Discounted Cash Flow based consideration for share-sale more than NAV cannot be tinkered

The Mumbai Income Tax Appellate Tribunal, while hearing an appeal involving additions of about Rs 225.85 Crores on account of the Assessing Officer (AO) harboring suspicions about a 50% drop in value of shares a month before their sale, observed there to be no need for the AO to tinker with the full value of consideration declared by the Assessee, where the full value of the consideration exceeded the Fair Market Value of the shares.

A Division Bench of Mr. B.R. Baskaran, Accountant Member, and Mr. PK Gadale, Judicial Member, noted that the Assessee had submitted its responses against the grounds on which the AO sought to reject the Fair Market Value of the shares and also observed that these submissions had not been contested or disproved by the Department.

The Appellant-Assessee was represented by Mr. P.J. Pardiwala whereas the Respondent-Revenue was represented by Mr. Fenil Bhatt.

The Assessee, a Singaporean company, acquired an Indian company named M/s Groupon India P Ltd, by purchasing 252237 shares having face value of Rs 10/- each at Rs 5774/- per share. Later the Assessee-company changed its name to M/s Nearbuy India P Ltd and was engaged in developing a local e-commerce market place that connected merchants with customers who required goods or services, at discounted prices. The subsidiary company earned commission income from the merchants.

Apart from the initial investment made into the subsidiary, the Assessee made additional investments as well through purchase of shares of the subsidiary company, till the total number of shares held by the Assessee reached 338822 shares.

Later, the Assessee entered into an agreement with another company, for selling the Assessee’s entire holding in the subsidiary company (M/s Groupon) at Rs 7094/- per share and the sale consideration was agreed to be received by way of receipt of 83,86,133 equity shares in Little Internet P Ltd at a price of Rs.265/- per share. Accordingly, the Assessee computed Long Term Capital Gain (LTCG) at about Rs 5.18 Crores and Short-Term Capital Gain (STCG) at about Rs 28.15 Crores.

On assessment, the Assessing Officer (AO) noted the latest purchase of shares by the Assessee at Rs 14361/- each. However, the Assessee sold all shares at Rs 7094/- each within a period of one and half month. The AO raised the question as to how the shares value dropped by 50% in a very short span. The AO thus sought to re-compute value of shares by adopting Fair Market Value of Rs 14361/- each.

The Assessee claimed to have conducted valuation as per Discounted Cash Flow method.

The AO further noted that the Assessee considered Balance Sheet as on 31.03.2017 to arrive at negative value of shares of (-) Rs 630.29/-, while the value of shares has to be determined as on the date of transfer of shares, which was 30-11-2017. This negative value was not acceptable to the AO. The AO also observed that the valuer had prepared the valuation report based on financial projections made available to him by the Management. However, the Assessee did not provide any supporting to justify the financial projections made by the management.

Such findings of the AO were later upheld by the Dispute Resolution Panel (DRP) and final addition of about Rs 225.85 Crores was framed.

On hearing the contentions of both parties, the Bench observed that regarding the reasons based on which the AO rejected the Fair Market Value as computed under Rule 11UAA of the Income Tax Rules, 1962, the Assessee had submitted by the assessee that there is no much difference in the financial position between 31.3.2017 and 31.3.2018. It is the submission that the FMV as on 30-11-2017 or 31-3- 2018 will not exceed the sale price of Rs.7,094/- per share.

As for the other defect, the Assessee submitted that the assessee could get sale price of Rs.7,094/- per share, which was many times more than the value arrived at under Net asset value method and hence there is no reason to suspect and reject the valuation done under DCF method.

In respect of both the contentions, the Bench noted that these submissions were reasonable and also had not been disproved by the Department.

Therefore, the Bench found no reason for the AO to tinker with the Full value of consideration declared by the Assessee and accordingly compute LTCG & STCG.

Cause Title: Nearby Pte. Limited vs. ACIT-International Taxation, Circle 3(3)(1), Mumbai [ITA No. 1607/Mum/2022 / 2023-Enterslice-20-ITAT-Mum]

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Nearby-Pte.-Limited-Vs-ACIT