERUT

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ITA 6244/DEL/2017Status: DisposedITAT Delhi28 June 2023AY 2013-149 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the assessee had the option to choose the valuation method as per Rules 11U and 11UA, and the AO could not substitute his own valuation. The rejection of the DCF method of valuation by the lower authorities was set aside.

What were the facts?

The assessee company received share application money in FY 2010-11 and allotted shares at a premium in FY 2012-13. The Assessing Officer (AO) made an addition of Rs. 48,45,000 under Section 56(2)(viib) as the issue price was considered in excess of the fair market value (FMV). The Commissioner (Appeals) upheld the AO's order.

What were the issues?

Whether the addition made under Section 56(2)(viib) for shares issued at a premium, based on a valuation report using the DCF method, was justified when the AO rejected this method and used the NAV method.

Which sections of the Income-tax Act were involved?

Section 56(2)(viib)

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Income Tax Appellate Tribunal, DELHI BENCH ‘A’: NEW DELHI

For Appellant: Mr. Monit Kumar, Advocate
For Respondent: Mr. Kanv Bali, Sr. DR
Hearing: 12/04/2023Pronounced: 28/06/2023

per share) and remaining sum of Rs.48,45,000/- was treated as amount received in excess of fair market value and consequentially brought to tax as income from other sources in terms of section 56(2)(viib) of the Act.

6.

This action of the Ld. AO is upheld by the Ld. CIT(A).

7.

It is not in dispute that the assessee had furnished the name of the share holders, address of the share holders, amount received from the share holders together with their PAN. The assessee has also furnished the bank accounts of the share holders, copy of income tax returns and copy of capital account of share holders Page 5 of 9 M/s AI-Yaseen Trading Co. P. Ltd. vs. ITO duly explaining the sources for making investment in share capital and share premium with the assessee company. The assessee has furnished during the course of assessment proceedings, valuation report from independent Chartered Accountant, Mr. Deepak Agarwal vide valuation report dated 22/02/2013, who had valued the shares using DCF method at Rs.992 per share to be the fair market value. Under the DCF method, obviously the valuation report if carried out by any person, had to value the shares by relying on certain assumptions and the projections about the performance of the company which would be only based on the representations made by the management of the such assessee company. The projections considered in the valuation report not matching with the actually performance in our considered view, is an irrelevant consideration. Usage of DCF method for the purpose of valuation of shares is an approved method in Rule 11U and 11UA of the Income Tax Rules. On perusal of the said Rules, an option is given to the assessee to choose either of the methods prescribed therein. Hence, the rejection of valuation report submitted by the assessee using DCF method by the lower authorities is hereby dismissed. As per DCF method of valuation, the fair market value of Page 6 of 9 M/s AI-Yaseen Trading Co. P. Ltd. vs. ITO the shares have been arrived at Rs.1136.92 and Rs.992 per share by Chartered Accountant namely Sh. A.K. Agarwal and Sh. Deepak Kumar Agarawal respectively. The assessee had ultimately issued shares to the aforesaid five share holders at a price below the fair market value of shares determined by the valuers in the valuation report. Obviously, the fair market value determined in the valuation report by the valuers represent the maximum value beyond which the shares could not be issued by any company. Hence, we do not find any justification in the action of the lower authorities in dismissing the DCF method of valuation and substitute it with any of the method of valuation and making addition u/s 56(2)(viib) of the Act.

8.

Further, we find that the issue in hand is squarely covered by the decision of this Tribunal in the case of Cinestaan Entertainment (P.) Ltd. vs. ITO reported in 106 taxmann.com 300 (Delhi-Trib.) wherein it was held as per section 56(2)(viib) of the Act read with Rule 11U and 11UA of the Rules, the assessee has an option to do valuation of shares and determine fair market value either using DCF method or NAV method and Assessing Officer cannot examine or substitute his own value in place of value determined. Page 7 of 9 M/s AI-Yaseen Trading Co. P. Ltd. vs. ITO Further, it was also held that the Revenue cannot sit in armchair of businessman to decide what is profitable and how business should be carried out and that commercial expediency has to be seen from point of view of businessman and not from the point of view of the revenue. It was further held that when shares were issued at premium based on valuation report from prescribed expert using DCF method of valuation, the said sum cannot be disregarded merely because the projection of revenues thereon did not match with actual revenues of subsequent years. In view of the aforesaid observations and respectfully following the judicial precedent relied upon herein above, we direct the Ld. AO to delete the addition made in the sum of Rs.48,45,000/- u/s 56(2)(viib) of the Act. Accordingly, the ground raised by the assessee is allowed.

9.

In the result, the appeal filed by the assessee is allowed.

Order pronounced in the open court on 28th June, 2023.

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