Fair Market Value method choice: AO cannot substitute NAV for taxpayer's DCF valuation; adjustment deleted.

The statutory scheme permits an assessee to determine fair market value of unquoted equity shares either by a prescribed formula or by a Discounted Cash Flow (DCF) valuation; the Assessing Officer may scrutinise, seek clarifications, require a fresh independent valuation, or rework computations using the same method, but lacks authority to supplant the assessee's chosen DCF method with the Net Asset Value (NAV) method absent specific, pinpointed defects in the DCF workings. On the facts the AO substituted NAV without identifying such defects; that substitution exceeded jurisdiction and the resulting addition was deleted.

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Issues: Whether the Assessing Officer / CIT(A) was justified in rejecting the assessee's valuation of unquoted shares based on the Discounted Cash Flow (DCF) method and substituting it by applying the Net Asset Value (NAV) method for computation of fair market value under Section 56(2)(viib) read with Explanation-2 and Rule 11UA of the Income-tax Rules, 1962.

Analysis: The statutory scheme in Explanation-2 to clause (viib) of Section 56(2) read with Rule 11UA(2) of the Income-tax Rules, 1962 provides the assessee an option to determine fair market value of unquoted equity shares either by the formula in clause (a) or by a valuation as per the Discounted Cash Flow (DCF) method in clause (b). While the Assessing Officer has power to scrutinize and, if necessary, reject the valuation produced by the assessee for cogent reasons, the statutory framework does not empower the Assessing Officer to substitute a different valuation method in place of the method chosen by the assessee. The Assessing Officer may examine the correctness of the assessees' computations, seek clarifications, require fresh valuation by an independent valuer, or rework the valuation applying the same method adopted by the assessee, but cannot, without specific pinpointed defects in the chosen method's workings, adopt an alternative method (NAV) to determine FMV. On the facts, the Assessing Officer rejected the DCF valuation without identifying specific inaccuracies in the DCF workings and adopted NAV to arrive at a lower value; this substitution exceeded jurisdiction under the statutory scheme. The Tribunal, following the consistent line of authority cited, held that the addition made by adopting NAV in place of the DCF method chosen by the assessee was not sustainable and must be deleted.

Conclusion: The substitution of the DCF method by the Assessing Officer/CIT(A) with the NAV method is beyond the Assessing Officer's jurisdiction and the addition made by applying NAV is deleted; the appeal is allowed in favour of the assessee.

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