By Jagdish T. Punjabi | Prachi Parekh | Chartered Accountants
Devendra Jain | Advocate
17. [2020] 120 taxmann.com 238
(Bang.)(Trib.) Valencia Nutrition Ltd. vs. DCIT A.Y.: 2015-16 Date of order: 9th October, 2020
Section
56(2)(viia), Rule 11UA – Valuation report prepared under DCF method should be
scrutinised by the A.O. and if necessary he can carry out a fresh valuation
either by himself or by calling for a determination from an independent valuer
to confront the assessee – However, he cannot change the method of valuation
but has to follow the DCF method only
FACTS
During the financial year
relevant to A.Y. 2015-16, the assessee company, engaged in the business of
manufacturing of energy drinks with the brand name ‘Bounce & Vita-Me’,
collected share capital along with share premium to the tune of Rs. 1.55 crores
by issue of 24,538 shares having a face value of Rs. 10 each at a share premium
of Rs. 622 per share.
The A.O. noticed that the
assessee has followed the ‘Discounted Cash Flow’ method (DCF method) for
determining the share price. As per the valuation report prepared under the DCF
method, the value of one share was determined at Rs. 634. Accordingly, the
assessee had issued shares @ Rs. 632 per share, which included share premium of
Rs. 622. The A.O. held that the value of the share @ Rs. 632 was an inflated
value since the share valuation under the DCF method has been carried out on
the basis of projections and estimations given by the management. He held that
the value of the share should be based on ‘Net Asset Method’ mentioned in Rule
11UA of the Income-tax Rules. Accordingly, the A.O. worked out the value of the
shares at Rs. 75 per share under the Net Asset Method. Since the par value of
the share is
Rs. 10, the A.O. took the view that the assessee should have collected a
maximum share premium of Rs. 65 per share. He held that the share premium
collected in excess of Rs. 65, i.e., Rs. 557 per share, is excess share premium
and he assessed Rs. 1,36,67,666 being the total amount of excess share premium
u/s 56(2)(viib).
Aggrieved, the assessee
preferred an appeal to the CIT(A) who confirmed the addition made by the A.O.
Aggrieved, the assessee
preferred an appeal to the Tribunal and prayed that this issue may be restored
to the file of the A.O. with a direction to examine the valuation report furnished
by the assessee under the DCF method.
HELD
The Tribunal noticed that
the coordinate bench has examined the issue of valuation of shares under the
DCF method in the case of Innoviti Payment Solutions
(P) Ltd. [ITA No. 1278/Bang/2018 dated 9th January, 2019]
and has followed the decision rendered by the Bombay High Court in the case of Vodafone M Pesa Ltd. vs. PCIT 164 DTR 257
and has held that the A.O. should scrutinise the valuation report prepared
under the DCF method and, if necessary, he can carry out fresh valuation either
by himself or by calling for a final determination from an independent valuer
to confront the assessee. The A.O. cannot change the method of valuation and he
has follow only the DCF method.
The decision rendered in
the case of Innoviti Payment Solutions (P) Ltd.
(Supra) was followed by another coordinate bench in the case of Futura Business Solutions (P) Ltd. [ITA No. 3404 (Bang.) 2018].
The Tribunal noted that in
the case of this assessee,too, the A.O. has proceeded to determine the value of
shares in both the years by adopting different methods without scrutinising the
valuation report furnished by the assessee under the DCF method. Accordingly,
following the decisions rendered by the coordinate benches, the Tribunal set
aside the order passed by the CIT(A) and restored the impugned issue to the
file of the A.O. with the direction to examine it afresh as per the directions
given by the coordinate bench in the case of Innoviti
Payment Solutions (P) Ltd. (Supra).
