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2025 Supreme(Online)(ITAT) 21504
INCOME TAX APPELLATE TRIBUNAL (RAJKOT BENCH)
Arjun Lal Saini, Accountant Member, Dinesh Mohan Sinha, Judicial Member
Kataria Snack Pellets Pvt. Ltd. – Appellant
Versus
ACIT, Circle-1(1), Rajkot – Respondent
ITA No.468/RJT/2024
For the Appellants/Petitioners: Nishit B. Jesur
For the Respondents: Sanjay Punglia
Where a share valuation report under the DCF method is based on unverified, unrealistic projections and fails to adhere to established technical standards, the Assessing Officer is justified in rejecting it and adopting the NAV method for determining the fair market value of shares.
Headnote:(A) Income Tax Act, 1961 - Section 56(2)(viib) - Income from other sources - Share premium valuation - Applicability of Discounted Cash Flow (DCF) method - Assessee claimed premium on issue of shares based on valuation report under DCF method - Assessing Officer rejected DCF valuation due to lack of verifiable data, absence of scientific basis, unrealistic projections mismatching subsequent actual performance, and failure to consider guidance notes - Held, in absence of credible valuation and adherence to established technical guidelines, Revenue justified in applying Net Asset Value (NAV) method - Primary onus to justify valuation projections lies on assessee. (Paras 4, 8, 9, 10, 12, 19, 20)
(B) Valuation of Shares - Rule 11UA of Income Tax Rules, 1962 - Rejection of valuation report - Valuation report prepared without independent verification of projections or adherence to technical standards for cash flow, terminal value, and growth assumptions constitutes a defective document - Foundation of valuation being weak, consequential findings of lower authorities upheld - Legal maxim 'Sublato fundamento cadit opus' applicable. (Paras 8, 17, 18, 21)
Facts of the case:
The assessee received share premium in excess of face value and sought to justify the fair market value through a valuation report using the DCF method. The assessing officer rejected this report, noting the company was newly incorporated, lacked evidence for projections, and projections significantly deviated from actual financial outcomes. The assessing officer proceeded to compute fair market value using the NAV method as per rules, resulting in an addition of the excess premium as income from other sources, which was confirmed by the appellate authority.
Findings of Court:
The Tribunal found that the valuation report was fundamentally defective, relying on unverified management data without scientific rigor or industry-standard benchmarking. The projections were optimistic and detached from actual business reality. The rejection of the DCF method and transition to the NAV method by the assessing officer was found to be consistent with legal precedents regarding unverified projections.
Issues: Whether the assessing officer was justified in rejecting the DCF valuation report and substituting it with the NAV method for determining the fair market value of shares under the Act.
Ratio Decidendi: When a valuation report suffers from lack of transparency, fails to justify terminal value or growth assumptions, and deviates significantly from factual performance, the assessing officer is empowered to reject the adopted valuation method and apply the NAV method to determine fair market value, as the initial reliance on self-serving, unverified projections does not satisfy the burden of proof required by statute.
Result: Appeal dismissed.
| Table of Content |
|---|
| 1. dismissal of withdrawn grounds of appeal. (Para 1 , 2 , 3) |
| 2. factual background regarding the share issue and the initiation of reassessment. (Para 4 , 5 , 6 , 7) |
| 3. justification for rejecting the assessee's dcf valuation and adopting the nav method for determining fmv under section 56(2)(viib). (Para 8 , 9 , 10 , 11 , 12 , 13) |
| 4. validation of the assessing officer's rejection of defective valuation reports lacking adherence to icai guidelines. (Para 14 , 15 , 16 , 17 , 18 , 19 , 20 , 21) |
| 5. formal dismissal of the assessee's appeal. (Para 22) |
ORDER
Per, Dr. Arjun Lal Saini, Accountant Member:
1. The Ld. CIT(A) erred in confirming reopening of assessment u/s 147 of the Act, as valid.
2. The Ld. CIT(A) erred in confirming addition of Rs. 3,99,20,000/- made u/s 56(2)(vii)(b) of the Act, being share premium received on issue of shares. The addition made kindly be deleted.
3. At the outset, learned Counsel for the assessee, informs the Bench that assessee does not wish to press ground No. 1 raised by it, therefore, we dismiss ground No.1, raised by the assessee, as not pressed.
4. The relevant material facts, as culled out from the material on record, are as follows. The assessee has filed return of income for assessment year (A.Y.) 2015-16, on 13.09.2015, declaring total income at nil and current year loss at Rs.2,26,57,224/-.The assessee`s case was selected for scrutiny through the CASS system and assessment u/s 143(3) of the Income Tax Act, 1961 was completed on 27.12.2017 accepting the total income. Thereafter, information was received by the Department in the category of High Risk Transaction on INSIGHT portal of the department that the assesse has received share premium of Rs. 3,99,20,000/-. Hence, after recording reasons of reopening and obtaining prior approval from the competent authority, the case was re-opened u/s 147 of the Income Tax Act. Accordingly, notice u/s 148 of the Act, was issued on 31.03.2021. The Assessee submitted its Return of income on 02.04.2021. Notice u/s143(2) of the Income Tax was issued to the assessee on 04.05.2021. The reasons of reopening was also supplied to the assessee. The Assessee submitted its objection vide letter dated 13.05.2021. The objection of the assesse was disposed of by passing a speaking order, by the assessing officer.
5. During the reassessment proceedings, it was noticed by the assessing officer that the assessee has issued 8000 share, whose face value is Rs. 10 and at a premium of Rs.4990/-, thus the assessee during the period has received Rs.80,000/-, as value of share and share premium of Rs. 3,99,20,000/-. Therefore, assessee was required to justify the valuation of share, as per provisions of Income Tax Act, 1961. Therefore, the assessing officer issued a show cause notice to the assessee, to explain the valuation and share premium received by it.
6. In response to the notice of the assessing officer, the assessee submitted the details of share issued and valuation report. The relevant portion of the same is as follows:
| Name & Address & PAN of Shareholder | No of Shares | Application Money | Share Capital | Share Premium |
|---|---|---|---|---|
| Kanjibhai Popatbhai Virani Shree Ram, Arjun Park, Amin Marg, Rajkot-360005, Gujarat PAN : AATPV7611H |
2000 | 1,00,00,000 | 20,000 | 99,80,000 |
| Paras Vallabhdas Katariya Vinayak, Opp. Bharat Dairy, Jalaram-3, University Road, Rajkot-360005, Gujarat PAN : AETPK0784J |
1000 | 50,00,000 | 10,000 | 49,90,000 |
| Rimal Vallabhbhai Kataria Vinayak, Opp. Bharat Dairy, Jalaram-3, University Road, Rajkot-360005, Gujarat PAN : AFOPK3437Q |
1000 | 50,00,000 | 10,000 | 49,90,000 |
| Vallabhdas Bavanjibhai Kataria Vinayak, Opp. Bharat Dairy, Jalaram-3, University Road, Rajkot-360005, Gujarat PAN : ADEPK4461G |
4000 | 2,00,00,000 | 40,000 | 1,99,60,000 |
| Total | 8000 | 4,00,00,000 | 80,000 | 3,99,20,000 |
7. The assessee submitted before the assessing officer that during the relevant previous year, 8000 equity shares having face value of Rs. 10 each was issued at a premium of Rs. 4990 per share. The details o
