Flutura Business Solutions (P) Ltd. v. ITO

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The Tax Publishers2020 TaxPub(DT) 2711 (Bang-Trib) : (2020) 183 ITD 0446 : (2020) 207 TTJ 0257

INCOME TAX ACT, 1961

Section 56(2)(viib)

In order to compute income taxable under section 56(2)(viib) on account of issusance of shares at premium AO could determine a fresh valuation for shares either by himself or by calling a determination from an independent valuer to confront assesse but the basis had to be DCF method as adopted by assessee and further, AO erred in considering the actuals of revenue and profits declared in future years as a basis to dispute projections as only expected and projected revenues are required for arriving at fair market value by following the DCF method.

Income from other sources - Issusance of shares at premium - AO rejected valuation as per DCF method and considering the actuals of revenue and profits declared in future years as a basis to dispute projections -

Assessee-company issued equity shares of face value of Rs. 10 each at a premium of Rs. 146 per share and premium collected during the previous year was Rs. 2,29,31,200. AO sought to tax the said amount as income of company under section 56(2)(viib). Assessee's case was that valuation of shares at a premium was based on valuation report issued by M/s. S Chartered Accountants who valued the shares adopting Discounted Cash Flow (DCF) method. AO rejected this on the ground that projection made in working as per DCF method was irrational and did not have any relevance to factual financial results of assessee-company. Accordingly, AO adopted NAV method and considering the actuals of revenue and profits declared in future years as a basis of dispute projections, made addition under section 56(2)(viib). Held: AO could determine a fresh valuation for shares either by himself or by calling a determination from an independent valuer to confront assesse but the basis had to be DCF method and he could not change the method of valuation which had been opted by the assessee. Thus AO erred in considering the actuals of revenue and profits declared in future years as a basis to dispute projections. At the time of valuing shares, the actual results of later years would not be available. What is required for arriving at fair market value by following the DCF method are the expected and projected revenues. Accordingly, valuation was on the basis of estimates of future income contemplated at the point of time when valuation was made. In view of the abvoe legal position, issue with regard to valuation had to be decided afresh by AO.

Supported by:Agro Portfolio Ltd. (2018) 171 ITD 74 (Del-Trib) : (2018) 94 Taxmann.com 112 (Del-Trib) : 2018 TaxPub(DT) 2615 (Del-Trib) and VBHC Value Homes (P) Ltd., v. ITO ITA No. 2541/Bang/2019 Order, dated 12-6-2020 and Vodafone M-Pesa Ltd. v. Pr. CIT (2018) 164 DTR 257 (Bom) : 2018 TaxPub(DT) 1191 (Bom-HC).