Angel Tax valuation methodology ‘solely’ assessee’s alternative, says Delhi HC

The Delhi Excessive Courtroom has upheld that taxpayers can select an choice for Angel Tax valuation. Nevertheless, the Revenue Tax Division can go for impartial Honest Market Worth (FMV) dedication. Specialists really feel that the strategy adopted by the division shouldn’t be totally different from that utilized by taxpayers.

Within the matter of Agra Portfolio and the Revenue Tax Division, the strategy in query was Discounted Money Move (DCF) to find out Honest Market Worth (FMV). DCF refers to a valuation methodology that estimates the worth of an funding utilizing its anticipated future money flows. Accordingly, the current worth of anticipated future money flows is arrived at through the use of a projected low cost fee. Based mostly on that, an unlisted firm allots shares to the angel investor.

• Learn extra: BL Explainer. Decoding the angel tax muddle

The Revenue Tax Division didn’t settle for the valuation. It independently ascertained the face worth of the shares by adopting the Internet Asset Worth (NAV) methodology. This methodology is utilized to fund valuation and pricing, which is arrived at by dividing the distinction between belongings and liabilities by the variety of shares held by traders.

Due to the totally different strategies adopted, the worth of a share ascertained by the IT Division was a lot decrease than what the agency reported. Because it acquired no aid from the Revenue Tax Appellate Tribunal (ITAT), the agency moved the Excessive Courtroom.

The Courtroom noticed that the IT Division can doubt or reject the valuation report adopted by the taxpayer. Nevertheless, the legislation doesn’t empower the division to independently consider the face worth of the unquoted shares by adopting a valuation methodology apart from the one chosen by the taxpayer, the Courtroom mentioned.

• Additionally learn: Angel tax: FinMin notifies valuation strategies and pointers for traders

It additionally mentioned numerous sections of the IT Act and IT Guidelines clearly stipulate that the choice and selection of methodology for honest market valuation vests solely with the taxpayers. The court docket noticed that the IT Division can scrutinise the valuation report and decide a contemporary valuation, both itself or by an impartial valuer, to confront the taxpayer, however the foundation must be the strategy already adopted by him.

Accordingly, the Courtroom remitted the matter again to the IT Division to undertake valuation afresh in accordance with the DCF methodology  

Commenting on the ruling, Amit Maheshwari, Tax Companion with AKM International, mentioned when a taxpayer’s chosen valuation methodology is rejected, it’s essential to grasp that hindsight shouldn’t be utilized, as many firms increase investments based mostly on future projections. Furthermore, “a major side emphasised on this case is that if the tax division is dissatisfied with the valuation chosen by the taxpayer, it might perform an impartial valuation. Nevertheless, it’s crucial that the valuation methodology ought to align with the one initially adopted by the taxpayer,” he mentioned.