Assessing Officer not empowered to reject selection and valuation methods adopted by Taxpayer: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT), Bangalore Bench held that the Assessing Officer (AO) is not empowered to reject selection and valuation methods adopted by taxpayers.

The assessee company, M/s. GSE Commerce Private Ltd. operates in the service sector. During the year under consideration, it has issued 3511 equity shares having a face value of Rs.10 each at premium of Rs.5,682 per share to resident investors. The assessee thus collected a share premium.

The assessee furnished a valuation report issued by a Chartered Accountant in support of the share premium amount collected by it. The Chartered Accountant had valued the shares under discounted cash flow method (DCF method).

The AO was of the view that the shares of the company have been overvalued and accordingly asked the assessee to justify the valuation. After considering the explanations of the assessee, the AO took the view that the valuation report has been prepared on the basis of information and data provided by the management of the assessee company and the Chartered Accountant has not carried out any independent verification.

The AO also took the view that the projections and estimates made by the management are not realistic and they do not have any basis and thus they were purely arbitrary in nature. Accordingly, the A.O. rejected the valuation report of the assessee.

Then the A.O. proceeded to determine the valuation of the shares under net Asset value/Book value method prescribed under rule 11UA of the Income Tax Rules. The AO calculated the value of shares at Rs.1,081.13ps. per share.

Accordingly, he determined excess share premium collected by the assessee at Rs.1,61,88,765/- and assessed the same as income of the assessee under section 56(2)(viib) of the Act. The CIT(A) also confirmed the same.

The two-member bench of B.R. Baskaran and Beena Pillai while considering the issue with regard to valuation has to be decided afresh by the AO on the lines indicated in the decision of ITAT, Bangalore in the case of VBHC Value Homes Pvt.Ltd. Vs. ITO wherein it was held that the AO can scrutinize the valuation report and he can determine a fresh valuation either by himself or by calling a determination from an independent valuer to confront the assessee but the basis has to be DCF method and he cannot change the method of valuation which has been opted by the assessee.

“The AO has proceeded to determine the value of shares in both the years by adopting different methods without scrutinizing the valuation report furnished by the assessee under DCF method. Accordingly, following the decisions rendered by the coordinate benches, we set aside the orders passed by CIT(A) in both the years and restore the impugned issue in both the years to the file of the AO with the direction to examine this afresh,” the tribunal said.