Method of valuation of shares adopted by the assessee could be challenged by Assessing Officer only if it was not a recognized method of valuation as per Rule 11UA(2)

FACTS
In the course of assessment proceedings, the Assessing Officer doubted the quantum of the premium received on the issue of shares.

During the course of assessment proceedings, though the Assessing Officer asked the assessee to file a certificate as per Rule 11UA but, the assessee had submitted that Rule 11UA was not applicable to the case of the assessee.

Since the assessee failed to comply with provisions of Rule 11UA, the Assessing Officer calculated the Fair Market Value and made an addition on that basis, u/s 56(2)(viib). The CIT (A) dismissed the assessee’s appeal.

Consequently, the assessee filed an appeal before the ITAT.

HELD
The ITAT observed that during the course of assessment proceedings, the assessee was not able to submit the report as made by the Chartered Accountant as per Discounted Cash Flow (DCF) method due to the negligence of the counsel. However, it had filed the copy of the said valuation report with the CIT(A) but the same was neither considered by her nor any comment was given on the same.

The ITAT was of the opinion that once the assessee had opted for valuation of shares under Rule 11 UA by following the DCF method, then it was not open for the assessing officer or the CIT(A) to adopt a different method of valuation, for determining the fair market value. As per Rule 11UA, the choice is given to the assessee and not to the assessing officer. The assessing officer is duty-bound to examine the working of the DCF method but has no right to change the method of calculating the fair market value of the shares. Once an assessee had exercised its option of opting for the DCF method, then the said method is required to be applied; however that the assessing officer has the power to review the calculations and correct adoption of the parameters applied by the assessee for the purpose of arriving at valuation of the shares by applying the DCF method.

It held that the law has specifically conferred an option upon the assessee that for the purpose of section 56(2)(viib) of the Act, an assessee can adopt any of the methods mentioned u/r 11UA(2). Therefore, in the instant case also, the assessee was free to choose any of the methods mentioned u/r 11UA(2). The method of valuation could be challenged by the Assessing Officer only if it was not a recognized method of valuation (as per Rule 11UA(2)) since the very purpose of certification of DCF valuation by a merchant banker or (at the relevant time) by a chartered accountant was to ensure that the valuation is fair and reasonable.

Since, in the instant case, the CIT (A) had not examined the method adopted by the assessee, the same could not be rejected. On this reasoning, the matter was remanded back to the file of the Assessing Officer with a direction to consider the report filed by the assessee.

It was also directed that the Assessing Officer was bound by the decision rendered in the case of Innoviti Payment Solutions (P.) Ltd. vs. ITO [2019] 102 taxmann.com 59/175 ITD 10 (Bang. – Trib.) wherein it was held that the AO can scrutinize the valuation report and if the AO is not satisfied with the explanation of the assessee, he has to record the reasons and basis for not accepting the valuation report submitted by the assessee and only thereafter- he can adopt his own valuation or obtain fresh valuation report from an independent valuer and confront the assessee. But he has no power to change the method of valuation opted by the assessee if it is one of the methods recognised u/r 11UA(2).