AO cannot Change Valuation of Shares Method Selected u/s 56(2)(viib) r.w. Rule 11UA(2): ITAT [Read Order]

The Bangalore Bench of the Income Tax Appellate Tribunal  ( ITAT ) ruled that the assessing officer cannot to interfere in the valuation of shares method selected by the assessee under section 56(2)(viib) of the Income Tax Act, 1961  read with Rule 11UA(2) Income Tax Rules, 1962.

Assessee, Pisces EServices Pvt. Ltd. is a food delivery company and a subsidiary of Delivery Hero in Germany. Delivery Hero transfers its shareholding in Pisces EServices Pvt. Ltd. to ANI Technologies Pvt. Ltd. (a holding company of OLA group).

The shares were valued at Rs.13.94 per share by Ernst and Young Merchant Banking Services Ltd. using the Discounted Cash Flow (DCF) method. The Delivery Hero (assessee’s holding company) transferred its shareholding to ANI Technologies Pvt. Ltd. at Rs.13.94 per share having a face value of Rs. 10 per share.

After the transfer, the Assessee company issued 14,66,02,662 shares to ANI Technologies Pvt. Ltd., at Rs.13.94 inclusive of a face value of Rs. 10 and a share premium of Rs. 3.94 per share. During the assessment proceedings, the AO observed the company facing losses from the A.Y 2013-14 to 2019-20 but the project report mentioned huge growth in turnover and profit. The valuer only relied on the information submitted by the assessee to value the fair market share.

The Income tax AO noticed that the valuation was done to achieve the desired valuation which will not work in reality. The AO considered the valuation should be done in the net assets value (NAV) method which comes out at Rs. 1.20 per share.

The AO asked for an explanation, and in response, the assessee explained that future prospective and growth potential is used rather than historical losses to value the shares in the discounted cash flow method.

The Assessee compared itself as a startup company so the initial losses are quite common. The assessee submitted that AO could only make an addition if it is charged more than the fair market value. The assessing officer was not satisfied with the reasoning and rejected the claim.

Aggrieved by this decision, the assessee appealed before the Commissioner of Income Tax (Appeals) [CITA(A)] and upheld the AO order. The Income tax appellate commissioner observed that the project report was prepared only to transfer the shares not to issue. The Assessee appealed before the ITAT, Bangalore.

The assessee's counsel submitted that the income tax first appellate authority erred in confirming the addition of Rs. 1,86,77,17,914/- under Section 56(2)(viib) of the Income tax legislation and the method adopted by the Assessee in the valuation of shares from DCF to NAV method which is beyond the AO jurisdiction.

The AO counsel, Vilas Shinde, CIT (DR) argued that the NAV method was more appropriate given the financial history of the company and the method used by the assessee was far away from reality.

The division bench of Waseem Ahmed ( Accountant Member ) and Soundararajan K ( Judicial Member ) heard both side's arguments. The tribunal observed that the assessee adopted the DCF but the revenue adopted the NAV method. According to rule 11UA(2) of Income tax Rule, choosing any DCF or NAV method is optional and it is the assessee’s discretion.

The Tribunal ruled that AO cannot interfere in the method for the valuation of the shares but can scrutinize the contents or working adopted by the assessee. By relying on the Bombay HC and ITAT Bangalore judgments, the tribunal ruled in favour of the assessee.

To Read the full text of the Order CLICK HERE

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