Valuation under Rule 11UA: revenue cannot replace an assessee's chosen method without proving a fundamentally wrong basis.

Section 56(2)(viib) treats share premium on issue of unquoted equity shares as taxable where the fair market value is understated, but the assessee may adopt a prescribed valuation method under Rule 11UA. Where the discounted cash flow method is chosen and supported by a valuation report, the Assessing Officer cannot substitute another approach merely because a different valuation is preferred. Interference is justified only if the chosen method is shown to be perverse, inherently wrong, or based on a wholly erroneous foundation. On the stated facts, the assessee's valuation was accepted and the revenue's substituted computation was rejected.

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Issues: (i) Whether the addition under section 56(2)(viib) of the Income-tax Act, 1961, arising from share premium received on allotment of shares, was justified when the assessee had adopted the discounted cash flow method under Rule 11UA of the Income-tax Rules, 1962. (ii) Whether the Assessing Officer was justified in substituting the assessee's valuation and adopting a different approach for determining fair market value.

Issue (i): Whether the addition under section 56(2)(viib) of the Income-tax Act, 1961, arising from share premium received on allotment of shares, was justified when the assessee had adopted the discounted cash flow method under Rule 11UA of the Income-tax Rules, 1962.

Analysis: The provision operates as a deeming provision and the fair market value of unquoted equity shares is to be determined by the prescribed method or by the valuation substantiated by the company, at the assessee's option. The valuation report adopted the discounted cash flow method, which is a recognised method under the Rules. The record did not establish that the method adopted was inherently wrong or that the valuation was made on a wholly erroneous basis.

Conclusion: The addition was not justified and the issue is decided in favour of the assessee.

Issue (ii): Whether the Assessing Officer was justified in substituting the assessee's valuation and adopting a different approach for determining fair market value.

Analysis: Once the assessee chooses one of the prescribed methods, the Assessing Officer cannot replace it with another method unless cogent material shows perversity or a demonstrably wrong approach. The valuation adopted by the Assessing Officer also suffered from substantial computational errors, including incorrect treatment of share capital and preference shares, which undermined the basis of the substituted valuation. In the absence of a legally sustainable ground to reject the assessee's valuation, interference was unwarranted.

Conclusion: The Assessing Officer was not justified in substituting the assessee's valuation, and the issue is decided in favour of the assessee.

Final Conclusion: The appellate challenge to the valuation-based additions fails, and the relief granted by the first appellate authority is sustained.

Ratio Decidendi: Where the statute permits valuation by an assessee's chosen prescribed method, the revenue cannot supplant that method unless it proves a demonstrably wrong approach, a wholly erroneous basis, or a defect going to the root of the valuation process.

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