AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2026 (5) TMI 1548
X X X X Extracts X X X X
X X X X Extracts X X X X
....l. Accordingly, assessee filed relevant information as called for. 3. The assessee is engaged in the business of IOT products and solutions, which forms the backbone of the all smart solutions. The AO observed that assessee has issued share capital on 25.07.2017, 23.10.2017 and 31.03.2018 and based on the valuation, assessee has issued share capital with the share premium of Rs. 993/- on 25.07.2017, share premium of Rs. 734.05 on 23.10.2017 and share premium of Rs. 888.80 on 31.03.2018. Since the assessee has adopted the same data to determine the different share premium to issue shares in three tranches during the same year. In response, assessee has submitted various details in support of the valuation of shares. Further, the AO observed that even though assessee has adopted projections from AY 2017-18 to 2020-21 whereas the actual figures are that assessee has incurred huge losses during this period. Accordingly, assessee was asked to explain as to why the above value of shares should not be added u/s 56(2)(viib)of the Act. In response to the above notices, assessee has submitted a detailed submissions and also submitted that one of the shareholders is Kamal Puri who is a non....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... read with Rule 11 UA. Further he relied on the assumptions and limitations declared in the valuation report and rejected the plea of the assessee. Further he observed that DCF method was based on projections which were adopted by the assessee did not exhibit any form of reasonable correlation with the guidelines and on account of valuer on the part of the assessee to substantiate the same. Based on the above obseervation on the various discrepancies found in the valuation report, he dismissed the grounds raised by the assessee and sustained the addition made by the AO. 5. Aggrieved with the above order, assessee is in appeal before us raising following grounds of appeal :- "1. Commissioner of Income Tax (Appeals) has erred in adding the share premium as undisclosed income on the pretext of mandatory disclosure of Chartered Accountants Valuation report which is required as per the guidelines of Institute of Chartered Accountants of India and hence this appeal. 2. Section 56(2)(viib) read with Rule 11 UA provides for DCF valuation for allotment of shares by the company. This share premium is considered as income from other sources in facts of the case. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 4. Pursuant to notice U/s 143(2), the learned AO has concluded the assessment by making an addition of Rs. 70,36,523/- as addition U/s 56(2)(viib) of the Income Tax Act, 1961.The addition was applicable only towards premium received from resident shareholders, while premium received from a non-resident shareholder was accepted. 5. This order was appealed with Commissioner of Income Tax (Appeals) on 27th March 2021. The Commissioner of Income Tax (Appeals) has passed its order U/s 250 on 18th August 2025 retaining the addition made by the assessing officer. The learned CIT(A) has confirmed the said addition mainly on the ground that: - the valuation reports were allegedly prepared for FEMA purposes and not explicitly for Rule 11UA; and - projections adopted under the DCF method did not match actual results. Issue under appeal 6. Addition of Rs. 70,36,523/- as excess share premium collected U/s 56(2)(viib) of the Income Tax Act, 1961 under the head "Income from Other Sources" by rejecting the DCF valuation method adopted by the Appellant. Grounds of Appeal (as filed in Form 36) i. Commissioner of Income Tax (Appeals) has erred in adding the share p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....et value. 11UA.(1) For the purposes of section 56 of the Act, the fair market value of a property, other than immovable property, shall be determined in the following manner, namely,- (a) valuation of .... (b) the fair market value of unquoted equity shares shall be the value, on the valuation date, of such unquoted equity shares as determined.... (c) the fair market value of unquoted shares and securities other than equity shares in a company which are not listed in any recognized stock exchange shall be estimated to be price it would fetch if sold in the open market on the valuation date and the assessee may obtain a report from a merchant banker or an accountant in respect of such valuation. (3) Where the date of valuation report by the merchant banker for the purposes of sub-rule (2) is not more than ninety days prior to the date of issue of shares which are the subject matter of valuation, such date may, at the option of the assessee, be deemed to be the valuation date: 9. The Learned AO has erred in law and facts of the case in making an addition of Rs. 70,36,523/-, in respect of share premium collected U/s 56(2)(viib), al....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 11. The assessee company has made three allotments during the year as shown above in Point No 10. The company has made these allotments to both Non resident& other resident shareholders. 12. Further the company has allotted the above-mentioned equity shares of Rs 10 each at a premium at various times in the year. The premium is determined based on the discounted cash flow method, which is an approved method of valuation as per the requirement of Sec 56 (2)(viib) r/w Rule 11UA and as well under the Foreign Exchange Management Act [FEMA] guidelines. 13. Regulation 5[1] of the foreign exchange management (transfer or issue of security by a person resident outside India), Regulation 20/2000 provides for issues of shares above the fair valuation of shares as certified by a chartered accountant. 14. The learned AO has erred in considering the share premium amount collected as "Income from Other Sources" U/s 56(2)(viib). Each of the three allotments made by the company are both to the resident and non-resident. Valuation of each of the three allotments have been made based on the discounted cash flow method as certified by an expert. When the valuation has....
X X X X Extracts X X X X
X X X X Extracts X X X X
....taan Entertainment Pvt. Ltd. v. ITO (2019) 106 taxmann.com 300 (ITAT Delhi) *DCIT v. Ozoneland Agro Pvt. Ltd. (2018) 89 taxmann.com 386 (ITAT Delhi) In both cases, it was held that the AO cannot replace the assessee's DCF valuation merely because actual results differ from projections. 16. Rebuttal to CIT(A) Paras 8.1.11 to 8.1.14 - Alleged mismatch between projections and actuals The learned CIT(A) has confirmed the addition primarily on the ground that projections adopted under DCF valuation did not match subsequent actual losses. This approach is legally untenable. DCF valuation is inherently forward‑looking and must be tested only with reference to information available on the valuation date, and not by applying hindsight based on subsequent events. The Delhi ITAT has consistently rejected the approach of comparing projections with actuals: * Ozoneland Agro Pvt. Ltd. v. DCIT (2018) 89 taxmann.com 386 (ITAT Delhi) * Rameshwaram Strong Glass Pvt. Ltd. v. ITO (2018) 94 taxmann.com 266 (ITAT Jaipur) It has been held that commercial failure of a business does not invalidate a bona-fide valuation. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e to non‑applicability of section 56(2)(viib). With respect, this misses the core issue. Acceptance or rejection of valuation is a question of correctness of methodology, not chargeability. If the valuation was fundamentally unreliable, it could not have been relied upon even for FEMA compliance. Such selective rejection violates the principle of consistency and non‑arbitrariness, as recognised by courts. Judicial support: - ITO v. M/s Vaani Estates Pvt. Ltd. (2018) (ITAT Delhi) 19. Rebuttal to CIT(A) Paras 8.1.11 to 8.1.14 - Substitution of commercial wisdom The AO and the CIT(A) have effectively substituted their own perception of business viability over that of the entrepreneur and investors. It is a settled principle that tax authorities cannot question commercial expediency or pricing of shares, once valuation is supported by a recognised method. Authoritative precedents: - Vodafone India Services Pvt. Ltd. (supra) Section 56(2)(viib) is an anti‑abuse provision, not a tool to re‑write genuine capital‑raising transactions of start‑ups. 20. Further as per Finance ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed. IoT based Products & solutions are still innovative, all pervasive and were considered to have huge business potential as projected in the market reports (Google search report attached) v. The prototype of the product was developed in the year 2015. Only after testing the prototype, the investors agreed to invest. The valuation report was prepared by qualified entity, commensurate valuation methodology and the premiums were decided accordingly. vi. The product was later sold through Amazon On-Line, at Exhibitions and Road shows. At Amazon, it was rated as at 5 Star/ 4.5 Stars (Report attached). vii. The product and the company was also valued high at various media forum e.g NDTV Tech, EFY etc. (attached) viii. Accordingly, the Premiums paid were logical and justified. ix. The assumption of "Undisclosed Income" is totally incorrect and illogical because all transactions have happened through banks and all rules and regulations pertaining to such investments were strictly complied with. x. The "Net Worth" methodology used by the AO to arrive at the "Indicative assessment" cannot be used as an alternative method as the assessme....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... d. Consistency with CBDT intent: The legislative intent behind Section 56(2)(viib) is to curb tax evasion through unreasonably high share premiums. In genuine cases where valuation is supported by recognized methods and reports, the provision should not be invoked mechanically to disregard bona fide commercial transactions. Appeal / Prayer In view of the above, it is submitted that the rejection of the DCF method is contrary to judicial precedents and statutory rules and the assumptions made regarding any undisclosed income are fundamentally incorrect. It is prayed that the addition made under section 56(2)(viib) be deleted in full, upholding the bona fide valuation as certified by the independent valuer. Due to the subject order, notices and prolonged fighting of the case the assessee has suffered in multiple way viz costs of CA for defending the case, opportunity losses, and also severe mental stress. Hence assessee look forward to the additional prayers for your considerations as submitted below: i. Cost of Defending the Case: Full reimbursement of the entire cost of defending the case viz. the fees of the Chartered Accountant, the Appe....