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Tax Publishers Addition under section 56(2)(viib) alleging excess share premium in the hands of a holding company valued on NAV basis with its value adding/proposition subsidiary valued on DCF basis *Facts:* Assessee company held 49,999 equity shares of ₹.10/- each fully paid up of a subsidiary entity called MLRPL valued at ₹ 3,48,25,690/-. Fresh shares were issued by the assessee company to external investors at a premium of Rs. 496-58 per share. This valuation was based on the Net Asset Value as per Rule 11UA. Assessee replaced the book value of the investment in the subsidiary with the DCF value while computing the NAV and justified the same by taking plea that they had followed only one method which is NAV method. Since they were the holding company and did not have any stand alone value proposition by themselves or derived their value only from the underlying DCF value of the subsidiary entity the book value was imputed with the DCF value for NAV computation and thus share premium was arrived with the valuation report also manifesting the same. This was rejected by the lower authorities citing that the assessee cannot adopt a mix and match of best of both worlds NAV and DCF and thus the excess premium over and above the book value of the investment of the subsidiary was disallowed under section 56(2)(viib) and additions sustained on the assessee. On higher appeal - Held in favour of the assessee that since their entire value was derived from the subsidiary entity, the assessee was logically correct to replace it with the DCF method which obviously would capture the future economic values of the investment of the underlying subsidiary what they held. "20. The Tax Authorities has to appreciate the purpose for which the valuation of shares were carried and it should also appreciate the evolution of various valuation methods to suit the purpose. In the given case, the assessee has brought in new investors and when the new investors are introduced the existing shareholders cannot be at par with the new shareholders by issuing shares at existing Net Asset Value valuation. The new shareholders have to bring in premium to match the goodwill carried on by the existing shareholders. 21. As stated above, the valuation of any holding company depends upon the performance of the subsidiary company. In this case the MLRPL are wholly owned subsidiary company and the valuation of the wholly owned subsidiary company has to be valued based on futuristic value by adopting Discounted cash flow Method. The above valuation of subsidiary company had a direct impact on the valuation of the assessee company. Therefore, we do not see any reason to reject the method adopted by the assessee. We are inclined to allow the ground raised by the assessee". *Ed. Note:* The decision echoes a resounding win to basic principles of valuation. Rule 11UA cannot be read in isolation as a rigid watertight compartment. The ambulatory approach on the principled reading is noteworthy. *Case:* Keep Learning Resources (P) Ltd. v. ITO 2024 TaxPub(DT) 836 (Mum-Trib)

Tax Publishers

Addition under section 56(2)(viib) alleging excess share premium in the hands of a holding company valued on NAV basis with its value adding/proposition subsidiary valued on DCF basis

Facts:

Assessee company held 49,999 equity shares of ₹.10/- each fully paid up of a subsidiary entity called MLRPL valued at ₹ 3,48,25,690/-. Fresh shares were issued by the assessee company to external investors at a premium of Rs. 496-58 per share. This valuation was based on the Net Asset Value as per Rule 11UA. Assessee replaced the book value of the investment in the subsidiary with the DCF value while computing the NAV and justified the same by taking plea that they had followed only one method which is NAV method. Since they were the holding company and did not have any stand alone value proposition by themselves or derived their value only from the underlying DCF value of the subsidiary entity the book value was imputed with the DCF value for NAV computation and thus share premium was arrived with the valuation report also manifesting the same. This was rejected by the lower authorities citing that the assessee cannot adopt a mix and match of best of both worlds NAV and DCF and thus the excess premium over and above the book value of the investment of the subsidiary was disallowed under section 56(2)(viib) and additions sustained on the assessee. On higher appeal -

Held in favour of the assessee that since their entire value was derived from the subsidiary entity, the assessee was logically correct to replace it with the DCF method which obviously would capture the future economic values of the investment of the underlying subsidiary what they held.

"20. The Tax Authorities has to appreciate the purpose for which the valuation of shares were carried and it should also appreciate the evolution of various valuation methods to suit the purpose. In the given case, the assessee has brought in new investors and when the new investors are introduced the existing shareholders cannot be at par with the new shareholders by issuing shares at existing Net Asset Value valuation. The new shareholders have to bring in premium to match the goodwill carried on by the existing shareholders.

21. As stated above, the valuation of any holding company depends upon the performance of the subsidiary company. In this case the MLRPL are wholly owned subsidiary company and the valuation of the wholly owned subsidiary company has to be valued based on futuristic value by adopting Discounted cash flow Method. The above valuation of subsidiary company had a direct impact on the valuation of the assessee company. Therefore, we do not see any reason to reject the method adopted by the assessee. We are inclined to allow the ground raised by the assessee".

Ed. Note: The decision echoes a resounding win to basic principles of valuation. Rule 11UA cannot be read in isolation as a rigid watertight compartment. The ambulatory approach on the principled reading is noteworthy.

Case: Keep Learning Resources (P) Ltd. v. ITO 2024 TaxPub(DT) 836 (Mum-Trib)