DCF valuation for share issue cannot be rejected with hindsight, and selective tax addition under section 56(2)(viib) fails.

Discounted Cash Flow valuation is a recognised method under Rule 11UA for share pricing, and it cannot be discarded merely because later business results differ from projections. The analysis notes that a projected valuation is forward-looking, so hindsight cannot by itself justify reworking the price for purposes of section 56(2)(viib). It also indicates that where the same valuation basis was accepted for FEMA-related share issues, the Revenue should not selectively reject it for resident subscriptions. On that reasoning, the DCF valuation was upheld and the addition under section 56(2)(viib) was deleted.

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Issues: Whether the addition made under section 56(2)(viib) of the Income-tax Act, 1961 by rejecting the assessee's Discounted Cash Flow valuation of shares was sustainable.

Analysis: The assessee had valued the shares by the Discounted Cash Flow method, which is one of the recognised methods under Rule 11UA of the Income-tax Rules, 1962. The dispute turned on whether the Assessing Officer and the first appellate authority could discard that valuation on the ground that the projections did not later match actual results and because the valuation reports were also used for FEMA compliance. The valuation exercised by the assessee was a projected, forward-looking exercise, and the subsequent outcome of the business could not by itself justify reworking the valuation with hindsight. The same valuation basis was also accepted for shares issued to a non-resident, and the Revenue could not selectively reject the valuation only for resident share subscriptions while accepting the same price for other allotments.

Conclusion: The rejection of the DCF valuation and the consequent addition under section 56(2)(viib) was unsustainable. The addition was deleted and the issue was decided in favour of the assessee.

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