Addition cannot be made under section 56(2)(viib) where AO does not dispute or question the financial, technical and professional credentials of the venturists

Facts of the case:

Mais India Medical Devices Private Limited (MAIS India) was incorporated in the year 2012 under a joint venture agreement between M/s Sysmech Industries LLP, a resident of India and M/s Demas Company, a non-resident. MAIS India developed in-house all the Assembly Machines & Packing Machines used in the product manufacturing like Body Assembly Machine, Tip Forming Machine, Final Assembly Machine, Needle Fixing Machine, 3 Way Handle-Channel Assembly Machine. Both Joint venture partners agreed to contribute to the project cost in the ratio of 60:40 and keep the shareholding in the ratio of 50:50.

MAIS India preferred the method of valuation as per the valuation rule 11UA of the income tax rule,1962 and the value of equity shares arrived at Rs. 60 per share following the DCF method. The MAIS India issued equity shares to non-residents at a rate of Rs. 60 per share, while shares were given to residents at a rate of Rs. 40 per share.

MAIS India filed its income tax return and declared the loss of Rs.2,97,79,141 and the case was selected for limited scrutiny to furnish various details including the valuation of shares as computed under rule 11UA of the income tax rules 1962. The assessing officer (AO) rejected the valuation of shares and made the addition under section 56(2) equivalent to the premium charged from the resident shareholder on the allotment of shares.

Aggrieved with the decision of the AO, MAIS India preferred an appeal to the CIT(A). CIT(A) set aside the order passed by AO and upheld the valuation done by the chartered accountant of the MAIS India on DCF method.

ITAT:

Aggrieved, revenue filed an appeal to the tribunal. ITAT noted that AO has rejected the DCF method for valuation adopted by MAIS India for the valuation of shares with the reason that the DCF method could not be applied since the company had suffered a loss in the previous assessment year. Tribunal held that the difference in the share price of resident and non-resident was due to furtherance of the clauses of the joint venture agreement. The discounted factor has occurred due to the difference in the share capital contribution to the project cost., however, the AO without considering the relevant clauses of the joint venture agreement presumed that there was a difference in the valuation of shares for resident and non-resident entity, the valuation given by prescribed expert is liable to be rejected. The tribunal relied on the decision of the supreme court in Duncans Industries Ltd vs state of UP 2000 ECR 19 held that question of valuation is a question of facts. Thus, law by virtue of section 56(2)(viib) read with rule 11UA(2)(b) makes the prescribed expert’s report admissible as evidence, then without discrediting it on facts, the valuation of shares cannot be rejected. AO has not questioned or disputed the financial, technical, and professional credentials of the venturists for entering into the joint venture agreement. The AO without disputing the details of the project, revenue expected, and cost projected has discredited the prescribed expert’s report which is admissible as evidence for the valuation of shares and to determine fair market value.

The Tribunal dismissed the appeal filed by the revenue.

DCIT vs MAIS India Medical Devises Private Limited (2022) 139 taxmann.com 94 (Delhi Tribunal)