2025 (10) TMI 39 - AT - Income Tax

Assessee's DCF valuation of unquoted shares upheld under Rule 11UA(2)(b), section 56(2)(viib) addition deleted

ITAT upheld the assessee's valuation of unquoted shares using the DCF method under Rule 11UA(2)(b), rejecting the AO's and CIT(A)'s addition under section ... Addition u/s 56(2)(viib) - consideration received by the appellant for issue of unquoted shares exceeded the fair market value of such shares, disregarding the valuation as per Discounted Cash Flow (DCF) Method adopted by the appellant by relying upon Rule 11UA(2)(b) HELD THAT:- It is clear that it is the option of the assessee to choose the method of valuation. Accordingly, the valuation of the shares by the assessee as explained in the written submission reproduced hereinbefore, is found to be justified and as per the provisions of law. We have also perused the judicial pronouncements relied upon by Ld. AR on this issue. He has placed reliance on various decisions of different Hon’ble High Courts as well as the co-ordinate Benches wherein this issue stands decided in favour of the assessee. Addition made by AO and confirmed by the CIT(A) is unjustified as the assessee had rightly exercised his option to choose the method of valuation under Rule 11UA(2) and ld. AO could not have altered the same. Accordingly, the addition u/s. 56(2) (viib) made on account of excess share premium received is hereby deleted. Appeal of the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether, for determination of fair market value (FMV) of unquoted equity shares under Rule 11UA(2), the assessee has the statutory option to choose between the NAV-formula and the Discounted Cash Flow (DCF) method and, if so, whether Revenue can override that choice and apply NAV when the assessee has adopted DCF. 2. Whether additions under section 56(2)(viib) for alleged excess consideration on allotment of unquoted shares are justified where the assessee furnished a valuation report under Rule 11UA(2)(b) based on DCF, but the Assessing Officer rejected that report and computed FMV under the NAV route. 3. Extent of AO's power to scrutinise, doubt or reject a valuation report under Rule 11UA(2) and whether the AO is authorised to independently compute FMV by adopting a valuation method other than that chosen by the assessee. ISSUE-WISE DETAILED ANALYSIS Issue 1: Assessee's statutory option under Rule 11UA(2) to adopt DCF or NAV Legal framework: Rule 11UA(2) prescribes that FMV of unquoted equity shares 'shall be the value ... as determined ... under clause (a) or clause (b), at the option of the assessee' - clause (a) containing the NAV-formula and clause (b) permitting FMV determined by a merchant banker as per the DCF method. Precedent treatment: Coordinated decisions and High Court pronouncements (as relied upon by the Tribunal) have interpreted Rule 11UA(2) as vesting the choice of valuation method in the assessee. The Tribunal expressly followed prior coordinate-bench decisions that gave effect to that construction. Interpretation and reasoning: A plain reading of Rule 11UA(2) places a statutory option on the assessee to present FMV either by formula (NAV) or by a DCF-based merchant banker/accountant report. The Tribunal found the statutory text 'indubitably' confers that choice to the assessee and that the valuation submitted in accordance with clause (b) complies with the rule. Ratio vs. Obiter: Ratio - Rule 11UA(2) vests the choice of method (NAV vs DCF) with the assessee; valuation presented under that option is prima facie acceptable if it conforms with the rule. Conclusion: The assessee was entitled to adopt the DCF method under Rule 11UA(2)(b); the valuation prepared thereunder is a valid exercise of the option conferred by the rule. Issue 2: Validity of additions under section 56(2)(viib) when AO replaces assessee's DCF valuation with NAV Legal framework: Section 56(2)(viib) taxes excess consideration where the consideration for allotment of unquoted shares to resident shareholders exceeds FMV; Rule 11UA prescribes the manner of determining FMV and provides the assessee's option. Precedent treatment: Tribunals and High Courts cited by the Tribunal (including coordinate-bench rulings) have held that where the assessee furnishes a valuation under Rule 11UA(2)(b), the AO cannot, without cogent reasons, substitute his own valuation method; the AO may scrutinise but lacks statutory power to impose a different method. Interpretation and reasoning: The Tribunal acknowledged that while an AO may, for recorded reasons, doubt or reject a valuation report, the statute does not empower the AO to independently compute FMV by unilaterally adopting a different method than the one chosen by the assessee. In the facts, the AO replaced the DCF valuation with NAV and made an addition of Rs. 6,60,02,100/-. The Tribunal found the assessee's DCF report supported by an accountant, contemporaneous market expectations and documentary evidence; prior acceptance of DCF-derived FMV in earlier assessments further bolstered the assessee's position. Ratio vs. Obiter: Ratio - An AO cannot substitute his preferred valuation method for the method legitimately chosen by the assessee under Rule 11UA(2) and then make additions under section 56(2)(viib) merely because he prefers NAV; however, AO may reject a valuation for recorded and justifiable reasons and initiate independent valuation processes (e.g., commission/expert) if justified. Obiter - observations about the particular commercial assumptions underlying the assessee's DCF projections (market opportunities, lost contracts, later valuations) are factual and ancillary to the legal holding. Conclusion: The addition under section 56(2)(viib) was unjustified because the AO improperly replaced the assessee's DCF-based FMV with NAV; the excess share premium addition was deleted. Issue 3: Scope of AO's scrutiny and power to reject or refer valuation reports Legal framework: Rule 11UA(2) allows AO to consider valuation placed before him; procedural fairness and power to verify are implicit in assessment scheme, but statutory scheme does not grant AO the power to adopt an alternative prescribed method in place of the assessee's chosen method. Precedent treatment: The Tribunal relied on judgments (including Vodafone M-Pesa and other tribunal and High Court decisions) holding that while AO can doubt or reject a valuation, the statute does not permit him to evaluate FMV by a method other than the one chosen by the assessee. In some precedents, where AO had cogent reasons, the matter was referred to an independent valuer/commission. Interpretation and reasoning: The Tribunal recognised that AO's role includes scrutiny and the power to reject a valuation for reasoned objections; however, statutory language and judicial precedents constrain AO from unilaterally imposing a different method. Where AO doubts the valuation's correctness, appropriate steps are to record reasons and, if required, obtain an independent valuation rather than simply adopting an alternative method from thin air. Ratio vs. Obiter: Ratio - AO's power is limited to doubting/rejecting a valuation and taking appropriate fact-finding steps (e.g., independent valuation), but not to assume the role of valuer by selecting and applying a different statutory method without justification. Obiter - procedural remedies and fact-specific approaches (e.g., use of commissions) discussed in cited authorities. Conclusion: The AO overstepped by applying NAV in lieu of the assessee's DCF without adequate recorded justification or independent valuation process; the correct course where AO has legitimate doubts is to record reasons and, if necessary, obtain independent expert valuation. Final Disposition and Legal Conclusion The Tribunal concluded that the assessee lawfully exercised the option under Rule 11UA(2) to adopt the DCF method and furnished a supporting valuation report; the Assessing Officer and CIT(A) erred in substituting NAV valuation and making an addition under section 56(2)(viib). The addition of Rs. 6,60,02,100/- was deleted. The holding follows settled statutory interpretation of Rule 11UA(2) and coordinated judicial authority; the decision is a ratio-based determination that Revenue cannot unilaterally impose a different valuation method in place of the method validly chosen by the assessee under the rule.