Methodology selected by taxpayer for determining Fair Market Value of shares: Jurisdiction of a Tax Officer to ignore/ reject such selection and valuation methods adopted by taxpayer.
Transaction: Valuation for issuing the Shares at a premium
Industry: Medical Management Services
- The Assessee had issued equity shares and preference shares at a premium. The Assessing Officer called upon the Assessee to furnish the basis of valuation for issuing the shares at a premium.
- The Assessee submitted that according to Section 56 of the Income Tax Act read with Rule 11UA, the Company had valued its shares as per discounted Free Cash Flow Method.
- However, the Assessing Officer rejected the valuation of discounted cash flow method calculated by the Assessee stating the same of having unrealistic results and calculated the valuation of share as per provisions of Rule 11UA(2)(a). Since, the liabilities exceeded the assets of the company the fair market value of the shares was negative and hence, the market value was taken at face value of Rs.10/- each.
- Accordingly, the share premium received of Rs. 3.96 Crs was added back to the total income of the Assessee under Section 56(2)(viib) of the Income Tax Act.
- The Tribunal placed reliance on the decision of the Bombay High court in the case of Vodafone M-Pesa Ltd. Vs Principal Commissioner of Income Tax, wherein it was held that the Assessing Officer could not change the method adopted by the Assessee for valuing the market value of the shares from discounted cash flow method to net asset value method which was violation of Rule 11UA and accordingly, the impugned order was to be set aside.
- Similarly, in the present facts of the case the Assessing Officer could not change the method of valuation adopted by the Assessee by merely relying on the actual results in the subsequent years and arbitrarily coming to the conclusion that projections were not achieved.
- Therefore, respectfully following the said decision, the Assessing Officer was directed to delete the additions.