DCF valuation cannot be rejected by hindsight; share premium addition under section 56(2)(viib) failed.

Where unquoted equity shares are valued under the Discounted Cash Flow method prescribed in Rule 11UA, the Assessing Officer cannot discard that valuation merely because later actual results differ from the projections. DCF valuation is inherently based on estimates and future assumptions, and its correctness cannot be tested by hindsight using subsequent figures. By substituting actual financials for projected figures and preferring Net Asset Value instead, the Assessing Officer departed from the prescribed method. The addition under section 56(2)(viib) was therefore held unsustainable.

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Issues: Whether the addition made under section 56(2)(viib) on account of share premium could be sustained when the assessee adopted the Discounted Cash Flow method under Rule 11UA and the Assessing Officer rejected that valuation by substituting projected figures with actual figures and by preferring the Net Asset Value method.

Analysis: The assessee had valued the unquoted equity shares by a qualified valuer using the DCF method, which is one of the prescribed methods under Rule 11UA. The dispute turned on the Assessing Officer's attempt to discard that valuation because subsequent actual results differed from projections. The Tribunal held that once the assessee chooses a prescribed valuation method, the Assessing Officer cannot replace it with another method merely because he considers the projections to be optimistic. It was further held that DCF valuation necessarily rests on estimates and future assumptions, and its correctness cannot be tested by hindsight using later actual figures. Since the Assessing Officer adopted actual financials instead of projected financials while purportedly applying DCF, the exercise was not in accordance with the prescribed method.

Conclusion: The addition under section 56(2)(viib) was not sustainable and the assessee succeeded on this issue.

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