AO cannot change the method of Valuation of Shares opted by the Assessee

Facts of the Case:

  • The assessee is engaged in the business of providing specialist solution in the areas of Decision Science and analytics. The assessee filed its return of income declaring loss of Rs. 1,438,104 for the year under consideration.
  • During the year the assessee had issued equity share having face value of Rs. 10 at a premium of Rs. 146.17. The assessee opted Discounted Cash Flow (DCF) method for valuation the shares of the company.
  • The Assessing officer (AO) invoked the provisions of section 56(2)(vii) and added the premium received by the assessee under the head income from other source. According to assessing officer the method opted by the assessee was not appropriate and changed the method of valuation to Net Asset Valuation (NAV) method.

Contentions of the Assessee:

  • The assessee contended that the assessee had issued the shares in lieu of price consideration for purchasing Intellectual Property Rights (IPR) from its promoters.
  • Further, according to provisions of rule 11UA (2)b, assessee can adopt the fair market value as per the any two methods i.e. DCF or NAV and the choice of method is that of the Assessee and the assessing officer has no jurisdiction to change method opted by the assessee.

Contention of the Department:

  • According to AO the projections in the working of DCF method is irrational and does not have any relevance to factual financial results of the assessee company.
  • AO contended that the projections of the assessee such as growth rate of 12%, WACC of 30% are appearing unrealistic and have no scientific base. The fundamental basis of arriving at a free cash flow itself is prima facie erroneous. Therefore, appropriate method of valuation shall be NAV method.

Conclusion:

  • As per the decision of ITAT it is held that AO can scrutinize the valuation report and he can determine a fresh valuation either by himself or by calling a final determination from an independent valuer to confront the assessee. But the basis has to be DCF method and he cannot change the method of valuation which has been opted by the assessee.
  • For scrutinizing the valuation report, the facts and data available on the date of valuation only has to be considered and actual result of future cannot be a basis to decide about reliability of the projections.
  • The AO has erred in considering the actuals of revenue and profits declared in the future years as a basis to dispute the projections. At the time of valuing the shares, the actual results of the later years would not be available.

Case Law: [2020] 117 taxmann.com 567 (Bangalore – Tribunal) Flutura Business Solution (P.) Ltd. v. Income Tax Officer (In favor of assessee)