Hon’ble Delhi High Court has passed the above judgement in case of AGRA PORTFOLIO PVT. LTD. Vs. PR. COMMISSIONER OF INCOME TAX – 1 vide order Dt. 04.04.2024.
Facts of the Case:
The ITAT has essentially upheld the additions made by the Assessing Officer in Assessment Year 2014-15 consequent to the rejection of the Fair Market Value evaluation as submitted by the appellant as contemplated under Section 56(2)(viib) of the Income Tax Act, 1961 read along with Rule 11UA of the Income Tax Rules, 1962. The issue of valuation had arisen in the context of the appellant having allotted 3,15,000 equity shares of a face value of INR 10/- each at a premium of INR 40/- per share and for a total amount of INR 1,26,00,000 /-.
For the purposes of valuation of the shares offered for subscription, the appellant had placed reliance on a Valuation Report drawn by a merchant banker, M/s SPA Capital Advisors Ltd., and wherein the value of each share was pegged at INR 9.60/-. Consequent to the rejection of that Report, the AO independently determined the value of each share to be INR 40.40/- and thus quantified the disallowance under Section 56(2)(viib) at INR 1,27,26,000/-.
Assessee’s contention:
The principal grievance of the appellant is that even if the AO had deemed it fit to reject the Valuation Report drawn on the basis of Discounted Cash Flow Method, it could not have substituted the means and the method of valuation of its own volition.
Counsel of appellant had mentioned that as per section 56(2)(viib), assessee is has the exclusive option to choose whichever method it wishes to adopt for valuation. Further, it would not be permissible for the respondents to adopt a method different from the one chosen by the assessee. Learned counsel contended that Rule 11UA(2) in unambiguous terms employs the expression “at the option of the assessee” and this being evidence of the choice of a valuation method being one placed in the hands of the assessee alone.
Revenue’s contetion:
AO took the position that the shares were liable to be valued at INR 9.60/- as against INR 50.60/- which had been adopted by the assessee.
The decision of the AO ultimately came to be affirmed by the Commissioner of Income Tax (Appeals) and both have essentially proceeded on a perceived failure on the part of the appellant assessee to substantiate the basis of valuation as adopted in the Valuation Report. They also appear to have held against the appellant on the ground that it had failed to provide any evidence in support of the figures which formed part of the Valuation Report.
The AO as well as the CIT(A) also appear to have drawn adverse inference from the disclaimers which stood introduced in the Valuation Report drawn by the merchant banker and which had clearly divulged that the Report had come to be drawn solely based on the data provided by the appellant without “independent verification” with respect to the truthfulness, accuracy and completeness of the information.
ITAT observed that based on above information, AO had no option but to reject the valuation report submitted by appellant but AO on the other hand adopted net asset value method.
Counsel for respondent submitted that assessee was given enough opportunity, however, he failed to establish the correctness of report and accordingly AO had no other option but to undertake independent exercise for determining FMV of shares.
Judgement:
A perusal of Rule 11UA(2) would indicate that the assessee is enabled to determine the FMV of the unquoted equity shares either in accordance with the formula prescribed in clause (a) or on the basis of a report drawn by a merchant banker who may have determined the FMV as per the DCF Method.
In our considered opinion, the language of Rule 11UA(2) indubitably places a choice upon the assessee to either follow the route as prescribed in clause (a) or in the alternative to place for the consideration of the AO a Valuation Report drawn by a merchant banker as per the DCF method. However, and as is manifest from a conjoint reading of Section 56(2)(viib) read along with Rule 11UA(2), the option and the choice stands vested solely in the hands of the assessee.
While it would be open for the AO, for reasons so recorded, to doubt or reject a valuation that may be submitted for its consideration, the statute clearly does not appear to empower it to independently evaluate the face value of the unquoted equity shares by adopting a valuation method other than the one chosen by the assessee.
Hon’ble Delhi High Court also relied on various orders of other courts in it’s judgement and held that assessee will have the power to choose valuation method and AO can evaluate and raise question if any.
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