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Issues: Whether the addition made under section 56(2)(viib) of the Income-tax Act, 1961 was sustainable when the assessee had adopted the Discounted Cash Flow method for valuing unquoted shares and the Assessing Officer substituted the Net Asset Value method.
Analysis: The assessee had chosen a recognised valuation method for determining the fair market value of shares, supported by a Chartered Accountant's valuation report. The governing framework under section 56(2)(viib) read with Rule 11UA vests the choice of valuation method in the assessee, and valuation is to be tested on the basis of information available on the valuation date. A later mismatch between projections and actual performance does not by itself justify rejection of the DCF method, since valuation is based on estimates and assumptions and is not an exact science. The Assessing Officer was not empowered to replace the assessee's chosen method merely because he preferred a different approach, and no legally sustainable basis was shown to treat the share premium as excessive on a nil or NAV basis.
Conclusion: The rejection of the DCF valuation and substitution of the NAV method was unsustainable, and the addition under section 56(2)(viib) was deleted.
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