AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2026 (3) TMI 387
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.... the year under consideration having face value of Rs. 10/- @ Rs. 70/- per unquoted equity share with a premium of Rs. 60/- per share. The learned Authorised Representative of the Assessee has referred to the valuation report placed at page nos.70 to 74 of the paper book and submitted that the valuer has determined the value of the share by selecting the DCF method and the calculation is given in the annexure to the valuation report placed at page no.71 of the paper book. The Assessing Officer did not accept the valuation of the assessee and proceeded to determine the fair market value of the shares of the assessee by adopting the NAV and thereby, made the disallowance of the entire premium of Rs. 45 lakhs while passing the impugned order. The learned Authorised Representative of the Assessee has submitted that it is well settled law as laid down by the Hon'ble High Courts as well as various Benches of this Tribunal the Assessing Officer has no jurisdiction to substitute the method of valuation as selected and chosen by the assessee. She has relied upon the following Judgments: (i) Judgment of Hon'ble Delhi High Court in the case of Agra Portfolio Pvt. Ltd., vs. PCIT-1 & A....
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....sessee was asked to submit the valuation report. The assessee submitted a certificate from a Chartered Accountant mentioning the fair value of the share at Rs.60/ -. However, the basis of valuation is not submitted. Even though there is an annexure to the certificate which is supposed to be containing the basis of valuation of the shares, except for mentioning the financials both audited and projected, no other details are shown as to how the share premium value is arrived at. Accordingly, a show-cause notice dated 7-10-2019 was issued proposing to make addition u/s.56(2)(viib) of the I.T. Act. The assessee was given sufficient time to submit its explanation. However, the assessee has not responded till date. Therefore, the matter is decided on merits as under. 2. As mentioned earlier, the assessee-company issued shares at a premium of Rs.60/- per share. For the reasons mentioned above, the valuation done by the assessee is rejected, as no methodology is followed and relied upon. Therefore in the alternative, the valuation is done as per Rule 11UA of the I.T. Rules. The valuation is as under: S. No. Description Figures in Rupees 1 Total Assets 4....
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....e shall be the value as determined in accordance with such method as may be prescribed or as the fair market value of the shares as may be substantiated by the Company to the satisfaction of the Assessing Officer based on the value on the date of issue of shares of its asset whichever is higher. The fair market value of the shares to be determined as per the method prescribed in Explanation-2 Clause-(viib) of sub-sec.(2) of sec.56 read with Rule 11UA of I.T. Rules, 1962. For ready reference, the Explanation to Clause-(viib) and Rule-11UA(2)(a) and (b) are quoted as under: "viib) where a company, not being a company in which the public are substantially interested, receives", in any previous year, from any person, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares: Provided that this clause shall not apply where the consideration for issue of shares is received- (i) by a venture capital undertaking from a venture capital company or a venture capital fund for a specified fund]; or (ii) by a company from a class or class....
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....tion to clause (viib) of sub-section (2) of section 56 shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner under clause (a) or clause (b), at the option of the assessee, namely:- (a) the fair market value of unquoted equity shares= (A-L) x (PV), (PE) A = book value of the assets in the balance-sheet as reduced by any amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act and any amount shown in the balance-sheet as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset; L= book value of liabilities shown in the balance-sheet, but not including the following amounts, namely:- (i) the paid-up capital in respect of equity shares; (ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company; (iii) reserves and surplus, by whatever name called, even if the resulting figu....
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....er words, the Assessing Officer can reject the valuation but has no jurisdiction to reject the method of valuation. The Hon'ble Madras High Court in the case of CIT vs. VVA Hotels (P.) Ltd. (supra) has held in Paras-8 to 14 as under: "8. On going through the figures of excess projection of sales, as mentioned by the Assessing Officer in a tabulated form in paragraph 4.2 of the assessment order, we find that the excess projection for 2013-14 was 10%, for 2014-15-4%, for 2015-16-8% and for 2016-17-18%. Therefore, the finding recorded by the CIT(A) that difference was marginal is found to be correct, though it may be stated that the difference of 18% for assessment year 2016-17 may be little on the higher side, but still unless and until there was material available with the Assessing Officer to pin down the assessee on the ground of fraud or misuse of the provisions of law, the adoption of the DCF method cannot be held to be wholly illegal. Further, the CIT(A) rightly took note of the nature of business, which was done by the assessee company and the vagaries of business atmosphere in the country in general and in Chennai in particular. Thus, on facts, the CIT(A) found that ....
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.... Officer for fresh consideration to determine the fair market value of the shares in question as required in Explanation to Section 56 of the Act. 12. We find, in the said judgment, the matter was remanded to the Assessing Officer for fresh consideration on a concession extended by the assessee by submitting that they will seek necessary clarification from the Central Board of Direct Taxes and they may be permitted to do so while the matter could be remanded back to the assessing authority. Therefore, a direction issued based on the concession extended by the assessee cannot be relied upon by the Revenue as a precedent. 13. Thus, we find that both the CIT(A) and the Tribunal, on careful appreciation of the facts and circumstances, have granted relief to the assessee and we find there is no question of law, much less substantial question of law arise for consideration in this appeal. 14. Accordingly, the appeal filed by the Revenue is dismissed on the ground that there is no substantial question of law arise for consideration. No costs." 12.1. Thus, the Hon'ble Madras High Court has held that the option to choose the method provided under Clause-(....
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....e from the judgment of Hon'ble Bombay High Court in the case of Vodafone M-Pesa Ltd. v. Pr. CIT [2018] 92 taxmann.com 73/256 Taxman 240 (Bombay), where it was held as under: 9. We note that, the Commissioner of Income-Tax in the impugned order dated 23 February, 2018 does not deal with the primary grievance of the petitioner. This, even after he concedes with the method of valuation namely, NAV Method or the DCF Method to determine the fair market value of shares has to be done adopted at the Assessee's option. Nevertheless, he does not deal with the change in the method of valuation by the Assessing Officer which has resulted in the demand. There is certainly no immunity from scrutiny of the valuation report submitted by the Assessee. Therefore, the Assessing Officer is undoubtedly entitled to scrutinise the valuation report and determine a fresh valuation either by himself or by calling for a final determination from an independent valuer to confront the petitioner. However, the basis has to be the DCF Method and it is not open to him to change the method of valuation which has been opted for by the Assessee. If Mr. Mohanty is correct in his submission that a par....
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....able." 12.3. Similarly, the Hon'ble Delhi High Court in the case of Agra Portfolio (P.) Ltd. vs. PCIT [2024] 464 ITR 348 (Del.) the Hon'ble High Court has held in Paras-15 to 22 as under: "15. A perusal of Rule 11UA(2) would indicate that the assessee is enabled to determine the FMV of the unquoted equity shares either in accordance with the formula prescribed in clause (a) or on the basis of a report drawn by a merchant banker who may have determined the FMV as per the DCF Method. 16. In our considered opinion, the language of Rule 11UA(2) indubitably places a choice upon the assessee to either follow the route as prescribed in clause (a) or in the alternative to place for the consideration of the AO a Valuation Report drawn by a merchant banker as per the DCF method. However, and as is manifest from a conjoint reading of Section 56(2)(viib) read along with Rule 11UA(2), the option and the choice stands vested solely in the hands of the assessee. 17. While it would be open for the AO, for reasons so recorded, to doubt or reject a valuation that may be submitted for its consideration, the statute clearly does not appear to empower it to independe....
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....n the slump sale. In the case of the assessee, the AO has taken FMV at Rs. 7,20,32,509/- which was worked out by the valuer following the PECV method, whereas the assessee has followed average value of PECV method as well as NAV method to justify the sale consideration actually received. We are of the opinion that Id Assessing Officer has not carried out valuation by an independent valuer and merely chosen a part of the valuation report submitted by the assessee. Therefore, we restore back the issue to the AO for referring the matter to a valuation expert by way of the issue of commission and thereafter, determining the FMV of the undertaking of the food division of the assessee." 19. Proceeding along similar lines, the Hyderabad Bench of the ITAT in Jt. CIT(OSD) v. MLR. Auto Ltd. [IT Appeal No. 115 (Hyd) of 2021, dated 28-12-2023) had held as follows:- "17.1. The conjoint reading of Section 56(2)(viib) and Rule 11U and 11UA makes it abundantly clear that in case assessee exercised his option for determination of the fair market value of the shares and exercise then such decision of the assessee shall be final and binding on the assessing officer. The option was g....
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....anker or a chartered accountant (till 24th of May 2018). In the present case the assessee has valued the shares according to one of the "options" available to assessee by adopting discounted cash low method. Therefore, such an option given to the assessee cannot be withdrawn or taken away by the learned Assessing Officer by adopting different method of valuation ie, net asset value method. The method of valuation is always the option of the assessee. The learned Assessing Officer is authorised to examine whether assessee has adopted one of the available options properly or not. In the present case, the learned Assessing Officer has thrust upon the assessee, net asset value method rejecting discounted cash flow method for only reason that there is a deviation in the actual figures from the projected figures. It is an established fact that discounted cash flow method is always based on future projections adopting certain parameters such as expected generation of cash flow, the discounted rate of return and cost of capital. In hindsight, on availability of the actual figures, if the future projections are not met, it cannot be said that the projections were wrong. To prove that the pr....
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....see who has to exercise one of the options available under the provisions of the law for valuing the shares. The learned Assessing Officer needs to examine that method. Naturally, if the discounted cash flow method and net asset value method gives the same result, where would have been the need to prescribe the two methods in the law. In view of above facts, we do not find any infirmity in the order of the learned Commissioner of Income-tax (Appeals) in deleting the addition of Rs. 69,000,000 made by the learned Assessing Officer u/s 56 (2) (viib) of the Act. Accordingly, ground Nos. 3 and 4 of the appeal of the learned Assessing Officer are dismissed." 21. We deem it apposite to lastly take note of the following pertinent observations as appearing in a decision rendered by the ITAT Bench at Bangalore in Taaq Music (P) Ltd. v. ITO [2020] SCC OnLine ITAT 9482:- "11. The law provides that, the fair market value may be determined with such method as may be prescribed or the fair market value can be determined to the satisfaction of the Assessing Officer. The provision provides an Assessee two choices of adopting either NAV method or DCF method. If the Assessee determ....
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.... of Id. CIT(A) is accordingly set aside and this issue is remanded to the AO for decision afresh, after due opportunity of hearing to the Assessee." 22. Accordingly, and for all the aforesaid reasons, we allow the instant appeal and set aside the order of the ITAT dated 16 May 2018. The Questions of Law as framed, namely, Question A and C are answered in the negative and in favor of the appellant assessee. In light of the answers rendered in respect of the aforenoted two questions, the additional questions which are framed would not merit an independent examination. The matter shall in consequence stand remitted to the AO which shall undertake an exercise of valuation afresh in accordance with the DCF method." 12.4. Thus, the Hon'ble High Court has held that the Assessing Officer is not empowered to independently evaluate the value of the unquoted equity shares by adopting a valuation method other than the one chosen by the assessee. A similar view has been taken by the Hon'ble Gujarat High Court in the case of Akash Ceramics (P.) Ltd. vs. ITO [2024] 168 taxmann.com 407 (Gujarat). Even the Assessing Officer in the remand report dated 30.09.2025 has accepted the DC....
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....company. This data was arrived after taking into consideration of various demand factors and the drug required for meeting this demand in the open market. This estimation was used to arrive at the expected purchases that is going to be made by the foreign company M/s Diabetomics Inc. USA from the assessee company M/s DMPL. The submissions given by the assessee are perused. It is noticed that the assessee has used the DCF method to calculate the share value of the company. The entire calculations of the DCF workings have been perused. It is noticed that the assessee company M/s DMPL was going to produce a unique product and the patented technology was only available with the foreign company M/s Diabetomics Inc. USA. As the drug was unique, the market projections were done as per the estimated requirements. The workings which were used to arrive the share value as per DCF method has been certified by the Chartered Accountant. B) Difference between ITR Data and Projections: It is noticed that there is a huge difference between the ITR data of revenue and the projections. The assessee in its submissions stated that the product could not take off as planned and it face....