2025 (8) TMI 351 - AT - Income Tax

AO cannot change valuation method of unquoted shares from DCF to NAV; must follow assessee's chosen method under law

The ITAT Hyderabad held that the AO cannot change the method of valuation of unquoted shares from the DCF method adopted by the assessee to the NAV ... Addition u/s 56(2)(viib) - consideration received for the issue of shares exceeds the fair market value (FMV) of the shares issued - change of method of valuation from Discounted Cash Flow (DCF) method to the Net Asset Value (NAV) method - main plank of argument of the assessee is that rule 11 UA (2) which enables the assessee to determine the fair market value of the unquoted equity shares either in accordance with the formula prescribed in clause (a) or on the basis of a report drawn by a merchant banker who may have determine the FMV as per the DCF method - HELD THAT:- Law is well settled now and the consistent view taken in the cases Agra Portfolio Private Limited private Ltd. [2024 (4) TMI 318 - DELHI HIGH COURT] AND M/s Cinestaan entertainment Pvt. Ltd. [2021 (3) TMI 239 - DELHI HIGH COURT] is that while it is open for the AO to doubt or reject a valuation that he submitted for his consideration by the assessee, is not open for the AO to reject the matter of valuation adopted by the assessee and to evaluate the face value of the unquoted equity shares independently by adopting a valuation method other than the one chosen by the assessee. Hon’ble Bombay High Court in the case of Vodafone M-Pesa Ltd. [[2018 (3) TMI 530 - BOMBAY HIGH COURT] held in unequivocal terms that the learned Assessing Officer is undoubtedly entitled to scrutinise the valuation report and determine the fresh valuation, either by himself or by calling for a final determination from an independent valuer to confront the same to the assessee, but at the same time the basis has to be the DCF or NAV method as adopted by the assessee, and it is not open for the learned Assessing Officer to change the method of valuation to a different one that was adopted by the assessee. Thus, we hold that the change of method by the learned Assessing Officer in this case from DCF method as adopted by the assessee to the NAV method is bad under law and cannot be accepted. Thus, restore the issue to the file of the AO to decide the same afresh. Appeal of the assessee allowed for statistical purpose. ISSUES: Whether the Assessing Officer can reject the valuation method adopted by the assessee for determining the fair market value (FMV) of unquoted shares under section 56(2)(viib) of the Income Tax Act.Whether the Assessing Officer is entitled to change the method of valuation from Discounted Cash Flow (DCF) method chosen by the assessee to the Net Asset Value (NAV) method.What is the scope of the Assessing Officer's power to scrutinize and re-determine the FMV of shares when a valuation report is submitted under Rule 11UA of the Income Tax Rules.What is the appropriate procedure when the valuation method adopted by the Assessing Officer is disapproved. RULINGS / HOLDINGS: The Assessing Officer cannot reject the valuation method adopted by the assessee and independently adopt a different valuation method; the method of valuation prescribed in Rule 11UA(2) is 'solely the prerogative of the assessee.'The change of valuation method by the Assessing Officer from the DCF method to the NAV method is 'bad under law and cannot be accepted.'The Assessing Officer is entitled to scrutinize the valuation report and determine a fresh valuation either by himself or through an independent valuer, but 'the basis has to be the DCF or NAV method as adopted by the assessee' and not a different method.When the valuation method adopted by the Assessing Officer is disapproved, the matter must be remanded for fresh decision by the Assessing Officer, who shall decide the issue afresh following the principles that (i) the valuation method chosen by the assessee must be retained, (ii) only facts and data available on the date of valuation can be considered, and (iii) the assessee bears the primary onus to prove the correctness of the valuation report. RATIONALE: The Court applied statutory provisions under section 56(2)(viib) of the Income Tax Act and Rule 11UA of the Income Tax Rules, 1962, which govern valuation of unquoted equity shares for taxation of share premium.The Court relied on binding precedents from the Hon'ble Delhi High Court and Bombay High Court which consistently hold that the Assessing Officer may scrutinize but cannot substitute the valuation method adopted by the assessee with a different method.The Court followed the principle that the Assessing Officer's power to reject a valuation report is limited to questioning the correctness of the valuation within the chosen method, not to selecting an alternative valuation methodology.The Court endorsed the approach from coordinate benches that the Assessing Officer may conduct a fresh valuation or call for an independent valuer's report to confront the assessee, but must adhere to the valuation method originally adopted by the assessee.The Court emphasized that the assessee has the 'primary onus to prove the correctness of the valuation Report' including projections, discounting factors, and terminal value, supported by empirical or scientific data, and that only data available as of the valuation date can be considered.The Court remanded the issue for fresh adjudication in accordance with these principles, setting aside the impugned orders that rejected the DCF method and adopted the NAV method.