Delhi ITAT Deletes ₹168.31 Cr Addition Against Hero FinCorp, Says DCF Valuation Must Use Available Facts

The Delhi Income Tax Appellate Tribunal (ITAT) on 25 August deleted a Rs. 168.31 crore share premium addition made against Hero FinCorp for Assessment Year 2018-19 under Section 56(2)(viib) of the Income Tax Act, 1961.

Accountant Member S. Rifaur Rahman and Judicial Member Raj Kumar Chauhan held that the company's Discounted Cash Flow (DCF) projections could not be rejected merely by comparing them with subsequent financial results, and allowed the company's appeal. The Bench observed:

“These projections, when seen in the light of past growth do not appear to be exorbitant and aggressive as has been held by authorities below.”

The dispute arose from Hero FinCorp's issue of 57,65,905 share warrants at Rs. 520.30 each. Hero FinCorp had relied on a DCF valuation prepared in August 2016.

The Assessing Officer compared the projected figures with the actual results for Financial Year 2017-18, rejected the DCF method and adopted the Net Asset Value method, resulting in the Rs. 168.31 crore addition under Section 56(2)(viib), which applies to certain excess share premiums received by closely held companies.

The Tribunal found that the Revenue had primarily relied on the company's financial results for a single subsequent year while questioning the DCF projections. It examined Hero FinCorp's historical growth and found that its past financial performance provided a reasonable basis for the assumptions made in the DCF valuation.

It also noted that Hero FinCorp's performance in later years had surpassed the DCF projections. It held that the initial difference between projected and actual figures could not, by itself, establish that the projections were unreasonable. It held:

“On this count also, observations made by Assessing Officer solely on the basis of financial results for one year do not convey correct position and approach of the authorities below in challenging the projections is devoid of any merit.”

The Bench reiterated that a DCF valuation involves estimates of future performance and must be examined based on the information and circumstances available when the valuation was prepared, rather than with hindsight based on subsequent financial results.

It deleted the Rs. 168,30,67,669.50 addition under Section 56(2)(viib), finding that the Revenue had failed to establish sufficient grounds to reject the DCF valuation. It also deleted a Rs. 1.16 lakh disallowance under Section 14A, which relates to expenditure incurred in relation to exempt income, holding that the Assessing Officer had not recorded the requisite satisfaction before rejecting Hero FinCorp's suo motu disallowance.

Accordingly, the ITAT allowed Hero FinCorp's appeal.

Counsel for the Assessee: Rohit Jain and Himanshu Agarwal, Advocates

Counsel for the Revenue: Vikram Singh Sharma, CIT-DR