DCF valuation of unquoted shares upheld where no specific defect justified substitution of book value under section 56(2)(viib).

DCF-based valuation of unquoted shares was accepted as a recognised method where the assessee supported its investment valuation with a report and related market factors, including the valuation used in SAFL's rights issue. The Revenue did not establish any specific defect in the methodology or underlying data, and a valuation could not be rejected merely on suspicion or general caveats. The Assessing Officer was therefore not justified in substituting book value for the adopted DCF method, and the addition under section 56(2)(viib) could not be sustained; the impugned addition was deleted.

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Issues: Whether the Assessing Officer and the first appellate authority were justified in rejecting the assessee's DCF-based valuation of its investments in SAFL and substituting book value for the purpose of computing addition under section 56(2)(viib) of the Income-tax Act, 1961.

Analysis: The assessee had supported the valuation of its unquoted shares by a report based on the discounted cash flow method, a recognised method of valuation. The investment in SAFL, the valuation adopted by SAFL for its rights issue, and the acceptance of that valuation by the existing shareholders and the tax department were relevant factors supporting the assessee's approach. No specific defect, error in methodology, or infirmity in the underlying data was established by the Revenue to discredit the valuation report. A valuation report based on general caveats and assumptions could not be rejected merely on suspicion, and the Assessing Officer was not justified in substituting book value for a duly adopted recognised valuation method.

Conclusion: The rejection of the DCF valuation was unjustified, and the addition made under section 56(2)(viib) could not be sustained. The appeal succeeded and the impugned addition was deleted.

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