ORDER

% 05.02.2024

1. Having heard Mr. Meharchandani, learned counsel appearing in support of the appeal and Mr. Jain, who appears for the respondent / assessee, we note that the principal question which arises for our consideration is the correctness of the Valuation Report dated 25 March 2015 which was submitted by the assessee in terms of the Section 56(2)(viiib) of the Income Tax Act, 1961 [“Act”] and which has been rejected by the Assessing Officer [“AO”] as would be evident from the following findings:

“5.2 The Chartered Accountant (Valuer) has given hint of limitation of the valuation; which states that the valuation process has been carried out on the basis of the projected data provided to the valuer.

The assessee has not provided any basis/documentary evidences in support of the projected data provided to the valuer; therefore, it is crystal clear that the reliability and correctness of the projected data are not based on any material. The assessee does not have any hidden assets in the form of patents, copy rights, intellectual property rights or even such investments etc belonging to the company based on which the assessee would be likely to substantially enhance its profits.

On going through this report, it is seen that accountant has taken future cash flow as certified by the management. No verification of projections and assumptions adopted by management was made by the valuer, thereby making the report as per the requirement of the management. In DCF method future free cash flow is the most relevant variable which can change the value to any extent.

5.3 Further, it is seen that the loans/capital added to the "Profit after Tax" contains a figure of Rs. 5,00,00,000/- for the F.Y. 2013-14, whereas it is Rs. 3,01,00,000 only as per the comparative figures in the balance sheet submitted by the assessee during the course of assessment proceedings. This amount includes the borrowed funds of Rs. 2.70 Crores and the capital of Rs. 1 Lakh. Therefore, wrong figure of Rs. 5 Crores has been put in the respective column of the DCF calculation chart.

DCF analysis is a technique used in finance and real estate to discount future cash flows back to the present. The procedure for real estate valuation consists of three steps:

• Forecast the expected future cash flows • Establish the required total return • Discount the cash flows back to the present at the required rate of return In the present case, the revenue projections provided by the management were merely self-serving figures which is evident from the final figures available in the return of income for the next two years i.e. for A.Y. 2016-17 and 2017-18. 5.4 Clause (viib) of sub section (2) of section 56 was inserted vide finance act, 2013 w.e.f. 01.04.2013 i.e. for A.Y. 2013-14 to provide that where a closely held company issues its shares at a price which is more than its fair market value then the amount received in excess of fair market value of shares will be charged to tax in the hand of the company as income from other sources. According to the provisions of Section 56(2)(viib) of the Income Tax Act, 1961 : "Where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the fair value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares:

Financial Year	Projected Profit before tax	Profit before interest, tax & depreciation.
2014-15 (A.Y. 2015-16)	7,00,000	5,08,936
2015-16 (A.Y. 2016-17)	25,00,000	(-6,65,450)
2016-17 (A.Y. 2017-18)	31,25,000	(-49, 100)

Financial Year	Projected Profit before tax	Profit before interest, tax & depreciation.
2014-15 (A.Y. 2015-16)	7,00,000	5,08,936
2015-16 (A.Y. 2016-17)	25,00,000	(-6,65,450)
2016-17 (A.Y. 2017-18)	31,25,000	(-49, 100)

Provided that this clause shall not apply where the consideration for issue of shares i