Recently, The Income Tax Appellate Tribunal (ITAT) of Ahmedabad dismissed an appeal moved by the Revenue department against a decision made in favor of the assessee in a matter regarding deletion of addition.
The assessee, M/S Magnet Buildtech Private Limited, filed its return of income for the A.Y. 2016-17 on 26-09-2016 declaring the total income of Rs.NIL under Section 143(1) of the Income Tax Act 1961 (ITA) Later, the case was selected for the limited scrutiny by issuing notices under Section 143(2) and 142(1).
During the assessment, it was observed that the assessee issued 7,99,900 Compulsory Convertible Preference Shares (CCPS) of Rs.10/- each at a premium of Rs. 990 per equity share, and the share capital of the company was increased by Rs 7,999,00/- and securities premium by Rs 79, 19,01,000/-.
The Assessing Officer (AO) asked the assessee to provide the genuineness of the share capital and premium share along with the certificate of Valuer as per 56(2)(viib) of ITA read with Rule 11UA. Based on the Audited balance-sheet of the assessee as on 31st March-2015, the AO observed that the Net Asset Value of the share of company was negative (-) Rs.2.10/- per share.
To arrive at this value, the AO used paid up capital of Rs.10,00,290/- and Reserves and Surplus of (-) Rs.1,21,398/-. Accordingly, the AO issued a show-cause notice to the assessee to explain why the amount of Rs.79,98,71,290/- should not be added to the income as per provisions of section 56(2)(viib) of the ITA. In reply, the assessee submitted the valuation certificate, wherein the Valuer considered Discounted Cash Flow (DCF) Method for valuation of shares in accordance with Rule 11UA of the Income Tax Rules.
The AO observed that the Valuer has given some disclaimers in his certificates relating to financial projections of the assessee company. Therefore, a notice u/s.133(6) of the ITA was issued to the Valuer. To this the Valuer replied that the certificate has been issued on the basis of financial statements provided by the company. He further submitted that the assumptions were validated by an independent technical consultant retained by the company for preparation of a detailed project report.
Unsatisfied with the explanations, the AO added an addition of Rs.79,19,01,000/- to the total income under Section 56(2)(viib), observing issues with the valuation report, relying on the company’s financial projections and subsequent losses.
Aggrieved by this, the assessee appealed against this order before the Commissioner of Income Tax (Appeals) [ CIT (A) ], who partly allowed the appeal and the addition was deleted. The Revenue, however, found this decision erroneous and appealed against it before ITAT.
The appellant/ Revenue’s main argument was that the DCF method used for valuation is not legitimate and thus it is not valid.
The bench of Mr Siddhartha Nautiyal and Mr Makarand V Mahadeokar, after carefully examining arguments from both the sides, concluded that the DCF method used by the assessee was indeed legitimate and in accordance with Rule 11UA.
The tribunal observed that the AO’s reliance on the company’s subsequent financial losses to question the valuation is misplaced, as projections must be assessed based on the facts and data available at the time of valuation, not on future outcomes, as held in various judicial pronouncements. The issuance of CCPS to the holding company does not align with the legislative intent of Section 56(2)(viib) of the ITA, which is to prevent the generation and use of unaccounted money.
It was also noted that the transaction between a wholly owned subsidiary and its holding company does not create any unaccounted income or inflated share value for tax evasion purposes unless it is specifically proved.
In light of the observations made, the appeal was dismissed.
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