Assessee may choose formula or merchant banker DCF for FMV; AO cannot substitute NAV; AO can seek independent valuation

HC set aside the appellate order and remitted the matter to the AO to determine FMV afresh. The court held the assessee may choose between the formulaic route or a merchant banker's DCF-based valuation, and the AO cannot, of its own volition, substitute a different valuation method (such as NAV) when rejecting a DCF report. AO may refer the matter to an independent valuation expert by commission and give the assessee opportunity to substantiate DCF inputs; primary onus to prove correctness of the DCF projections lies on the assessee.

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Issues Involved:
1. Rejection of Valuation Report
2. Conjecture or Surmise in Decision
3. Substitution of Valuation Method by AO
4. Revenue's Authority to Reject Expert Report
5. Mandatory Reference to DVO
6. Allegations of Non-Cooperation

Summary:

1. Rejection of Valuation Report:
The assessee appellant challenged the ITAT's judgment upholding the rejection of the valuation report prepared by M/s SPA Capital Advisors Ltd., which was based on figures provided by the appellant without independent verification. The Tribunal upheld the AO's rejection, citing the unrealistic valuation of shares and lack of substantiation by the appellant.

2. Conjecture or Surmise in Decision:
The appellant argued that the Tribunal erred in deciding the appeal based on conjecture, suggesting the possibility of data tailoring. The Tribunal found that the appellant failed to provide satisfactory explanations for the valuation figures, leading to the rejection of the DCF Method in favor of the NAV Method.

3. Substitution of Valuation Method by AO:
The Tribunal upheld the AO's decision to substitute the DCF Method with the NAV Method for valuing the shares. The appellant contended that the choice of valuation method u/s 56(2)(viib) and Rule 11UA is vested exclusively in the assessee. The Tribunal's decision was challenged based on the precedent set by the Bombay High Court in Vodafone M-Pesa Limited, which stated that the AO cannot change the method chosen by the assessee.

4. Revenue's Authority to Reject Expert Report:
The appellant argued that the Revenue cannot reject a merchant banker's report and substitute its own valuation without referring it to the DVO or an expert. The Tribunal found that the AO acted within his rights to reject the valuation report due to lack of independent verification and unrealistic assumptions.

5. Mandatory Reference to DVO:
The appellant contended that the Act mandates a reference to the DVO whenever a valuation report is rejected. The Tribunal did not find this argument persuasive, noting that the AO's independent valuation was justified due to the appellant's failure to substantiate the report.

6. Allegations of Non-Cooperation:
The appellant argued that even in cases of alleged non-cooperation, the AO should have referred the valuation to the DVO. The Tribunal upheld the AO's independent valuation, citing the appellant's failure to provide necessary information and satisfactory explanations.

Judgment:
The High Court allowed the appeal, setting aside the ITAT's order dated 16 May 2018. The court held that the choice of valuation method u/s 56(2)(viib) and Rule 11UA lies solely with the assessee. The AO cannot adopt a different method but can scrutinize and question the assumptions and data used in the chosen method. The matter was remitted to the AO for a fresh valuation using the DCF Method, with the option to appoint an independent valuer.

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