This article provides an in-depth analysis of the case ITA 316/DEL/2019, involving Rockland Diagnostics Services Pvt. Ltd, New Delhi, and the Income Tax Officer, Ward-21(3), New Delhi. The appeal pertains to the assessment year 2015-16 and discusses the reasons behind the dismissal of the appeal concerning the addition made by the Assessing Officer (AO) on the basis of share valuation.
The appellant, Rockland Diagnostics Services Pvt. Ltd, filed an appeal for the assessment year 2015-16, contesting the order of the learned Commissioner of Income Tax (Appeals) [CIT(A)], New Delhi, dated November 27, 2018. The case was filed on January 17, 2019, and the final tribunal order was pronounced on February 25, 2021.
The primary issue in this case was the addition of Rs. 1,07,82,453 made by the AO under Section 56(2)(viib) of the Income Tax Act, 1961, and the disallowance of Rs. 4,09,250 on account of ROC fees paid by the assessee company.
The assessee company is engaged in the business of setting up, operating, and managing diagnostic centers and clinical pathology testing services. For the relevant assessment year, the return of income was filed declaring income at Rs. Nil, which was initially processed under Section 143(1) of the Act and later selected for limited scrutiny to examine the large share premium received during the year.
The AO completed the assessment at an income of Rs. 1,11,91,703 after making the aforementioned additions. The assessee’s appeal before the CIT(A) was dismissed, leading to the current appeal before the Tribunal.
The Ld. Authorized Representative (AR) for the assessee argued that the share premium was justified based on a valuation report by a qualified Chartered Accountant using the Discounted Cash Flow (DCF) method. The AR submitted that the valuation was lower than the estimated DCF value and was made to facilitate the operation of diagnostic centers.
The AR contended that the AO disregarded the valuation report due to the projection of revenue not matching actual revenues in subsequent years. However, it was emphasized that the DCF method is a recognized method for valuation and should be accepted unless specific discrepancies are found.
The Tribunal, presided over by Judicial Member Shri Sudhanshu Srivastava and Accountant Member Shri N.K. Billaiya, reviewed the submissions and material on record. They noted that the AO had rejected the valuation report based on assumptions and not on specific discrepancies. The Tribunal cited precedents where it was held that the AO cannot substitute his own valuation for the one determined using prescribed methods like DCF or NAV.
The Tribunal directed that the issue be re-examined by the AO, providing the assessee an opportunity to present its case. Regarding the ROC fees, the Tribunal noted that it should be considered as preliminary expenditure within the meaning of Section 35D of the Act.
The Tribunal allowed the appeal for statistical purposes, directing a re-examination of the share valuation issue by the AO and allowing the ROC fees as preliminary expenditure.
The case of ITA 316/DEL/2019 highlights the importance of adhering to prescribed valuation methods under tax laws. The Tribunal’s decision underscores that valuation reports, when prepared according to recognized methods, should be accepted unless specific defects are identified. This decision serves as a reminder to tax authorities to base their assessments on concrete evidence rather than assumptions.
This decision reinforces the principle that taxpayers have the right to choose their valuation method, and tax authorities must respect these valuations unless they can specifically demonstrate inaccuracies. It also emphasizes the need for thorough documentation and clear justification for valuations made using methods like DCF.
In summary, the Tribunal’s order in ITA 316/DEL/2019 serves as a crucial reference for similar cases, ensuring that valuations are treated fairly and consistently within the legal framework.
Rockland Diagnostics Appeal Disallowed on Valuation: ITA 316/DEL/2019
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