Reworking Value Of Investments Held In Subsidiary By Applying DCF Method Is Permitted, Once Correctness Of Valuation Stands Proved: Delhi ITAT
Referring to Explanation to Section 56(2)(viib), the Delhi ITAT held that the assessee is entitled to suitably modify the Net Asset Value (NAV) as long as the NAV is capable of being substituted by some proof or competent evidence.
Further, finding that the assessee has produced the valuation report as well as the market valuation of Hotel Residence AG Switzerland in German currency, the Tribunal observed that the valuation of shares of subsidiary company to determine the FMV of the holding company, i.e., the assessee company for the purposes of issuance of shares at premium, thus is in accord with the deeming provision.
The Bench of Pradip Kumar Kedia (Accountant Member) and Yogesh Kumar Us (Judicial Member) observed that “The method adopted for reworking of the subsidiary company by applying the DCF method or any known method is permissible as long as the assessee is able to establish the correctness of the valuation in the light of the valuation report furnished”. (Para 11)
The assessee is therefore free to adopt the Fair Market Value (FMV) of the asset held by the subsidiary company and rework the value of investments held in the subsidiary company, and said approach do not run contrary to the object and purpose of Section 56(2)(viib), added the Bench.
Facts of the case
The assessee, a fully owned holding company holding of foreign subsidiary (through SPV), issued 10 lakh equity shares of Rs.10/- at a premium of Rs.70/- stated to be determined as per the valuation of asset and liabilities of the company. The return filed by assessee was subjected to scrutiny, where the AO observed that the assessee has received large premium on issue of equity shares to M/s. Legacy Food Pvt Ltd. The AO observed that the assessee in consideration of issue of 10 lakh equity shares received a sum of Rs.1 crore as share capital subscript ion and Rs.7 crore as share premium thereon.
On enquiry towards justification of share premium, the assessee pointed out before the AO that for the purposes of computation of FMV of its shares issued, the assessee has taken value of the property held in the name of overseas subsidiary company at a fair value of Rs.51,92,50,000/- instead of book value of Rs.21,42,27,200/-. The NAV of investment held in 100% subsidiary company has thus been accordingly adjusted to account for intrinsic value of shares held by Assessee-company in its subsidiary. The AO therefore recomputed the FMV at Rs.19.02 per share as against aggregate issue price of Rs.80 per share.
The AO also modified the Fair Market Value essentially on the premise that investment held by foreign subsidiary in the form of 'Hotel Residence AG in Switzerland' has been incorrectly taken on market value using DCF method instead of book value. The AO adopted book value of investment in subsidiary for deriving FMV at Rs.19.02 per share. The AO thus invoked the provisions of Sect ion 56(2)(viib) and held that consideration received by way of share premium on issue of equity shares to M/s. Legacy Food is in excess of FMV and a sum to the extent of Rs.6,10,00,000/- collected by way of share premium from M/s. Legacy Foods falls within the ambit of deeming fiction and thus susceptible to tax. Accordingly, the said sum was added to the total income of assessee.
Observation of the Tribunal
The Bench observed that amount received by way of share premium is essentially a capital receipt.
However, Section 56(2)(viib) seeks to treat such consideration received as deemed income by a closely held company, added the Bench.
Also, the Bench highlighted that Section 56(2)(viib) is one of the anti-abuse provision which brings to tax such excess consideration deemed to have been received by the closely held company while issuing shares at premium if such consideration is found to exceed the FMV of such shares.
The rationale behind the introduction of deeming provisions of Section 56(2)(viib) in the statute is to deter generation and use of black money, added the Bench.
The Bench referred to the submission of assessee that it owns overseas subsidiary by holding 100% shares thereon and thus the investment value in such subsidiary company shown in its books at book value requires to be substituted by the intrinsic value of the shares of the overseas subsidiary company.
For such claim, the assessee has advanced a justification that the valuation of hotel asset proposed to be used as hotel building stood substantially converted to hotel apartment and this change in the building plan leading to high earning potential and revenue generation has led to higher valuations determined equivalent to Rs.51.92 crore of value of shares of subsidiary company as against Rs.21.24 crore reflected in its books, added the Bench.
Hence, the Bench stated that the assessee has rightly modified the value of investment and enhanced the book value of the assessee-company based on increase in the value of shares of subsidiary which justifies the share premium charged on issue of shares.
On perusal of extant provision of Section 56(2)(viib) r.w. Explanation thereto, the Bench noticed that for the purposes of the said provision, the FMV of the shares shall be the value as determined in accordance with such method as may be prescribed under Rule 11UA of the Income Tax Rules.
Coupled with this and in addition thereto, the assessee is also entitled to substantiate the FMV to the satisfaction of the AO based any rational basis, added the Bench.
The Bench thus stated that both AO and the CIT(A) have proceeded on misconception that while determining the FMV as per NAV, the book value cannot at al l be substituted even on some rational basis.
The ITAT therefore concluded that the method adopted for reworking of the subsidiary company by applying the DCF method or any known method is permissible as long as the assessee is able to establish the correctness of the valuation in the light of the valuation report furnished.
Resultantly, the ITAT allowed the Assessee's appeal.
Counsel for Appellant/ Assessee: Rajiv Khandelwal and Jaind Kumarm
Counsel for Respondent/ Revenue: Subhra Jyoti Chakraborty
Case Title: Leela Tourism and Heritage Pvt. Ltd. versus ACIT
Case Number: ITA No.3685/Del/2023