Addition of premium amount cannot be made solely on the basis of valuation of loss-making company
Conclusion: Addition of difference premium amount of Rs. 20/- per share in assessee-company on the ground that M company was a loss-making company was not justified as assessee had substantiated the shares issued at Rs. 30 per share was less than the FMV and the underlying asset of assessee company, i.e., M was valued as per DCF method which was a recognised method where future projections of various factors by applying hindsight view and it could not be matched with actual performance, thus, to reject the valuation of M mainly on the basis of losses shown in the financial statement would not be correct, until and unless some discrepancy had been out either in the DCF method or in the Valuation Report furnished by an independent Valuer of M.
Held: Assessee-company was engaged in the business of development, design and maintenance of website and sale and purchase of shares. It had received share application money from M/s. M Ltd. The value of shares shown by assessee was Rs. 30 per share, i.e., face value of Rs. 10 and premium of Rs. 20/-. AO required the assessee to justify the difference between premium charged and the book value of the shares and why the difference should not be added back in terms of section 56(2)(viib). Assessee had submitted that it had issued shares to M at a price of Rs. 30 per share based on the valuation report certified by independent Chartered Accountant. AO rejected assessee’s contention. It was held the fair market value of the shares can be determined, either in accordance with method prescribed which now has been given in Rule 11U and 11UA; or as may be substantiated by the company to the satisfaction of the AO based on the value on the date of issuance of shares. Assessee had substantiated the fair market value which was based on Valuation Report which in turn was largely based on the valuation of share provided by the Valuer of the M as on 20.7.2012, wherein the valuer had applied DCF method in order to value the share of M. As per valuation report dated 27.12.2012, the value per share of assessee company on NAV method was worked out to Rs. 77.06, which was far more than on which assessee had issued shares, i.e., at Rs. 30. The underlying asset of assessee company, i.e., M was valued as per DCF method and value of shares of assessee-company was based on NAV method. When law envisages that the FMV can be determined in either of the two manners, whichever is higher, so as to demonstrate that the value of shares did not exceeds the FMV, then AO could not insist upon to follow only one particular method. It would be incorrect to hold that substantiation made by assessee had to be only in accordance with Rule 11U and 11UA. Also, noticing that auditor had reported that M was in losses and book value of the shares was negative and based on such statement to infer the value of the shares shown by the assessee was incorrect, would not be proper, especially, when the same auditor/valuer had valued the shares of M. Moreso, DCF method is a recognised method where future projections of various factors by applying hindsight view and it cannot be matched with actual performance. Valuation under DCF is not exact science and can never be done with arithmetic precision, hence the valuation by a Valuer has to be accepted unless, specific discrepancy in the figures and factors taken are found. Therefore, to reject the valuation of M mainly on the basis of losses shown in the financial statement would not be correct, until and unless some discrepancy had been out either in the DCF method or in the Valuation Report furnished by an independent Valuer of M.
India Today Online Pvt. Ltd. Vs ITO (ITAT Delhi)
ITA Nos. 6453 & 6454/Del/2018
