By TIOL News Service

NEW DELHI, MAY 31, 2018: THE ISSUE IS - Whether when the merchant banker did nothing to test the veracity of the financial data furnished by the assessee, no fault is to be found with the AO if the DCF method adopted to compute the FMV was rejected. YES IS THE ANSWER.

Facts of the case

The assessee company deals with all kinds of investment instruments. During the PY, the assessee allotted equity shares u/s 56(2)(viib) r.w. Rule 11UA, of face value of Rs.10/- each at a premium of Rs.40/- per share consisting total amount of Rs. 1,26,00,000/-. However, the fair market value(FMV) of the share of Rs. 50/- was calculated on Discounted Cash Flow (DCF) method by the merchant banker appointed by the assessee. Pursuantly, the assessee returned losses of Rs. 53,083/- for the relevant AY. During the assessment proceedings, the AO issued Sec.142(1) notice calling for clarifications. The assessee failed to satisfy the queries of the AO, hence another notice u/s 142(1) was issued whereunder the AO computed the FMV of shares by following the NAV method. However, the assessee did not respond to this notice also. Therefore, under best judgement method, the AO made additions of Rs. 1,27,26,000/- u/s 56(2)(viib) by determining the FMV of shares by Net Asset Value (NAV) method thereby rejecting the valuation report of the merchant banker. Even on appeal before the CIT(A), the assessee did not produce any evidence to verify the correctness of the data supplied by the assessee to the merchant banker. Hence, the CIT(A) upheld the findings of the AO.

The Tribunal held that,

++ the Tribunal is unable to accept the contentions of the assessee that in view of the provisions u/s 56(2)(viib) r.w. Rule 11UA(2) the AO had no jurisdiction to adopt a different method than the one adopted by the assessee, and if for any reason the AO has any doubt recording such valuation report and does not agree with the same is bound to make a reference to the Income tax Department Valuation Officer to determine the FMV of such capital asset. This is so because unless and until the assessee produces the evidences to substantiate the basis of projections in cash flow and provides reasonable connectivity between those projections in cash flow with the reality evidences by the material, it is not possible even for the Departmental Valuation Officer to conduct any exercise of verification of the acceptability of the value determine by the merchant banker. This is more particularly in view of the long disclaimer appended by the merchant banker at page no. 16 & 17 of the paper book which clearly establishes that no independent enquiry is caused by merchant banker to verify the truth or otherwise the figures furnished by the assessee at least on test basis. The merchant bankers solely relied upon an assumption without independent verification, the truthfulness, accuracy and completeness of the information and the financial data provided by the company. A perusal of this long disclaimer clearly shows that the merchant banker did not do anything reflecting their expertise, except mere applying the formula to the data provided. Therefore, this Tribunal is unable to brush aside the contention of the Revenue that the possibility of tailoring the data by applying the reverse engineering to the pre-determined conclusions;

++ there has not been any possibility of verifying the correctness or otherwise of the data supplied by the assessee to the merchant banker, in the absence of which the correctness of the result of DCF method cannot be verified. This left no option to the AO but to reject the DCF method and to go by NAV method to determine the FMV of the shares. Without such evidence, it serves no purpose even if the matter is referred to the Department's Valuation Officer. Therefore, no illegality or irregularity in the approach of conclusions is found by the authorities below. While confirming the same, this Tribunal dismissed the appeal as devoid of merits. In the result, the appeal of the assessee is dismissed.

(See 2018-TIOL-777-ITAT-DEL)