DCF valuation method choice for unquoted shares cannot be replaced by NAV without statutory basis

Rule 11UA allows an assessee valuing unquoted equity shares under section 56(2)(viib) to choose either the DCF method or the NAV method, and the Assessing Officer cannot compel a switch to NAV merely because he prefers that approach. At the same time, a DCF valuation must be supported by cogent material; where projections and feasibility inputs are inadequately substantiated, the reports may be rejected. The proper course in such a case is fresh valuation by an approved valuer on the DCF method, rather than unilateral substitution of method by the Assessing Officer.

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Issues: Whether, for addition under section 56(2)(viib), the Assessing Officer could substitute the assessee's chosen DCF valuation of unquoted equity shares with the NAV method, and whether the valuation reports furnished by the assessee could be accepted.

Analysis: Rule 11UA conferred on the assessee the choice to determine fair market value by either the DCF method or the NAV method, and the Assessing Officer had no authority to compel a change of method merely because he preferred another approach. At the same time, the valuation adopted by the assessee was found to suffer from serious deficiencies, since the projected assumptions and feasibility inputs were not satisfactorily supported by cogent material. The valuation reports, therefore, could not be accepted as they stood, and the Assessing Officer's substitution of NAV valuation was also not sustainable as the statutory basis for changing the assessee's chosen method.

Conclusion: The addition could not be sustained on the basis of the Assessing Officer's substitution of method, but the assessee's DCF valuation was also not accepted; the matter was remanded for fresh valuation by an approved valuer on the DCF method.

Final Conclusion: The assessee obtained relief against the impugned addition to the extent that the NAV-based substitution was set aside, but the valuation issue was sent back for fresh determination in accordance with law.

Ratio Decidendi: Where the statute permits the assessee to choose the prescribed method for valuation of unquoted shares, the Assessing Officer cannot substitute a different method on his own, though a defective DCF valuation may be remanded for fresh determination by an approved valuer.

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