The Delhi High Court while giving relief to the startups from angel tax ruled that if a proper methodology is followed while valuing a company during valuation rounds, it should not be challenged later.
The assessee, M/s Cinestaan Entertainment Pvt. Ltd. is engaged in the business of entertainment. During the concerned Assessment Year, the Respondent-Assessee allotted shares at a premium to various persons, as encapsulated in the assessment order.
The Assessee filed return of income for the relevant Assessment Year 2015-16, declaring nil income. The return was processed under Section 143(1) of the Act. Thereafter, the case was selected for “Limited Scrutiny” and the reasons for scrutiny selection were large share premium received during the year; low income in comparison to very high investment; and Low income in comparison to very high loans or advances or investments in shares.
The notice under Section 143(2) of the Act was issued on 07.04.2016 and was followed by a detailed questionnaire along with the notice under Section 142(1). In response thereto, the Respondent-Assessee filed a valuation report. Thereafter the assessment was framed under Section 143(3) of the Act and the total income of the Respondent-Assessee was assessed as Rs. 90,95,46,200.
The Respondent-Assessee preferred an appeal before the CIT(A), who upheld the additions made by the AO. The second appeal before the ITAT was allowed vide the impugned order and resultantly, the order of the CIT (A) has been set aside.
Mr. Ajit Sharma, Senior Standing Counsel for the Appellant-Revenue submitted that the learned ITAT has erred in deleting the additions made by the AO as confirmed by the CIT(A) and submitted The AO analysed the business profitability of the Respondent-Assessee only to the extent that such profitability was not commensurate with the actual financials provided by the Respondent- Assessee during the course of assessment proceedings. Therefore, the financials of the Respondent-Assessee did not support the business module of the company.
The division bench of Justice Manmohan and Justice Sanjeev Narula noted that ITAT has followed the dicta of the Hon’ble Supreme Court in matters relating to the commercial prudence of an assessee relating to the valuation of an asset. The law requires the determination of fair market values as per the prescribed methodology. The Appellant-Revenue had the option to conduct its own valuation and determine FMV on the basis of either the DCF or NAV Method.
“The Respondent-Assessee being a start-up company adopted the DCF method to value its shares. This was carried out on the basis of information and material available on the date of valuation and projection of future revenue. There is no dispute that the methodology adopted by the Respondent-Assessee has been done applying a recognized and accepted method. Since the performance did not match the projections, Revenue sought to challenge the valuation, on that footing. This approach lacks material foundation and is irrational since the valuation is intrinsically based on projections which can be affected by various factors,” the court said.
The court held that the methodology adopted by the Respondent-Assessee, accepted by the ITAT, is a conclusion of fact drawn on the basis of material and facts available. The test laid down by the Courts for interfering with the findings of a valuer is not satisfied in the present case, as the Respondent-Assessee adopted a recognized method of valuation and Appellant-Revenue is unable to show that the assessee adopted a demonstrably wrong approach, or that the method of valuation was made on a wholly erroneous basis, or that it committed a mistake which goes to the root of the valuation process.
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