Angel Tax: Delhi High Court Grants A Taxpayer-Friendly Ruling

The tax department is not empowered to use a different share-valuation method than what the taxpayer has chosen for the purpose of angel taxation, the Delhi High Court has said in an appeal filed by Agra Portfolio Pvt. against an order of the Income Tax Appellate Tribunal. Angel tax is a tax levied on capital received by unlisted startups on the sale of shares above their fair market value.

The primary bone of contention in this case was that the Income Tax Department had chosen a different method of share valuation than the one chosen by Agra Portfolio. The department had rejected the determination of the fair market value of shares as arrived at by Agra Portfolio. It had used the discounted cash flow or the DCF method to arrive at fair market value of Rs 50.60 per share.

The assessing officer did not find merit in Agra Portfolio’s valuation report and maintained that the taxpayer could not provide enough evidence to back its report. As a result, the AO went ahead and independently evaluated the company’s share price using the net asset value or the NAV method to arrive at a fair market value of Rs 9.60 per share.

Agra Portfolio’s main argument before the high court was that even if the evaluation report submitted by it is in doubt, the department cannot go ahead and adopt a different evaluation method than the one chosen by it.

In an order dated April 4, the high court agreed with the Agra Portfolio's stance and said the sole authority to determine the method for an evaluation of its share prices lies with the taxpayer, as long as the method is in accordance with the income-tax rules.

Valuations have been questioned by the department in several other cases as well. However, there is emerging jurisprudence in favour of the choice of the method resting solely with the assessee, according to Pallav Pradyumn Narang, partner at CNK RK & Co.

In today's dynamic world, the share price of companies fluctuates on account of change of technologies, adoption of new manufacturing processes, significant upswing or downswing based on market conditions, and it is next to impossible for a tax officer to apply any valuation mechanism based on his own understanding, according to SR Patnaik, partner at Cyril Amarchand Mangaldas.

The court has also held that while it would be open for the assessing officer to doubt or reject a valuation report, the statute clearly does not appear to empower it to independently evaluate the face value of the unquoted equity shares by adopting a valuation method other than the one chosen by the taxpayer.

Patnaik said the court did not provide any rationale for holding the same.

In such cases, the tax officers cannot reject the DCF method in the future by holding that the valuation report cannot be relied upon since the projections made in the valuation report did not match with the actual figures, Patnaik said.