AO cannot Change Method followed by Assessee from DCF Method to NAV Method: ITAT [Read Order]

The Chennai bench of the Income Tax Appellate Tribunal (ITAT)has recently held that the  Assessing Officer (AO)could not change the  method which was followed by the assessee from discounted cash flow to Net Asset Value method.

Assessee Brio Bliss Life Science P Ltd. Company has filed its return of income for the assessment year 2015-16 on 22.09.2015, declaring a loss of Rs. 2, 33, 27,290.After the scrutiny assessment AO noticed that during the year under consideration the assessee company has received share premium of Rs. 1.75 crores and Rs. 2.05 crores from M/s. Fulcrum Venture India Trust for allotment of equity shares with a premium of Rs. 22/- per share. Assessee’s justification for the transaction was not accepted by the A O.

For calculating the share value assessee followed a discounted cash flow (DCF) method. But the AO determined fair value of equity shares under rule 11UA of the Income Tax Rules, 1962 by adopting Net Asset Value (NAV) method and determined per equity share price.

Further excess consideration received over and above face value of Rs. 22/- per share has been treated as income of the assessee in terms of provisions of section 56(2)(viib) Income Tax Act 1961.against this order of assessment assessee filed an appeal before the ITAT.

S. Sridhar counsel for the assessee submits that the assessee has followed DCF method for valuation of shares and has considered certain projections. The AO, rejected DCF method followed by the assessee only on the ground that actual performance of the company for two assessment years is not equal to projected financials.

Also AO ignored the fact that it is not necessary that actual performance of a company should be equal to projected financials, because the DCF method of valuation of shares comes on the basis of projected financials of future years, which depends upon various factors including certain estimations and assumptions.

D. Hema Bhupal, counsel for the revenue contented that, assessee could not be able to justify valuation method adopted for determination of share price, the AO can very well determine share price on the basis of rule 11UA of the Income Tax Rules, 1962.

After providing so much time for rectifying the defect in appeal filed by the assessee, the division bench of the ITAT comprising V. Durga Rao (Judicial Member) and G. Manjunatha, (Accountant Member) allowed the appeal and observed that,

AO has completely erred in arriving at a conclusion that DCF method followed by the assessee is incorrect only on the basis of one element, difference in projected financials and actual performance of the company for two financial years, because DCF method is mainly on the basis of projected financials of future years and depends upon various estimations and assumptions.

Therefore The AO is free to examine the method followed by the assessee, however, he did not have power to change the method followed by the assessee from DCF method to NAV method, and to decide the issue in accordance with law.

Support our journalism by subscribing to TaxscanAdFree. Follow us on Telegram for quick updates.