INCOME TAX ACT, 1961

Section 56(2)(viib)

Income from other sources - Addition under section 56(2)(viib) - Issuance of shares at premium - AO adopted NAV method rejecting DCF method adopted by assessee

Assessee-company issued shares at premium on the basis of valuation report as on the date of issue of shares by following discounted cash flow method as prescribed under rule 11UA. AO took the view that since assessee was not carrying any intangibles that value arrived at by assessee under DCF method was not showing correct value of shares as on the date of issue of shares. Accordingly, AO adopted NAV method and made addition under section 56(2)(viib). Held: DCF method is one of the trusted methods for valuation of shares and said method is prescribed under rule 11UA, therefore, AO could not brush aside DCF method for simple reason that assessee did not carry any intangibles in its business. No doubt, there might be a difference in projections considered by assessee for valuation of shares when compared to actual financial for relevant financial year, but that itself could not be a ground for rejection of DCF method, because primarily DCF method follows projected financial of the company for future years which may not be equal to actual financial of the company for the relevant financial years. But, what is relevant to see is whether the projection worked out by the assessee is based on some degree of estimation or not. In assessee's case, AO had not pointed out any discrepancy or inconsistency in the projections adopted by the assessee for discounted cash flow method. Therefore, AO erred in rejecting DCF method and adopting net asset value method for the purpose of valuation of shares. Accordingly, value of shares arrived at by AO under net asset value method could not be accepted and therefore, additions made by AO towards excess premium charged on issue of shares under section 56(2)(viib) was deleted.

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2015-16

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