TaxTMI 
TaxTMI 
2026 (8) TMI 271
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.... Assessing Officer's adoption of the NAV method, rejecting the DCF method adopted by the Appellant. 4. The Ld. Commissioner of Income Tax (Appeals) failed to appreciate the fact that the Assessing Officer cannot substitute the method of valuation by adopting a method other than the method adopted by the Appellant and hence the DCF method adopted by the Appellant should have been upheld." 3. The solitary issue in this appeal of the assessee is whether in the facts and circumstances of the case, the learned CIT(A) has erred in confirming the addition made by the Assessing Officer u/sec.56(2)(viib) of the Income Tax Act [in short "the Act"], 1961 by rejecting the Discounted Cash Flow [in short "DCF"] method applied by the assessee for valuation of the shares and substituting the same with Net Asset Value [in short "NAV"] method. 4. The assessee company is engaged in the business of retailing women garments and textile business. The assessee filed its return of income for the year under consideration on 30.10.2017 declaring Rs. NIL income after carry forwarding current year loss of Rs. 93,53,626/-. During the scrutiny assessment, the Assessing Officer noticed that th....
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....020] 181 ITD 242 [Mumbai - Trib.]. 6. On the other hand, the learned DR has submitted that the valuation made by the assessee in the valuation report is not based on the reasonable projected sales/revenue in the future years but the projections of sales/revenue for the assessment years 2017-2018 to 2019-2020 are highly unrealistic and unreliable presumption and parameters. Further, the learned CIT(A) has relied upon the decision of this Tribunal in the case of DG Entertainment International vs. ACIT whereby the Tribunal held that burden is on the taxpayer to prove that the estimation used in the DCF calculations are reasonable and based on market realities. Thus, the learned DR has submitted that the valuation of the assessee is not found to be based on the reasonable projections and parameters then, the Assessing Officer has rightly rejected the valuation of the assessee and determined the valuation by applying the NAV method. The learned DR has submitted that in the absence of the reliable data the valuation under DCF method is not possible and hence, the valuation determined by the Assessing Officer on the basis of the NAV method is proper and justified. He has relied upon th....
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....apital company or a venture capital fund for a specified fund]; or (ii) by a company from a class or classes of persons as may be notified" by the Central Government in this behalf: Provided further that where the provisions of this clause have not been applied to a company on account of fulfilment of conditions specified in the notification issued under clause (ii) of the first proviso and such company fails to comply with any of those conditions, then, any consideration received for issue of share that exceeds the fair market value of such share shall be deemed to be the income of that company chargeable to income-tax for the previous year in which such failure has taken place and, it shall also be deemed that the company has under reported the said income in consequence of the misreporting referred to in sub-section (8) and subsection (9) of section 270A for the said previous year.] Provided also that the provisions of this clause shall not apply on or after the 1st day of April, 2025.] Explanation. For the purposes of this clause,- (a) the fair market value of the shares shall be the value- (i) as may be determined in accord....
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.... of the company; (iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation; (iv) any amount representing provision for taxation, other than 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, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto; (v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities; (vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares; PE=total amount of paid up equity share capital as shown in the balance-sheet; PV = the paid up value of such equity shares; or (b) the fair market value of the unquoted equity shares determined by a merchant banker or an accountant as per the Discounted Free Cash Flow method; [I.- Determination of value of assets and apportionment of income in certain cases." 1....
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....atmosphere in the country in general and in Chennai in particular. Thus, on facts, the CIT(A) found that the assessee company has not abused the privilege of choosing the DCF method for arriving at the value of the shares instead of NAV method. 9. The Revenue contended before the Tribunal that the CIT(A) ignored the huge variation in value of shares to the extent of ten times between value adopted by the assessee company as against its actual value of underlying assets, the CIT(A) erred in ignoring the finding of the Assessing Officer that there is no basis for the discount factor adopted by the assessee company as at 16%. The assessee contended before the Tribunal that they had adopted the DCF method as available under Rule IIUA of the Rules for arriving at the value of the shares allotted and the share premium received whereas, the Assessing Officer adopted the NAV method and revalued the land owned by the assessee company for the purpose of determining the share value of the premium thereof. 10. It was submitted that when the assessee has adopted a particular method of valuation as provided under the Act and Rules and in the absence of any material that such me....
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....hus, the Hon'ble Madras High Court has held that the option to choose the method provided under Clause-(a) or (b) is available with the assessee for determining the fair market value. DCF is one of the methods prescribed under the provisions of sec.56(2)(viib) read with Rule-11UA of I.T. Rules, 1962. The Assessing Officer cannot reject the method selected by the assessee for valuation of the shares. However, the Assessing Officer can scrutinize the contents or working of the method adopted by the assessee so as to find out the fair valuation. In case the Assessing Officer is not satisfied with the working of the assessee, then the Assessing Officer may do fresh valuation or get fresh valuation from an Independent Valuer, but such fresh valuation can only be done as per the method adopted by the assessee. Accordingly, in the case in hand, adopting a different method, i.e., NAV by the Assessing Officer instead of DCF method of valuation as chosen by the assessee is a clear breach of jurisdiction and power on the part of the Assessing Officer which is not permissible. Even otherwise, the Assessing Officer cannot question the valuation as determined on the basis of prescribed method be....
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....aluation which has been opted for by the Assessee. If Mr. Mohanty is correct in his submission that a part of demand arising out of the assessment order dated 21 December, 2017 would on adoption of DCF Method will be sustained in part, the same is without working out the figures. This was an exercise which ought to have been done by the Assessing Officer and that has not been done by him. In fact, he has completely disregarded the DCF Method for arriving at the fair market value. Therefore, the demand in the facts need to be stayed." 20.3 We also draw support and guidance from the order this Tribunal in case of Innoviti Payment Solutions (P.) Ltd. v. ITO [2019] 102 taxmann.com 59/175 ITD 10 (Bangalore-Trib), the relevant observation of the coordinate bench reads as under: 14. In nutshell, our conclusions are as under- 1) The AO can scrutinize the valuation report and the if the AO is not satisfied with the explanation of the assessee, he has to record the reasons and basis for not accepting the valuation report submitted by the assessee and only thereafter, he can go for own valuation or to obtain the fresh valuation report from an independent valuer and ....
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....at may be submitted for its consideration, the statute clearly does not appear to empower it to independently evaluate the face value of the unquoted equity shares by adopting a valuation method other than the one chosen by the assessee. It is this aspect which was duly acknowledged by the Bombay High Court in Vodafone M-Pesa. Ltd. (supra) "18. We note that the view as taken by the Bombay High Court in the aforenoted judgment appears to have been consistently followed by Tribunals of different regions as would be evident from the discussion which ensues. We, in this regard, firstly take into consideration the judgment rendered by the Mumbai Bench of the ITAT in Dy. CIT v. Sodexo Facilities Management Services India (P.) Ltd. (IT Appeal No. 2945 (Mum.) of 2022, dated 25-5-2023] where it was held as under:- "18. On the other hand, Ld. Counsel for the assessee submitted that the AO has not accepted the method of valuation which was furnished by the assessee. The valuer computed the FMV by averaging the valuation as per PECV method as well as net asset value method. He submitted that when the legislation has conferred an option on the assessee to choose a particular m....
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.... then such decision of the assessee shall be final and binding on the assessing officer. The option was given by the Act to the assessee either to apply the DCF method or net asset valuation method, this option is not available to the assessing officer. Rule 11UA provides the method of determining the FMV of a property other than the immovable property. Rule 11UA(2) reproduced hereinabove provides the method of providing the FMV of unquoted shares to be determined at the option of the assessee. 17.2. Once the assessee applied particular method of valuation, (in the present case DCF method), then it is the duty of the Assessing Officer / learned CIT(A) to scrutinize the valuation report within the four corners or parameters laid down while making the valuation report under DCF method only. It is not permissible for the Assessing Officer to reject the method opted by the assessee and apply a different method of valuation and the Assessing Officer can definitely reject the valuation report but not the method. In case, the AO rejected the valuation report, then the AO has to carry out a fresh valuation report by applying the same valuation method and determine the fair market ....
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.... future projections are not met, it cannot be said that the projections were wrong. To prove that the projections were unreliable, the learned Assessing Officer must examine how the valuation has been done. In a case future cash flow projections do not meet the actual figures, rejection of discounted cash flow method is not proper. If projected future cash flow and actual result matches, such situation would always be rare. For projecting the future cash flow certain assumptions are required to be made, there needs to be tested and then such exemptions becomes the base of estimation of such projected future cash flows. If there are no assumptions, there cannot be an estimate of future projected cash flows and then discounted cash flow method becomes redundant. For exercise of valuation, assumption made by the valuer and information available at the time of the valuation date are relevant. As the exercise of valuation must be viewed as on the date of the valuation looking forward and cannot be reviewed in retrospect. Further, the valuation is always made based on review of historical data and projected financial information provided by the management. Further report of expert will a....
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....n provides an Assessee two choices of adopting either NAV method or DCF method. If the Assessee determines the fair market value in a method as prescribed the Assessing Officer does not have a choice to dispute the justification. The methods of valuation are prescribed in Rule 11UA(2) of the Rules. The provisions of Rule 11UA(2)(b) of the Rules provides that, the Assessee can adopt the fair market value as per the above two methods i.e., either DCF method or fair market value of the unquoted equity shares determined by a merchant banker. The choice of method is that of the Assessee. The Tribunal has followed the judgment of Hon'ble Bombay High Court rendered in the case of Vodafone M-Pesa Ltd. v. Pr. CIT (supra) and has taken the view that the AO can scrutinize the valuation report and he can determine a fresh valuation either by himself or by calling a determination from an independent valuer to confront the Assessee but the basis has to be DCF method and he cannot change the method of valuation which has been opted by the Assessee. The decision of ITAT, Delhi in the case of Agro Portfolio Ltd. 171 ITD 74 has also been considered by the ITAT, Bangalore in the case of VBHC Valu....
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....om 407 (Gujarat). Even the Assessing Officer in the remand report dated 30.09.2025 has accepted the DCF method as appropriate for fair market value as under: "Introduction: 1. M/s Diabetomics Medical Private Limited, a closely held company, incorporated on 16.06.2015 with the objective of manufacturing and commercialization of medical diagnostic products relating to Diabetes and pregnancy for early diagnosis of Pre-eclampsia, Geostational Diabetes, Point-ofcare test for Auto Immune Diabetes, non-invasive salivabased test for Type Il diabetes. The said diagnostic products are first of its kind not only in India but also in the world. 2. The projections by the management regarding the future cash flows factored in the benefits, which the company would derive from technology involved i.e. technology transfer from US company, Innovative product, vast experience and reputation of the promoter in developing vaccines and innovative products in addition to the expected earnings / growth potential. Accordingly, the underlying projections were made on such reasonable assumptions as reflected in the Annexure to the Valuation Report and the preference shares were iss....