Valuation method choice: an assessee's Rule 11UA-prescribed DCF valuation stands unless demonstrably incorrect, not to be supplanted by NAV.

Whether an Assessing Officer may reject an assessee's DCF valuation and substitute NAV under the statutory scheme of section 56(2)(viib) and Rule 11UA is governed by the rule that assessees may adopt any prescribed method and support it with a valuation report; the AO may displace the chosen method only if the method or report is demonstrably incorrect or unsupported by record. Applying that principle, the DCF-based valuation substantiated by the assessee could not be supplanted by NAV absent compelling justification, so the addition was held unsustainable.

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Issues: Whether the Assessing Officer/CIT(A) was justified in rejecting the assessee's valuation of shares by Discounted Cash Flow (DCF) method and instead adopting Net Asset Value (NAV) valuation for determining fair market value under section 56(2)(viib) of the Income-tax Act, 1961 read with Rule 11UA of the Income Tax Rules, 1962.

Analysis: The statutory scheme of section 56(2)(viib) and the Explanation thereto permits determination of fair market value by methods prescribed in Rule 11UA. Rule 11UA contemplates valuation by prescribed methods and the assessees are entitled to adopt any one of the prescribed methods and substantiate the chosen valuation by a report. The record contains the assessee's valuation report applying the DCF method and the AO's computation applying NAV, differing marginally (Rs. 2.55 per share). The Tribunal examined the applicability of DCF for the facts on record and the correctness of the AO's substitution of NAV in place of the method chosen and substantiated by the assessee under Rule 11UA. The Tribunal also considered relevant precedent recognising the assessee's right to opt for a prescribed method and the limitation on the AO's power to substitute a different valuation method absent compelling justification.

Conclusion: The assessee's adoption of the DCF method (as per the valuation report) is permissible under Rule 11UA and the AO/CIT(A) was not justified in rejecting that method and substituting NAV; the addition under section 56(2)(viib) is therefore not sustainable and the appeal is allowed in favour of the assessee.

Ratio Decidendi: Where Rule 11UA prescribes valuation methods for determining fair market value under section 56(2)(viib), an assessee's choice of a prescribed method substantiated by a valuation report cannot be displaced by the Assessing Officer by adopting a different prescribed method unless the chosen method is shown to be demonstrably incorrect or unsupported by the record.

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