DCF valuation under Rule 11UA(2) cannot be rejected under section 56(2)(viib) without a specific defect in the report.

An assessee valuing compulsorily convertible preference shares under the Discounted Cash Flow method permitted by Rule 11UA(2) could not have the addition under section 56(2)(viib) sustained merely because the Assessing Officer compared projected figures with later actual results. The record showed that a valuation report, feasibility material and supporting details were furnished, and the DCF method is inherently projection-based. In the absence of any specific defect, error or inaccuracy in the valuation report, the revenue authorities could not discard the chosen method or substitute their own view of valuation. The addition was therefore deleted and the Revenue's challenge failed.

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Issues: (i) Whether the addition made under section 56(2)(viib) of the Income-tax Act, 1961 could be sustained where the assessee valued compulsorily convertible preference shares by the Discounted Cash Flow method under Rule 11UA(2) of the Income-tax Rules, 1962 and the Assessing Officer sought to reject the valuation by comparing projections with actual results and alleging lack of supporting details.

Issue (i): Whether the addition made under section 56(2)(viib) of the Income-tax Act, 1961 could be sustained where the assessee valued compulsorily convertible preference shares by the Discounted Cash Flow method under Rule 11UA(2) of the Income-tax Rules, 1962 and the Assessing Officer sought to reject the valuation by comparing projections with actual results and alleging lack of supporting details.

Analysis: The assessee had adopted one of the statutorily permitted valuation methods and obtained a valuation report based on DCF methodology. The record showed that supporting material, including the feasibility report and valuation details, had been furnished before the Assessing Officer. The valuation under DCF is inherently projection-based, and the Assessing Officer had not identified any specific defect, error, or inaccuracy in the report. In such a situation, the revenue authorities could not substitute their own view of valuation or discard the chosen method merely because actual figures later differed from projections.

Conclusion: The deletion of the addition was justified and the challenge under section 56(2)(viib) failed.

Final Conclusion: The Revenue's appeal was rejected and the deletion of the addition was sustained.

Ratio Decidendi: Where the assessee adopts a valuation method specifically permitted by law and supports it with a valuation report, the Assessing Officer cannot replace that method or reject the valuation merely because subsequent actual results differ from the projections, unless a specific defect in the valuation is identified.

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