The Delhi Bench of Income Tax Appellate Tribunal (ITAT) has held that the Assessing Officer (AO) could not reject the valuation report of share merely based on the absence of DCF method in rule 11UA of Income Tax Rules, 1962 at the time of issuance of shares.
The assessee company, Etawah Chakeri was incorporated on 15.12.2011 and was awarded a Toll Road contract by NHAI for construction of six lanes in the state of Uttar Pradesh, on design, build, finance, operate and transfer basis. During the year under consideration, the assessee had allotted to its parent company Oriental Structural Engineers Projects Ltd and Oriental Tollways Ltd 1 crore shares of Rs. 10/- each, at a premium of Rs.90 per share.
On the issue of consideration received by the assessee for issuing of shares being more than the fair market value of such shares in terms of Section under Section 56(2)(viib) read with Section 2(24)(xvi) of the Income Tax Act, directions under Section 144A of the Income Tax Act had been received from the Additional Commissioner of income tax.
The Assessing Officer found that the assessee had issued 51 lakh shares on 29.8.2012 for a consideration of Rs.51 crores to Oriental Structural Engineers Projects Private Limited and 49 lakh shares for a consideration of Rs.49 crores to Oriental Tollways Ltd. Drawing support from the relevant provisions of the Income Tax Act, the Assessing Officer was of the opinion that the relevant provisions provides for determination of fair market value of shares in accordance with sections 11U and 11UA of the Act and as per Rule 11UA of the Income Tax Act prevailing as on 01.04.2012.
As regards valuation of unquoted equity shares NAV method was to be used. However, the CBDT, vide notification No 52/2012, dated 29.11.2012, amended Rule 11UA and inserted an option to the assessee either to choose NAV or DCF method for determination of fair market value.
The Assessing Officer noted that since the assessee had issued shares on 29.08.2012, prior to the date of notification and insertion of DCF method, the assessee ought to have valued the fair market value of the shares by applying NAV method as, on the date of issue of shares, Rule 11UA of Income Tax Rules did not provide for computation of fair market value as per DCF method.
Discarding the method adopted by the assessee, the Assessing Officer adopted NAV method and re-computed the fair market value and concluded by holding that fair market value of assessee’s shares as on the valuation date comes to Rs.10/- per share and since the assessee has issued each share at Rs. 100/-, therefore, excess of the rate at which the assessee had issued shares over the fair market value was treated as assessee’s income under Section 56(2)(viib) read with Section 2(24)(xvi) of the Income Tax Act and ,accordingly, made the addition of Rs.90 crores.
KVSR Krishna, appeared on behalf of the assessee and T. James Singson, who appeared on behalf of the revenue strongly supported the findings of the Assessing Officer.
The two-member Bench of N.K. Billaiya, (Accountant Member), And Anubhav Sharma, (Judicial Member) observed that the Assessing Officer had not pointed out any flaw, infirmity or error in the valuation of the fair market value determined by DCF method and had simply rejected because on the date of issue of shares, DCF method was not there in Rule 11UA of the Income Tax rules, but was subsequently introduced. In our considered opinion, this could not be a valid reason for discarding the valuation.
The valuation was not an exact science and, therefore, could not be done with arithmetic precision. It was a technical and complex problem which could be appropriately left to the consideration and wisdom of experts in the field of accountancy, having regard to the imponderables which enter the process of valuation of shares.
The Bench dismissed the appeal filed by the revenue, upholding the decision of Commissioner of Income Tax Appeals as the Assessing officer had simply rejected the valuation of the assessee on the ground that on the date of issue of shares, DCF method was not there in Rule 11 UA of Income Tax Rules.
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