The Assessing Officer cannot substitute the valuation method chosen by the assessee under the Income Tax Act, and reopening of assessment based on such substitution is unjustified.

JUDGMENT :

BHARGAV D. KARIA, J.

1. Heard learned advocate Mr. B.S. Soparkar for the petitioner and learned Senior Standing Counsel Mr. Varun Patel for the respondent.

2. Having regard to the controversy in narrow compass, with the consent of learned advocates for the parties, the matter is taken up for final hearing.

3. Rule returnable forthwith. Learned Senior Standing Counsel Mr. Varun Patel for the respondent waives service of notice of rule.

4. Brief facts of the care are as under:

4.1 The petitioner, a Private Limited Company, filed its return of income for the Assessment Year 2015-16 on 31.10.2015 declaring the loss of Rs. 1,34,25,127/-.

4.2 During the Financial Year 2014-15, the petitioner had issued 3,59,500 equity shares of Rs. 10/- each, at a premium of Rs. 143/- totaling to premium collected at Rs. 5,14,08,500/-.

4.3 Notices under section 133(6) of the Income Tax Act, 1961 [for short ‘the Act’] were issued by the Income Tax Officer on 01.09.2017, 14.09.2017, 26.09.2017 and 20.05.2019 to conduct inquiry into the issuance of such share capital at such valuation. The petitioner filed replies to each of the notices issued under section 133(6) of the Act.

4.4 It appears that the return filed by the petitioner was not taken for scrutiny and intimation under section 143(1) of the Act was issued.

4.5 The respondent No. 1-Assessing Officer has issued impugned notice under section 148 of the Act on 29.03.2021 asking the petitioner to file a return of income for A.Y. 2015-16. The petitioner filed return in response to the notice under section 148 of the Act on 03.01.2022 and sought reasons recorded for reopening.

4.6 The respondent No. 1 provided reasons to the petitioner on 04.02.2022 which reads as under:

“(1) Brief details of the assessee: The assessee company is engaged in ceramic mess filed its return of income for the A.Y.2015-16 on 30.10.2015 declaring total loss Rs. 4,3425,127/-.

(2) Brief details of information collected received by the AO: An information has been received from Insight Portal uploaded by ITO(I8Cl), Ahmedabad that the assessee company had sold its 359500 shares @ Rs. 153 per share at a premium value of 80 Rs. per share which is required to be added u/s. 56(2) 9(vii)(b) of the act.

(3) Analysis and Enquiries made by the AO as sequel to information collected received: The information as received is analyzed. After verification of the case, it is found that: “AS per the valuation certificate dated 04.07.2014 (Pertaining to AY2015-16), the value per Share is determined at Rs. 73/- as per Value/price based on book value of share (Net Asset Value) and Rs. 143 as per value/price on Discounted Free Cash Flow method as per annexue-1 & 2 submitted by the assessee, The assessee company has issued 350500 equity shares of Rs. 153/- each at @ premium of Rs. 143/- per share on 26.03.2015. On Verification of the both the certificate prepared by the Chartered accountant, there is huge difference of Rs. 80/- was found. Hence, the Discounted cash flow method adopted by the assessee is not acceptable at this stage. Further, the assessee has produced the projected cash flow value & actual cash flow maintained. On verification of data provided by the assesses, there is also huge difference in projected value and actual value. The difference is worked out as under: