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Judgment
PER S. RIFAUR RAHMAN, AM :
This appeal is filed by the assessee against the order of the Ld. Commissioner of Income-tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘ld. CIT(A)] dated 18.08.2025 for the Assessment Year 2018-19.
Brief facts of the case are, assessee filed its original return of income declaring total loss of Rs.1,46,02,003/- on 15.10.2018. Subsequently, the return was revised on 01.03.2019 at a total loss of Rs.1,46,02,003/-. The case was selected for scrutiny through CASS under limited scrutiny in order to verify the share premium. Accordingly, notices under section 143(2) and 142(1) of the Income-tax Act, 1961 (for short ‘the Act’) were issued and served on the assessee through ITBA Portal. Accordingly, assessee filed relevant information as called for.
The assessee is engaged in the business of IOT products and solutions, which forms the backbone of the all smart solutions. The AO observed that assessee has issued share capital on 25.07.2017, 23.10.2017 and 31.03.2018 and based on the valuation, assessee has issued share capital with the share premium of Rs.993/- on 25.07.2017, share premium of Rs.734.05 on 23.10.2017 and share premium of Rs.888.80 on 31.03.2018. Since the assessee has adopted the same data to determine the different share premium to issue shares in three tranches during the same year. In response, assessee has submitted various details in support of the valuation of shares. Further, the AO observed that even though assessee has adopted projections from AY 2017-18 to 2020-21 whereas the actual figures are that assessee has incurred huge losses during this period. Accordingly, assessee was asked to explain as to why the above value of shares should not be added u/s 56(2)(viib)of the Act. In response to the above notices, assessee has submitted a detailed submissions and also submitted that one of the shareholders is Kamal Puri who is a non-resident and the provisions of section 56(2)(viib) are not applicable. The AO took note of the same and proceeded to make the addition towards collection of share premium to the extent of resident only. The proportionate amount to the extent of share issue to the resident to Rs.70,36,523/- was considered. The AO has adopted the other method of valuation of equity shares as specified under Rule 11UA of Income-tax Rules, 1962 (for short ‘the Rules’) on the basis of net worth based valuation. Based on that, he has determined the value per share and accordingly he disallowed the difference between values determined by him and share premium amount collected from the resident Indian.
Aggrieved with the above order, assessee preferred an appeal before NFAC, Delhi and filed detailed submissions. After considering the detailed submissions, ld. CIT (A) observed that on perusal of the three valuation reports submitted by the assessee certified by the certified valuer adopting DCF method, the above reports clearly state that fair valuation of the equity shares is pursuant to Regulation 5(1) of foreign exchange management. He has reproduced scope and purpose of the report at page 16 of the appellate order. He further observed that although the valuation of the equity shares has been done on the basis of DCF method certified by the Chartered Accountant, the report does not certify that valuation is for the purpose of compliance of Rule 11UA of the Rules instead of the valuations have been done solely in pursuance of FEMA Regulations for the purpose of proposed issuance of equity shares to non-resident Indian and/or are foreign corporate body. As per section 56(2)(viib), where a company, not being a company in which public are substantially interested, receives, in any previous year, from any person being resident, any consideration received for issue of shares as exceeds the fair market value of such shares, the correct consideration received for such shares as exceeds the fair market value of the shares. Therefore, the difference has to be taxed under the head ‘income from other sources’. Since the assessee has prepared and submitted valuation report which was prepared solely on pursuance of FEMA Regulations to issue shares to the non-resident, the assessee has clearly failed to exhibit compliance with the conditions mandated in Explanation to section 56(2)(viib) read with Rule 11 UA. Further he relied on the assumptions and limitations declared in the valuation report and rejected the plea of the assessee. Further he observed that DCF method was based on projections which were adopted by the assessee did not exhibit any form of reasonable correlation with the guidelines and on account of valuer on the part of the assessee to substantiate the same. Based on the above obseervation on the various discrepancies found in the valuation report, he dismissed the grounds raised by the assessee and sustained the addition made by the AO.
Aggrieved with the above order, assessee is in appeal before us raising following grounds of appeal :-
“1.Commissioner of Income Tax (Appeals) has erred in adding the share premium as undisclosed income on the pretext of mandatory disclosure of Chartered Accountants Valuation report which is required as per the guidelines of Institute of Chartered Accountants of India and hence this appeal.
2.Section 56(2)(viib) read with Rule 11 UA provides for DCF valuation for allotment of shares by the company. This share premium is considered as income from other sources in facts of the case.
3.ITO / Commissioner of Income Tax (Appeals) has not considered valuation report wherein valuation and allotment of shares are at the same price.”
At the time of hearing, ld. AR of the assessee brought to our notice page 16 of the impugned order and submitted that the shares were issued to non-resident as well as to resident. Ld. CIT (A) rejected the projections based on the assumptions certified by the valuer in his report. Further he brought to our notice page 4 of the paper book which is reproduction of Rule 11UA of the Rules. With reference to above, he submitted that there is no discretion between valuation based on FEMA or Income-tax Rules. He objected to the method adopted by the lower authorities to reject DCF method by finding discrepancies in the method adopted for selection of data supplied by the assessee to determine the value and the same was applied by the valuer. He submitted that lower authorities cannot tinker the valuations adopted by the valuer and also cannot change the method selected by the assessee as per Rule 11UA of the Rules. He further submitted that the same shares were issued to the non-resident as well as to resident, there cannot be any discrepancy. Further ld. AR of the assessee submitted written submissions which are reproduced below :-
2.The assessee is a private limited company. In this case, the assessee had filed return of income for AY 2018-19 on 15th October 2018 declaring a total loss of Rs. 1,46,02,003/-. Subsequently, the matter was taken up for scrutiny under CASS for “Verification of Share Premium” and a notice U/s 143 (2) of the IT Act was served, requiring the appellant to represent before ITO.
3.In response, Appellant submitted the required data / information before the learned AO which were called for. During the relevant year, the Appellant issued equity shares of face value Rs. 10/- at premium on three occasions (25.07.2017, 23.10.2017 and 31.03.2018).This investment was made for a new technology (IoT) based innovative product that was researched, designed and developed by the company. The product designed was innovative and futuristic in nature with huge growth potential as substantiated by the market reports about the IoT technology business. As such, the share price on each occasion was determined based on valuation carried out using the Discounted Cash Flow (DCF) method.
4.Pursuant to notice U/s 143(2), the learned AO has concluded the assessment by making an addition of Rs. 70,36,523/- as addition U/s 56(2)(viib) of the Income Tax Act, 1961.The addition was applicable only towards premium received from resident shareholders, while premium received from a non-resident shareholder was accepted.
5.This order was appealed with Commissioner of Income Tax (Appeals) on 27th March 2021. The Commissioner of Income Tax (Appeals) has passed its order U/s 250 on 18th August 2025 retaining the addition made by the assessing officer.The learned CIT(A) has confirmed the said addition mainly on the ground that: - the valuation reports were allegedly prepared for FEMA purposes and not explicitly for Rule 11UA; and -projections adopted under the DCF method did not match actual results.
Issue under appeal
6.Addition of Rs. 70,36,523/- as excess share premium collected U/s 56(2)(viib) of the Income Tax Act, 1961 under the head “Income from Other Sources” by rejecting the DCF valuation method adopted by the Appellant.
Grounds of Appeal (as filed in Form 36)
i.Commissioner of Income Tax (Appeals) has erred in adding the share premium as undisclosed income on the pretext of mandatory disclosure of Chartered Accountants Valuation report which is required as per the guidelines of Institute of Chartered Accountants of India and hence this appeal.
ii.Section 56(2)(viib) read with Rule 11UA provides for DCF valuation methodology for allotment of shares by the company. This share premium is considered as income from other sources in facts of the case.
iii.AO/ Commissioner of Income Tax (Appeals) has not considered valuation report wherein valuation and allotment of shares are at the same price.
iv.Add modify any or all the of appeal.
Submissions
7.Sec. 56(2)(viib) of the Income Tax Act reads as under:
Income from other sources.
56.(1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head "Income from other sources", if it is not chargeable to income-tax under any of the heads ….
(2)In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head "Income from other sources", namely :—
(i)dividends ;
(ia)income referred to in sub-clause (viii) of clause (24) of section 2;
(ib)income…..
(viib) 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 face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares:
…
Explanation.—For the purposes of this clause,—
(a)the fair market value of the shares shall be the value—
(i)as may be determined in accordance with such method as may be prescribed; or
(ii)as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher;
8.Rule 11UA of the Income Tax Rules reads as under:
Determination of fair market value.
11UA.(1) For the purposes of section 56 of the Act, the fair market value of a property, other than immovable property, shall be determined in the following manner, namely,—
(a)valuation of ….
(b)the fair market value of unquoted equity shares shall be the value, on the valuation date, of such unquoted equity shares as determined….
(c)the fair market value of unquoted shares and securities other than equity shares in a company which are not listed in any recognized stock exchange shall be estimated to be price it would fetch if sold in the open market on the valuation date and the assessee may obtain a report from a merchant banker or an accountant in respect of such valuation.
(3)Where the date of valuation report by the merchant banker for the purposes of sub-rule (2) is not more than ninety days prior to the date of issue of shares which are the subject matter of valuation, such date may, at the option of the assessee, be deemed to be the valuation date:
9.The Learned AO has erred in law and facts of the case in making an addition of Rs.70,36,523/-, in respect of share premium collected U/s 56(2)(viib), alleging the same to be excessive.
10.The assessee company made the following allotment of shares during the AY 2018-19:
1st Allotment (Date of Allotment – 25th July 2017)
Name of the Shareholder Residential Status Number of Equity Shares allotted Face Value of Each Share Premium Paid per share Total premium Paid on allotment Amount added as Income U/s 56(2)(viib) a d = a X c Kamal Puri Non Resident 2,492 1003 24,74,556 -- Carron Capital Advisors LLP Resident 1,196 1003 11,87,628 11,87,628 Vineet Resident 299 1003 2,96,907 2,96,907 Taneja Abhishek Behari Sharma Resident 1,561 1003 15,50,073 15,50,073 Saurabh Sharma Resident 2166 1003 21,50,838 21,50,838 Total 76,60,002 51,85,446 2ndAllotment (Date of Allotment – 23rd Oct 2017)
Name of the Shareholder Residential Status Number of Equity Shares allotted Face Value of Each Share Premium Paid per share Total premium Paid on allotment Amount added as Income U/s 56(2)(viib) B c d = a X c Kamal Puri Non Resident 1,679 10 744.05 12,32,470 -- Carron Capital Advisors LLP Resident 806 10 744.05 5,91,644 5,91,644 Vineet Taneja Resident 201 10 744.05 1,47,544 1,47,544 Total 19,71,658 7,39,188 3rdAllotment (Date of Allotment – 31st March 2018)
Name of the Shareholder Residential Status Number of Equity Shares allotted Face Value of Each Share Premium Paid per share Total premium Paid on allotment Amount added as Income U/s 56(2)(viib) A B c d = a X c Kamal Puri Non Resident 2,086 10 898.8 18,54,037 -- Carron Capital Advisors LLP Resident 1,001 10 898.8 8,89,689 8,89,689 Vineet Taneja Resident 250 10 898.8 2,22,200 2,22,200 Total 29,65,926 11,11,889 Summary of Income added U/s 56(2)(viib) as per the above table
1st Allotment 25th July 2017 51,85,446 2nd Allotment 23rd Oct 2017 7,39,188 3rd Allotment 31st March 2018 11,11,889 Total 70,36,523 11.The assessee company has made three allotments during the year as shown above in Point No 10. The company has made these allotments to both Non resident& other resident shareholders.
12.Further the company has allotted the above-mentioned equity shares of Rs 10 each at a premium at various times in the year. The premium is determined based on the discounted cash flow method, which is an approved method of valuation as per the requirement of Sec 56 (2)(viib) r/w Rule 11UA and as well under the Foreign Exchange Management Act [FEMA] guidelines.
13.Regulation 5[1] of the foreign exchange management (transfer or issue of security by a person resident outside India), Regulation 20/2000 provides for issues of shares above the fair valuation of sharesas certified by a chartered accountant.
14.The learned AO has erred in considering the share premium amount collected as “Income from Other Sources” U/s 56(2)(viib). Each of the three allotments made by the company are both to the resident and non-resident. Valuation of each of the three allotments have been made based on the discounted cash flow method as certified by an expert. When the valuation has been accepted for a non-resident by the learned AO, by no stretch of imagination, the same valuation for a resident is deemed to be excessive and taxable U/s 56(2)(viib).
15. Rebuttal to CIT(A) Para 8.1.6 – Alleged substitution / rejection of DCF method
The learned CIT(A) records that the AO did not technically substitute the DCF method with NAV and that reference to NAV was only “indicative”. In this regard, this reasoning is misconceived.
The learned CIT(A) failed to appreciate the basic and critical mistake by the AO, as explained below:
a. The AO used a method whose calculation referred to the totally irrelevant parameters, referring to the Balance Sheet and corresponding Net Worth of the loss-making Business Lines from the erstwhile products and services “Phone Data Backup” which had become obsolete because of which company chose to migrate to another IoT Technology based products & services. The learned AO should have used a methodology which is applicable to any new and innovative product/ services with futuristic business estimations.
b. The reason why the previous service of Phone Data Backup became loss making has already been explained Point No 23 (advent of Smart Phones in the market and the Google as well as the phone companies started offering the same service for free, in-built in the Smart Phones).
c. However, most importantly, the learned CIT(A) has, while accepting the alternate method as “only indicative”, ignoring the fact that the method used by the Ld AO was “Not Applicable” / unfit in case of the subject valuation due to mismatch, irrelevance etc of the parameters of stated alternate method, but has accepted exactly the same figures of valuation arrived at by this erroneous and improper method.
The moment the AO rejects the valuation arrived at under a prescribed method and proceeds to treat the share value as equivalent to face value, the AO has effectively disregarded the DCF valuation, which is impermissible in law.
Rule 11UA grants the assessee a statutory option to choose between DCF and NAV. Once the assessee exercises this option and furnishes a valuation report, the AO cannot sit in judgement over the valuation unless there is material to show fraud, perversity or manipulation.
This legal position is well settled by the Delhi ITAT:
•Cinestaan Entertainment Pvt. Ltd. v. ITO (2019) 106 taxmann.com 300 (ITAT Delhi)
•DCIT v. Ozoneland Agro Pvt. Ltd. (2018) 89 taxmann.com 386 (ITAT Delhi)
In both cases, it was held that the AO cannot replace the assessee’s DCF valuation merely because actual results differ from projections.
16. Rebuttal to CIT(A) Paras 8.1.11 to 8.1.14 – Alleged mismatch between projections and actuals
The learned CIT(A) has confirmed the addition primarily on the ground that projections adopted under DCF valuation did not match subsequent actual losses. This approach is legally untenable.
DCF valuation is inherently forward‑looking and must be tested only with reference to information available on the valuation date, and not by applying hindsight based on subsequent events.
The Delhi ITAT has consistently rejected the approach of comparing projections with actuals:
Ozoneland Agro Pvt. Ltd. v. DCIT (2018) 89 taxmann.com 386 (ITAT Delhi)
Rameshwaram Strong Glass Pvt. Ltd. v. ITO (2018) 94 taxmann.com 266 (ITAT Jaipur)
It has been held that commercial failure of a business does not invalidate a bonafide valuation.
The Appellant has demonstrated bona fide commercial reasons for under‑performance, including competition, inadequate marketing capital, technical failures, and customer default. None of these factors were foreseeable with certainty at the time of valuation.
The Appellant has demonstrated bona fide commercial reasons for under‑performance, including competition, inadequate marketing capital, technical failures, and customer default. None of these factors were foreseeable with certainty at the time of valuation.
17. Rebuttal to CIT(A) Paras 8.1.8 to 8.1.10 – FEMA vs Income‑tax valuation objection
The learned CIT(A) has rejected the valuation reports on the ground that they were prepared pursuant to FEMA regulations and not explicitly for Rule 11UA purposes.
This objection is hyper‑technical and unsustainable. Rule 11UA does not prescribe any specific format or language for valuation reports; it only prescribes the method.
The valuation reports submitted by the Appellant: - adopts the DCF method, which is expressly permitted under Rule 11UA; - discloses assumptions, cash‑flow projections and discount rates; - are issued by a qualified Chartered Accountant.
FEMA and Income‑tax statutes operate in different fields, but DCF mechanics remain same irrespective of the law under which the valuation report is prepared. Courts have repeatedly held that valuation cannot be rejected merely because it was originally prepared for another statutory purpose.
Judicial support: - Vodafone India Services Pvt. Ltd. v. UOI (2014) 368 ITR 1 (Bom HC), affirmed in principle by SC - Innoviti Payment Solutions Pvt. Ltd. v. ITO (2019) 102 taxmann.com 59 (ITAT Bangalore)
The disclaimer clauses relied upon by the CIT(A) are standard professional disclaimers and do not render the valuation invalid. If such disclaimers are treated as fatal, no DCF valuation would ever survive scrutiny.
18. Rebuttal to CIT(A) Para 8.1.10 – Inconsistent treatment of resident vs non‑resident valuation
The AO accepted the very same valuation for shares issued to a non‑resident shareholder and rejected it only for resident shareholders.
The learned CIT(A) has attempted to justify this inconsistency by stating that acceptance for non‑resident was only due to non‑applicability of section 56(2)(viib). With respect, this misses the core issue.
Acceptance or rejection of valuation is a question of correctness of methodology, not chargeability. If the valuation was fundamentally unreliable, it could not have been relied upon even for FEMA compliance.
Such selective rejection violates the principle of consistency and non‑arbitrariness, as recognised by courts.
Judicial support: - ITO v. M/s Vaani Estates Pvt. Ltd. (2018) (ITAT Delhi)
19. Rebuttal to CIT(A) Paras 8.1.11 to 8.1.14 – Substitution of commercial wisdom
The AO and the CIT(A) have effectively substituted their own perception of business viability over that of the entrepreneur and investors.
It is a settled principle that tax authorities cannot question commercial expediency or pricing of shares, once valuation is supported by a recognised method.
Authoritative precedents: - Vodafone India Services Pvt. Ltd. (supra)
Section 56(2)(viib) is an anti‑abuse provision, not a tool to re‑write genuine capital‑raising transactions of start‑ups.
20.Further as per Finance Act No. 2 of 2024, this sub-section (Sec 56(2)(viib))has been repealed and no more in force with effect from 01.04.2025. The memorandum to Finance Bill 2024 which explains the intent of making this provision ineffective is as under:
Vide Finance Act, 2012, a new clause (viib) was inserted in sub-section (2) of section 56 to provide that 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, if the consideration received for issue of shares exceeds the face value of such shares, the aggregate consideration received for such shares exceeding such fair market value shall be chargeable to income tax under the head “Income from other sources”.
It has been decided by the Government to sun-set the provisions of clause(viib) of sub-section (2) of section 56 of the Act. Consequent to said decision, amendment to clause (viib) of sub-section (2) of section 56 of the Act is being carried out to provide that the provisions of this clause shall not apply from the assessment year 2025-26.
21.While repeal may not operate retrospectively, it clearly indicates that the provision should be interpreted reasonably and not mechanically to penalize bona fide capital raising transactions.
22.The learned AO / Commissioner of Income Tax (Appeals) has not considered valuation report wherein valuation and allotment of shares are at the same price for both resident and non resident.
23.Some of the key points which are pitched for further emphasizing our Case:
i.The AO committed the fundamental error while doing the assessment.
ii.The assessment made by the AO was for the previous line of business products & services viz. “Phone Data Backup” which had already become obsolete while the share premium and investments were made for business of another, a new technology innovative products and services.
iii.The “Phone data Backup” became obsolete and loss making because with the advent of Smart Phones in the market, Google had started offering the service for free and the phone makers started offering the service in-built in the new phones with no extra cost.
iv.This new Technology was IoT(Internet of Things) based on which the new Product “Smart Plug” were being developed. IoT based Products & solutions are still innovative, all pervasive and were considered to have huge business potential as projected in the market reports (Google search report attached)
v.The prototype of the product was developed in the year 2015. Only after testing the prototype, the investors agreed to invest. The valuation report was prepared by qualified entity, commensurate valuation methodology and the premiums were decided accordingly.
vi.The product was later sold through Amazon On-Line, at Exhibitions and Road shows. At Amazon, it was rated as at 5 Star/ 4.5 Stars (Report attached).
vii.The product and the company was also valued high at various media forum e.g NDTV Tech, EFY etc. (attached)
viii.Accordingly, the Premiums paid were logical and justified.
ix.The assumption of “Undisclosed Income” is totally incorrect and illogical because all transactions have happened through banks and all rules and regulations pertaining to such investments were strictly complied with.
x.The “Net Worth” methodology used by the AO to arrive at the “Indicative assessment” cannot be used as an alternative method as the assessment parameters are totally different and the NW method was “Not Applicable” in this case (of new technology based futuristic products).
24.On fundamentals about the premium, the Assessing Officer has wrongly construed that the subject investment and associated premium were for the erstwhile utility Mobile App VAS business of the company which, by then, had started making losses due to the advent of new technology “Smart Phones” and Google started offering the same service as ours (Phone Data backup) Free of Cost.
25.We would like to assert that this assumption of the learned A.O. was completely wrong. The investment raised was not for the erstwhile loss-making services (VAS), But for a new product & Solution called “Smart Plug with “Betty” as its brand name, and for developing, marketing and selling the new Innovative products/ solutions using latest IoT Technology” that the company had, post 2015, decided to develop for its business.
26.The learned AO during the assessment proceedings have been provided all the valuation report obtained by the company for each of the three allotments made during the year.
27.Further, the assessee humbly submits that the addition made under section 56(2)(viib) on account of alleged excessive share premium, by rejecting the DCF valuation method, is unjustified both in facts and in law.
a. Valuation is an estimation, not an exact science:
It is a settled position that share valuation, particularly under the DCF method, is inherently based on estimates and projections which may vary due to future business dynamic circumstances.
b. Assessee’s right to choose a prescribed method:
Rule 11UA allows an assessee to adopt either the Net Asset Value (NAV) or the DCF method for valuation. Once the assessee has validly exercised this option and obtained a report from a qualified valuer/merchant banker, the Assessing Officer cannot substitute his own method unless he demonstrates perversity or fraud in the report (Cinestaan Entertainment Pvt. Ltd. vs. ITO).
c. Revenue cannot second-guess projections with hindsight:
Future projections are made in good faith on the basis of information available at the time of valuation. Any shortfall in actual results vis-à-vis projections cannot render the valuation invalid (DCIT vs. Ozoneland Agro Pvt. Ltd.).
d. Consistency with CBDT intent:
The legislative intent behind Section 56(2)(viib) is to curb tax evasion through unreasonably high share premiums. In genuine cases where valuation is supported by recognized methods and reports, the provision should not be invoked mechanically to disregard bona fide commercial transactions.
Appeal / Prayer
In view of the above, it is submitted that the rejection of the DCF method is contrary to judicial precedents and statutory rules and the assumptions made regarding any undisclosed income are fundamentally incorrect.
It is prayed that the addition made under section 56(2)(viib) be deleted in full, upholding the bona fide valuation as certified by the independent valuer.
Due to the subject order, notices and prolonged fighting of the case the assessee has suffered in multiple way viz costs of CA for defending the case, opportunity losses, and also severe mental stress. Hence assessee look forward to the additional prayers for your considerations as submitted below:
i.Cost of Defending the Case: Full reimbursement of the entire cost of defending the case viz. the fees of the Chartered Accountant, the Appeal Fees and all such associated costs for responding to this case may please be allowed.
ii.Opportunity Cost to the Company: The company, due to the ongoing proceedings, could neither attracts any investment to revive the company nor could merge with other company (M&A) nor dispose off at its fair value in all these years despite there being many opportunities. Now seven years have passed since the IT Order hence company’s technology and intellectual assets too have gone older which would lead to much lower valuation of the company for any investment merger or sell off. This loss may also be off set by awarding a value as may be worked out utilising any available bona fide assessment methodology by any competent specialist of the field.
iii.Personal Stress: It may please be appreciated that for the person, the concerned Director, now 75 years, who have led the life of honesty, ethics & values, abiding by all laws of the land, being slapped a case such a nature, a false allegation (concealing undisclosed income), and defending for nearly six years, has caused enormous stress, mental and physical. An order to compensate it as an appropriate healing touch is also submitted for your assessment and appropriate consideration.”
On the other hand, ld. DR of the Revenue brought to our notice pages 8 to 21 of the impugned order wherein ld. CIT (A) has discussed the projections adopted by the assessee for projection vs. guidelines, there is huge difference between the projection adopted by the assessee and guidelines. Further he submitted that assessee has adopted same data to determine three valuation reports to issue shares at three occasions in the same year. This itself shows that data adopted by the assessee is not proper and finally he relied on the detailed findings of the lower authorities.
Considered the rival submissions and material placed on record. We observed that assessee has issued shares during the year under consideration in three tranches and adopted the method of DCF in all the three occasions and we are also surprised that by adopting the same set of projections, value of shares was determined at three different values. Since the assessee has selected one of the method to value its shares i.e. DCF method. We noticed that various courts have held that to determine the valuation of shares by adopting DCF, it is based on projections of future. The projections adopted by the assessee cannot be tinkered with in the future. Therefore, the assessee has adopted certain projections to determine the value of shares which is futuristic. We cannot reject the valuation method adopted by the assessee even though the similar data was applied to value the shares in three occasions in the same year.
Further we observed that the assessee has issued shares to resident as well as non-resident. The tax authorities conveniently accepted the method of valuation adopted by the assessee for issue of shares to non-resident and only restricted to disallow to the extent of shares issued to the resident. They cannot adopt two different methods. Further we observed that assessee has adopted three projected data to value its own shares to issue shares in the same year. This method of adopting three different projections is not acceptable. However, we observed that same valuation method was adopted by the assessee to issue the shares to the non-resident even though the method adopted by the assessee is not proper to project the value of shares. However, the same value was adopted to issue shares to resident as well as non-resident. The Revenue authorities cannot adopt to change the method of valuation which is one of the approved method under Rule 11UA and proceed to reject the valuation of shares issued to only resident. We cannot adopt method of such discrimination to reject value of shares to resident, whereas accept the same value of shares to non-resident. Therefore, we are inclined to allow the valuation of shares adopted by the assessee to issue shares to all the stakeholders. We are conscience to note that the method of adopting similar data to determine the futuristic value of shares. However, Assessee has used the value of shares to benchmark the price to issue to the non-resident and consistently applied the same to issue shares to resident also. Therefore, we are inclined to allow the grounds raised by the assessee.
In the result, the appeal filed by the assessee is allowed.