DCF valuation for unquoted shares upheld, and no section 14A disallowance without exempt income under pre-amendment law.

Where an assessee values unquoted shares under Rule 11UA using the Discounted Cash Flow method, the Assessing Officer may scrutinise the valuation report and its assumptions but cannot reject the recognised method and substitute the Net Asset Value method merely because later actual results differ; the section 56(2)(viib) addition was deleted. Where no exempt income was earned during the year, section 14A read with Rule 8D could not be invoked for the pre-amendment assessment year; the disallowance was deleted.

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Issues: (i) Whether the Assessing Officer could reject the assessee's valuation of unquoted shares under the Discounted Cash Flow method and substitute the Net Asset Value method for invoking section 56(2)(viib) of the Income-tax Act, 1961 on share premium received. (ii) Whether disallowance under section 14A of the Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962 was sustainable in the absence of exempt income during the year.

Issue (i): Whether the Assessing Officer could reject the assessee's valuation of unquoted shares under the Discounted Cash Flow method and substitute the Net Asset Value method for invoking section 56(2)(viib) of the Income-tax Act, 1961 on share premium received.

Analysis: The assessee had valued its shares under Rule 11UA by adopting the Discounted Cash Flow method, which is a recognised method for determining fair market value of unquoted shares. The valuation was supported by a report and the shares were subscribed by an independent investor. The Tribunal noted that the Assessing Officer could examine the valuation report and test its assumptions, but could not discard the method chosen by the assessee and replace it with another method merely because the projected figures differed from later actual results. The Tribunal also relied on the fact that in an earlier year on similar facts the valuation had been accepted.

Conclusion: The addition made under section 56(2)(viib) was unsustainable and was deleted in favour of the assessee.

Issue (ii): Whether disallowance under section 14A of the Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962 was sustainable in the absence of exempt income during the year.

Analysis: The assessee had not earned any exempt dividend income during the relevant assessment year. The Tribunal applied the settled position that, for years prior to the prospective amendment brought in by the Finance Act, 2022, disallowance under section 14A cannot be made when no exempt income is earned during the year. As the assessment year involved was 2018-19, the later amendment did not apply.

Conclusion: The disallowance under section 14A was deleted in favour of the assessee.

Final Conclusion: Both appeals were allowed and the additions on share premium as well as the disallowance under section 14A were set aside.

Ratio Decidendi: Where the assessee adopts a recognised valuation method for unquoted shares under Rule 11UA, the Assessing Officer may scrutinise the valuation but cannot substitute a different method chosen by the assessee; and for assessment years governed by the pre-amendment law, no disallowance under section 14A can be made in the absence of exempt income.

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