2025 (10) TMI 303 - AT - Income Tax

Revenue appeal dismissed: Assessee's choice of Rule 11UA/Section 56(2)(viib) DFCF valuation via registered valuer upheld

ITAT Delhi (AT) dismissed the revenue's appeal, holding that once the assessee selected an approved valuation method under Rule 11UA/Section 56(2)(viib) ... Valuation of shares determined by a registered valuer - Flaws In the valuation done by the valuer of the assessee - AO right to change method of valuation - difference between actual amount paid for shares and fair market value of shares u/s 56(2)(viib) - AO found discrepancies like not matching the projected figures with the actual figures and he grossly rejected the valuation report and proceeded to value the shares by applying NAV method which is another approved method HELD THAT:- It is fact on record that Rule 11UA gives option to the assessee to adopt one of the approved methods i.e. NAV or DFCF method and in this case, assessee has adopted DFCF method by adopting a valuation from a chartered accountant. That being the case, there are several decisions in favour of the assessee wherein the approved option of adopting DFCF method as given in Rule 11UA. Once the option is adopted by the assessee, the Assessing Officer has no right to change the method of valuation adopted by the assessee Assessing Officer has compared the actual figure with projected figures. In this regard, we observe that in the case of Pr.CIT vs. M/s. Cinestaan Entertainment Pvt. Ltd. [2021 (3) TMI 239 - DELHI HIGH COURT] in which it was held that valuation is not an exact science and involves imponderables that can change over time. It was emphasized that valuation is a technical and complex problem best left to experts in accounting. Further they observed that the investors who had invested in the company had accepted the valuation which further supported its validity. After considering the detailed findings of the ld. CIT (A), we are in agreement with the findings of the ld. CIT (A). In the present case, Assessing Officer not only rejected but also provided for computation of fair market value of shares. After considering the above submissions, we are of the view that once the assessee has selected one of the approved method under Rule 56(2)(viib), the Assessing Officer cannot disturb the same and also there are other decisions of Hon’ble Delhi High Court wherein Assessing Officer also cannot compare the projections adopted by the assessee with actual. Therefore, we are not inclined to accept the above submissions. Dismiss the appeal filed by the Revenue. ISSUES PRESENTED AND CONSIDERED 1. Whether an Assessing Officer may reject a valuation of shares determined by a registered valuer under the Discounted Free Cash Flow (DFCF/DCF) method prescribed by Rule 11UA and substitute an alternative method (NAV) to compute fair market value for the purposes of Section 56(2)(viib). 2. Whether the Assessing Officer can test or displace a DCF valuation by comparing the management/valuer's projected future figures with the assessee's historical actuals and thereby conclude that the DCF valuation is unreliable. 3. Whether the valuation report prepared by a valuer who used projections supplied by management (without independent underpinning, workings, assumptions or application of mind) can be rejected as not constituting a valuation 'in accordance with such method as may be prescribed' under Rule 11UA. 4. Whether non-response by investors to notices issued under Section 133(6) casts doubt on the genuineness of consideration received on allotment of shares and supports the Assessing Officer's rejection of the DCF valuation. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Power of Assessing Officer to reject DCF valuation and substitute NAV Legal framework: Section 56(2)(viib) deems excess consideration over fair market value on issue of shares as income; the Explanation prescribes that FMV shall be determined in accordance with such method as may be prescribed. Rule 11UA prescribes two options for FMV: (a) formulaic/book (NAV) method; or (b) DFCF method by a registered valuer. Precedent treatment: Tribunal and High Court decisions were cited holding that where assessee validly adopts a prescribed method (DFCF) and obtains valuation from a prescribed expert, the AO has no statutory power to substitute another method absent enabling provision; several decisions were followed in this judgment (including decisions treating valuation as technical and DCF as permissible). Interpretation and reasoning: The Court reasoned that Rule 11UA gives the assessee an option between two prescribed methods, and the statutory scheme does not confer on the AO unilateral power to substitute the method chosen by the assessee. Rejection of a prescribed-method valuation in favour of another prescribed method effectively nullifies the option provided to the assessee and is beyond AO's jurisdiction unless the valuation fails to meet the requirements of the prescribed method. Ratio vs. Obiter: Ratio - where an assessee obtains a DCF valuation in accordance with Rule 11UA(2)(b) from a prescribed valuer, the AO cannot substitute NAV merely because he prefers a different method; the AO's power to change method is not provided in the statute/rules. (Followed decisions are treated as binding guidance in the judgment.) Conclusion: AO cannot, as a general proposition, reject a DCF valuation adopted under Rule 11UA and substitute NAV unless the DCF valuation is shown not to comply with the requirements of the prescribed method. Issue 2 - Permissibility of comparing projected DCF figures with historical actuals Legal framework: DCF valuation is forward-looking and depends on projections, which are inherently approximations; Rule 11UA(2)(b) contemplates valuation based on future cash flows. Precedent treatment: The Court relied on authorities recognizing valuation as not an exact science and holding that use of hindsight to displace projections is inappropriate; it followed judgments that criticized AO's comparison of projections with subsequent actuals or that emphasized deference to expert valuations based on projections. Interpretation and reasoning: The Tribunal found that comparing DCF projections with historical figures (or subsequent results) to invalidate a valuation overlooks the character of DCF as an estimate of future potential and involves factual imponderables. Where the valuation method chosen is prescribed and performed by a qualified valuer, mere variance between projections and past performance is not a sufficient basis to reject the valuation unless the projections are shown to be unreasonable or the valuer failed to apply accepted valuation standards. Ratio vs. Obiter: Ratio - AO cannot reject a DCF valuation merely because projections differ materially from historical actuals; disallowance requires demonstration that projections/assumptions are unreasonable or that the valuation does not comply with Rule 11UA requirements. (This is applied as a binding approach in the judgment.) Conclusion: Comparison of projections with historical actuals, without more, does not justify rejection of a DCF valuation; the AO must show specific non-compliance or manifest unreasonableness in the valuation approach. Issue 3 - Adequacy of valuer's application of mind and onus of proof Legal framework: Rule 11UA requires valuation in accordance with prescribed methods by prescribed valuers; Section 56(2)(viib) and its Explanation contemplate that FMV determined under the prescribed method shall be accepted unless the report fails to conform to the method. Precedent treatment: The judgment noted precedents that treat valuation as technical and to be respected when prepared by experts; however, precedents also indicate that valuations lacking independent application of mind or necessary workings may be suspect and can be assessed by the AO. Interpretation and reasoning: The Tribunal considered contentions that the valuer merely rubber-stamped management projections, did not provide workings for discount factors, assumptions, risk adjustments, or independent cash-flow derivations, and that some workings on valuer's letterhead were actually on company letterhead. While such defects may justify scrutiny, the Court emphasized that unless there is clear demonstration that the valuation does not meet Rule 11UA standards (for example, absence of required disclosures or that the valuer is not a prescribed expert), the AO cannot substitute the method chosen by the assessee. The onus to substantiate correctness of DCF approach rests primarily on the assessee, but judicial authorities require that rejection must be founded on demonstrable non-compliance rather than mere scepticism. Ratio vs. Obiter: Mixed - Ratio that the assessee bears primary onus to justify DCF assumptions; but factual findings about sufficiency of the particular valuer's application of mind were left to the tribunal's evaluation of evidence rather than stated as a universal rule. The Tribunal applied these principles to the specific record and found the CIT(A)'s acceptance warranted. Conclusion: Where a DCF report shows material procedural/technical deficiencies (no assumptions, no workings, valuer's non-application of mind), the AO may question it; however, absence of ideal disclosures does not ipso facto permit substitution of method - AO must demonstrate non-compliance with Rule 11UA requirements. On facts, the Tribunal upheld the appellate authority's conclusion that the DCF valuation was acceptable. Issue 4 - Impact of non-response by investors to Section 133(6) notices on genuineness of share consideration and valuation Legal framework: Assessing Officer may issue Section 133(6) notices to third parties to verify transactions; non-response may be a factor in assessing credibility of declared transactions. Precedent treatment: Authorities recognize third-party corroboration can strengthen a valuation's credibility, but absence of response is only one evidentiary piece and cannot alone displace a valid valuation carried out under prescribed rules. Interpretation and reasoning: The Tribunal recognized the AO's contention that non-response by investors raises questions about genuineness, but found that lack of investor response did not, standing alone, justify substituting the valuation method chosen under Rule 11UA. The overall statutory scheme and precedents require that AO's skepticism be supported by substantive defects in the valuation or other corroborative evidence of sham or unaccounted receipts. Ratio vs. Obiter: Obiter as to weight - non-response to third-party notices is relevant but not determinative; acceptance depends on the totality of evidence. The Tribunal applied this to the facts and found the evidence insufficient to overturn the DCF valuation. Conclusion: Non-response to Section 133(6) notices may be probative but does not automatically invalidate a DCF valuation; the AO must couple such non-response with other material showing non-genuineness or non-compliance with prescribed valuation requirements. Final disposition applied to the facts Applying the above legal principles and precedents, the Tribunal concluded that the Assessing Officer had no jurisdiction to substitute NAV for a DCF valuation properly conducted under Rule 11UA merely on the basis of differences between projections and past actuals or investor non-responses. The appellate authority's deletion of additions under Section 56(2)(viib) was upheld; the Revenue's appeal was dismissed.