[2002] 125 Taxman 963 (SC)/[2003] 259 ITR 19 (SC)/[2003] 179 CTR 11 (SC)[25-11-

2002]

[2002] 125 Taxman 963 (SC)

SUPREME COURT OF INDIA
GKN Driveshafts (India) Ltd.
v.
Income-tax Officer*
SYED SHAH MOHAMMED QUADRI AND ARIJIT PASAYAT, JJ.
CIVIL APPEAL NOS. 7731 TO 7737 OF 2002
NOVEMBER 25, 2002

Section 148, read with section 143, of the Income-tax Act, 1961 - Income escaping
assessment - Issue of notice for - Assessment years 1992-93 to 1994-95, 1997-98 and 1998-99
- Whether when a notice is issued under section 148, proper course of action for noticee is
to file return and if he so desires, to seek reasons for issuing notice and on receipt thereof to
file objections to issuance of notice - Held, yes - Whether where notices were issued under
sections 143(2) and 148 and all that assessee was agitating could be submitted by filing
reply to said notices, assessee was unjustified in invoking extraordinary writ jurisdiction at
notice stage itself - Held, yes
FACTS

The assessee had filed a writ petition challenging the validity of notices issued under sections 148 and 143(2).
The High Court held that the assessee could have taken all the objections in its reply to the notices and that, at
that stage, the writ petition was premature. Accordingly, the writ petition was dismissed.
On appeal :
HELD

There was no justifiable reason to interfere with the order under challenge. However, it was clarified that
when a notice under section 148 is issued, the proper course of action for the noticee is to file return and if he
so desires, to seek reasons for issuing notice. The Assessing Officer is bound to furnish reasons within a
reasonable time. On receipt of reasons, the noticee is entitled to file objections to issuance of notice and the
Assessing Officer is bound to dispose of the same by passing a speaking order. In the instant case, as the
reasons had been disclosed in the proceedings, the Assessing Officer had to dispose of the objections, if filed,
by passing a speaking order, before proceeding with the assessment.
CASE REVIEW

The order of Delhi High Court in GKN Driveshafts (India) Ltd. v. ITO [2002] 123 Taxman 802 affirmed.
M.L. Verma, Jagdish Kumar Chawla, V.P. Gupta and R.K. Jain for the Appellant. Ranbir Chandra, Ms.
Neera Gupta, Rajiv Tyagi and B.V. Balaram Das for the Respondent.
ORDER

Heard learned counsel for the parties.

Leave is granted.
By the order under challenge, a Division Bench of the High Court at Delhi dismissed the writ petition filed by
the appellant challenging the validity of notices issued under sections 148 and 143(2) of the Income Tax Act,
1961. The High Court took the view that the appellant could have taken all the objections in its reply to the
notices and that, at that stage, the writ petition was premature. Accordingly, the writ petition was dismissed on
31st January, 2001. Aggrieved by that order, the appellant is in appeal before us.
Mr. M.L. Verma, learned senior counsel appearing for the appellant, submits that the impugned notices relate
to seven assessment years; that during the pendency of these appeals, in respect of two assessment years, viz.,
1995-96 and 1996-97, assessment has been completed against which appeals have been filed. Notices relating
to the other five assessment years, viz., 1992-93, 1993-94, 1994-95, 1997-98 and 1998-99, are now the
subject-matter of these appeals.
We see no justifiable reason to interfere with the order under challenge. However, we clarify that when a
notice under section 148 of the Income Tax Act is issued, the proper course of action for the noticee is to file
return and if he so desires, to seek reasons for issuing notices. The Assessing Officer is bound to furnish
reasons within a reasonable time. On receipt of reasons, the noticee is entitled to file objections to issuance of
notice and the Assessing Officer is bound to dispose of the same by passing a speaking order. In the instant
case, as the reasons have been disclosed in these proceedings, the Assessing Officer has to dispose of the
objections, if filed, by passing a speaking order, before proceeding with the assessment in respect of the
abovesaid five assessment years.
Insofar as the appeals filed against the order of assessment before the Commissioner (Appeals), we direct the
appellate authority to dispose of the same, expeditiously.
With the above observations, the civil appeals are dismissed.
No costs.
■■

*In favour of revenue.

[2018] 96 taxmann.com 542 (Jaipur - Trib.)/[2018] 172 ITD 571 (Jaipur - Trib.)[12-
07-2018]

IT : Where assessee company determined Fair Market Value of shares issued at

premium on basis of Discount Cash Flow method in accordance with rule 11UA(2)(b)
read bith section 56(2)(viib) and valuation report was prepared as per guidelines
given by ICAI and no fault was found in same, Assessing Officer was unjustified in
changing method of valuation of shares at premium to Net Asset Value method

■■■

[2018] 96 taxmann.com 542 (Jaipur - Trib.)

IN THE ITAT JAIPUR BENCH
Rameshwaram Strong Glass (P.) Ltd.
v.
Income-tax Officer, Ward-2(1), Ajmer*
VIJAY PAL RAO, JUDICIAL MEMBER
AND BHAGCHAND, ACCOUNTANT MEMBER
IT APPEAL NO. 884 (JP) OF 2016
[ASSESSMENT YEAR 2013-14]
JULY 12, 2018

Section 56 of the Income-tax Act, 1961 read with rule 11UA of the Income-tax Rules, 1962 -
Income from other sources - Chargeable as (Sub-section (2) (viib)) - Assessment year 2013-
14 - Assessee-company issued 1,40,000 shares having face value of Rs. 10 each, at premium
of Rs. 60 per share - Assessee had determined Fair Market Value (FMV) of shares on basis of
Discount Cash Flow (DCF) method in accordance with rule 11UA(2)(b) read with section 56(2)
(viib) - Assessing Officer rejected such valuation done by assessee and determined FMV of
shares based on Net Asset Value (NAV) method - Consequently, excess premium charged by
assessee was considered as income from other sources and was added to income of
assessee - It was noted that law had specifically conferred an option upon assessee that for
purpose of section 56(2)(viib) an assessee could adopt any of methods mentioned under rule
11UA(2) - Whether when law had specifically given an option to assessee to choose any of
method of valuation of his choice and assessee exercised an option by choosing a particular
method (DCF here), changing method or adopting a different method would be beyond
powers of revenue authorities - Held, yes - Whether, further, since while following DCF
method, assessee had considered plant capacity, industry and market conditions,
sanctioning of loan by bank and that valuation reports were prepared as per guidelines given
by Institute of Chartered Accountants of India and Assessing Officer had not found any fault
in said report, Assessing Officer was unjustified in rejecting valuation report submitted by
assessee based on DCF method - Held, yes [Paras 4.5 and 4.5.3] [In favour of assessee]
Circulars and Notifications: CBDT Letter File No. 173/14/2018-ITA.I, dated 6-2-2018
FACTS

■ The assessee was a private limited company. There was no business activity during the starting assessment
years except purchase of a land worth Rs. 3.27 lakhs. During the year under consideration, the assessee
had issued 1,40,000 shares having the face value of Rs. 10 each, at the premium of Rs. 60 per share,
 receiving a total premium of Rs. 84 lakhs over and above the share application money of Rs. 14 lakhs.
The assessee had determined Fair Market Value (FMV) on the basis of Discounted Cash Flow Method.
■ As per the Assessing Officer, the prerequisite for issue of share at premium was the substantial increase in
the net worth of the income which was mainly due to the profitability, credibility, goodwill etc. of the
concern, however, such requirements were not available in the present case. Therefore, these shares did
not have intrinsic value to give price to premium in the business, thus, premium of Rs. 60 per share did
not appear to be justifiable. The Assessing Officer found that calculation of share premium was not in
accordance with rule 11UA and after referring to rule 11UA(2)(b), the Assessing Officer computed the
FMV of share based on Book Value and finally held that the fair market value of unquoted equity shares
of the assessee cames to Rs. 32.76 only and the assessee was entitled to charge premium to Rs. 2.27 lakhs
(32.76(-) Rs. 10 = 22.76 X 10000 shares) against which the assessee charged premium of Rs. 84 lakhs.
Thus, the excess premium of Rs. 81.72 lakhs received by the assessee was not justified and not in
accordance with the amended provisions of section 56(2)(viib). Consequently, the excess premium by the
assessee was considered as income from other sources and was added to the total income of the assessee.
■ In appeal, the Commissioner (Appeals) partly confirmed the addition by rejecting the valuation done as
per DSF method.
■ On assessee's appeal to Tribunal:
HELD

■ From the order of the Commissioner (Appeals) it emerges that the parties appeared and the matter was
discussed with them and they were asked to furnish the actual figures in respect of financial years 2013-
14, 2014-15 and 2015-16. In compliance of such direction, the parties attended before the Commissioner
(Appeals) and filed another valuation report wherein the value of the share was worked out at the rate of
65.31 per share. It is clear from the order of the Commissioner (Appeals) that he made a comparison of
the last report submitted to him based on the actual figures with the earlier reports submitted and prepared
by the CA as per rule 11UA(2)(b) on DCF method, and the Commissioner (Appeals) finding difference
between the figure of the two, rejected the report submitted by the assessee as absolutely unreliable and
without any basis. Thus, the basic dispute between the parties is whether the authorities below could have
applied the Net Asset Value as prescribed under rule 11UA(2)(a) or whether the assessee has got a right to
opt for the method of valuation given under rule 11UA(2)(b) and secondly, if the assessee is entitled to the
adopt the DCF method to estimate the fair market value, the valuation submitted by the assessee was fair
and reasonable in accordance with rule 11UA(2).
■ However, there is no dispute between the parties that rule 11UA(1) is not applicable on the facts and
circumstances of the present case which is a provision of general nature whereas rule 11UA(2) is a
specific provision providing for the valuation of the unquoted equity shares. After going through the
relevant section and the rules, the matter of valuation of unquoted equity shares, has been completely left
to the discretion of the assessee and it is his option whether to choose NAV Method (Book Value) under
clause (a) or to choose DCF Method under clause (b) and the Assessing Officer cannot adopt a method of
his own choice. The authorities cannot compel the assessee to choose NAV Method only as against DCF
Method. When the legislation has conferred an option upon the assessee to choose a particular method, the
valuation of the shares has to be in accordance with such method only i.e. DCF method in the present case
under rule 11UA(2)(b) read with section 56(2)(viib).
■ It is observed that in the instant case, the assessee-company had exercised an option to value the share by
DCF method. However, the Assessing Officer had worked out the value based on NAV Method though in
the body of assessment order he has referred to rule 11UA(2)(b) but in substance, he has valued the share
based on the book value figures only by considering the value of the assets shown in the balance sheet as
on 31-3-2013 being the land valuing Rs. 3.27 lakhs and the liabilities. The Commissioner (Appeals) also,
though considered the case in context of rule11UA(2)(b) yet however, his act of asking the assessee & his
CA to prepare and submit a valuation report only on actual figures, is nothing but a valuation done on the
basis of NAV Method under rule 11UA(2)(a) only. From the facts it is clear that the authorities below
wanted to impose upon the method of valuation of their own choice, completely disregarding the
legislative intent which has given an option to the assessee to choose any one of the two methods of
valuation of his choice. When the law has specifically provided a method of valuation and the assessee
 exercised an option by choosing a particular method (DCF here), changing the method or adopting a
different method would be beyond the powers of the revenue authorities. Permitting the revenue to do so
will render the clause (b) of rule 11UA(2) as nugatory and purposeless. Thus, to this extent the action of
the authorities below is not justified and it is held that the assessee has got all the right to choose a method
which, cannot be changed by the Assessing Officer. Further, though the Assessing Officer can scrutinize
the valuation report only if some arithmetical mistakes are found, he may make necessary adjustments.
But if he finds the working of the C.A. or the assumptions made as erroneous or contradictory, he may
suggest the necessary modification and alterations therein provided the same are based on sound
reasoning and rational basis and for this purpose the Assessing Officer may call for independent expert
valuer's report or may also invite comment on the report furnished by the assessee's valuer as the
Assessing Officer is not an expert. It is not open for the Assessing Officer to challenge or change the
method of valuation, once opted by the assessee and to modify the figures as per his own whims and
fancies. In any case, the revenue could not ask to prepare the valuation report based on actuals which is
not contemplated in rule 11UA(2)(b). [Para 4.5]
■ Now coming to the aspect where the assessee has complied with the conditions laid down under rule
11UA(2)(b), it is clear that to comply with this rule the assessee is required to obtain a certificate of a
Merchant Banker or Chartered Accountant and such a valuation must be based on Discounted Free Cash
Flow (DCF) Method only. To exercise the option under this clause, the assessee is not subjected to the
fulfilment of any other condition except these two. It is not denied that the assessee did file the valuation
report first one dated 31-3-2013 and the revised report dated 23-8-2016 valuing the FMV of the unquoted
shares at Rs. 119.93 & 95.90 per equity share respectively prepared by a C.A. only. The reason for the
difference was explained that in the earlier report, the figure of change in networking capital was left out
by oversight, which has now been taken care and corrected in the revised report. This contention was
supported by the earlier valuation report and the revised valuation report. There is nothing wrong if a bona
fide mistake was corrected. [Para 4.5.1]
■ Before examining the fairness or reasonableness of valuation report submitted by the assessee, one has to
bear in mind that the DCF Method, and is essentially based on the projections (estimations) only and
hence these projection cannot be compared with the actuals to expect the same figures as were projected.
The valuer has to make forecast on the basis of some material but to estimate the exact figures is beyond
its control. At the time of making a valuation for the purpose of determination of the fair market value, the
past history may or may not be available in a given case and therefore, the other relevant factors may be
considered. The projections are affected by various factors hence in the case of company where, there is
no commencement of production or of the business, does not mean that its share cannot command any
premium. For such cases, the concept of startup is a good example and as submitted, the Income-tax Act
has also recognized and is encouraging the startups for which, a separate deduction under section 80IAC
has been provided. In this context, a CBDT Instruction (File No. 173/14/2018-ITA.I) on dated 6-2-2018
given in the case of startup companies useful in the context of determination of fair market value of the
unquoted equity shares under section 56(2)(viib) read with rule 11UA(2), which states that tough startup
companies invariably submits valuation report in accordance with rule 11UA(2)(b) but in the assessments
such reports are not being accepted and rejected/modified by the Assessing Officer's considering the same
as based on abnormal valuations which results in additions. The CBDT has accordingly directed not to
take coercive measures in such cases for recovery of demand resulting in additions and the Commissioner
(Appeals) have been directed to dispose such appeals expeditiously. [Para 4.5.2]
■ Coming to the basis of the projections, it is submitted that the plant capacity was taken as a basis to make
projections of the production. It is further submitted that as the assessee is dealing in toughened glass
which is related to real estate (construction) industry and at the relevant point of time, the real estate sector
was in boom and there existed favourable conditions in the industry. The Directors of the assessee
company were having experience and knowledge of the field. The other three companies to whom shares
were allotted were also in the real estate sector, as their name suggest. The Board of Directors were
expecting good results in the future. Except the initial years where the production could not be
commenced because of the circumstances beyond the control but as per the actual figures available now
for the previous year ended on 31-3-2017, the value per share comes to Rs. 84.67 based on the audited
accounts which is almost in accordance with the value of Rs. 95.90 estimated by the C.A. Moreover, such
report was also submitted to the bank as per a notes for obtaining hypothecation limit of Rs. 4 crores
which was sanctioned based on such valuation report along with the hypothecation of the properties of the
directors. Hence, it cannot be said that the projections made by the C.A. in the valuation report were
 imaginary figures, completely without any basis. There is substance in the contentions. It is not the case of
the Commissioner (Appeals) that the projection made in the C.A.'s report are in contradiction of the
figures of the installed production capacity which being lesser yet the production was shown
disproportionately higher. Also there is no whisper in the orders of the Commissioner (Appeals) as to
which figure was found incorrect and what should be the correct figures. Except making comparison with
the actuals there is nothing on record to doubt the veracity of the C.A.'s report or to support the
observations of the Commissioner (Appeals). He further doubts that the figures of the sale shown in the
valuation report and those shown the in the balance sheet of financial year 2014-15 and financial year
2015-16. However such an objection cannot be given weightage for the reason that firstly no explanation
was called for by the Commissioner (Appeals) on this aspect but he assumed on his own and there apart
the assessee has already stated that due to the non-availability of the power connection, it could not
commence the production in the initial years therefore, there was no production, which fact is admitted by
the Assessing Officer also and hence, comparison of the projected sales figure with the actuals was not
justified. As already stated that the figures given by the C.A. were mere projection/estimations depending
upon various factors which nobody could have anticipated or foreseen on the day when such valuation
were made. Therefore, there was no justification yet to make a comparison of the estimations with the
actuals. Such a comparison is otherwise principally against the contemplation of rule 11UA(2)(b) which
required the C.A. to prepare a report on DCF Method only i.e. based on mere projections and not actuals
as against the NAV Method prescribed under rule 11UA(2)(a). For these reason there is no justifications
behind the objection of the Commissioner (Appeals) that the valuation done by the C.A. was based
absolutely imaginary and incorrect figures or without any basis. The C.A. had considered the plant
capacity, industry and market conditions as prevailed in the state, the sanctioning of the loan by the bank
are the factors which formed a reasonable basis of projections. Moreover it is not denied and that the
valuation reports were prepared as per the guidelines given by the Institute of Chartered Accountants of
India and the Assessing Officer has not found any fault. Thus, there is no rational or sound basis in the
order of the authorities below, Assessing Officer was unjustified in rejecting the valuation report
submitted by the assessee based on DCF Method. [Para 4.5.3]
■ In any case, it is also noticed that even as per the valuation got done by the Commissioner (Appeals)
based on the actuals, the FMV came to Rs. 65.31 per share as against which, the assessee had charged a
premium of Rs. 60 only per share. Therefore, even assuming that the valuation reports submitted by the
assessee are not reliable for any reason than too there was no justification to rely upon the valuation of the
shares done by the Assessing Officer based on book value at Rs. 32.76 per share or premium at Rs. 27.76
per share. Reducing the face value of Rs. 10 from the FMV of Rs. 65.31, the amount of premium comes to
Rs. 55.31 per share as against the premium claimed by the assessee at Rs. 60. Thus there is a small
difference of around Rs. 5 which was less even than 10 per cent of the premium claimed by the assessee at
the rate of Rs. 60 per share. The variation to this extent is possible in the matters of estimations. [Para
4.5.4]
■ The Assessing Officer though observed that the assessee raised loans from the above associate concerns
and has converted them into shares application/premium money. However, it has not shown how it will
affect the correctness of the valuation claimed. It is not the case of the Assessing Officer that the shares
were allotted to the outsiders non-related persons but the existing amount of the loans from the related
persons were converted into shares. Hence there cannot be any scope of introduction of assessee's
unaccounted income through allotment of shares at unreasonably high priced shares. Therefore, such
observations is not relevant and a mere suspicion. It appears that the authorities below have ignored
Explanation (a) below section 56(2)(viib). The said Explanation provides that the fair market value of the
shares shall be the value— (i) as may be determined in accordance with such method as may be
prescribed i.e. under rule 11UA; or (ii) 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 assets, including intangible
assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other
business or commercial rights of similar nature, whichever is higher. Accordingly, the value computed
under the rule at Rs. 95.90 per share is higher than Rs. 65.31 or Rs. 32.76 per share and therefore, the
higher valuation has to be adopted. Moreover, it is only the Explanation (a)(ii) speaks of the satisfaction
of the Assessing Officer but there appears no such condition in the Explanation (a)(i) which therefore
Assessing Officer is not permitted to interfere in the valuation, once done in accordance with the method
prescribed in the rule 11UA(2). For the reasons stated above, there is no justification behind rejecting the
 declared valuation of the shares and in the impugned addition made by the Assessing Officer but partly
sustained by the Commissioner (Appeals), which is hereby deleted. [Para 4.5.6]
■ In the result, the appeal of the assessee is partly allowed as indicated above. [Para 5.0]
CASE REVIEW

Medplus Health Services (P.) Ltd. v. ITO [2016] 68 taxmann.com 29/158 ITD 105 (Hyd. - Trib.) (para 4.5);
ITO v. Universal Polysack (India) (P.) Ltd. [IT Appeal No. 609 (JP) of 2017, dated 31-1-2018] (para 4.5) and
Vodafone M-Pesa Ltd. v. Pr. CIT [2018] 92 taxmann.com 73 (Bom.) (DPB 79-83) (para 4.5.6) followed.
CASES REFERRED TO

Medplus Health Services (P.) Ltd. v. ITO [2016] 68 taxmann.com 29/158 ITD 105 (Hyd. - Trib.) (para 4.5),
ITO v. Universal Polysack (India) (P.) Ltd. [IT Appeal No. 609 (JP) of 2017, dated 31-1-2018] (para 4.5.5)
and Vodafone M-Pesa Ltd. v. Pr. CIT [2018] 92 taxmann.com 73 (Bom.) (para 4.5.6).
Mahendra Gargieya, Adv. for the Appellant. Smt. Seema Meena, JCIT-DR for the Respondent.
ORDER

Bhagchand, Accountant Member - The appeal filed by the assessee emanates from order of the ld. CIT (A),
Ajmer dated 29.08.2016 for the Assessment Year 2013-14 raising therein following grounds of appeal:

"1. That the learned CIT (Appeals) Ajmer erred in maintaining the value of share premium at Rs. 22.76
per share as decided by AO as per valuation method provided in Rule 11UA(2)(a) without
appreciating the full facts and circumstances of the case. Thus he has not at all considered the
second method as provided in Rule 11UA(2)(b) as ascertained and provided by us duly determined
by Fellow Chartered Accountant of ICAI as per discounted free cash flow method which was
higher and justify the full premium of Rs. 60/- per share as charged by us from each shareholder. As
such the addition maintained for Rs. 52,13,600/- against share premium income was without
considering our CA certificates based on projection as per project report submitted with bank to
take loans and advances.
2. That the CIT (Appeals) has not even considered our written submissions submitted before him at
length. He has not at all considered the jurisdiction point even. There was no notice u/s 143(2) in
time by competent authority having correct jurisdiction and as such the notice issued u/s 143(2) by
correct authority having jurisdiction over the assessee was time barred.
3. That as the project delayed by more than one year due to non-receipt of electricity connection the
factory started in FY. 15-16 instead of 14-15 as per project report. However as desired by CIT
(Appeals), Ajmer we have submitted the share valuation on the basis of actual figure Of FY. 15-16
even and according to that also the value ascertained Rs. 65 as admitted by him even in his order
but due to non-production in FYs. 13-14 and 14-15, he was not satisfied with valuation report given
by CA as per Rules 11UA(2)(b). That the copy of submissions in report of share valuation on the
basis of clause (b) of Rule 11UA(2) i.e., Discounted cash flow as per technical guide on share
valuation issued by Research Committee of the Institute of Chartered Accountants of India, New
Delhi. The discounted cash flow model indicates the fair market value of a business based on the
value of cash flow that the business is expected to generate in future. Accordingly the Appellate
Authority should have considered the value as per discounted Cash Flow provided &/or determined
by Chartered Accountants as per law.
4. That the order of both the lower authorities are bad-in-law."
2.1 During the course of the hearing, the ld. AR of the assessee has not pressed the ground No. 2, Hence the
same is dismissed being not pressed.
3.1 The Ground No. 4 of the assessee is general in nature which does not require any adjudication.
4.1 Apropos Ground Nos. 1 and 3 of the assessee, the facts as observed by the AO are that the assessee is a
private limited company incorporated on 31.1.2011 which is registered under the Companies Act, 1956. There
was no business activity during the starting A.Y.s, from A.ys. 2011 to 12 to 2013-14, except purchase of a
land worth Rs. 3,27,690/-. During the year under consideration, the assessee-company had issued 1,40,000
shares having the face value of Rs. 10 each, at the premium of Rs. 60 per share, receiving a total premium of
Rs. 84,00,000/-, over and above the share application money of Rs. 14,00,000/-, as per the following chart:—

Name of the parties to whom No. of Share Application money @ Share premium @ Rs. Total amount
share were allotted shares Rs. 10/- per share 60/- per share received
Rameshwaram Buildmat Pvt. 50,000 5,00,000/- 30,00,000/- 35,00,000/-
Ltd.
Rameshwaram Architecture 40,000 4,00,000/- 24,00,000/- 28,00,000/-
Pvt. Ltd.
Shri Oswal Granites Pvt. Ltd. 50000 5,00,000 30,00,000/- 35,00,000/-
Total 1,40,000 14,00,000/- 84,00,000/- 98,00,000/-

The assessee was asked to furnish the basis and justification behind the issuance of the shares on premium in
spite of the fact that the company did not have any worth except a land of Rs. 3,27,690/-. As per AO, the
prerequisite for issue of share at premium is the substantial increase in the net worth of the income which is
mainly due to the profitability, credibility, goodwill etc, of the concern. However, such requirements were not
available in the present case. Therefore, these shares do not have intrinsic value to give price to premium in
the business. In his view, the premium of Rs. 60 per share did not appear to be justifiable. He also referred to
the Section of 56(2)(viib) of the Income-tax Act, 1961 (hereinafter referred as the "Act"). The assessee filed a
detailed reply in response on 30.11.2015, wherein he mainly contended that receipt of share premium was a
capital receipt and was a commercial decision which does not require justification under the law. It was
prerogative of the Board of Directors of the company to decide the premium amount and it is the wisdom of
the shareholder whether they want to subscribe to share at a premium amount or not. Such receipts are not
having the character of an income being capital assets. The AO observed that the assessee raised loans from
the above associate concerns and has converted them to shares application/premium money. The appellant
vide letter dated 15.12.2015 provided the calculation of the book value of each share, which comes to Rs.
108/-. However, the assessee issued the shares at Rs. 70 per share i.e Rs. Face value of Rs. 10 per share +
Share premium of Rs. 60 per share. The AO found such calculation not in accordance with Rule 11UA and
after referring to rule 11UA(2)(b), the AO computed the fair market value ('FMV' in short) of the share based
on Book Value and finally held as under :
"Accordingly to the above formula, the fair market value of unquoted equity shares of the assessee comes
to Rs. 32.76 only and the assessee is entitle to charge premium to Rs. 2,27,600/-(32.76(-) Rs. 10/-=22.76
x 10000 shares) against which the assessee charged premium of Rs. 84,00,000/-. Thus the excess
premium of Rs. 81,72,400/- received by the assessee is not justified and not in accordance with the
amended provisions of section 56(2)(viib) of the I.T. Act."
Consequently, the excess premium of Rs. 81,72,400 received by the assessee was held unjustified and
considered as income from other sources and was added to the total income of the assessee by the AO.
4.2 In first appeal, the ld. CIT (A) partly confirmed the addition by rejecting the valuation done as per
Discounted Cash Flow Method by observing as under:
"4.3 I have gone through the assessment order, statement of facts grounds of appeal and written
submission carefully. It is seen that w.e.f 01.04.2013 the provisions of section 56(2)(vii) are applicable to
the any consideration received for issue of shares which exceeds the fair market value of the shares
issued by the appellant company. During the course of appellate proceedings, the appellant has furnished
the statement showing fair market value of the shares, claimed to have been computed as per the
Discounted Free cash Flow Method ,as provided under Clause (b) of Sub-rule 2 of Rule 11UA. The
valuation of the share as par this statement was Rs. 119.93 par share. When the appellant was requested
to explain the basis of the figures adopted by the appellant for computing the fair market value at Rs.
119.93, the appellant attended on 25.08.2016 along with Smt. Dhanwanti Gupta, CA who had signed the
valuation report in which the valuation of shares was shown at Rs. 119.93 per share. She filed a revised
valuation report, wherein the valuation per share was shown at Rs. 95.90 per share when the A\R and
Smt. Dhanwanti Gupta was asked to furnish the actual figure in respect of FYs. 2013-14, 2014-15 and
2015-2016, they attended on 29.08.2016 and filed another valuation statement wherein the valuation of
 shares was shown at Rs. 65.31 per share. I have discussed the issue with the A\R and Smt. Dhanwanti
Gupta, CA. It has been explained by them that the figures adopted for computing the fair market value of
share at Rs. 119.93 and Rs. 95.90 are purely on estimate basis. Therefore, they were asked to provide the
actual figures for the Fys 2013-14, 2014-15 and 2015-16 which are available with the appellant. When on
29.08.2016, the valuation statement prepared on the basis of actual figures for the F.ys 2013-14,2014-
15and 2015-16 was furnished, it was noticed that the Discounted Cash Flow during the F.ys 2013-14,
2014-15 and 2015-16 was Nil, Rs. -46.4 lakhs and Rs. -2.25 lakhs for the FYs 2013-14, 2014-15 and
2015-16, whereas in the original valuation statement, the Discounted cash flow these financial years was
shown at Rs. 27.13 lakhs, Rs. 30.41 lakhs and Rs. 37.61 lakhs. In the revised valuation statement filed on
25.08.2016, the discounted cash flow for these financial year was shown at Rs. 27.13 lakhs, Rs. 10.65
lakhs and Rs. 21.42 lakhs. Thus, it is clear that the valuation statement furnished by the appellant
showing Discounted Cash flow is based absolutely on imaginary and incorrect figures, because when the
actual figures for the Fys 2013-14, 2014-15 and 2015-16 are compared with the imaginary figures
adopted in the valuation statement furnished by the appellant, it is clear that the actual discounted cash
flow in these three financial years was negative i.e Rs. 48.72 lakhs (Nil, Rs. -46.49, Rs. 2.225). Whereas
in the valuation statement furnished by the appellant, the discounted cash flow for these three financial
years was shown at Rs. 95.15 lakhs (Rs. 27.13+Rs.30.40 + Rs. 37.61). Even the figures of sales adopted
in the valuation statement furnished by the appellant for these three years is absurd and are not even
approximately close to the actual figures. The sales for the Fys. 2013-14, 2014-15 and 2015-16 shown in
the valuation statement furnished by the appellant is Rs. 1152.71 lakhs, Rs. 1297.25 lakhs and Rs.
1405.65 lakhs whereas the actual figure of sale of these three financial years were Nil, Rs. 328.74 lakhs
and Rs. 790.81 lakhs. In view of these facts ,I am of the considered view that the valuation of shares
made in the valuation statement claimed to have been prepared on the basis of discounted free Cash Flow
Method as provided under Clause 'b' of Sub-rule 2 of Rule 11UA is absolutely unreliable and without any
basis .Therefore, the valuation of shares made in any of the three valuation report submitted by the
appellant can be the held to be in accordance with the method provided under Clause 'b' of Sub-rule 2of
Rule 11UA. Hence, the valuation submitted by the appellant is hereby rejected. However, the contention
of the appellant that there is arithmetical mistake in computation of the fair market value by the AO by
applying the fair market value by applying @32.76% is found to be correct. The AO is directed to
compute the fair market value by applying the rate of 32.76 per share of the share allotted by the
appellant in premium and revise the computation of income u/s. 56(2) (viib) accordingly.''
4.3 During the course of the hearing, the ld.AR of the assessee submitted following written submission which
has been taken into consideration:—
'submissions
1. Firstly, we strongly rely upon the submissions made by us before the CIT (A).
2. At the outset it is submitted that the Explanation to S. 56(2)(viib) of the Act provides that the fair
market value (FMV) of unquoted equity shares for the purpose of S. 56(2)(viib) of the Act shall be the
value as determined in accordance with such method as may be prescribed. The prescribed methods of
valuations are given under Rule 11 UA of Income tax Rules, 1962 (herein after referred as "Rules"). The
relevant extract are as under:
(2) Notwithstanding anything contained in sub-clause (b) of clause (c) of sub-rule (1), the fair market
value of unquoted equity shares for the purposes of sub-clause (i) of clause (a) of Explanation 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) ……….
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
Hence the law has specifically conferred an option upon the assessee that for the purpose of S. 56(2)(viib)
of the Act an assessee can adopt any of the methods mentioned u/r. 11UA(2) of the Rules. From Rule
11UA, it is clear that either the Break Up Value Method (Clause 'a') or DCF Method (Clause 'b') can be
applied for the purpose of S. 56(2)(viib) Expl. a(i) of the Act, at the option of the assessee.
3. In the present case, it is not denied that the assessee adopted clause (b) of Rule 11UA(2) of the Rules
and accordingly obtained a Valuation Report from a Chartered Accountant. Since the law has prescribed
the specific method for valuation i.e Discounted Cash Flow Method (hereinafter also referred as "DCF"),
so he was free (and rather entitled) to choose this method. The method of valuation could be challenged
by the AO only if it was not a recognized method of valuation (as per Rule 11UA (2) of the Rules). The
very purpose of certification of DCF valuation by a merchant banker or chartered accountant is to ensure
that the valuation is fair and reasonable. Such valuation is to be done by an expert of the subject only,
which an assessing officer is not expected to be. The said rule provides that such valuation shall be the
fair market value for the purpose of this section based on DCF Method. The Rule nowhere permits the
AO to make any adjustment therein.
3.1 The Discounted Cash Flow Method derives the value from the present value of future cash flows
therefore, this method entails the assessee to make the projections (i.e. Estimations) about revenue,
expenses, investments, repayments etc. The projection is made on certain reasonable assumptions w.r.t
reasonableness of future cash flows, industry and economic scenario, discount rate etc. The value is
derived from the future profitability or cash flows of the company. The investors expect a certain
minimum return on his investment. (ROI) Such returns can be generated only by future profits. Thus
valuation of shares is primarily based on future expectations which necessarily involves estimations.
Such projections are mere estimations and the valuer cannot expect to put the actual figures here.
Needless to say that there will always the some difference between the estimation and the actual and to
accurately foresee what is going to be the actual in the future is, certainly beyond the control of the
management at the point of time while making the estimation. If the management was able to foresee
losses, then why they should have set up the industry. It is precisely for this reason, now a days, there is a
huge investment made in the startup and at the very introduction of the project. The concept of startup
has been recognize even by the Income tax act where under, certain deductions u/s. 80-IAC of the Act
have been provided which provides for the period 7 years as gestation period.
3.2 Further, there are several factors which effect the profitability of a project/industries which, broadly
may be of 2 types i.e. general factors and the specific factors. Where the general factors are like
economic and political environment of the country, however, demand supply of the product and the
government policies regarding that particular industry, are such specific factor.
3.3 Therefore, the very requirement made by the ld. CIT (A) during the course of the appellate
proceedings directing the assessee to give the valuation report based on the actual figures and then to
compare such valuation report with these earlier reports based on the DCF Method (As approved by Rule
11UA(2)(b) of the Rules), is absolutely contrary to the provisions of the law and misconception of law.
Otherwise also, the fact is not denied that the assessee couldn't commence its production for want of
power availability in the next two years i.e up to AY. 2016-17 and there was no justification for making a
comparison. Pertinently, in AY. 2017-18 when the company became operational the valuation can be seen
almost in accordance with the actuals (as submitted in para 9 herein below).
3.4 The earning of assessee is volatile and depends upon economic cycles. The earning may be high
when the economy is booming, while the earning may be depressed in the recession. The projection so
made, are always subject to change due to subsequent events. The Valuer calculates the value after
considering all the relevant factors affecting the value of share at the time of valuation. Since the future is
always uncertain, so there may be some post reporting events, which may affect the valuation done by the
Valuer at the time of valuation, but the Valuer is not required to update the report for these subsequent
events. It is further submitted that the determination of the fair market value of the unquoted equity share,
can't be done with a mathematical precision in as much as it all depends upon the projections being made
which may or may not accurately match with the facts and circumstances which are in the womb of the
future. One cannot foresee the future. It is for this reason only, the Rules itself has provided for such the
fair market value to be determined based on a certificate of a Chartered accountant (as per discounted
free cash flow method). It is not denied that in this case such fair market value has been determined based
on a certificate of a Chartered Accountant Smt. Dhanvanti Gupta (PB 18-21) @ of Rs. 119.93 per equity
share. However, because of some calculation mistake, it was correctly revised showing value of Rs.
95.90/- Per equity share. The focus of the ld. CIT (A) is only on the issue that what the actual figures
were in the immediately later year.
3.5 The DCF Method is based on the income approach of business valuation. This approach indicates the
value of the business based on the value of cash flows that a business is expected to generate in future.
This method is most appropriate in going concern situations where the worth of the business is generally
a function of its ability to earn income/cash flows.
4. Conditions Fulfilled: Under the law i.e. u/s. 56(2)(viib) Expl. a(i) r/w. Rule 11UA(1)(b), the only
responsibility casted upon the assessee, is to get a valuation report from the merchant banker or an
accountant by using DCF Method, who have expertise in the valuation of shares and securities. The Fair
Market Value has to be determined by an Accountant and that too as per DCF Method alone. Once the
facts are admitted that there was a report by an accountant, which was as per the Discounted Cash Flow
Method, the FMV determined in such a manner is binding upon the revenue as if directed by the law.
There is no denial by the lower authorities from these facts and the fulfillment of the conditions as
prescribed.
5. Comparison with Actual Unwarranted: The only objection of the ld. CIT (A), keeping in mind the
actual figures, was that the valuation report (though undisputedly based upon DCF Method), "is based
absolutely on the imaginary or on incorrect figures" and "is absolutely unreliable and without any basis".
Such allegations are completely without any basis and merely on surmises and conjecture, in the light of
the following submissions:
5.1 Firstly, its comparison of the projections/estimated figures used in report (derived) with the actual
figures, was contrary to the very concept of valuation under the DCF.
5.2 Secondly, the ld. CIT (A) completely failed to point out which particular figure was found to be
incorrect or imaginary. On the contrary it was the AO who considered the incorrect figure of Rs. 32.76
per share as against the correct amount of Rs. 95.90
5.3 Thirdly, he has not demonstrated how the valuation report was unreliable and whether the AO or the
CIT (A) has got the valuation report examined from some other independent expert of the subject (i.e. a
Chartered Accountant or a financial analyst) In view of the facts, legal position and the above submission
his last allegation that such report was without any basis, is self-contradictory.
5.4 Fourthly, the working of the DCF was done by the valuer in accordance with the Technical Guidance
Note of the ICAI on DCF which is of recommendatory in nature yet however, the lower authorities
completely failed to point out any defect/deficiency.
5.5 A newly started company or a start-up can be valued only by this method, as these type of
organizations have very little or no capital base. In this case, the assessee was a newly incorporated
company with a very little assets base. The Board of Directors of the company decided to issue the shares
at the premium because of the great prospects of earning and growth in the future. It is the wisdom of the
shareholders whether they want to subscribe to share at such premium or not.
5.6 This way, the ld. CIT (A), in fact, has indirectly applied the provisions of Rule 11UA(1)(a) which
speaks of the such valuation to be based on the actual i.e. as per NAV Method. That is the reason he
started making a comparison between the estimation made by the CA u/r. 11UA(2)(b) @ 119/95.90 with
the actuals which was not warranted had the ld. CIT (A) correctly appreciated and applied clause (b) only
of Rule 11UA. Hence the CIT (A) clearly proceeded on a misconception. Interestingly the same CIT (A)
earlier decided a similar controversy in the case of M/s. Universal Polusack (infra) in favor of the
assessee. Under the guide of finding deficiencies in the DCF method adopted by the assessee u/r.
11UA(2)(b), the CIT (A) could not have imposed/thrust upon the assessee to apply rule 11UA(2)(a).
6. Provisions of Rule 11UA (2) shall prevail over rule 11UA(1): A bare reading of the relevant rules
make it clear that the rule 11UA (2) of the Rules talks about the method of valuation of the unquoted
equity shares specifically for the purpose of S. 56(2)(viib) r/w Explanation (a)(i) with which, the present
appeal relates to, is a special law and therefore, shall prevail over the general law contained u/r. 11UA(1)
of the Rules. It is a trite law that special law will always prevail over the general law.
Kindly refer Reliance - (1) AIR 1978 (SC) 851 - Mohindersingh Gill v. Chief Election Comm. (2) (1981)
131 ITR 429 (Ker.) Ramaraj (M.S. v. Comm of Agr. IT)); (3) (1980) 126 ITR 270 (Mad) - Asa John
Devinathan v. Addl. CIT and (4) (1988) 174 ITR 714 (Cal.) - Equitable Investment Co. (P.) Ltd. v. ITO.
7. Supporting Case Laws:
7.1 On this aspect kindly refer a direct decision of Hon'ble ITAT Jaipur in the case of ITO v. Universal
Polysack (India) Pvt. Ltd. ITA No. 609/JP/2017 (DPB 38-55). wherein, in para 16 page 14 it is held that:
"Therefore, we are unable to accede to the contention so raised by the ld. DT that Sub-Rule 1 of Rule
11UA which provides for determination of fair market value of unquoted equity shares as per book value
as per formula so specified is applicable in the instant case. Rather, sub-Rule 2 of Rule 11UA is more
specific for the purposes of determination of fair market value of unquoted equity shares under section
56(viib) and shall be applicable in the instant case".
Such option cannot be taken back merely because the AO is of the different opinion. Further, apart from
the requirement of obtaining a certificate from the CA, the assessee was not required to fulfil any other
condition and it has been left to the sole discretion of the assessee to choose the methods prescribed
under clause (a) or (b). This aspect is also directly covered by the aforesaid order wherein, it was held
that:
"The exercise of such an option by the assessee is not subject to fulfilment of any specified conditions
and it is left to the sole discretion of the assessee as it deems fit to apply. In the instant case, the assessee
company has exercised its option to value its shares as per DCF method and we find that the objection of
the AO is primarily directed at not adopting the book value of determination of value of shares as against
DCF adopted by the assessee company. The exercise of such an option cannot therefore be challenged by
the Revenue once the same has been exercised at first place by the assessee."
17. "Further, where the Assessing officer is of the opinion that the methodology so adopted by the
assessee and/or the underlying assumption while determining the share valuation as per DCF is not
acceptable to him, there is no discretion with the assessing officer to discard the DCF method of
valuation and adopt book value method."
7.2 On this aspect kindly refer DCIT v. M/s. Ozoneland Agro Pvt. Ltd. in ITA No. 4854/Mum/2016 vide
order dated 02.05.2018 Para 5 (DPB 66-78) and Green Infra Ltd. v. ITO in ITA No. 7762/Mum/2012 vide
order dated 23.08.2013 Para 10.
7.3 Also refer Medplus Health Services P. Ltd. v. ITO (2016) 158 ITD 0105 (Trib. - Hyd.) (DPB 56-65)
7.4 Also refer Vodafone M-Pesa Ltd. v. PCIT (2018) 92 Taxmann 73 (Bomabay) (DPB 79-83)
7.5 Also refer a very recent decision in the case of DCIT v. Ozoneland Agro (P.) Ltd. in ITA No.
4854/Mum/2016 vide order dated 02.05.2018 (DPB 66-78).
7.6 One common factual aspect which is available in the case of the assessee with the other two i.e.
universal Polysack (supra) and Green Infra Ltd. are that in all these cases, either the assessee company
was incorporated in the subjected year itself or in the present case and the universal Polysack (supra), no
production was commenced and that is the reason the AO considered the valuation based on the
projections as imaginary so also did the ld. CIT (A) and i.e. perhaps the reason the lower authorities
proceeded on a misconception, while ignoring the very purpose of introduction of Rule 11UA(2)(b) of
the Rules.
8. Projections now Reconciled with the Actuals: As submitted earlier, the valuer had merely made
projections which may or may not reconcile with the actuals. But the projections have to be made on
some basis. In this case, the ld. CA did her best to estimate the FMV at Rs. 95.90 per Share based on
DCF Method which fact, now is evident if the actual figures for the year ending on 31.03.2017 (AY.
2017-18) are seen and compared with the projections. The assessee prepared Valuation report as per DCF
Method and considered projected figures up to 31.03.2019. The Audited Balance Sheet of the assessee as
on 31.03.2017 depicts the following picture.

Particulars Amount (Rs.)

Fixed Assets 2,21,20,988
Current Assets 85,10,652
Loans and Advances(Assets) 17,05,531
Long Term Borrowings (47,11,887)
Current Liabilities and Provisions (1,49,24,429)
Net Assets 1,27,00,855
No. of Shares 1,50,000
Value Per Share 84.67

(Note: However, these figures were not before the lower authorities as have come into the existence later
on)
Thus evidently the actual value of the share @ Rs. 84.67 is quite near to the projected FMV of Rs. 95.90
per share by the ld. CA-Valuer. Such variation is within the tolerance limit of 15% only and considering
Rs. 70, the claimed FMV is fully justified.
9. The Projections are not without any basis: It is submitted that while making the projection, the ld. CA
while giving her report u/r. 11UA(2)(b), duly considered the plant capacity, the expected demand to be
generated in the future, the expected production to be done accordingly vis-à-vis the capital and revenue
expenditure likely to be incurred. There apart, notably the Dena bank, Bangalore have also sanctioned
Term Loan and CC Limit of Rs. 4 crores also taking into consideration these projections made by the
assessee (although such loan were granted mainly taking into account the personal properties of the
director hypothecated with the Bank).
One important aspect and a later development is that there has been a change in the management and
ownership in as much as the earlier Goyal Group, Beawar sold the 100% Shares to the present Jain
Group, Banglore, who purchased the 1,50,000 Shares @ Rs. 98.67 Per Equity Share in the month of
January, 2015. Moreover, the buyers are completely unrelated parties and as on day are managing the
entire show and the assessee company is in full swing of production. These facts strongly support the
case that looking to the purchase price of Rs. 98.67/- and purchase being in the January, 2015, the
estimated Fair Market Value (FMV) by ld. CA around Rs. 95.90 was fully justified. Needless to say that
why a stranger should have purchased the shares at such a high price i.e. as against 32.76 estimated by
the authorities below based on the actuals.
Startup is the best example:
10. It is further submitted that even sec. 80-IAC has recognized the gestation period up to 7 years. As
stated already the DCF Method is based on projection of future profits. The changes in the future are
inevitable so there will be gapes between the projected figures and actual figures. The DCF Method or
the projections made cannot be rejected straight away just because there were some difference between
actual and projected. The reconciliation or equilibrium between the actual and projected takes some time
i.e around 5 to 8 Years depending upon economic conditions.
11. CBDT's Letter strongly supports Assessee's case: Very pertinently, the CBDT has recently come up
with a letter (Instruction) (File No. 173/14/2018-ITA.I) dated 06.02.2018 (DPB-84) wherein, the CBDT
has taken note that in the cases of the startup where the assessee has applied for DCF Method by opting
u/r. 11UA(2)(b) r/w sec. 56(2)(viib), "….in the assessment, such reports are not being accepted and
rejected/modified by the Assessing Officer by treating them as based upon abnormal valuation resulting
in additions being made u/s. 56(2)(viib) of the Act in cases of "Start Up" companies"
It appears that as per CBDT this is not in accordance with the correct interpretation of the law, therefore,
the CBDT has indirectly hinted the field officers of its contrary view, by observing as under:
"3. In view of the above, it has been decided that in case of 'start up' companies which fall within the
definition given in notification of DIPP, Min. of commerce & industry, in G.S.R. 501(E) dated
23.05.2017, if additions have been made by the Assessing Officer under section 56(2)(viib) of the Act
after modifying/rejecting the valuation so furnished under Rule 11UA(2), no coercive measure to recover
the outstanding demand would be taken. Further, in all such case which are pending with the
commissioner (Appeals), necessary administrative steps should be taken for expeditious disposal of
appeals, preferably by 31st march 2018."
12. In the first valuation report, there was an inadvertent mistake committed of not considering the
working capital requirement and hence the ld. valuer has rightly modified her report accordingly so as to
 bring the correct fact on record. The assessee issued the shares @ Rs. 70 per share including premium of
Rs. 60 per share in respect of 1,40,000 share out of total 1,50,000 shares. The value per share derived as
per DCF Method was Rs. 95.90 Per Share.
13. The confusion of the AO is also evident from Page 7 Para 3(b) top wherein, he continued with the
share premium amount as per the Companies Act, i.e. based on NAV method and ignoring DCF and he
speaks of substantial increase in the net worth, profitability, credibility and goodwill etc. which are not
available in the assessee's case and alleged that the shares were not having intrinsic value to give price to
premium in the business. In fact, all these are not possible in the case of newly startup/set up company
being in existence of 8-10 years.
14. AY. 2013-14 is not the rightful year: Alternatively and without prejudice to the above contention,
even assuming it is held that the revenue is justified in their action, a careful reading of sec. 56(2)(viib)
shows that the happening of the two events (viz. the receipt of the consideration and the allotment of the
shares) both must happen in the same year or at least, it can be later year where the shares have already
been allotted (and that too on the date of allotment only) when the amount of the consideration can be
compared with the FMV of the shares (on the date of the allotment) for the simple reason that unless
there are shares in the existence there cannot be any valuation thereof. Moreover the FMV can also be
different if the year of the receipt and the year of the allotment are different. In this case, there was only a
receipt of the consideration but there was no allotment in this year (which was allotted in AY. 2014-15
only). There may be situation where the consideration is received in one year and the allotement is made
in fifth year then how the AO can apply the provisions in the year of receipt. For these reasons the said
provision is evidently not found workable on the peculiar facts of the case. In the case of CIT v. B.C.
Srinivasa Setty (1981) 128 ITR 294 (SC), it was held that unless the machinery section is found
workable, the substantive provision of the law even can't be applied. (Please see AO Pg. to top).
Hence the impugned additions deserves to be deleted in full".
4.4 On the other hand the ld. DR relied upon the orders of the authorities below.
4.5 We have heard the rival contentions and perused the materials available on record including the written
submissions and case laws relied upon during the course of hearing. From the order of the ld. CIT (A) it
emerges that the ld.AR and Smt. Dhanwanti Gupta, CA appeared and the matter was discussed with them and
they were asked to furnish the actual figures in respect of F.Ys. 2013-14, 2014-15 & 2015-16. In compliance
of such direction, the ld. AR and the ld. CA attended before the CIT (A) on 29.08.2016 and filed another
valuation report wherein the value of the share was worked out @ 65.31 per share. A copy of the said report is
placed on Pages 47-50 of the assessee's paper book. It is clear from the order of the ld. CIT (A) that he made a
comparison of the last report submitted to him on 29.08.2016 based on the actual figures with the earlier
reports submitted and prepared by the CA as per Rule 11UA(2)(b) on DCF method, and the ld. CIT (A)
finding difference between the figure of the two, rejected the report submitted by the assessee as absolutely
unreliable and without any basis. Thus, the basic dispute between the parties is whether the authorities below
could have applied the Net Asset Value as prescribed u/r. 11UA(2)(a) or whether the assessee has got a right
to opt for the method of valuation given u/r 11UA(2)(b) and secondly, if the assessee is entitled to the adopt
the DCF method to estimate the fair market value, the valuation submitted by the assessee was fair and
reasonable in accordance with Rule 11UA(2). Before proceeding further, we would like to reproduce the
relevant Provisions contained u/s. 56(2)(vii)(b) of the Act and the relevant Rules, which reads as under: —
"S. 56(2) (viia) where a firm or a company not being a company in which the public are substantially
interested, receives, in any previous year, from any person or persons, on or after the 1st day of June,
2010, any property, being shares of a company not being a company in which the public are substantially
interested,—

(i) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the
whole of the aggregate fair market value of such property;
(ii) for a consideration which is less than the aggregate fair market value of the property by an amount
exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such
consideration :
Provided that this clause shall not apply to any such property received by way of a transaction not
regarded as transfer under clause (via) or clause (vic) or clause (vicb) or clause (vid) or clause (vii) of
 section 47.
Explanation.—For the purposes of this clause, "fair market value" of a property, being shares of a
company not being a company in which the public are substantially interested, shall have the meaning
assigned to it in the Explanation to clause (vii);
(viib) where a company, not being a company in which the public are substantially interested, receives, in
any previous year, from any person being a resident, 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; or
(ii) by a company from a class or classes of persons as may be notified by the Central Government in
this behalf.
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 accordance with such method as may be prescribed"; or
(ii) 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 assets, including intangible assets being
goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other
business or commercial rights of similar nature,
whichever is higher;
(b) "venture capital company", "venture capital fund" and "venture capital undertaking" shall have the
meanings respectively assigned to them in clause (a), clause (b) and clause (c) of Explanation to
clause (23FB) of section 10;
"[Rule 11UA(2) Notwithstanding anything contained in sub-clause (b) of clause (c) of sub-rule (1), the
fair market value of unquoted equity shares for the purposes of sub-clause (i) of clause (a) of Explanation
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)

where,
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 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.]"'
However, there is no dispute between the parties that Rule 11UA(1) is not applicable on the facts and
circumstances of the present case which is a provision of general nature whereas Rule 11UA(2) is a specific
provision providing for the valuation of the unquoted equity shares. After going through the relevant Section
and the Rules, in our opinion, the matter of valuation of unquoted equity shares, has been completely left to
the discretion of the assessee. It is his option whether to choose NAV Method (Book Value) under clause (a)
or to choose DCF Method under clause (b) and the AO cannot adopt a method of his own choice. The
authorities below cannot compel the assessee to choose NAV Method only as against DCF Method. When the
legislation has conferred an option upon the assessee to choose a particular method, the valuation of the shares
has to be in accordance with such method only i.e. DCF method in the present case u/r 11UA(2)(b) r/w S.
56(2)(viib). In the case of Medplus Health Services (P.) Ltd. v. ITO [2016] 68 taxmann.com 29/158 ITD 105
(Hyd. - Trib.), the ITAT, Hyderabad Coordinate Bench, after taking into consideration various decisions, has
observed as under:
"11. On a careful reading of the judgments discussed above, it is seen that the Courts have held that
where a method has been prescribed by the legislature, that method alone shall be followed for
computation of the fair market value. The A.O. and the Ld. CIT (A) have not followed the relevant
provisions for adopting or computing the fair market value of the shares, but have adopted the market
value at which some of the shares have been purchased by the assessee as FMV. This, in our opinion, is
not correct. As held by the Courts in the above judgments, the A.O. has to compute the fair market value
in accordance with the prescribed method but cannot adopt the market value as fair market value under
Section 56(2)(viia) of the Act. The legislature in its wisdom has also given a formulae for computation of
the fair market value which cannot be ignored by the authorities below."
It is observed that in the instant case, the assessee company had exercised an option to value the share by DCF
Method however, we find that the AO has worked out the value based on NAV Method though in the body of
assessment order he has referred to Rule 11UA(2)(b) but in substance, he has valued the share based on the
book value figures only by considering the value of the assets shown in the Balance Sheet as on 31.03.2013
being the land valuing Rs. 3,27,690/- and the liabilities. The ld. CIT (A) also, though considered the case in
context of Rule 11UA(2)(b) yet however, his act of asking the assessee & his CA to prepare and submit a
valuation report only on actual figures, is nothing but a valuation done on the basis of NAV Method u/r
11UA(2)(a) only. From the facts thus, it is clear that the authorities below wanted to impose upon the method
of valuation of their own choice, completely disregarding the legislative intent which has given an option to
the assessee to choose any one of the two methods of valuation of his choice. When the law has specifically
provided a method of valuation and the assessee exercised an option by choosing a particular method (DCF
here), changing the method or adopting a different method would be beyond the powers of the revenue
authorities. Permitting the revenue to do so will render the clause (b) of Rule. 11UA(2) as nugatory and
purposeless. Thus, to this extent the action of the authorities below is not justified and it is held that the
assessee has got all the right to choose a method which, cannot be changed by the AO. Further, though the AO
can scrutinize the valuation report only if some arithmetical mistakes are found, he may make necessary
adjustments. But if he finds the working of the C.A. or the assumptions made as erroneous or contradictory,
he may suggest the necessary modification and alterations therein provided the same are based on sound
reasoning and rational basis and for this purpose the AO may call for independent expert valuer's report or
may also invite comment on the report furnished by the assessee's valuer as the AO is not an expert. It is not
open for the AO to challenge or change the method of valuation, once opted by the assessee and to modify the
figures as per his own whims and fancies. In any case, the revenue could not ask to prepare the valuation
report based on actuals which is not contemplated in Rule 11UA(2)(b).
4.5.1 Now coming to the aspect where the assessee has complied with the conditions laid down under Rule
11UA(2)(b), it is clear that to comply with this rule the assessee is required to obtain a certificate of a
Merchant Banker or Chartered Accountant and such a valuation must be based on Discounted Free Cash Flow
(DCF) Method only. To exercise the option under this clause, the assessee is not subjected to the fulfillment of
any other condition except these two. It is not denied that the assessee did file the valuation report first one
dated 31.03.2013 and the revised report dated 23.08.2016 valuing the FMV of the unquoted shares at Rs.
119.93 & 95.90 per equity share respectively prepared by a C.A. only. The reason for the difference was
explained that in the earlier report, the figure of change in networking capital was left out by oversight, which
has now been taken care and corrected in the revised report. This contention was supported by Paper Book
Page No.21 of the earlier valuation report and the revised valuation report Paper Book Page No.46.We find
nothing wrong if a bonafide mistake was corrected.
4.5.2 Before examining the fairness or reasonableness of valuation report submitted by the assessee, we have
to bear in mind that the DCF Method, and is essentially based on the projections (estimations) only and hence
these projection cannot be compared with the actuals to expect the same figures as were projected. The valuer
has to make forecast on the basis of some material but to estimate the exact figures is beyond its control. At
the time of making a valuation for the purpose of determination of the fair market value, the past history may
or may not be available in a given case and therefore, the other relevant factors may be considered. The
projections are affected by various factors hence in the case of company where, there is no commencement of
production or of the business, does not mean that its share cannot command any premium. For such cases, the
concept of startup is a good example and as submitted, the Income-tax Act has also recognized and is
encouraging the startups for which, a separate deduction u/s 80IAC has been provided. In this context, we find
a CBDT Instruction (File No. 173/14/2018-ITA.I) on dated 06.02.2018 (copy placed at paper book-84) given
in the case of startup companies useful in the context of determination of fair market value of the unquoted
equity shares u/s 56(2)(viib) of the Act r/w Rule 11 UA(2), which states that tough startup companies
invariably submits valuation report in accordance with Rule 11UA(2)(b) but in the assessments such reports
are not being accepted and rejected/modified by the AOs considering the same as based on abnormal
valuations which results in additions. The CBDT has accordingly directed not to take coercive measures in
such cases for recovery of demand resulting in additions and the CIT (A) have been directed to dispose such
appeals expeditiously.
4.5.3 Coming to the basis of the projections, it is submitted that the plant capacity was taken as a basis to
make projections of the production. It is further submitted that at the assessee is dealing in toughened glass
which is related to real estate (construction) industry and at the relevant point of time, the real estate sector
was in boom and there existed favourable conditions in the industry. The Directors of the assessee company
were having experience and knowledge of the field. The other three companies to whom shares were allotted
were also in the real estate sector, as their name suggest. The Board of Directors were expecting good results
in the future. Except the initial years where the production could not be commenced because of the
circumstances beyond the control but as per the actual figures available now for the previous year ended on
31.03.2017, the value per share comes to Rs. 84.67 based on the audited accounts which is almost in
accordance with the value of Rs. 95.90 estimated by the C.A. Moreover, such report was also submitted to the
bank as per a notes at Page 46 of the assessee's paperbook, for obtaining hypothecation limit of Rs. 4 crores
which was sanctioned based on such valuation report along with the hypothecation of the properties of the
directors. Hence, it cannot be said that the projections made by the C.A. in the valuation report were
imaginary figures, completely without any basis. We find substance in the contentions. It is not the case of the
ld. CIT (A) that the projection made in the C.A.'s report are in contradiction of the figures of the installed
production capacity which being lesser yet the production was shown disproportionately higher. Also there is
no whisper in the orders of the CIT (A) as to which figure was found incorrect and what should be the correct
figures. Except making comparison with the actuals there is nothing on record to doubt the veracity of the
C.A.'s report or to support the observations of the ld. CIT (A).He further doubts that the figures of the sale
shown in the valuation report and those shown the in the Balance Sheet of F.Y.2014-15 and F.Y.2015-16.
However such an objection cannot be given weightage for the reason that firstly no explanation was called for
by the ld. CIT (A) on this aspect but he assumed on his own and there apart the assessee has already stated
that due to the non-availability of the power connection, it could not commence the production in the initial
years therefore, there was no production, which fact is admitted by the AO also and hence, comparison of the
projected sales figure with the actuals was not justified. As already stated that the figures given by the C.A.
were mere projection/estimations depending upon various factors which nobody could have anticipated or
foreseen on the day when such valuation were made. Therefore, there was no justification yet to make a
comparison of the estimations with the actuals. Such a comparison is otherwise principally against the
contemplation of Rule 11 UA(2)(b) which required the C.A. to prepare a report on DCF Method only i.e.
based on mere projections and not actuals as against the NAV Method prescribed u/r 11UA(2)(a). For these
reason we find no justifications behind the objection of the ld. CIT (A) that the valuation done by the C.A.
was based absolutely imaginary and incorrect figures or without any basis. The C.A. has considered the plant
capacity, industry and market conditions as prevailed in the state, the sanctioning of the loan by the bank are
the factors which formed a reasonable basis of projections. Moreover it is not denied that the valuation reports
were prepared by the C.A. as per the guidelines given by the Institute of Chartered Accountants of India and
the AO has not found any fault. We thus, find no rational or sound basis in the order of the authorities below
to reject the valuation report submitted by the assessee based on DCF Method.
4.5.4 In any case, it is also noticed that even as per the valuation got done by the CIT (A) based on the actuals,
the FMV came to Rs. 65.31 per share as against which, the assessee had charged a premium of Rs. 60 only per
share. Therefore even assuming that the valuation reports submitted by the assessee are not reliable for any
reason than too there was no justification to rely upon the valuation of the shares done by the AO based on
book value at Rs. 32.76 per share or premium at Rs. 27.76 per share. Reducing the face value of Rs. 10 from
the FMV of Rs. 65.31, the amount of premium comes to Rs. 55.31 per share as against the premium claimed
by the assessee at Rs. 60. Thus there is a small difference of around Rs. 5 which was less even than 10% of
the premium claimed by the assessee @ Rs. 60 per share. The variation to this extent is possible in the matters
of estimations.
4.5.5 We find that a similar controversy came up before a co-ordinate bench of ITAI in the case ITO v.
Universal Polysack (India) (P.) Ltd. [IT Appeal No. 609 (JP) of 2017, dated 31-1-2018] (Assessee's PB Pages
38-55). The facts noted by the Hon'ble Co-ordinate Bench in that case are identical with the facts of the
present case wherein the Hon'ble Bench held as under:
'14 We have heard the rival contentions and pursued the material available on record. In the instant case,
it is not in dispute that the assessee company is a company in which the public are not substantially
interested and the shares of the assessee company are not listed or traded on any recognized stock
exchange. It is also not in dispute that during the previous year. the assessee company has issued 11,500
shares of face value of Rs. 100 at a premium of Rs. 900 per share to M/s. Terry Towel Industries Ltd and
has thus received total consideration of Rs. 1,03,50,000. The limited issue under consideration is whether
the consideration so received for such shares exceeds the fair market value of the shares. Where the
answer to the same is in affirmative, the excess so determined over the fair market will be brought to tax
as income from other sources as per the provisions of section 56(2)(viib) of the act which reads as under:
''Where a company, not being a company in which the public are substantially interested, receives, in any
previous year, from any person being a resident, any consideration for issue of shares that exceeds the
face value of such shares, the segregate consideration received for such shares exceeds the fair market
value of the shares.''
15. The explanation to section 56(2)(viib) provides that the fair market value of such shares means the
value determined in accordance with the method as may be prescribed. The method of valuation has been
prescribed in rule 11UA which reads as under:
** ** **

16. As it is clear from the above, sub-rule 2 of rule 11UA talks about method of valuation of unquoted
equity shares of the assessee company specifically for the purposes of section 56(2)(viib) of the act and
the same overrides the general provisions of sub-rule 1 of rule 11UA. In the instant case, the context in
which the valuation of the shares have to be determined is in the context of the section 56(2)(viib) of the
Act as invoked by the AO and therefore, both the assessee and the revenue are equally guided by the said
provisions and there is no discretion with either of the parties in terms of non-applicability of Sub-rule 2
of Rule 11UA. Therefore, we are unable to accede to the contention so raised by the Id DR4 that sub-rule
1 of rule 11UA which provides for determination of fair market value4 of unquoted equity shares as per
book value as per formula so specified is applicable in the instant case. Rather, Sub-Rule 2 of Rule 11UA
is more specific for the purposes of determination of fair market value of unquoted equity shares under
section 56(viib) and shall be applicable in the instant case. The latter provides an option to the assessee to
 determine the fair market value of the shares either as per the book Value or Discounted Free Cash Flow
Method. The exercise of such an option by the assessee is not subject to fulfillment of any specified
conditions and it is left to the sole discretion of the assessee as it deems fit to apply. In the instant case,
the assessee company has exercised its option to value its shares as per DCF method and we find that the
objection of the AO is primarily directed at not adopting the book value of determination of value of
shares as against DCF adopted by the assessee company. The exercise of such an option cannot therefore
be challenged by the revenue once the same has been exercised at first place by the assessee.
17. Further, where the assessing officer is of the opinion that the methodology so adopted by the assessee
and/or the underlying assumption while determining the share valuation as per DCF is not acceptable to
him, there is no discretion with the AO to discard the DCF method of valuation and adopt book value
method. At the same time, in our view the AO is well within his rights to examine the methodology so
adopted by the assessee and/or the underlying assumption and where he is not satisfied with the same, he
can challenge the same and suggest necessary modification/alterations provided the same are based on
sound reasoning and rational basis. In the instant case, we find that certain basis objections have been
raised by the Assessing Officer in terms of applying the estimated turnover numbers instead of actual
numbers and discounting factor, etc which, in our view, has been satisfactorily explained by the assessee
company during the appellate proceedings and nothing has been brought on record which can
substantially challenge the methodology or the underlying assumption while determining the value of the
shares. Further, the fact that the said valuation and the projected financials have been found acceptable by
the Bank while sanctioning the term loan and working capital limits, it cannot be said that the same are
purely hypothetical and not based on sound financial understanding and market dynamics of the industry
in which the assessee operates.
18. ** ** **

19. In light of above discussions and in the entirety of facts and circumstances of the case, the order of
the Id CIT (A) is confirmed and the ground taken by the Revenue is dismissed.'
4.5.6 We also find that in the case of Vodafone M-Pesa Ltd. v. Pr. CIT [2018] 92 taxmann.com 73 (Bom.)
(DPB 79-83), the Hon'ble Mumbai High Court in para 9 has observed that
"9. ….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."
The AO though observed that the assessee raised loans from the above associate concerns and has converted
them into shares application/premium money. However, it has not shown how it will affect the correctness of
the valuation claimed. It is not the case of the AO that the shares were allotted to the outsiders non-related
persons but the existing amount of the loans from the related persons were converted into shares. Hence there
cannot be any scope of introduction of assessee's unaccounted income through allotment of shares at
unreasonably high priced shares. Therefore, such observations is not relevant and a mere suspicion. It appears
that the authorities below have ignored Explanation (a) below S. 56(2)(viib).The said Explanation provides
that the fair market value of the shares shall be the value— (i) as may be determined in accordance with such
method as may be prescribed i.e. u/r 11UA; or (ii) 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 assets, including intangible
assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business
or commercial rights of similar nature, whichever is higher. Accordingly, the value computed under the Rule
at Rs. 95.90 per share is higher than Rs. 65.31 or Rs. 32.76 per share and therefore, the higher valuation has to
be adopted. Moreover, it is only the Explanation (a)(ii) speaks of the satisfaction of the AO but there appears
no such condition in the Explanation (a)(i) which therefore AO is not permitted to interfere in the valuation,
once done in accordance with the method prescribed in the Rule 11UA(2). For the reasons stated above, we
find no justification behind rejecting the declared valuation of the shares and in the impugned addition made
by the AO but partly sustained by the CIT (A), which is hereby deleted.
5. In the result, the appeal of the assessee is partly allowed as indicated above
TANVI
*In favour of assessee.
 [2024] 161 taxmann.com 303 (Delhi)[04-04-2024]

INCOME TAX : Where assessee-company for valuation of shares placed reliance on

valuation report drawn by a merchant banker wherein DCF method was adopted, AO
could not have rejected said method and adopted NAV method for valuation of
shares

■■■

[2024] 161 taxmann.com 303 (Delhi)

HIGH COURT OF DELHI
Agra Portfolio (P.) Ltd.
v.
Principal Commissioner of Income-tax*
YASHWANT VARMA AND PURUSHAINDRA KUMAR KAURAV, JJ.
IT APPEAL NO. 1385 OF 2018
APRIL 4, 2024

Section 56 of the Income-tax Act, 1961, read with rule 11UA of the Income-Tax Rules, 1962 -
Income from other sources - Chargeable as (Sub-section (2)(viib)) - Assessment year 2014-15
- Assessee-company issued equity shares at premium - For purpose of valuation of shares,
assessee placed reliance on valuation report drawn by a merchant banker wherein DCF
method was adopted and value of each share was pegged at Rs. 9.60 - However, Assessing
Officer rejected said valuation report on ground that valuation of shares was not realistic
keeping in view growth and stature of company - He further observed that in valuation report
only figures had been put up without giving reasons as to how these assumptions had been
made - Assessing Officer thus, independently determined value of each share to be Rs. 40.40
and made addition to income of assessee under section 56(2)(viib) - Whether language of
rule 11UA(2) indubitably places a choice upon assessee to either follow route as prescribed
in clause (a) or in alternative to place for consideration of Assessing Officer a Valuation
Report drawn by a merchant banker as per DCF method - Held, yes - Whether therefore,
while it would be open for Assessing Officer, for reasons so recorded, to doubt or reject a
valuation that may be submitted for its consideration, statute clearly does not appear to
empower it to independently evaluate face value of unquoted equity shares by adopting a
valuation method other than one chosen by assessee - Held, yes - Whether in view of
aforesaid, matter was to be remanded to Assessing Officer who shall undertake an exercise
of valuation afresh in accordance with DCF method - Held, yes [Paras 16, 17 and 22] [In
favour of assessee]
CASES REFERRED TO

DCIT v. Sodexo Facilities Management Services [ITA No. 2945/Mum/2022] (para 18).
Sumit Lalchandani, Vibhu Jain, and Salil Kapoor, Advs. for the Appellant. Sanjay Kumar, Ms. Easha,
and Ms. Hemlata Rawat, Advs., for I.T. Dept, for the Respondent.
JUDGMENT

Yashwant Varma, J. - The assessee appellant has instituted the present appeal aggrieved by the judgment
rendered by the Income Tax Appellate Tribunal1 dated 16 May 2018 and has raised the following questions
for our consideration: -
 "A. Whether in view of the facts and circumstances of the case and in law, the Tribunal is right in
upholding the rejection of the valuation report on the ground that the same was prepared without any
verification and upon only considering the figures supplied by the Appellant, while at the same time,
ascribing no errors in the said figures?
B. Whether in view of the facts and circumstances of the case and in law, the Tribunal has erred by
deciding the appeal basis the conjecture/surmise that the possibility of tailoring of data could not be ruled
out?
C. Whether in view of the facts and circumstances of the case and in law, the Tribunal is right in holding
that the AO was at liberty to substitute the method of valuation adopted by the Assessee (DCF Method)
for his own preferred method of valuation (NAV Method)?
D. Whether in view of the facts and circumstances of the case and in law, the Revenue can reject the
report of an expert merchant banker and substitute its own valuation without referring it to the DVO or an
expert on the subject?
E. Whether in view of the facts and circumstances of the case and in law, the Tribunal erred by not
considering that the Act does not give any scope for the AO to conduct his own valuation exercise, and in
all cases where a particular valuation report was rejected, reference to DVO becomes mandatory?
F. Whether the Tribunal erred in law by failing to consider that the even if allegations of non-cooperation
are levelled against the Appellant, reference for valuation purpose could have been made to the DVO, as
only the DVO has appropriate powers to declare whether the information furnished was erroneous /
incorrect or if some further information was required?"
2. Upon hearing learned counsels, we formally admit the appeal on the aforenoted questions.

3. The ITAT has essentially upheld the additions made by the Assessing Officer2 in Assessment Year3 2014-
15 consequent to the rejection of the Fair Market Value4 evaluation as submitted by the appellant as
contemplated under Section 56(2)(viib) of the Income Tax Act, 19615 read along with Rule 11UA of the
Income Tax Rules, 19626. The issue of valuation had arisen in the context of the appellant having allotted
3,15,000 equity shares of a face value of INR 10/- each at a premium of INR 40/- per share and for a total
amount of INR 1,26,00,000 /-.
4. For the purposes of valuation of the shares offered for subscription, the appellant had placed reliance on a
Valuation Report drawn by a merchant banker, M/s SPA Capital Advisors Ltd., and wherein the value of each
share was pegged at INR 9.60/-. Consequent to the rejection of that Report, the AO independently determined
the value of each share to be INR 40.40/- and thus quantified the disallowance under Section 56(2)(viib) at
INR 1,27,26,000/-.
5. The principal grievance of the appellant is that even if the AO had deemed it fit to reject the Valuation
Report drawn on the basis of Discounted Cash Flow Method7, it could not have substituted the means and the
method of valuation of its own volition. It is this principal ground of challenge which was urged by Mr.
Lalchandani, learned counsel who appeared in support of the appeal.
6. Doubting the veracity of Valuation Report, the AO is stated to have placed the appellant on notice under
Section 142(1) asserting as follows:-
"1. Please refer to your submission dated 07/09/2016 wherein you have submitted certificate of valuation
of shares under rule 11UA. On perusal of the valuation report the following facts have been noticed.

(i) In its valuation report M/s SPA Capital Advisors Ltd. has given a disclaimer as under: "In preparing
the Final Report, SPA has relied upon and assumed, without independent verification, the
truthfulness, accuracy and completeness of the information and the financial data provided by the
company. SPA has therefore relied upon all specific information as received and declines any
responsibility should the results presented be affected by the lack of completeness or truthfulness of
such information. "
From perusal of the report it appears that the valuation of shares is not realistic keeping in view the
growth and stature of your company. Further, in the valuation report only figures have been put up
 without giving reasons as to how these assumptions have been made.

(ii) In the DCF methodfirst step is to forecast expected cash flow based on assumptions regarding the
company's revenue growth rate, net operating profit margin, income tax rate, fixed investment
requirement, and incremental working capital requirement. The revenue growth rate as well as the
net profit margin of your Company, since inception, is negative and you have been carrying forward
business losses. Even in the subsequent years, for which data is available, you have incurred losses
(loss of Rs. 53083/- (AY 2014-15) and Rs. 1,00,384/- (AY 2015-16). However, as per the
computation of valuation, the free cash flow to equity figures are -0.98 (2013-14), 32.61 (2014-15),
34.89 (201516), 37.00 (2016-17), 39.22 (2017-18) which are unrealistic.
You are also requested to submit actual free cash flow (FCF) for the AY 2014-15, 2015-16 & 2016-17 till
date)

(iii) Similarly with regard to calculation of Cost of Capital, it is requested to clarify whether weighted
average has been taken or otherwise. Further use of BSE 500 return data in your case is uncalled
for. All your investments are in the associates company only and you must have the data of their
year on year growth rate to calculate the actual return in your case. Also BSE 500 return data since
inception is very unusal. Practically for assumption purpose this is a very long period for a
company which is incorporated a few years back. Therefore, you are requested to take the realistic
figure as deduced from your associate company investments. Further, you are having investments in
your associates so the risk factor should be at a very low side. Therefore, you are requested to
clarify the basis relying upon the company specific risk has been calculated at5%. Similarly Beta
figure of I and Risk premium of 6.75 may also be justified.

(iv) Also you have taken a discounting factor @ 20.80% for a company whose returns are continuously
in negative which is an unrealistic approach to calculate the value of shares. In view of the above
you are also requested to give details of values which have been taken to arrive at a discounting
figure @ 20.8% and also the basis behind such assumption for a company whose return have
consistently been negative. Also, whether sector specific study has been carried out to reach the rate
of return of growth. If, yes give a copy of the same.

(v) Further, you are requested to submit Financial statement of six months ended on September 30,
2013.
In view of the above, you are requested to submit the details and explanations called for above and to
explains as to why the DCF method of valuation employed by you for valuation of shares under Rule
11UA should not be rejected and, therefore, the book value method as per RULE 11UA (2)(a) should not
be taken for the purpose of Section 56(2)(viib) of the I.T. Act, 1961."
7. Noticing that the appellants had failed to satisfactorily answer the queries which stood raised, the AO
proceeded to issue further notices referable to Sections 144 and 142(1) of the Act. It was in terms of the
aforesaid notices that the AO took the position that the shares were liable to be valued at INR 9.60/- as against
INR 50.60/- which had been adopted by the assessee.

8. The decision of the AO ultimately came to be affirmed by the Commissioner of Income Tax (Appeals)8 and
both have essentially proceeded on a perceived failure on the part of the appellant assessee to substantiate the
basis of valuation as adopted in the Valuation Report. They also appear to have held against the appellant on
the ground that it had failed to provide any evidence in support of the figures which formed part of the
Valuation Report. The AO as well as the CIT(A) also appear to have drawn adverse inference from the
disclaimers which stood introduced in the Valuation Report drawn by the merchant banker and which had
clearly divulged that the Report had come to be drawn solely based on the data provided by the appellant
without "independent verification" with respect to the truthfulness, accuracy and completeness of the
information.
9. The ITAT on the basis of the above came to hold that since the AO was deprived of any satisfactory
explanation, it was left with no option but to reject the Valuation Report and independently evaluate the face
value of the shares. While doing so, however, the AO has chosen to depart from the DCF Method which was
adopted by the assessee and has independently ascertained the face value of the shares by adopting the Net
Asset Value Method9.
10. Assailing the view so taken, Mr. Lalchandani submitted that in terms of Section 56(2)(viib), the option of
choosing a method of valuation stands vested exclusively in the assessee. According to learned counsel, even
if a valuation as submitted were to be doubted, it would not be permissible for the respondents to adopt a
method different from the one chosen by the assessee. Mr. Lalchandani contended that the aforesaid position
would clearly flow from the language in which Section 56(2)(viib) stands couched read along with Rule
11UA. Learned counsel contended that Rule 11UA(2) in unambiguous terms employs the expression "at the
option of the assessee" and this being evidence of the choice of a valuation method being one placed in the
hands of the assessee alone.
11. In support of his submission, Mr. Lalchandani also drew our attention to the following pertinent
observations as rendered by a Division Bench of the Bombay High Court in Vodafone M-Pesa Limited v.
Principal Commissioner of Income Tax and Others 2018 SCC OnLine Bom 21317 :-

"9. We note that, the Commissioner of Income-Tax in the impugned order dated 23rd 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 part of demand arising
out of the assessment order dated 21st 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. Infact, he has completely
disregarded the DCF Method for arriving at the fair market value. Therefore, the demand in the facts
need to be stayed."
12. Appearing for the respondents, Mr. Kumar, learned counsel, submitted that Section 56(2)(viib) places the
assessee under an obligation to submit a report depicting the FMV of shares and which can be duly
substantiated to the satisfaction of the AO. According to learned counsel, since the appellant, despite adequate
opportunities having been provided failed to establish the correctness of the valuation, the AO became entitled
to undertake an independent exercise for the purposes of determining the FMV of the unquoted equity shares.
It is these rival submissions which fall for our determination.
13. In order to appreciate the submissions which have been addressed, we deem it apposite to firstly extract
Section 56(2)(viib) which reads as follows:-
"Section 56. Income from other sources.
xxxx xxxx xxxx
(vii-b) where a company, not being a company in which the public are substantially interested, receives,
in any previous year, from any person [being a resident], 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 [or 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 income in consequence of the misreporting
referred to in sub-section (8) and sub-section (9) of Section 270-A for the said previous year.]
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 accordance with such method as may be prescribed; or

(ii) 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 assets, including intangible assets being goodwill, know-
how, patents, copyrights, trademarks, licences, franchises or any other business or commercial
rights of similar nature, whichever is higher;

[(aa) "specified fund" means a fund established or incorporated in India in the form of a trust or a
company or a limited liability partnership or a body corporate which has been granted a certificate
of registration as a Category I or a Category II Alternative Investment Fund and is regulated under
the Securities and Exchange Board of India (Alternative Investment Fund) Regulations, 2012 made
under the Securities and Exchange Board of India Act, 1992 (15 of 1992) [or regulated under the
[International Financial Services Centre Authority (Fund Management) Regulations, 2022 made
under the] International Financial Services Centres Authority Act, 2019];

(ab) "trust" means a trust established under the Indian Trusts Act, 1882 (2 of 1882) or under any other
law for the time being in force;]

(b) "venture capital company", "venture capital fund" and "venture capital undertaking" shall have the
meanings respectively assigned to them in clause (a), clause (b) and clause (c) of [Explanation] to
clause (23-FB) of Section 10;]"
14. As is manifest from the above, the explanation placed in clause (viib) postulates that the FMV of shares
shall be the value determined in accordance with the methods as may be prescribed or as may be substantiated
by the company to the satisfaction of the AO, whichever be higher. The methods for valuation stand
enumerated in Rule 11UA which reads as follows: -
"Determination of fair market 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 jewellery,-

(i) the fair market value of jewellery shall be estimated to be the price which such jewellery would
fetch if sold in the open market on the valuation date;

(ii) in case the jewellery is received by the way of purchase on the valuation date, from a registered
dealer, the invoice value of the jewellery shall be the fair market value;

(iii) in case the jewellery is received by any other mode and the value of the jewellery exceeds rupees
fifty thousand, then assessee may obtain the report of registered valuer in respect of the price it
would fetch if sold in the open market on the valuation date;

(b) valuation of archaeological collections, drawings, paintings, sculptures or any work of art,-

(i) the fair market value of archaeological collections, drawings, paintings, sculptures or any work of
art (hereinafter referred as artistic work) shall be estimated to be price which it would fetch if sold
in the open market on the valuation date;

(ii) in case the artistic work is received by the way of purchase on the valuation date, from a registered
dealer, the invoice value of the artistic work shall be the fair market value;
(iii) in case the artistic work is received by any other mode and the value of the artistic work exceeds
rupees fifty thousand, then assessee may obtain the report of registered valuer in respect of the price
 it would fetch if sold in the open market on the valuation date;

(c) valuation of shares and securities,-

(a) the fair market value of quoted shares and securities shall be determined in the following manner,
namely,-

(i) if the quoted shares and securities are received by way of transaction carried out through any
recognized stock exchange, the fair market value of such shares and securities shall be the
transaction value as recorded in such stock exchange;
(ii) if such quoted shares and securities are received by way of transaction carried out other than
through any recognized stock exchange, the fair market value of such shares and securities shall
be,-
(a) the lowest price of such shares and securities quoted on any recognized stock exchange on the
valuation date, and

(b) the lowest price of such shares and securities on any recognized stock exchange on a date
immediately preceding the valuation date when such shares and securities were traded on such
stock exchange, in cases where on the valuation date there is no trading in such shares and
securities on any recognized stock exchange;
[(b) the fair market value of unquoted equity shares shall be the value, on the valuation date, of such
unquoted equity shares as determined in the following manner, namely:-the fair market value of
unquoted equity shares = (A+B+C+D - L) X (PV)/(PE), where,
A= book value of all the assets (other than jewellery, artistic work, shares, securities and immovable
property) in the balance-sheet as reduced by,-

(i) any amount of income-tax paid, if any, less the amount of income-tax refund claimed, if any; and
(ii) any amount shown as asset including the unamortised amount of deferred expenditure which does
not represent the value of any asset;
B = the price which the jewellery and artistic work would fetch if sold in the open market on the basis of
the valuation report obtained from a registered valuer;
C = fair market value of shares and securities as determined in the manner provided in this rule;
D = the value adopted or assessed or assessable by any authority of the Government for the purpose of
payment of stamp duty in respect of the immovable property;
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 figure is negative, other than
those set apart towards depreciation;

(iv) any amount representing provision for taxation, other than amount of income-tax paid, if any, less
the amount of income-tax claimed as refund, if any, 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;
 PV = the paid up value of such equity shares;
PE ="total" amount of paid up equity share capital as shown in the balance-sheet;]
(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 which such valuation.]
(2) Notwithstanding anything contained in sub-clause (b) of clause (c) of sub-rule (1), the fair market
value of unquoted equity shares for the purposes of sub-clause (i) of clause (a) of Explanation 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=

where,
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 a 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 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 [***] as per the
Discounted Free Cash Flow Method.]"
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 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.
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 DCIT, Circle 13(2)(2), Mumbai v. Sodexo Facilities Management Services [ITA No.
2945/Mum/2022] 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 method of the valuation, the AO cannot
find fault in the said recognized method and adopting the method of his own choice. In support of this, he
relied on the decision of the Hon'ble Jurisdictional High Court in the case of Vodafone M-Pesa Ltd. v.
PCIT [2018] 164 DTR 257[2018] 92 taxmann.com 73/256 Taxman 240 (Bombay) (HC). As far as the
worth of food division is concerned, the Ld. Counsel for the assessee submitted that assessee has
followed the method prescribed under section 50B(3) of the Act alongwith Explanation (2). He submitted
that in the net worth computed by the assessee and in the AO, there is only one difference. It was
submitted that the assessee following the Explanation-2 below section 50B(3) of the Act has adopted
written down value of the block asset in case of the depreciable asset as per the proviso to section 43 of
the Act, which the AO has omitted.
19. We have heard rival submissions on the issue in dispute and perused the material on record. We find
that computation of LTCG on the transfer of undertaking as the slump sale consists of two components.
First component is sale consideration and the second component is the net worth or cost of acquisition.
When the net worth of division is subtracted from the sale consideration, which results into LTCG on 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 ld 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 Joint Commissioner of Income
Tax v. M/s MLR Auto Limited [ITA No. 115/Hyd/2021] 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 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 / ld.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 value of the unquoted shares.
18 .Therefore, in our view, the Assessing Officer was incorrect in concluding that the DCF method is
"quite unrealistic and inapplicable" to the terms of the Income Tax Act. On the contrary, the DCF method
 is quite applicable and was required to be applied by the Assessing Officer to determine the FMV of the
unquoted shares. . . . . . . . . . . . . ."
20. A more detailed discussion on the issue which confronts us in this appeal is found in the judgment
rendered by the Mumbai Bench of the ITAT in Dy. Commissioner of Income Tax 6(2)(1) v. Credtalpha
Alternative [2022] 94 ITR (Trib) 596 and the relevant parts whereof are reproduced hereunder:-
"15. Thus, the fair market value of the share shall be higher of the value as determined in accordance
with the provisions of rule 11 UA or any other method, which can be substantiated by the assessee before
the Assessing Officer. For the purpose of determining "fair market value" of unquoted shares provisions
of rule 11 UA (2) applies which gives an option to the assessee to either value the shares as per
prescribed formula given in clause (a) or clause (b) which provides for the determination of the fair
market value based on discounted cash flow method as valued by a merchant banker 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 flow 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 i.e., 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 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 always
include limitation and responsibilities but that does not make his report incorrect. Of course, if there are
errors in the working of projected cash flow, estimating the projected revenue and projected expenditure
as well as in adoption of cost of equity and discount factor, the learned Assessing Officer is within his
right to correct it after questioning the same to the assessee. The learned Assessing Officer can also
question the basic assumptions made by the valuer. If they are unreasonable or not based on historical
data coupled with the management expectation, the learned Assessing Officer has every right to question
it and adjust the valuation so derived at. However, if he does not find any error in those workings, he
could not have rejected the same. Further the reason given by the learned Assessing Officer that the net
asset value method and the discounted cash flow method for valuation of the shares of the company gives
a wide variation between them, we do not find any reason to find fault with the assessee in such cases.
Both these methods have different approaches and methodologies therefore there are bound to be
differences, but it does not give any authority to the learned Assessing Officer to pick and choose one of
the method and make the addition. It is the assessee 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 Pvt. Ltd. v. Income Tax Officer [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 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 Value Homes Pvt. Ltd. (supra).
12. In view of the above legal position, we are of view that the issue with regard to valuation has to be
decided afresh by the AO on the lines indicated in the decision of ITAT, Bangalore in the case of VBHC
Value Homes Pvt. Ltd., v. ITO (supra) i.e., (i) 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. (ii) For scrutinizing the valuation report, the facts and data
available on the date of valuation only has to be considered and actual result of future cannot be a basis to
decide about reliability of the projections. The primary onus to prove the correctness of the valuation
Report is on the assessee as he has special knowledge and he is privy to the facts of the company and
only he has opted for this method. Hence, he has to satisfy about the correctness of the projections,
Discounting factor and Terminal value etc. with the help of Empirical data or industry norm if any and/or
Scientific Data, Scientific Method, scientific study and applicable Guidelines regarding DCF Method of
Valuation. The order of ld. 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.
23. We also accord liberty to the AO to determine the FMV of the shares bearing in mind the DCF Method by
having the same independently determined by a Valuer appointed for the aforesaid purpose.
■■

*In favour of assessee.

1. ITAT
2. AO
3. AY
4. FMV
5. Act
6. Rules
7. DCF Method
8. CIT(A)
9. NAV Method
[2018] 96 taxmann.com 542 (Jaipur - Trib.)/[2018] 172 ITD 571 (Jaipur - Trib.)[12-
07-2018]

IT : Where assessee company determined Fair Market Value of shares issued at

premium on basis of Discount Cash Flow method in accordance with rule 11UA(2)(b)
read bith section 56(2)(viib) and valuation report was prepared as per guidelines
given by ICAI and no fault was found in same, Assessing Officer was unjustified in
changing method of valuation of shares at premium to Net Asset Value method

■■■

[2018] 96 taxmann.com 542 (Jaipur - Trib.)

IN THE ITAT JAIPUR BENCH
Rameshwaram Strong Glass (P.) Ltd.
v.
Income-tax Officer, Ward-2(1), Ajmer*
VIJAY PAL RAO, JUDICIAL MEMBER
AND BHAGCHAND, ACCOUNTANT MEMBER
IT APPEAL NO. 884 (JP) OF 2016
[ASSESSMENT YEAR 2013-14]
JULY 12, 2018

Section 56 of the Income-tax Act, 1961 read with rule 11UA of the Income-tax Rules, 1962 -
Income from other sources - Chargeable as (Sub-section (2) (viib)) - Assessment year 2013-
14 - Assessee-company issued 1,40,000 shares having face value of Rs. 10 each, at premium
of Rs. 60 per share - Assessee had determined Fair Market Value (FMV) of shares on basis of
Discount Cash Flow (DCF) method in accordance with rule 11UA(2)(b) read with section 56(2)
(viib) - Assessing Officer rejected such valuation done by assessee and determined FMV of
shares based on Net Asset Value (NAV) method - Consequently, excess premium charged by
assessee was considered as income from other sources and was added to income of
assessee - It was noted that law had specifically conferred an option upon assessee that for
purpose of section 56(2)(viib) an assessee could adopt any of methods mentioned under rule
11UA(2) - Whether when law had specifically given an option to assessee to choose any of
method of valuation of his choice and assessee exercised an option by choosing a particular
method (DCF here), changing method or adopting a different method would be beyond
powers of revenue authorities - Held, yes - Whether, further, since while following DCF
method, assessee had considered plant capacity, industry and market conditions,
sanctioning of loan by bank and that valuation reports were prepared as per guidelines given
by Institute of Chartered Accountants of India and Assessing Officer had not found any fault
in said report, Assessing Officer was unjustified in rejecting valuation report submitted by
assessee based on DCF method - Held, yes [Paras 4.5 and 4.5.3] [In favour of assessee]
Circulars and Notifications: CBDT Letter File No. 173/14/2018-ITA.I, dated 6-2-2018
FACTS

■ The assessee was a private limited company. There was no business activity during the starting assessment
years except purchase of a land worth Rs. 3.27 lakhs. During the year under consideration, the assessee
had issued 1,40,000 shares having the face value of Rs. 10 each, at the premium of Rs. 60 per share,
 receiving a total premium of Rs. 84 lakhs over and above the share application money of Rs. 14 lakhs.
The assessee had determined Fair Market Value (FMV) on the basis of Discounted Cash Flow Method.
■ As per the Assessing Officer, the prerequisite for issue of share at premium was the substantial increase in
the net worth of the income which was mainly due to the profitability, credibility, goodwill etc. of the
concern, however, such requirements were not available in the present case. Therefore, these shares did
not have intrinsic value to give price to premium in the business, thus, premium of Rs. 60 per share did
not appear to be justifiable. The Assessing Officer found that calculation of share premium was not in
accordance with rule 11UA and after referring to rule 11UA(2)(b), the Assessing Officer computed the
FMV of share based on Book Value and finally held that the fair market value of unquoted equity shares
of the assessee cames to Rs. 32.76 only and the assessee was entitled to charge premium to Rs. 2.27 lakhs
(32.76(-) Rs. 10 = 22.76 X 10000 shares) against which the assessee charged premium of Rs. 84 lakhs.
Thus, the excess premium of Rs. 81.72 lakhs received by the assessee was not justified and not in
accordance with the amended provisions of section 56(2)(viib). Consequently, the excess premium by the
assessee was considered as income from other sources and was added to the total income of the assessee.
■ In appeal, the Commissioner (Appeals) partly confirmed the addition by rejecting the valuation done as
per DSF method.
■ On assessee's appeal to Tribunal:
HELD

■ From the order of the Commissioner (Appeals) it emerges that the parties appeared and the matter was
discussed with them and they were asked to furnish the actual figures in respect of financial years 2013-
14, 2014-15 and 2015-16. In compliance of such direction, the parties attended before the Commissioner
(Appeals) and filed another valuation report wherein the value of the share was worked out at the rate of
65.31 per share. It is clear from the order of the Commissioner (Appeals) that he made a comparison of
the last report submitted to him based on the actual figures with the earlier reports submitted and prepared
by the CA as per rule 11UA(2)(b) on DCF method, and the Commissioner (Appeals) finding difference
between the figure of the two, rejected the report submitted by the assessee as absolutely unreliable and
without any basis. Thus, the basic dispute between the parties is whether the authorities below could have
applied the Net Asset Value as prescribed under rule 11UA(2)(a) or whether the assessee has got a right to
opt for the method of valuation given under rule 11UA(2)(b) and secondly, if the assessee is entitled to the
adopt the DCF method to estimate the fair market value, the valuation submitted by the assessee was fair
and reasonable in accordance with rule 11UA(2).
■ However, there is no dispute between the parties that rule 11UA(1) is not applicable on the facts and
circumstances of the present case which is a provision of general nature whereas rule 11UA(2) is a
specific provision providing for the valuation of the unquoted equity shares. After going through the
relevant section and the rules, the matter of valuation of unquoted equity shares, has been completely left
to the discretion of the assessee and it is his option whether to choose NAV Method (Book Value) under
clause (a) or to choose DCF Method under clause (b) and the Assessing Officer cannot adopt a method of
his own choice. The authorities cannot compel the assessee to choose NAV Method only as against DCF
Method. When the legislation has conferred an option upon the assessee to choose a particular method, the
valuation of the shares has to be in accordance with such method only i.e. DCF method in the present case
under rule 11UA(2)(b) read with section 56(2)(viib).
■ It is observed that in the instant case, the assessee-company had exercised an option to value the share by
DCF method. However, the Assessing Officer had worked out the value based on NAV Method though in
the body of assessment order he has referred to rule 11UA(2)(b) but in substance, he has valued the share
based on the book value figures only by considering the value of the assets shown in the balance sheet as
on 31-3-2013 being the land valuing Rs. 3.27 lakhs and the liabilities. The Commissioner (Appeals) also,
though considered the case in context of rule11UA(2)(b) yet however, his act of asking the assessee & his
CA to prepare and submit a valuation report only on actual figures, is nothing but a valuation done on the
basis of NAV Method under rule 11UA(2)(a) only. From the facts it is clear that the authorities below
wanted to impose upon the method of valuation of their own choice, completely disregarding the
legislative intent which has given an option to the assessee to choose any one of the two methods of
valuation of his choice. When the law has specifically provided a method of valuation and the assessee
 exercised an option by choosing a particular method (DCF here), changing the method or adopting a
different method would be beyond the powers of the revenue authorities. Permitting the revenue to do so
will render the clause (b) of rule 11UA(2) as nugatory and purposeless. Thus, to this extent the action of
the authorities below is not justified and it is held that the assessee has got all the right to choose a method
which, cannot be changed by the Assessing Officer. Further, though the Assessing Officer can scrutinize
the valuation report only if some arithmetical mistakes are found, he may make necessary adjustments.
But if he finds the working of the C.A. or the assumptions made as erroneous or contradictory, he may
suggest the necessary modification and alterations therein provided the same are based on sound
reasoning and rational basis and for this purpose the Assessing Officer may call for independent expert
valuer's report or may also invite comment on the report furnished by the assessee's valuer as the
Assessing Officer is not an expert. It is not open for the Assessing Officer to challenge or change the
method of valuation, once opted by the assessee and to modify the figures as per his own whims and
fancies. In any case, the revenue could not ask to prepare the valuation report based on actuals which is
not contemplated in rule 11UA(2)(b). [Para 4.5]
■ Now coming to the aspect where the assessee has complied with the conditions laid down under rule
11UA(2)(b), it is clear that to comply with this rule the assessee is required to obtain a certificate of a
Merchant Banker or Chartered Accountant and such a valuation must be based on Discounted Free Cash
Flow (DCF) Method only. To exercise the option under this clause, the assessee is not subjected to the
fulfilment of any other condition except these two. It is not denied that the assessee did file the valuation
report first one dated 31-3-2013 and the revised report dated 23-8-2016 valuing the FMV of the unquoted
shares at Rs. 119.93 & 95.90 per equity share respectively prepared by a C.A. only. The reason for the
difference was explained that in the earlier report, the figure of change in networking capital was left out
by oversight, which has now been taken care and corrected in the revised report. This contention was
supported by the earlier valuation report and the revised valuation report. There is nothing wrong if a bona
fide mistake was corrected. [Para 4.5.1]
■ Before examining the fairness or reasonableness of valuation report submitted by the assessee, one has to
bear in mind that the DCF Method, and is essentially based on the projections (estimations) only and
hence these projection cannot be compared with the actuals to expect the same figures as were projected.
The valuer has to make forecast on the basis of some material but to estimate the exact figures is beyond
its control. At the time of making a valuation for the purpose of determination of the fair market value, the
past history may or may not be available in a given case and therefore, the other relevant factors may be
considered. The projections are affected by various factors hence in the case of company where, there is
no commencement of production or of the business, does not mean that its share cannot command any
premium. For such cases, the concept of startup is a good example and as submitted, the Income-tax Act
has also recognized and is encouraging the startups for which, a separate deduction under section 80IAC
has been provided. In this context, a CBDT Instruction (File No. 173/14/2018-ITA.I) on dated 6-2-2018
given in the case of startup companies useful in the context of determination of fair market value of the
unquoted equity shares under section 56(2)(viib) read with rule 11UA(2), which states that tough startup
companies invariably submits valuation report in accordance with rule 11UA(2)(b) but in the assessments
such reports are not being accepted and rejected/modified by the Assessing Officer's considering the same
as based on abnormal valuations which results in additions. The CBDT has accordingly directed not to
take coercive measures in such cases for recovery of demand resulting in additions and the Commissioner
(Appeals) have been directed to dispose such appeals expeditiously. [Para 4.5.2]
■ Coming to the basis of the projections, it is submitted that the plant capacity was taken as a basis to make
projections of the production. It is further submitted that as the assessee is dealing in toughened glass
which is related to real estate (construction) industry and at the relevant point of time, the real estate sector
was in boom and there existed favourable conditions in the industry. The Directors of the assessee
company were having experience and knowledge of the field. The other three companies to whom shares
were allotted were also in the real estate sector, as their name suggest. The Board of Directors were
expecting good results in the future. Except the initial years where the production could not be
commenced because of the circumstances beyond the control but as per the actual figures available now
for the previous year ended on 31-3-2017, the value per share comes to Rs. 84.67 based on the audited
accounts which is almost in accordance with the value of Rs. 95.90 estimated by the C.A. Moreover, such
report was also submitted to the bank as per a notes for obtaining hypothecation limit of Rs. 4 crores
which was sanctioned based on such valuation report along with the hypothecation of the properties of the
directors. Hence, it cannot be said that the projections made by the C.A. in the valuation report were
 imaginary figures, completely without any basis. There is substance in the contentions. It is not the case of
the Commissioner (Appeals) that the projection made in the C.A.'s report are in contradiction of the
figures of the installed production capacity which being lesser yet the production was shown
disproportionately higher. Also there is no whisper in the orders of the Commissioner (Appeals) as to
which figure was found incorrect and what should be the correct figures. Except making comparison with
the actuals there is nothing on record to doubt the veracity of the C.A.'s report or to support the
observations of the Commissioner (Appeals). He further doubts that the figures of the sale shown in the
valuation report and those shown the in the balance sheet of financial year 2014-15 and financial year
2015-16. However such an objection cannot be given weightage for the reason that firstly no explanation
was called for by the Commissioner (Appeals) on this aspect but he assumed on his own and there apart
the assessee has already stated that due to the non-availability of the power connection, it could not
commence the production in the initial years therefore, there was no production, which fact is admitted by
the Assessing Officer also and hence, comparison of the projected sales figure with the actuals was not
justified. As already stated that the figures given by the C.A. were mere projection/estimations depending
upon various factors which nobody could have anticipated or foreseen on the day when such valuation
were made. Therefore, there was no justification yet to make a comparison of the estimations with the
actuals. Such a comparison is otherwise principally against the contemplation of rule 11UA(2)(b) which
required the C.A. to prepare a report on DCF Method only i.e. based on mere projections and not actuals
as against the NAV Method prescribed under rule 11UA(2)(a). For these reason there is no justifications
behind the objection of the Commissioner (Appeals) that the valuation done by the C.A. was based
absolutely imaginary and incorrect figures or without any basis. The C.A. had considered the plant
capacity, industry and market conditions as prevailed in the state, the sanctioning of the loan by the bank
are the factors which formed a reasonable basis of projections. Moreover it is not denied and that the
valuation reports were prepared as per the guidelines given by the Institute of Chartered Accountants of
India and the Assessing Officer has not found any fault. Thus, there is no rational or sound basis in the
order of the authorities below, Assessing Officer was unjustified in rejecting the valuation report
submitted by the assessee based on DCF Method. [Para 4.5.3]
■ In any case, it is also noticed that even as per the valuation got done by the Commissioner (Appeals)
based on the actuals, the FMV came to Rs. 65.31 per share as against which, the assessee had charged a
premium of Rs. 60 only per share. Therefore, even assuming that the valuation reports submitted by the
assessee are not reliable for any reason than too there was no justification to rely upon the valuation of the
shares done by the Assessing Officer based on book value at Rs. 32.76 per share or premium at Rs. 27.76
per share. Reducing the face value of Rs. 10 from the FMV of Rs. 65.31, the amount of premium comes to
Rs. 55.31 per share as against the premium claimed by the assessee at Rs. 60. Thus there is a small
difference of around Rs. 5 which was less even than 10 per cent of the premium claimed by the assessee at
the rate of Rs. 60 per share. The variation to this extent is possible in the matters of estimations. [Para
4.5.4]
■ The Assessing Officer though observed that the assessee raised loans from the above associate concerns
and has converted them into shares application/premium money. However, it has not shown how it will
affect the correctness of the valuation claimed. It is not the case of the Assessing Officer that the shares
were allotted to the outsiders non-related persons but the existing amount of the loans from the related
persons were converted into shares. Hence there cannot be any scope of introduction of assessee's
unaccounted income through allotment of shares at unreasonably high priced shares. Therefore, such
observations is not relevant and a mere suspicion. It appears that the authorities below have ignored
Explanation (a) below section 56(2)(viib). The said Explanation provides that the fair market value of the
shares shall be the value— (i) as may be determined in accordance with such method as may be
prescribed i.e. under rule 11UA; or (ii) 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 assets, including intangible
assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other
business or commercial rights of similar nature, whichever is higher. Accordingly, the value computed
under the rule at Rs. 95.90 per share is higher than Rs. 65.31 or Rs. 32.76 per share and therefore, the
higher valuation has to be adopted. Moreover, it is only the Explanation (a)(ii) speaks of the satisfaction
of the Assessing Officer but there appears no such condition in the Explanation (a)(i) which therefore
Assessing Officer is not permitted to interfere in the valuation, once done in accordance with the method
prescribed in the rule 11UA(2). For the reasons stated above, there is no justification behind rejecting the
 declared valuation of the shares and in the impugned addition made by the Assessing Officer but partly
sustained by the Commissioner (Appeals), which is hereby deleted. [Para 4.5.6]
■ In the result, the appeal of the assessee is partly allowed as indicated above. [Para 5.0]
CASE REVIEW

Medplus Health Services (P.) Ltd. v. ITO [2016] 68 taxmann.com 29/158 ITD 105 (Hyd. - Trib.) (para 4.5);
ITO v. Universal Polysack (India) (P.) Ltd. [IT Appeal No. 609 (JP) of 2017, dated 31-1-2018] (para 4.5) and
Vodafone M-Pesa Ltd. v. Pr. CIT [2018] 92 taxmann.com 73 (Bom.) (DPB 79-83) (para 4.5.6) followed.
CASES REFERRED TO

Medplus Health Services (P.) Ltd. v. ITO [2016] 68 taxmann.com 29/158 ITD 105 (Hyd. - Trib.) (para 4.5),
ITO v. Universal Polysack (India) (P.) Ltd. [IT Appeal No. 609 (JP) of 2017, dated 31-1-2018] (para 4.5.5)
and Vodafone M-Pesa Ltd. v. Pr. CIT [2018] 92 taxmann.com 73 (Bom.) (para 4.5.6).
Mahendra Gargieya, Adv. for the Appellant. Smt. Seema Meena, JCIT-DR for the Respondent.
ORDER

Bhagchand, Accountant Member - The appeal filed by the assessee emanates from order of the ld. CIT (A),
Ajmer dated 29.08.2016 for the Assessment Year 2013-14 raising therein following grounds of appeal:

"1. That the learned CIT (Appeals) Ajmer erred in maintaining the value of share premium at Rs. 22.76
per share as decided by AO as per valuation method provided in Rule 11UA(2)(a) without
appreciating the full facts and circumstances of the case. Thus he has not at all considered the
second method as provided in Rule 11UA(2)(b) as ascertained and provided by us duly determined
by Fellow Chartered Accountant of ICAI as per discounted free cash flow method which was
higher and justify the full premium of Rs. 60/- per share as charged by us from each shareholder. As
such the addition maintained for Rs. 52,13,600/- against share premium income was without
considering our CA certificates based on projection as per project report submitted with bank to
take loans and advances.
2. That the CIT (Appeals) has not even considered our written submissions submitted before him at
length. He has not at all considered the jurisdiction point even. There was no notice u/s 143(2) in
time by competent authority having correct jurisdiction and as such the notice issued u/s 143(2) by
correct authority having jurisdiction over the assessee was time barred.
3. That as the project delayed by more than one year due to non-receipt of electricity connection the
factory started in FY. 15-16 instead of 14-15 as per project report. However as desired by CIT
(Appeals), Ajmer we have submitted the share valuation on the basis of actual figure Of FY. 15-16
even and according to that also the value ascertained Rs. 65 as admitted by him even in his order
but due to non-production in FYs. 13-14 and 14-15, he was not satisfied with valuation report given
by CA as per Rules 11UA(2)(b). That the copy of submissions in report of share valuation on the
basis of clause (b) of Rule 11UA(2) i.e., Discounted cash flow as per technical guide on share
valuation issued by Research Committee of the Institute of Chartered Accountants of India, New
Delhi. The discounted cash flow model indicates the fair market value of a business based on the
value of cash flow that the business is expected to generate in future. Accordingly the Appellate
Authority should have considered the value as per discounted Cash Flow provided &/or determined
by Chartered Accountants as per law.
4. That the order of both the lower authorities are bad-in-law."
2.1 During the course of the hearing, the ld. AR of the assessee has not pressed the ground No. 2, Hence the
same is dismissed being not pressed.
3.1 The Ground No. 4 of the assessee is general in nature which does not require any adjudication.
4.1 Apropos Ground Nos. 1 and 3 of the assessee, the facts as observed by the AO are that the assessee is a
private limited company incorporated on 31.1.2011 which is registered under the Companies Act, 1956. There
was no business activity during the starting A.Y.s, from A.ys. 2011 to 12 to 2013-14, except purchase of a
land worth Rs. 3,27,690/-. During the year under consideration, the assessee-company had issued 1,40,000
shares having the face value of Rs. 10 each, at the premium of Rs. 60 per share, receiving a total premium of
Rs. 84,00,000/-, over and above the share application money of Rs. 14,00,000/-, as per the following chart:—

Name of the parties to whom No. of Share Application money @ Share premium @ Rs. Total amount
share were allotted shares Rs. 10/- per share 60/- per share received
Rameshwaram Buildmat Pvt. 50,000 5,00,000/- 30,00,000/- 35,00,000/-
Ltd.
Rameshwaram Architecture 40,000 4,00,000/- 24,00,000/- 28,00,000/-
Pvt. Ltd.
Shri Oswal Granites Pvt. Ltd. 50000 5,00,000 30,00,000/- 35,00,000/-
Total 1,40,000 14,00,000/- 84,00,000/- 98,00,000/-

The assessee was asked to furnish the basis and justification behind the issuance of the shares on premium in
spite of the fact that the company did not have any worth except a land of Rs. 3,27,690/-. As per AO, the
prerequisite for issue of share at premium is the substantial increase in the net worth of the income which is
mainly due to the profitability, credibility, goodwill etc, of the concern. However, such requirements were not
available in the present case. Therefore, these shares do not have intrinsic value to give price to premium in
the business. In his view, the premium of Rs. 60 per share did not appear to be justifiable. He also referred to
the Section of 56(2)(viib) of the Income-tax Act, 1961 (hereinafter referred as the "Act"). The assessee filed a
detailed reply in response on 30.11.2015, wherein he mainly contended that receipt of share premium was a
capital receipt and was a commercial decision which does not require justification under the law. It was
prerogative of the Board of Directors of the company to decide the premium amount and it is the wisdom of
the shareholder whether they want to subscribe to share at a premium amount or not. Such receipts are not
having the character of an income being capital assets. The AO observed that the assessee raised loans from
the above associate concerns and has converted them to shares application/premium money. The appellant
vide letter dated 15.12.2015 provided the calculation of the book value of each share, which comes to Rs.
108/-. However, the assessee issued the shares at Rs. 70 per share i.e Rs. Face value of Rs. 10 per share +
Share premium of Rs. 60 per share. The AO found such calculation not in accordance with Rule 11UA and
after referring to rule 11UA(2)(b), the AO computed the fair market value ('FMV' in short) of the share based
on Book Value and finally held as under :
"Accordingly to the above formula, the fair market value of unquoted equity shares of the assessee comes
to Rs. 32.76 only and the assessee is entitle to charge premium to Rs. 2,27,600/-(32.76(-) Rs. 10/-=22.76
x 10000 shares) against which the assessee charged premium of Rs. 84,00,000/-. Thus the excess
premium of Rs. 81,72,400/- received by the assessee is not justified and not in accordance with the
amended provisions of section 56(2)(viib) of the I.T. Act."
Consequently, the excess premium of Rs. 81,72,400 received by the assessee was held unjustified and
considered as income from other sources and was added to the total income of the assessee by the AO.
4.2 In first appeal, the ld. CIT (A) partly confirmed the addition by rejecting the valuation done as per
Discounted Cash Flow Method by observing as under:
"4.3 I have gone through the assessment order, statement of facts grounds of appeal and written
submission carefully. It is seen that w.e.f 01.04.2013 the provisions of section 56(2)(vii) are applicable to
the any consideration received for issue of shares which exceeds the fair market value of the shares
issued by the appellant company. During the course of appellate proceedings, the appellant has furnished
the statement showing fair market value of the shares, claimed to have been computed as per the
Discounted Free cash Flow Method ,as provided under Clause (b) of Sub-rule 2 of Rule 11UA. The
valuation of the share as par this statement was Rs. 119.93 par share. When the appellant was requested
to explain the basis of the figures adopted by the appellant for computing the fair market value at Rs.
119.93, the appellant attended on 25.08.2016 along with Smt. Dhanwanti Gupta, CA who had signed the
valuation report in which the valuation of shares was shown at Rs. 119.93 per share. She filed a revised
valuation report, wherein the valuation per share was shown at Rs. 95.90 per share when the A\R and
Smt. Dhanwanti Gupta was asked to furnish the actual figure in respect of FYs. 2013-14, 2014-15 and
2015-2016, they attended on 29.08.2016 and filed another valuation statement wherein the valuation of
 shares was shown at Rs. 65.31 per share. I have discussed the issue with the A\R and Smt. Dhanwanti
Gupta, CA. It has been explained by them that the figures adopted for computing the fair market value of
share at Rs. 119.93 and Rs. 95.90 are purely on estimate basis. Therefore, they were asked to provide the
actual figures for the Fys 2013-14, 2014-15 and 2015-16 which are available with the appellant. When on
29.08.2016, the valuation statement prepared on the basis of actual figures for the F.ys 2013-14,2014-
15and 2015-16 was furnished, it was noticed that the Discounted Cash Flow during the F.ys 2013-14,
2014-15 and 2015-16 was Nil, Rs. -46.4 lakhs and Rs. -2.25 lakhs for the FYs 2013-14, 2014-15 and
2015-16, whereas in the original valuation statement, the Discounted cash flow these financial years was
shown at Rs. 27.13 lakhs, Rs. 30.41 lakhs and Rs. 37.61 lakhs. In the revised valuation statement filed on
25.08.2016, the discounted cash flow for these financial year was shown at Rs. 27.13 lakhs, Rs. 10.65
lakhs and Rs. 21.42 lakhs. Thus, it is clear that the valuation statement furnished by the appellant
showing Discounted Cash flow is based absolutely on imaginary and incorrect figures, because when the
actual figures for the Fys 2013-14, 2014-15 and 2015-16 are compared with the imaginary figures
adopted in the valuation statement furnished by the appellant, it is clear that the actual discounted cash
flow in these three financial years was negative i.e Rs. 48.72 lakhs (Nil, Rs. -46.49, Rs. 2.225). Whereas
in the valuation statement furnished by the appellant, the discounted cash flow for these three financial
years was shown at Rs. 95.15 lakhs (Rs. 27.13+Rs.30.40 + Rs. 37.61). Even the figures of sales adopted
in the valuation statement furnished by the appellant for these three years is absurd and are not even
approximately close to the actual figures. The sales for the Fys. 2013-14, 2014-15 and 2015-16 shown in
the valuation statement furnished by the appellant is Rs. 1152.71 lakhs, Rs. 1297.25 lakhs and Rs.
1405.65 lakhs whereas the actual figure of sale of these three financial years were Nil, Rs. 328.74 lakhs
and Rs. 790.81 lakhs. In view of these facts ,I am of the considered view that the valuation of shares
made in the valuation statement claimed to have been prepared on the basis of discounted free Cash Flow
Method as provided under Clause 'b' of Sub-rule 2 of Rule 11UA is absolutely unreliable and without any
basis .Therefore, the valuation of shares made in any of the three valuation report submitted by the
appellant can be the held to be in accordance with the method provided under Clause 'b' of Sub-rule 2of
Rule 11UA. Hence, the valuation submitted by the appellant is hereby rejected. However, the contention
of the appellant that there is arithmetical mistake in computation of the fair market value by the AO by
applying the fair market value by applying @32.76% is found to be correct. The AO is directed to
compute the fair market value by applying the rate of 32.76 per share of the share allotted by the
appellant in premium and revise the computation of income u/s. 56(2) (viib) accordingly.''
4.3 During the course of the hearing, the ld.AR of the assessee submitted following written submission which
has been taken into consideration:—
'submissions
1. Firstly, we strongly rely upon the submissions made by us before the CIT (A).
2. At the outset it is submitted that the Explanation to S. 56(2)(viib) of the Act provides that the fair
market value (FMV) of unquoted equity shares for the purpose of S. 56(2)(viib) of the Act shall be the
value as determined in accordance with such method as may be prescribed. The prescribed methods of
valuations are given under Rule 11 UA of Income tax Rules, 1962 (herein after referred as "Rules"). The
relevant extract are as under:
(2) Notwithstanding anything contained in sub-clause (b) of clause (c) of sub-rule (1), the fair market
value of unquoted equity shares for the purposes of sub-clause (i) of clause (a) of Explanation 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) ……….
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
Hence the law has specifically conferred an option upon the assessee that for the purpose of S. 56(2)(viib)
of the Act an assessee can adopt any of the methods mentioned u/r. 11UA(2) of the Rules. From Rule
11UA, it is clear that either the Break Up Value Method (Clause 'a') or DCF Method (Clause 'b') can be
applied for the purpose of S. 56(2)(viib) Expl. a(i) of the Act, at the option of the assessee.
3. In the present case, it is not denied that the assessee adopted clause (b) of Rule 11UA(2) of the Rules
and accordingly obtained a Valuation Report from a Chartered Accountant. Since the law has prescribed
the specific method for valuation i.e Discounted Cash Flow Method (hereinafter also referred as "DCF"),
so he was free (and rather entitled) to choose this method. The method of valuation could be challenged
by the AO only if it was not a recognized method of valuation (as per Rule 11UA (2) of the Rules). The
very purpose of certification of DCF valuation by a merchant banker or chartered accountant is to ensure
that the valuation is fair and reasonable. Such valuation is to be done by an expert of the subject only,
which an assessing officer is not expected to be. The said rule provides that such valuation shall be the
fair market value for the purpose of this section based on DCF Method. The Rule nowhere permits the
AO to make any adjustment therein.
3.1 The Discounted Cash Flow Method derives the value from the present value of future cash flows
therefore, this method entails the assessee to make the projections (i.e. Estimations) about revenue,
expenses, investments, repayments etc. The projection is made on certain reasonable assumptions w.r.t
reasonableness of future cash flows, industry and economic scenario, discount rate etc. The value is
derived from the future profitability or cash flows of the company. The investors expect a certain
minimum return on his investment. (ROI) Such returns can be generated only by future profits. Thus
valuation of shares is primarily based on future expectations which necessarily involves estimations.
Such projections are mere estimations and the valuer cannot expect to put the actual figures here.
Needless to say that there will always the some difference between the estimation and the actual and to
accurately foresee what is going to be the actual in the future is, certainly beyond the control of the
management at the point of time while making the estimation. If the management was able to foresee
losses, then why they should have set up the industry. It is precisely for this reason, now a days, there is a
huge investment made in the startup and at the very introduction of the project. The concept of startup
has been recognize even by the Income tax act where under, certain deductions u/s. 80-IAC of the Act
have been provided which provides for the period 7 years as gestation period.
3.2 Further, there are several factors which effect the profitability of a project/industries which, broadly
may be of 2 types i.e. general factors and the specific factors. Where the general factors are like
economic and political environment of the country, however, demand supply of the product and the
government policies regarding that particular industry, are such specific factor.
3.3 Therefore, the very requirement made by the ld. CIT (A) during the course of the appellate
proceedings directing the assessee to give the valuation report based on the actual figures and then to
compare such valuation report with these earlier reports based on the DCF Method (As approved by Rule
11UA(2)(b) of the Rules), is absolutely contrary to the provisions of the law and misconception of law.
Otherwise also, the fact is not denied that the assessee couldn't commence its production for want of
power availability in the next two years i.e up to AY. 2016-17 and there was no justification for making a
comparison. Pertinently, in AY. 2017-18 when the company became operational the valuation can be seen
almost in accordance with the actuals (as submitted in para 9 herein below).
3.4 The earning of assessee is volatile and depends upon economic cycles. The earning may be high
when the economy is booming, while the earning may be depressed in the recession. The projection so
made, are always subject to change due to subsequent events. The Valuer calculates the value after
considering all the relevant factors affecting the value of share at the time of valuation. Since the future is
always uncertain, so there may be some post reporting events, which may affect the valuation done by the
Valuer at the time of valuation, but the Valuer is not required to update the report for these subsequent
events. It is further submitted that the determination of the fair market value of the unquoted equity share,
can't be done with a mathematical precision in as much as it all depends upon the projections being made
which may or may not accurately match with the facts and circumstances which are in the womb of the
future. One cannot foresee the future. It is for this reason only, the Rules itself has provided for such the
fair market value to be determined based on a certificate of a Chartered accountant (as per discounted
free cash flow method). It is not denied that in this case such fair market value has been determined based
on a certificate of a Chartered Accountant Smt. Dhanvanti Gupta (PB 18-21) @ of Rs. 119.93 per equity
share. However, because of some calculation mistake, it was correctly revised showing value of Rs.
95.90/- Per equity share. The focus of the ld. CIT (A) is only on the issue that what the actual figures
were in the immediately later year.
3.5 The DCF Method is based on the income approach of business valuation. This approach indicates the
value of the business based on the value of cash flows that a business is expected to generate in future.
This method is most appropriate in going concern situations where the worth of the business is generally
a function of its ability to earn income/cash flows.
4. Conditions Fulfilled: Under the law i.e. u/s. 56(2)(viib) Expl. a(i) r/w. Rule 11UA(1)(b), the only
responsibility casted upon the assessee, is to get a valuation report from the merchant banker or an
accountant by using DCF Method, who have expertise in the valuation of shares and securities. The Fair
Market Value has to be determined by an Accountant and that too as per DCF Method alone. Once the
facts are admitted that there was a report by an accountant, which was as per the Discounted Cash Flow
Method, the FMV determined in such a manner is binding upon the revenue as if directed by the law.
There is no denial by the lower authorities from these facts and the fulfillment of the conditions as
prescribed.
5. Comparison with Actual Unwarranted: The only objection of the ld. CIT (A), keeping in mind the
actual figures, was that the valuation report (though undisputedly based upon DCF Method), "is based
absolutely on the imaginary or on incorrect figures" and "is absolutely unreliable and without any basis".
Such allegations are completely without any basis and merely on surmises and conjecture, in the light of
the following submissions:
5.1 Firstly, its comparison of the projections/estimated figures used in report (derived) with the actual
figures, was contrary to the very concept of valuation under the DCF.
5.2 Secondly, the ld. CIT (A) completely failed to point out which particular figure was found to be
incorrect or imaginary. On the contrary it was the AO who considered the incorrect figure of Rs. 32.76
per share as against the correct amount of Rs. 95.90
5.3 Thirdly, he has not demonstrated how the valuation report was unreliable and whether the AO or the
CIT (A) has got the valuation report examined from some other independent expert of the subject (i.e. a
Chartered Accountant or a financial analyst) In view of the facts, legal position and the above submission
his last allegation that such report was without any basis, is self-contradictory.
5.4 Fourthly, the working of the DCF was done by the valuer in accordance with the Technical Guidance
Note of the ICAI on DCF which is of recommendatory in nature yet however, the lower authorities
completely failed to point out any defect/deficiency.
5.5 A newly started company or a start-up can be valued only by this method, as these type of
organizations have very little or no capital base. In this case, the assessee was a newly incorporated
company with a very little assets base. The Board of Directors of the company decided to issue the shares
at the premium because of the great prospects of earning and growth in the future. It is the wisdom of the
shareholders whether they want to subscribe to share at such premium or not.
5.6 This way, the ld. CIT (A), in fact, has indirectly applied the provisions of Rule 11UA(1)(a) which
speaks of the such valuation to be based on the actual i.e. as per NAV Method. That is the reason he
started making a comparison between the estimation made by the CA u/r. 11UA(2)(b) @ 119/95.90 with
the actuals which was not warranted had the ld. CIT (A) correctly appreciated and applied clause (b) only
of Rule 11UA. Hence the CIT (A) clearly proceeded on a misconception. Interestingly the same CIT (A)
earlier decided a similar controversy in the case of M/s. Universal Polusack (infra) in favor of the
assessee. Under the guide of finding deficiencies in the DCF method adopted by the assessee u/r.
11UA(2)(b), the CIT (A) could not have imposed/thrust upon the assessee to apply rule 11UA(2)(a).
6. Provisions of Rule 11UA (2) shall prevail over rule 11UA(1): A bare reading of the relevant rules
make it clear that the rule 11UA (2) of the Rules talks about the method of valuation of the unquoted
equity shares specifically for the purpose of S. 56(2)(viib) r/w Explanation (a)(i) with which, the present
appeal relates to, is a special law and therefore, shall prevail over the general law contained u/r. 11UA(1)
of the Rules. It is a trite law that special law will always prevail over the general law.
Kindly refer Reliance - (1) AIR 1978 (SC) 851 - Mohindersingh Gill v. Chief Election Comm. (2) (1981)
131 ITR 429 (Ker.) Ramaraj (M.S. v. Comm of Agr. IT)); (3) (1980) 126 ITR 270 (Mad) - Asa John
Devinathan v. Addl. CIT and (4) (1988) 174 ITR 714 (Cal.) - Equitable Investment Co. (P.) Ltd. v. ITO.
7. Supporting Case Laws:
7.1 On this aspect kindly refer a direct decision of Hon'ble ITAT Jaipur in the case of ITO v. Universal
Polysack (India) Pvt. Ltd. ITA No. 609/JP/2017 (DPB 38-55). wherein, in para 16 page 14 it is held that:
"Therefore, we are unable to accede to the contention so raised by the ld. DT that Sub-Rule 1 of Rule
11UA which provides for determination of fair market value of unquoted equity shares as per book value
as per formula so specified is applicable in the instant case. Rather, sub-Rule 2 of Rule 11UA is more
specific for the purposes of determination of fair market value of unquoted equity shares under section
56(viib) and shall be applicable in the instant case".
Such option cannot be taken back merely because the AO is of the different opinion. Further, apart from
the requirement of obtaining a certificate from the CA, the assessee was not required to fulfil any other
condition and it has been left to the sole discretion of the assessee to choose the methods prescribed
under clause (a) or (b). This aspect is also directly covered by the aforesaid order wherein, it was held
that:
"The exercise of such an option by the assessee is not subject to fulfilment of any specified conditions
and it is left to the sole discretion of the assessee as it deems fit to apply. In the instant case, the assessee
company has exercised its option to value its shares as per DCF method and we find that the objection of
the AO is primarily directed at not adopting the book value of determination of value of shares as against
DCF adopted by the assessee company. The exercise of such an option cannot therefore be challenged by
the Revenue once the same has been exercised at first place by the assessee."
17. "Further, where the Assessing officer is of the opinion that the methodology so adopted by the
assessee and/or the underlying assumption while determining the share valuation as per DCF is not
acceptable to him, there is no discretion with the assessing officer to discard the DCF method of
valuation and adopt book value method."
7.2 On this aspect kindly refer DCIT v. M/s. Ozoneland Agro Pvt. Ltd. in ITA No. 4854/Mum/2016 vide
order dated 02.05.2018 Para 5 (DPB 66-78) and Green Infra Ltd. v. ITO in ITA No. 7762/Mum/2012 vide
order dated 23.08.2013 Para 10.
7.3 Also refer Medplus Health Services P. Ltd. v. ITO (2016) 158 ITD 0105 (Trib. - Hyd.) (DPB 56-65)
7.4 Also refer Vodafone M-Pesa Ltd. v. PCIT (2018) 92 Taxmann 73 (Bomabay) (DPB 79-83)
7.5 Also refer a very recent decision in the case of DCIT v. Ozoneland Agro (P.) Ltd. in ITA No.
4854/Mum/2016 vide order dated 02.05.2018 (DPB 66-78).
7.6 One common factual aspect which is available in the case of the assessee with the other two i.e.
universal Polysack (supra) and Green Infra Ltd. are that in all these cases, either the assessee company
was incorporated in the subjected year itself or in the present case and the universal Polysack (supra), no
production was commenced and that is the reason the AO considered the valuation based on the
projections as imaginary so also did the ld. CIT (A) and i.e. perhaps the reason the lower authorities
proceeded on a misconception, while ignoring the very purpose of introduction of Rule 11UA(2)(b) of
the Rules.
8. Projections now Reconciled with the Actuals: As submitted earlier, the valuer had merely made
projections which may or may not reconcile with the actuals. But the projections have to be made on
some basis. In this case, the ld. CA did her best to estimate the FMV at Rs. 95.90 per Share based on
DCF Method which fact, now is evident if the actual figures for the year ending on 31.03.2017 (AY.
2017-18) are seen and compared with the projections. The assessee prepared Valuation report as per DCF
Method and considered projected figures up to 31.03.2019. The Audited Balance Sheet of the assessee as
on 31.03.2017 depicts the following picture.

Particulars Amount (Rs.)

Fixed Assets 2,21,20,988
Current Assets 85,10,652
Loans and Advances(Assets) 17,05,531
Long Term Borrowings (47,11,887)
Current Liabilities and Provisions (1,49,24,429)
Net Assets 1,27,00,855
No. of Shares 1,50,000
Value Per Share 84.67

(Note: However, these figures were not before the lower authorities as have come into the existence later
on)
Thus evidently the actual value of the share @ Rs. 84.67 is quite near to the projected FMV of Rs. 95.90
per share by the ld. CA-Valuer. Such variation is within the tolerance limit of 15% only and considering
Rs. 70, the claimed FMV is fully justified.
9. The Projections are not without any basis: It is submitted that while making the projection, the ld. CA
while giving her report u/r. 11UA(2)(b), duly considered the plant capacity, the expected demand to be
generated in the future, the expected production to be done accordingly vis-à-vis the capital and revenue
expenditure likely to be incurred. There apart, notably the Dena bank, Bangalore have also sanctioned
Term Loan and CC Limit of Rs. 4 crores also taking into consideration these projections made by the
assessee (although such loan were granted mainly taking into account the personal properties of the
director hypothecated with the Bank).
One important aspect and a later development is that there has been a change in the management and
ownership in as much as the earlier Goyal Group, Beawar sold the 100% Shares to the present Jain
Group, Banglore, who purchased the 1,50,000 Shares @ Rs. 98.67 Per Equity Share in the month of
January, 2015. Moreover, the buyers are completely unrelated parties and as on day are managing the
entire show and the assessee company is in full swing of production. These facts strongly support the
case that looking to the purchase price of Rs. 98.67/- and purchase being in the January, 2015, the
estimated Fair Market Value (FMV) by ld. CA around Rs. 95.90 was fully justified. Needless to say that
why a stranger should have purchased the shares at such a high price i.e. as against 32.76 estimated by
the authorities below based on the actuals.
Startup is the best example:
10. It is further submitted that even sec. 80-IAC has recognized the gestation period up to 7 years. As
stated already the DCF Method is based on projection of future profits. The changes in the future are
inevitable so there will be gapes between the projected figures and actual figures. The DCF Method or
the projections made cannot be rejected straight away just because there were some difference between
actual and projected. The reconciliation or equilibrium between the actual and projected takes some time
i.e around 5 to 8 Years depending upon economic conditions.
11. CBDT's Letter strongly supports Assessee's case: Very pertinently, the CBDT has recently come up
with a letter (Instruction) (File No. 173/14/2018-ITA.I) dated 06.02.2018 (DPB-84) wherein, the CBDT
has taken note that in the cases of the startup where the assessee has applied for DCF Method by opting
u/r. 11UA(2)(b) r/w sec. 56(2)(viib), "….in the assessment, such reports are not being accepted and
rejected/modified by the Assessing Officer by treating them as based upon abnormal valuation resulting
in additions being made u/s. 56(2)(viib) of the Act in cases of "Start Up" companies"
It appears that as per CBDT this is not in accordance with the correct interpretation of the law, therefore,
the CBDT has indirectly hinted the field officers of its contrary view, by observing as under:
"3. In view of the above, it has been decided that in case of 'start up' companies which fall within the
definition given in notification of DIPP, Min. of commerce & industry, in G.S.R. 501(E) dated
23.05.2017, if additions have been made by the Assessing Officer under section 56(2)(viib) of the Act
after modifying/rejecting the valuation so furnished under Rule 11UA(2), no coercive measure to recover
the outstanding demand would be taken. Further, in all such case which are pending with the
commissioner (Appeals), necessary administrative steps should be taken for expeditious disposal of
appeals, preferably by 31st march 2018."
12. In the first valuation report, there was an inadvertent mistake committed of not considering the
working capital requirement and hence the ld. valuer has rightly modified her report accordingly so as to
 bring the correct fact on record. The assessee issued the shares @ Rs. 70 per share including premium of
Rs. 60 per share in respect of 1,40,000 share out of total 1,50,000 shares. The value per share derived as
per DCF Method was Rs. 95.90 Per Share.
13. The confusion of the AO is also evident from Page 7 Para 3(b) top wherein, he continued with the
share premium amount as per the Companies Act, i.e. based on NAV method and ignoring DCF and he
speaks of substantial increase in the net worth, profitability, credibility and goodwill etc. which are not
available in the assessee's case and alleged that the shares were not having intrinsic value to give price to
premium in the business. In fact, all these are not possible in the case of newly startup/set up company
being in existence of 8-10 years.
14. AY. 2013-14 is not the rightful year: Alternatively and without prejudice to the above contention,
even assuming it is held that the revenue is justified in their action, a careful reading of sec. 56(2)(viib)
shows that the happening of the two events (viz. the receipt of the consideration and the allotment of the
shares) both must happen in the same year or at least, it can be later year where the shares have already
been allotted (and that too on the date of allotment only) when the amount of the consideration can be
compared with the FMV of the shares (on the date of the allotment) for the simple reason that unless
there are shares in the existence there cannot be any valuation thereof. Moreover the FMV can also be
different if the year of the receipt and the year of the allotment are different. In this case, there was only a
receipt of the consideration but there was no allotment in this year (which was allotted in AY. 2014-15
only). There may be situation where the consideration is received in one year and the allotement is made
in fifth year then how the AO can apply the provisions in the year of receipt. For these reasons the said
provision is evidently not found workable on the peculiar facts of the case. In the case of CIT v. B.C.
Srinivasa Setty (1981) 128 ITR 294 (SC), it was held that unless the machinery section is found
workable, the substantive provision of the law even can't be applied. (Please see AO Pg. to top).
Hence the impugned additions deserves to be deleted in full".
4.4 On the other hand the ld. DR relied upon the orders of the authorities below.
4.5 We have heard the rival contentions and perused the materials available on record including the written
submissions and case laws relied upon during the course of hearing. From the order of the ld. CIT (A) it
emerges that the ld.AR and Smt. Dhanwanti Gupta, CA appeared and the matter was discussed with them and
they were asked to furnish the actual figures in respect of F.Ys. 2013-14, 2014-15 & 2015-16. In compliance
of such direction, the ld. AR and the ld. CA attended before the CIT (A) on 29.08.2016 and filed another
valuation report wherein the value of the share was worked out @ 65.31 per share. A copy of the said report is
placed on Pages 47-50 of the assessee's paper book. It is clear from the order of the ld. CIT (A) that he made a
comparison of the last report submitted to him on 29.08.2016 based on the actual figures with the earlier
reports submitted and prepared by the CA as per Rule 11UA(2)(b) on DCF method, and the ld. CIT (A)
finding difference between the figure of the two, rejected the report submitted by the assessee as absolutely
unreliable and without any basis. Thus, the basic dispute between the parties is whether the authorities below
could have applied the Net Asset Value as prescribed u/r. 11UA(2)(a) or whether the assessee has got a right
to opt for the method of valuation given u/r 11UA(2)(b) and secondly, if the assessee is entitled to the adopt
the DCF method to estimate the fair market value, the valuation submitted by the assessee was fair and
reasonable in accordance with Rule 11UA(2). Before proceeding further, we would like to reproduce the
relevant Provisions contained u/s. 56(2)(vii)(b) of the Act and the relevant Rules, which reads as under: —
"S. 56(2) (viia) where a firm or a company not being a company in which the public are substantially
interested, receives, in any previous year, from any person or persons, on or after the 1st day of June,
2010, any property, being shares of a company not being a company in which the public are substantially
interested,—

(i) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the
whole of the aggregate fair market value of such property;
(ii) for a consideration which is less than the aggregate fair market value of the property by an amount
exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such
consideration :
Provided that this clause shall not apply to any such property received by way of a transaction not
regarded as transfer under clause (via) or clause (vic) or clause (vicb) or clause (vid) or clause (vii) of
 section 47.
Explanation.—For the purposes of this clause, "fair market value" of a property, being shares of a
company not being a company in which the public are substantially interested, shall have the meaning
assigned to it in the Explanation to clause (vii);
(viib) where a company, not being a company in which the public are substantially interested, receives, in
any previous year, from any person being a resident, 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; or
(ii) by a company from a class or classes of persons as may be notified by the Central Government in
this behalf.
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 accordance with such method as may be prescribed"; or
(ii) 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 assets, including intangible assets being
goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other
business or commercial rights of similar nature,
whichever is higher;
(b) "venture capital company", "venture capital fund" and "venture capital undertaking" shall have the
meanings respectively assigned to them in clause (a), clause (b) and clause (c) of Explanation to
clause (23FB) of section 10;
"[Rule 11UA(2) Notwithstanding anything contained in sub-clause (b) of clause (c) of sub-rule (1), the
fair market value of unquoted equity shares for the purposes of sub-clause (i) of clause (a) of Explanation
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)

where,
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 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.]"'
However, there is no dispute between the parties that Rule 11UA(1) is not applicable on the facts and
circumstances of the present case which is a provision of general nature whereas Rule 11UA(2) is a specific
provision providing for the valuation of the unquoted equity shares. After going through the relevant Section
and the Rules, in our opinion, the matter of valuation of unquoted equity shares, has been completely left to
the discretion of the assessee. It is his option whether to choose NAV Method (Book Value) under clause (a)
or to choose DCF Method under clause (b) and the AO cannot adopt a method of his own choice. The
authorities below cannot compel the assessee to choose NAV Method only as against DCF Method. When the
legislation has conferred an option upon the assessee to choose a particular method, the valuation of the shares
has to be in accordance with such method only i.e. DCF method in the present case u/r 11UA(2)(b) r/w S.
56(2)(viib). In the case of Medplus Health Services (P.) Ltd. v. ITO [2016] 68 taxmann.com 29/158 ITD 105
(Hyd. - Trib.), the ITAT, Hyderabad Coordinate Bench, after taking into consideration various decisions, has
observed as under:
"11. On a careful reading of the judgments discussed above, it is seen that the Courts have held that
where a method has been prescribed by the legislature, that method alone shall be followed for
computation of the fair market value. The A.O. and the Ld. CIT (A) have not followed the relevant
provisions for adopting or computing the fair market value of the shares, but have adopted the market
value at which some of the shares have been purchased by the assessee as FMV. This, in our opinion, is
not correct. As held by the Courts in the above judgments, the A.O. has to compute the fair market value
in accordance with the prescribed method but cannot adopt the market value as fair market value under
Section 56(2)(viia) of the Act. The legislature in its wisdom has also given a formulae for computation of
the fair market value which cannot be ignored by the authorities below."
It is observed that in the instant case, the assessee company had exercised an option to value the share by DCF
Method however, we find that the AO has worked out the value based on NAV Method though in the body of
assessment order he has referred to Rule 11UA(2)(b) but in substance, he has valued the share based on the
book value figures only by considering the value of the assets shown in the Balance Sheet as on 31.03.2013
being the land valuing Rs. 3,27,690/- and the liabilities. The ld. CIT (A) also, though considered the case in
context of Rule 11UA(2)(b) yet however, his act of asking the assessee & his CA to prepare and submit a
valuation report only on actual figures, is nothing but a valuation done on the basis of NAV Method u/r
11UA(2)(a) only. From the facts thus, it is clear that the authorities below wanted to impose upon the method
of valuation of their own choice, completely disregarding the legislative intent which has given an option to
the assessee to choose any one of the two methods of valuation of his choice. When the law has specifically
provided a method of valuation and the assessee exercised an option by choosing a particular method (DCF
here), changing the method or adopting a different method would be beyond the powers of the revenue
authorities. Permitting the revenue to do so will render the clause (b) of Rule. 11UA(2) as nugatory and
purposeless. Thus, to this extent the action of the authorities below is not justified and it is held that the
assessee has got all the right to choose a method which, cannot be changed by the AO. Further, though the AO
can scrutinize the valuation report only if some arithmetical mistakes are found, he may make necessary
adjustments. But if he finds the working of the C.A. or the assumptions made as erroneous or contradictory,
he may suggest the necessary modification and alterations therein provided the same are based on sound
reasoning and rational basis and for this purpose the AO may call for independent expert valuer's report or
may also invite comment on the report furnished by the assessee's valuer as the AO is not an expert. It is not
open for the AO to challenge or change the method of valuation, once opted by the assessee and to modify the
figures as per his own whims and fancies. In any case, the revenue could not ask to prepare the valuation
report based on actuals which is not contemplated in Rule 11UA(2)(b).
4.5.1 Now coming to the aspect where the assessee has complied with the conditions laid down under Rule
11UA(2)(b), it is clear that to comply with this rule the assessee is required to obtain a certificate of a
Merchant Banker or Chartered Accountant and such a valuation must be based on Discounted Free Cash Flow
(DCF) Method only. To exercise the option under this clause, the assessee is not subjected to the fulfillment of
any other condition except these two. It is not denied that the assessee did file the valuation report first one
dated 31.03.2013 and the revised report dated 23.08.2016 valuing the FMV of the unquoted shares at Rs.
119.93 & 95.90 per equity share respectively prepared by a C.A. only. The reason for the difference was
explained that in the earlier report, the figure of change in networking capital was left out by oversight, which
has now been taken care and corrected in the revised report. This contention was supported by Paper Book
Page No.21 of the earlier valuation report and the revised valuation report Paper Book Page No.46.We find
nothing wrong if a bonafide mistake was corrected.
4.5.2 Before examining the fairness or reasonableness of valuation report submitted by the assessee, we have
to bear in mind that the DCF Method, and is essentially based on the projections (estimations) only and hence
these projection cannot be compared with the actuals to expect the same figures as were projected. The valuer
has to make forecast on the basis of some material but to estimate the exact figures is beyond its control. At
the time of making a valuation for the purpose of determination of the fair market value, the past history may
or may not be available in a given case and therefore, the other relevant factors may be considered. The
projections are affected by various factors hence in the case of company where, there is no commencement of
production or of the business, does not mean that its share cannot command any premium. For such cases, the
concept of startup is a good example and as submitted, the Income-tax Act has also recognized and is
encouraging the startups for which, a separate deduction u/s 80IAC has been provided. In this context, we find
a CBDT Instruction (File No. 173/14/2018-ITA.I) on dated 06.02.2018 (copy placed at paper book-84) given
in the case of startup companies useful in the context of determination of fair market value of the unquoted
equity shares u/s 56(2)(viib) of the Act r/w Rule 11 UA(2), which states that tough startup companies
invariably submits valuation report in accordance with Rule 11UA(2)(b) but in the assessments such reports
are not being accepted and rejected/modified by the AOs considering the same as based on abnormal
valuations which results in additions. The CBDT has accordingly directed not to take coercive measures in
such cases for recovery of demand resulting in additions and the CIT (A) have been directed to dispose such
appeals expeditiously.
4.5.3 Coming to the basis of the projections, it is submitted that the plant capacity was taken as a basis to
make projections of the production. It is further submitted that at the assessee is dealing in toughened glass
which is related to real estate (construction) industry and at the relevant point of time, the real estate sector
was in boom and there existed favourable conditions in the industry. The Directors of the assessee company
were having experience and knowledge of the field. The other three companies to whom shares were allotted
were also in the real estate sector, as their name suggest. The Board of Directors were expecting good results
in the future. Except the initial years where the production could not be commenced because of the
circumstances beyond the control but as per the actual figures available now for the previous year ended on
31.03.2017, the value per share comes to Rs. 84.67 based on the audited accounts which is almost in
accordance with the value of Rs. 95.90 estimated by the C.A. Moreover, such report was also submitted to the
bank as per a notes at Page 46 of the assessee's paperbook, for obtaining hypothecation limit of Rs. 4 crores
which was sanctioned based on such valuation report along with the hypothecation of the properties of the
directors. Hence, it cannot be said that the projections made by the C.A. in the valuation report were
imaginary figures, completely without any basis. We find substance in the contentions. It is not the case of the
ld. CIT (A) that the projection made in the C.A.'s report are in contradiction of the figures of the installed
production capacity which being lesser yet the production was shown disproportionately higher. Also there is
no whisper in the orders of the CIT (A) as to which figure was found incorrect and what should be the correct
figures. Except making comparison with the actuals there is nothing on record to doubt the veracity of the
C.A.'s report or to support the observations of the ld. CIT (A).He further doubts that the figures of the sale
shown in the valuation report and those shown the in the Balance Sheet of F.Y.2014-15 and F.Y.2015-16.
However such an objection cannot be given weightage for the reason that firstly no explanation was called for
by the ld. CIT (A) on this aspect but he assumed on his own and there apart the assessee has already stated
that due to the non-availability of the power connection, it could not commence the production in the initial
years therefore, there was no production, which fact is admitted by the AO also and hence, comparison of the
projected sales figure with the actuals was not justified. As already stated that the figures given by the C.A.
were mere projection/estimations depending upon various factors which nobody could have anticipated or
foreseen on the day when such valuation were made. Therefore, there was no justification yet to make a
comparison of the estimations with the actuals. Such a comparison is otherwise principally against the
contemplation of Rule 11 UA(2)(b) which required the C.A. to prepare a report on DCF Method only i.e.
based on mere projections and not actuals as against the NAV Method prescribed u/r 11UA(2)(a). For these
reason we find no justifications behind the objection of the ld. CIT (A) that the valuation done by the C.A.
was based absolutely imaginary and incorrect figures or without any basis. The C.A. has considered the plant
capacity, industry and market conditions as prevailed in the state, the sanctioning of the loan by the bank are
the factors which formed a reasonable basis of projections. Moreover it is not denied that the valuation reports
were prepared by the C.A. as per the guidelines given by the Institute of Chartered Accountants of India and
the AO has not found any fault. We thus, find no rational or sound basis in the order of the authorities below
to reject the valuation report submitted by the assessee based on DCF Method.
4.5.4 In any case, it is also noticed that even as per the valuation got done by the CIT (A) based on the actuals,
the FMV came to Rs. 65.31 per share as against which, the assessee had charged a premium of Rs. 60 only per
share. Therefore even assuming that the valuation reports submitted by the assessee are not reliable for any
reason than too there was no justification to rely upon the valuation of the shares done by the AO based on
book value at Rs. 32.76 per share or premium at Rs. 27.76 per share. Reducing the face value of Rs. 10 from
the FMV of Rs. 65.31, the amount of premium comes to Rs. 55.31 per share as against the premium claimed
by the assessee at Rs. 60. Thus there is a small difference of around Rs. 5 which was less even than 10% of
the premium claimed by the assessee @ Rs. 60 per share. The variation to this extent is possible in the matters
of estimations.
4.5.5 We find that a similar controversy came up before a co-ordinate bench of ITAI in the case ITO v.
Universal Polysack (India) (P.) Ltd. [IT Appeal No. 609 (JP) of 2017, dated 31-1-2018] (Assessee's PB Pages
38-55). The facts noted by the Hon'ble Co-ordinate Bench in that case are identical with the facts of the
present case wherein the Hon'ble Bench held as under:
'14 We have heard the rival contentions and pursued the material available on record. In the instant case,
it is not in dispute that the assessee company is a company in which the public are not substantially
interested and the shares of the assessee company are not listed or traded on any recognized stock
exchange. It is also not in dispute that during the previous year. the assessee company has issued 11,500
shares of face value of Rs. 100 at a premium of Rs. 900 per share to M/s. Terry Towel Industries Ltd and
has thus received total consideration of Rs. 1,03,50,000. The limited issue under consideration is whether
the consideration so received for such shares exceeds the fair market value of the shares. Where the
answer to the same is in affirmative, the excess so determined over the fair market will be brought to tax
as income from other sources as per the provisions of section 56(2)(viib) of the act which reads as under:
''Where a company, not being a company in which the public are substantially interested, receives, in any
previous year, from any person being a resident, any consideration for issue of shares that exceeds the
face value of such shares, the segregate consideration received for such shares exceeds the fair market
value of the shares.''
15. The explanation to section 56(2)(viib) provides that the fair market value of such shares means the
value determined in accordance with the method as may be prescribed. The method of valuation has been
prescribed in rule 11UA which reads as under:
** ** **

16. As it is clear from the above, sub-rule 2 of rule 11UA talks about method of valuation of unquoted
equity shares of the assessee company specifically for the purposes of section 56(2)(viib) of the act and
the same overrides the general provisions of sub-rule 1 of rule 11UA. In the instant case, the context in
which the valuation of the shares have to be determined is in the context of the section 56(2)(viib) of the
Act as invoked by the AO and therefore, both the assessee and the revenue are equally guided by the said
provisions and there is no discretion with either of the parties in terms of non-applicability of Sub-rule 2
of Rule 11UA. Therefore, we are unable to accede to the contention so raised by the Id DR4 that sub-rule
1 of rule 11UA which provides for determination of fair market value4 of unquoted equity shares as per
book value as per formula so specified is applicable in the instant case. Rather, Sub-Rule 2 of Rule 11UA
is more specific for the purposes of determination of fair market value of unquoted equity shares under
section 56(viib) and shall be applicable in the instant case. The latter provides an option to the assessee to
 determine the fair market value of the shares either as per the book Value or Discounted Free Cash Flow
Method. The exercise of such an option by the assessee is not subject to fulfillment of any specified
conditions and it is left to the sole discretion of the assessee as it deems fit to apply. In the instant case,
the assessee company has exercised its option to value its shares as per DCF method and we find that the
objection of the AO is primarily directed at not adopting the book value of determination of value of
shares as against DCF adopted by the assessee company. The exercise of such an option cannot therefore
be challenged by the revenue once the same has been exercised at first place by the assessee.
17. Further, where the assessing officer is of the opinion that the methodology so adopted by the assessee
and/or the underlying assumption while determining the share valuation as per DCF is not acceptable to
him, there is no discretion with the AO to discard the DCF method of valuation and adopt book value
method. At the same time, in our view the AO is well within his rights to examine the methodology so
adopted by the assessee and/or the underlying assumption and where he is not satisfied with the same, he
can challenge the same and suggest necessary modification/alterations provided the same are based on
sound reasoning and rational basis. In the instant case, we find that certain basis objections have been
raised by the Assessing Officer in terms of applying the estimated turnover numbers instead of actual
numbers and discounting factor, etc which, in our view, has been satisfactorily explained by the assessee
company during the appellate proceedings and nothing has been brought on record which can
substantially challenge the methodology or the underlying assumption while determining the value of the
shares. Further, the fact that the said valuation and the projected financials have been found acceptable by
the Bank while sanctioning the term loan and working capital limits, it cannot be said that the same are
purely hypothetical and not based on sound financial understanding and market dynamics of the industry
in which the assessee operates.
18. ** ** **

19. In light of above discussions and in the entirety of facts and circumstances of the case, the order of
the Id CIT (A) is confirmed and the ground taken by the Revenue is dismissed.'
4.5.6 We also find that in the case of Vodafone M-Pesa Ltd. v. Pr. CIT [2018] 92 taxmann.com 73 (Bom.)
(DPB 79-83), the Hon'ble Mumbai High Court in para 9 has observed that
"9. ….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."
The AO though observed that the assessee raised loans from the above associate concerns and has converted
them into shares application/premium money. However, it has not shown how it will affect the correctness of
the valuation claimed. It is not the case of the AO that the shares were allotted to the outsiders non-related
persons but the existing amount of the loans from the related persons were converted into shares. Hence there
cannot be any scope of introduction of assessee's unaccounted income through allotment of shares at
unreasonably high priced shares. Therefore, such observations is not relevant and a mere suspicion. It appears
that the authorities below have ignored Explanation (a) below S. 56(2)(viib).The said Explanation provides
that the fair market value of the shares shall be the value— (i) as may be determined in accordance with such
method as may be prescribed i.e. u/r 11UA; or (ii) 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 assets, including intangible
assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business
or commercial rights of similar nature, whichever is higher. Accordingly, the value computed under the Rule
at Rs. 95.90 per share is higher than Rs. 65.31 or Rs. 32.76 per share and therefore, the higher valuation has to
be adopted. Moreover, it is only the Explanation (a)(ii) speaks of the satisfaction of the AO but there appears
no such condition in the Explanation (a)(i) which therefore AO is not permitted to interfere in the valuation,
once done in accordance with the method prescribed in the Rule 11UA(2). For the reasons stated above, we
find no justification behind rejecting the declared valuation of the shares and in the impugned addition made
by the AO but partly sustained by the CIT (A), which is hereby deleted.
5. In the result, the appeal of the assessee is partly allowed as indicated above
TANVI
*In favour of assessee.
 [2024] 161 taxmann.com 303 (Delhi)[04-04-2024]

INCOME TAX : Where assessee-company for valuation of shares placed reliance on

valuation report drawn by a merchant banker wherein DCF method was adopted, AO
could not have rejected said method and adopted NAV method for valuation of
shares

■■■

[2024] 161 taxmann.com 303 (Delhi)

HIGH COURT OF DELHI
Agra Portfolio (P.) Ltd.
v.
Principal Commissioner of Income-tax*
YASHWANT VARMA AND PURUSHAINDRA KUMAR KAURAV, JJ.
IT APPEAL NO. 1385 OF 2018
APRIL 4, 2024

Section 56 of the Income-tax Act, 1961, read with rule 11UA of the Income-Tax Rules, 1962 -
Income from other sources - Chargeable as (Sub-section (2)(viib)) - Assessment year 2014-15
- Assessee-company issued equity shares at premium - For purpose of valuation of shares,
assessee placed reliance on valuation report drawn by a merchant banker wherein DCF
method was adopted and value of each share was pegged at Rs. 9.60 - However, Assessing
Officer rejected said valuation report on ground that valuation of shares was not realistic
keeping in view growth and stature of company - He further observed that in valuation report
only figures had been put up without giving reasons as to how these assumptions had been
made - Assessing Officer thus, independently determined value of each share to be Rs. 40.40
and made addition to income of assessee under section 56(2)(viib) - Whether language of
rule 11UA(2) indubitably places a choice upon assessee to either follow route as prescribed
in clause (a) or in alternative to place for consideration of Assessing Officer a Valuation
Report drawn by a merchant banker as per DCF method - Held, yes - Whether therefore,
while it would be open for Assessing Officer, for reasons so recorded, to doubt or reject a
valuation that may be submitted for its consideration, statute clearly does not appear to
empower it to independently evaluate face value of unquoted equity shares by adopting a
valuation method other than one chosen by assessee - Held, yes - Whether in view of
aforesaid, matter was to be remanded to Assessing Officer who shall undertake an exercise
of valuation afresh in accordance with DCF method - Held, yes [Paras 16, 17 and 22] [In
favour of assessee]
CASES REFERRED TO

DCIT v. Sodexo Facilities Management Services [ITA No. 2945/Mum/2022] (para 18).
Sumit Lalchandani, Vibhu Jain, and Salil Kapoor, Advs. for the Appellant. Sanjay Kumar, Ms. Easha,
and Ms. Hemlata Rawat, Advs., for I.T. Dept, for the Respondent.
JUDGMENT

Yashwant Varma, J. - The assessee appellant has instituted the present appeal aggrieved by the judgment
rendered by the Income Tax Appellate Tribunal1 dated 16 May 2018 and has raised the following questions
for our consideration: -
 "A. Whether in view of the facts and circumstances of the case and in law, the Tribunal is right in
upholding the rejection of the valuation report on the ground that the same was prepared without any
verification and upon only considering the figures supplied by the Appellant, while at the same time,
ascribing no errors in the said figures?
B. Whether in view of the facts and circumstances of the case and in law, the Tribunal has erred by
deciding the appeal basis the conjecture/surmise that the possibility of tailoring of data could not be ruled
out?
C. Whether in view of the facts and circumstances of the case and in law, the Tribunal is right in holding
that the AO was at liberty to substitute the method of valuation adopted by the Assessee (DCF Method)
for his own preferred method of valuation (NAV Method)?
D. Whether in view of the facts and circumstances of the case and in law, the Revenue can reject the
report of an expert merchant banker and substitute its own valuation without referring it to the DVO or an
expert on the subject?
E. Whether in view of the facts and circumstances of the case and in law, the Tribunal erred by not
considering that the Act does not give any scope for the AO to conduct his own valuation exercise, and in
all cases where a particular valuation report was rejected, reference to DVO becomes mandatory?
F. Whether the Tribunal erred in law by failing to consider that the even if allegations of non-cooperation
are levelled against the Appellant, reference for valuation purpose could have been made to the DVO, as
only the DVO has appropriate powers to declare whether the information furnished was erroneous /
incorrect or if some further information was required?"
2. Upon hearing learned counsels, we formally admit the appeal on the aforenoted questions.

3. The ITAT has essentially upheld the additions made by the Assessing Officer2 in Assessment Year3 2014-
15 consequent to the rejection of the Fair Market Value4 evaluation as submitted by the appellant as
contemplated under Section 56(2)(viib) of the Income Tax Act, 19615 read along with Rule 11UA of the
Income Tax Rules, 19626. The issue of valuation had arisen in the context of the appellant having allotted
3,15,000 equity shares of a face value of INR 10/- each at a premium of INR 40/- per share and for a total
amount of INR 1,26,00,000 /-.
4. For the purposes of valuation of the shares offered for subscription, the appellant had placed reliance on a
Valuation Report drawn by a merchant banker, M/s SPA Capital Advisors Ltd., and wherein the value of each
share was pegged at INR 9.60/-. Consequent to the rejection of that Report, the AO independently determined
the value of each share to be INR 40.40/- and thus quantified the disallowance under Section 56(2)(viib) at
INR 1,27,26,000/-.
5. The principal grievance of the appellant is that even if the AO had deemed it fit to reject the Valuation
Report drawn on the basis of Discounted Cash Flow Method7, it could not have substituted the means and the
method of valuation of its own volition. It is this principal ground of challenge which was urged by Mr.
Lalchandani, learned counsel who appeared in support of the appeal.
6. Doubting the veracity of Valuation Report, the AO is stated to have placed the appellant on notice under
Section 142(1) asserting as follows:-
"1. Please refer to your submission dated 07/09/2016 wherein you have submitted certificate of valuation
of shares under rule 11UA. On perusal of the valuation report the following facts have been noticed.

(i) In its valuation report M/s SPA Capital Advisors Ltd. has given a disclaimer as under: "In preparing
the Final Report, SPA has relied upon and assumed, without independent verification, the
truthfulness, accuracy and completeness of the information and the financial data provided by the
company. SPA has therefore relied upon all specific information as received and declines any
responsibility should the results presented be affected by the lack of completeness or truthfulness of
such information. "
From perusal of the report it appears that the valuation of shares is not realistic keeping in view the
growth and stature of your company. Further, in the valuation report only figures have been put up
 without giving reasons as to how these assumptions have been made.

(ii) In the DCF methodfirst step is to forecast expected cash flow based on assumptions regarding the
company's revenue growth rate, net operating profit margin, income tax rate, fixed investment
requirement, and incremental working capital requirement. The revenue growth rate as well as the
net profit margin of your Company, since inception, is negative and you have been carrying forward
business losses. Even in the subsequent years, for which data is available, you have incurred losses
(loss of Rs. 53083/- (AY 2014-15) and Rs. 1,00,384/- (AY 2015-16). However, as per the
computation of valuation, the free cash flow to equity figures are -0.98 (2013-14), 32.61 (2014-15),
34.89 (201516), 37.00 (2016-17), 39.22 (2017-18) which are unrealistic.
You are also requested to submit actual free cash flow (FCF) for the AY 2014-15, 2015-16 & 2016-17 till
date)

(iii) Similarly with regard to calculation of Cost of Capital, it is requested to clarify whether weighted
average has been taken or otherwise. Further use of BSE 500 return data in your case is uncalled
for. All your investments are in the associates company only and you must have the data of their
year on year growth rate to calculate the actual return in your case. Also BSE 500 return data since
inception is very unusal. Practically for assumption purpose this is a very long period for a
company which is incorporated a few years back. Therefore, you are requested to take the realistic
figure as deduced from your associate company investments. Further, you are having investments in
your associates so the risk factor should be at a very low side. Therefore, you are requested to
clarify the basis relying upon the company specific risk has been calculated at5%. Similarly Beta
figure of I and Risk premium of 6.75 may also be justified.

(iv) Also you have taken a discounting factor @ 20.80% for a company whose returns are continuously
in negative which is an unrealistic approach to calculate the value of shares. In view of the above
you are also requested to give details of values which have been taken to arrive at a discounting
figure @ 20.8% and also the basis behind such assumption for a company whose return have
consistently been negative. Also, whether sector specific study has been carried out to reach the rate
of return of growth. If, yes give a copy of the same.

(v) Further, you are requested to submit Financial statement of six months ended on September 30,
2013.
In view of the above, you are requested to submit the details and explanations called for above and to
explains as to why the DCF method of valuation employed by you for valuation of shares under Rule
11UA should not be rejected and, therefore, the book value method as per RULE 11UA (2)(a) should not
be taken for the purpose of Section 56(2)(viib) of the I.T. Act, 1961."
7. Noticing that the appellants had failed to satisfactorily answer the queries which stood raised, the AO
proceeded to issue further notices referable to Sections 144 and 142(1) of the Act. It was in terms of the
aforesaid notices that the AO took the position that the shares were liable to be valued at INR 9.60/- as against
INR 50.60/- which had been adopted by the assessee.

8. The decision of the AO ultimately came to be affirmed by the Commissioner of Income Tax (Appeals)8 and
both have essentially proceeded on a perceived failure on the part of the appellant assessee to substantiate the
basis of valuation as adopted in the Valuation Report. They also appear to have held against the appellant on
the ground that it had failed to provide any evidence in support of the figures which formed part of the
Valuation Report. The AO as well as the CIT(A) also appear to have drawn adverse inference from the
disclaimers which stood introduced in the Valuation Report drawn by the merchant banker and which had
clearly divulged that the Report had come to be drawn solely based on the data provided by the appellant
without "independent verification" with respect to the truthfulness, accuracy and completeness of the
information.
9. The ITAT on the basis of the above came to hold that since the AO was deprived of any satisfactory
explanation, it was left with no option but to reject the Valuation Report and independently evaluate the face
value of the shares. While doing so, however, the AO has chosen to depart from the DCF Method which was
adopted by the assessee and has independently ascertained the face value of the shares by adopting the Net
Asset Value Method9.
10. Assailing the view so taken, Mr. Lalchandani submitted that in terms of Section 56(2)(viib), the option of
choosing a method of valuation stands vested exclusively in the assessee. According to learned counsel, even
if a valuation as submitted were to be doubted, it would not be permissible for the respondents to adopt a
method different from the one chosen by the assessee. Mr. Lalchandani contended that the aforesaid position
would clearly flow from the language in which Section 56(2)(viib) stands couched read along with Rule
11UA. Learned counsel contended that Rule 11UA(2) in unambiguous terms employs the expression "at the
option of the assessee" and this being evidence of the choice of a valuation method being one placed in the
hands of the assessee alone.
11. In support of his submission, Mr. Lalchandani also drew our attention to the following pertinent
observations as rendered by a Division Bench of the Bombay High Court in Vodafone M-Pesa Limited v.
Principal Commissioner of Income Tax and Others 2018 SCC OnLine Bom 21317 :-

"9. We note that, the Commissioner of Income-Tax in the impugned order dated 23rd 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 part of demand arising
out of the assessment order dated 21st 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. Infact, he has completely
disregarded the DCF Method for arriving at the fair market value. Therefore, the demand in the facts
need to be stayed."
12. Appearing for the respondents, Mr. Kumar, learned counsel, submitted that Section 56(2)(viib) places the
assessee under an obligation to submit a report depicting the FMV of shares and which can be duly
substantiated to the satisfaction of the AO. According to learned counsel, since the appellant, despite adequate
opportunities having been provided failed to establish the correctness of the valuation, the AO became entitled
to undertake an independent exercise for the purposes of determining the FMV of the unquoted equity shares.
It is these rival submissions which fall for our determination.
13. In order to appreciate the submissions which have been addressed, we deem it apposite to firstly extract
Section 56(2)(viib) which reads as follows:-
"Section 56. Income from other sources.
xxxx xxxx xxxx
(vii-b) where a company, not being a company in which the public are substantially interested, receives,
in any previous year, from any person [being a resident], 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 [or 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 income in consequence of the misreporting
referred to in sub-section (8) and sub-section (9) of Section 270-A for the said previous year.]
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 accordance with such method as may be prescribed; or

(ii) 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 assets, including intangible assets being goodwill, know-
how, patents, copyrights, trademarks, licences, franchises or any other business or commercial
rights of similar nature, whichever is higher;

[(aa) "specified fund" means a fund established or incorporated in India in the form of a trust or a
company or a limited liability partnership or a body corporate which has been granted a certificate
of registration as a Category I or a Category II Alternative Investment Fund and is regulated under
the Securities and Exchange Board of India (Alternative Investment Fund) Regulations, 2012 made
under the Securities and Exchange Board of India Act, 1992 (15 of 1992) [or regulated under the
[International Financial Services Centre Authority (Fund Management) Regulations, 2022 made
under the] International Financial Services Centres Authority Act, 2019];

(ab) "trust" means a trust established under the Indian Trusts Act, 1882 (2 of 1882) or under any other
law for the time being in force;]

(b) "venture capital company", "venture capital fund" and "venture capital undertaking" shall have the
meanings respectively assigned to them in clause (a), clause (b) and clause (c) of [Explanation] to
clause (23-FB) of Section 10;]"
14. As is manifest from the above, the explanation placed in clause (viib) postulates that the FMV of shares
shall be the value determined in accordance with the methods as may be prescribed or as may be substantiated
by the company to the satisfaction of the AO, whichever be higher. The methods for valuation stand
enumerated in Rule 11UA which reads as follows: -
"Determination of fair market 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 jewellery,-

(i) the fair market value of jewellery shall be estimated to be the price which such jewellery would
fetch if sold in the open market on the valuation date;

(ii) in case the jewellery is received by the way of purchase on the valuation date, from a registered
dealer, the invoice value of the jewellery shall be the fair market value;

(iii) in case the jewellery is received by any other mode and the value of the jewellery exceeds rupees
fifty thousand, then assessee may obtain the report of registered valuer in respect of the price it
would fetch if sold in the open market on the valuation date;

(b) valuation of archaeological collections, drawings, paintings, sculptures or any work of art,-

(i) the fair market value of archaeological collections, drawings, paintings, sculptures or any work of
art (hereinafter referred as artistic work) shall be estimated to be price which it would fetch if sold
in the open market on the valuation date;

(ii) in case the artistic work is received by the way of purchase on the valuation date, from a registered
dealer, the invoice value of the artistic work shall be the fair market value;
(iii) in case the artistic work is received by any other mode and the value of the artistic work exceeds
rupees fifty thousand, then assessee may obtain the report of registered valuer in respect of the price
 it would fetch if sold in the open market on the valuation date;

(c) valuation of shares and securities,-

(a) the fair market value of quoted shares and securities shall be determined in the following manner,
namely,-

(i) if the quoted shares and securities are received by way of transaction carried out through any
recognized stock exchange, the fair market value of such shares and securities shall be the
transaction value as recorded in such stock exchange;
(ii) if such quoted shares and securities are received by way of transaction carried out other than
through any recognized stock exchange, the fair market value of such shares and securities shall
be,-
(a) the lowest price of such shares and securities quoted on any recognized stock exchange on the
valuation date, and

(b) the lowest price of such shares and securities on any recognized stock exchange on a date
immediately preceding the valuation date when such shares and securities were traded on such
stock exchange, in cases where on the valuation date there is no trading in such shares and
securities on any recognized stock exchange;
[(b) the fair market value of unquoted equity shares shall be the value, on the valuation date, of such
unquoted equity shares as determined in the following manner, namely:-the fair market value of
unquoted equity shares = (A+B+C+D - L) X (PV)/(PE), where,
A= book value of all the assets (other than jewellery, artistic work, shares, securities and immovable
property) in the balance-sheet as reduced by,-

(i) any amount of income-tax paid, if any, less the amount of income-tax refund claimed, if any; and
(ii) any amount shown as asset including the unamortised amount of deferred expenditure which does
not represent the value of any asset;
B = the price which the jewellery and artistic work would fetch if sold in the open market on the basis of
the valuation report obtained from a registered valuer;
C = fair market value of shares and securities as determined in the manner provided in this rule;
D = the value adopted or assessed or assessable by any authority of the Government for the purpose of
payment of stamp duty in respect of the immovable property;
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 figure is negative, other than
those set apart towards depreciation;

(iv) any amount representing provision for taxation, other than amount of income-tax paid, if any, less
the amount of income-tax claimed as refund, if any, 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;
 PV = the paid up value of such equity shares;
PE ="total" amount of paid up equity share capital as shown in the balance-sheet;]
(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 which such valuation.]
(2) Notwithstanding anything contained in sub-clause (b) of clause (c) of sub-rule (1), the fair market
value of unquoted equity shares for the purposes of sub-clause (i) of clause (a) of Explanation 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=

where,
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 a 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 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 [***] as per the
Discounted Free Cash Flow Method.]"
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 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.
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 DCIT, Circle 13(2)(2), Mumbai v. Sodexo Facilities Management Services [ITA No.
2945/Mum/2022] 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 method of the valuation, the AO cannot
find fault in the said recognized method and adopting the method of his own choice. In support of this, he
relied on the decision of the Hon'ble Jurisdictional High Court in the case of Vodafone M-Pesa Ltd. v.
PCIT [2018] 164 DTR 257[2018] 92 taxmann.com 73/256 Taxman 240 (Bombay) (HC). As far as the
worth of food division is concerned, the Ld. Counsel for the assessee submitted that assessee has
followed the method prescribed under section 50B(3) of the Act alongwith Explanation (2). He submitted
that in the net worth computed by the assessee and in the AO, there is only one difference. It was
submitted that the assessee following the Explanation-2 below section 50B(3) of the Act has adopted
written down value of the block asset in case of the depreciable asset as per the proviso to section 43 of
the Act, which the AO has omitted.
19. We have heard rival submissions on the issue in dispute and perused the material on record. We find
that computation of LTCG on the transfer of undertaking as the slump sale consists of two components.
First component is sale consideration and the second component is the net worth or cost of acquisition.
When the net worth of division is subtracted from the sale consideration, which results into LTCG on 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 ld 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 Joint Commissioner of Income
Tax v. M/s MLR Auto Limited [ITA No. 115/Hyd/2021] 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 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 / ld.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 value of the unquoted shares.
18 .Therefore, in our view, the Assessing Officer was incorrect in concluding that the DCF method is
"quite unrealistic and inapplicable" to the terms of the Income Tax Act. On the contrary, the DCF method
 is quite applicable and was required to be applied by the Assessing Officer to determine the FMV of the
unquoted shares. . . . . . . . . . . . . ."
20. A more detailed discussion on the issue which confronts us in this appeal is found in the judgment
rendered by the Mumbai Bench of the ITAT in Dy. Commissioner of Income Tax 6(2)(1) v. Credtalpha
Alternative [2022] 94 ITR (Trib) 596 and the relevant parts whereof are reproduced hereunder:-
"15. Thus, the fair market value of the share shall be higher of the value as determined in accordance
with the provisions of rule 11 UA or any other method, which can be substantiated by the assessee before
the Assessing Officer. For the purpose of determining "fair market value" of unquoted shares provisions
of rule 11 UA (2) applies which gives an option to the assessee to either value the shares as per
prescribed formula given in clause (a) or clause (b) which provides for the determination of the fair
market value based on discounted cash flow method as valued by a merchant banker 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 flow 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 i.e., 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 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 always
include limitation and responsibilities but that does not make his report incorrect. Of course, if there are
errors in the working of projected cash flow, estimating the projected revenue and projected expenditure
as well as in adoption of cost of equity and discount factor, the learned Assessing Officer is within his
right to correct it after questioning the same to the assessee. The learned Assessing Officer can also
question the basic assumptions made by the valuer. If they are unreasonable or not based on historical
data coupled with the management expectation, the learned Assessing Officer has every right to question
it and adjust the valuation so derived at. However, if he does not find any error in those workings, he
could not have rejected the same. Further the reason given by the learned Assessing Officer that the net
asset value method and the discounted cash flow method for valuation of the shares of the company gives
a wide variation between them, we do not find any reason to find fault with the assessee in such cases.
Both these methods have different approaches and methodologies therefore there are bound to be
differences, but it does not give any authority to the learned Assessing Officer to pick and choose one of
the method and make the addition. It is the assessee 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 Pvt. Ltd. v. Income Tax Officer [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 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 Value Homes Pvt. Ltd. (supra).
12. In view of the above legal position, we are of view that the issue with regard to valuation has to be
decided afresh by the AO on the lines indicated in the decision of ITAT, Bangalore in the case of VBHC
Value Homes Pvt. Ltd., v. ITO (supra) i.e., (i) 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. (ii) For scrutinizing the valuation report, the facts and data
available on the date of valuation only has to be considered and actual result of future cannot be a basis to
decide about reliability of the projections. The primary onus to prove the correctness of the valuation
Report is on the assessee as he has special knowledge and he is privy to the facts of the company and
only he has opted for this method. Hence, he has to satisfy about the correctness of the projections,
Discounting factor and Terminal value etc. with the help of Empirical data or industry norm if any and/or
Scientific Data, Scientific Method, scientific study and applicable Guidelines regarding DCF Method of
Valuation. The order of ld. 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.
23. We also accord liberty to the AO to determine the FMV of the shares bearing in mind the DCF Method by
having the same independently determined by a Valuer appointed for the aforesaid purpose.
■■

*In favour of assessee.

1. ITAT
2. AO
3. AY
4. FMV
5. Act
6. Rules
7. DCF Method
8. CIT(A)
9. NAV Method