ITAT Mumbai Deletes ₹36.54 Crore Share Premium Tax Addition, Says AO Could Not Replace Projections With Actuals

The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has recently deleted a ₹36.54 crore tax addition made on share premium received by footwear company Catwalk Worldwide Ltd, holding that the tax department wrongly rejected the company's share valuation by comparing business projections with actual later performance

“The Assessing Officer ought not to have disturbed the method adopted by assessee or cannot adopt the figures by replacing the projections with actual financials.”

A bench of Judicial Member Amit Shukla and Accountant Member Arun Khodpia held that Catwalk had validly adopted the Discounted Cash Flow (DCF) method to value its shares and that the Assessing Officer could not recalculate the valuation using hindsight.

The dispute arose after the Revenue invoked Section 56(2)(viib) of the Income Tax Act to tax share premium received by the footwear company from investor Sara Soule Pvt Ltd.

Catwalk, which manufactures and trades ladies' footwear, had issued 7,05,387 shares at a face value of ₹10 and a premium of ₹518.08 per share. A Chartered Accountant's valuation report dated March 21, 2016 determined the fair market value at ₹536.17 per share using the DCF method.

During assessment, the Assessing Officer compared projected profits in the valuation report with Catwalk's actual financial performance in later years, found a significant mismatch, and concluded that the projections did not justify the valuation.

The officer first attempted valuation under the Net Asset Value method and later recalculated the DCF valuation itself using actual financial figures, arriving at a negative value per share of ₹58.67.

Catwalk argued that the law allowed it to choose either the DCF or Net Asset Value method and that the Assessing Officer could not alter the chosen methodology or substitute projections with actual figures from subsequent years.

It said the divergence between projections and actual performance stemmed from demonetisation, GST implementation, heightened competition from e-commerce platforms, and one-time accounting write-offs identified during investor due diligence.

Relying on the Delhi High Court's ruling in Cinestaan Entertainment Pvt Ltd, the Tribunal reiterated that valuation is not an exact science and that DCF valuations must be assessed based on information available on the valuation date rather than later business outcomes.

The tribunal also noted that Section 56(2)(viib) was introduced as an anti-abuse measure to check the introduction of unaccounted money through an unjustified share premium.

Accordingly, the tribunal set aside the appellate order and deleted the ₹36.54 crore addition.

For Assessee: Advocates Madhur Agrawal,

For Revenue: R.A. Dhyani (CIT – DR)