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Facts
The assessee, a Private Limited company and Non-Banking Finance Company (NBFC), filed its return of income for AY 2017-18. It issued equity shares at a premium, and the Assessing Officer (AO) made an addition of Rs. 46,06,00,000/- under Section 56(2)(viib) of the Act, rejecting the assessee's Discounted Cash Flow (DCF) valuation report. The Ld. CIT(A) admitted a fresh valuation report as additional evidence and deleted the addition.
Held
The Tribunal upheld the CIT(A)'s order, affirming that the choice of valuation method (DCF or NAV) under Rule 11UA for unquoted equity shares is at the assessee's option. The AO has no power to change the chosen method or reject a valid valuation report solely because projections do not match actual figures, especially when no alternative valuation report is provided by the AO. The Tribunal relied on jurisdictional High Court and coordinate bench precedents.
Key Issues
Whether the Assessing Officer can reject the assessee's chosen valuation method (DCF) for share premium under Section 56(2)(viib) if future projections in the valuation report do not match actual financials. Whether the assessee has the sole option to choose between prescribed valuation methods (DCF/NAV) under Rule 11UA.
Sections Cited
250, 143(3), 56(2)(viib), Rule 11UA, Rule 46A
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Income Tax Appellate Tribunal, DELHI “B” BENCH: NEW DELHI
Before: SHRI SATBEER SINGH GODARA & SHRI MANISH AGARWAL
ORDER
PER MANISH AGARWAL, AM :
The present appeal is filed by the revenue against the order of Ld. Commissioner of Income Tax [“Ld. CIT(A)”] National Faceless Appeal Centre (NFAC) dated 29.11.2023 in Appeal No. CIT(A), Delhi- 4/10730/2019-20 passed u/s 250 of the Income Tax Act, 1961 [“the Act”] arising out of the assessment order dated 30.12.2019 passed u/s 143(3) of the Act pertaining to Assessment Year 2017-18.
Brief facts of the case are that assessee is a Private Limited company and filed its return of income on 21.03.2018, declaring total ITO vs Highrise Securities & Trading Pvt.Ltd. income of INR 2,130/-. The assessee is a ‘Non-Banking Finance Companies’ (NBFC) and carry the business of investment in all its aspects and is dealers in shares, stock, debentures, debenture stock, bonds, obligations and units. The case was selected for Limited Scrutiny to examine the following issues:
- Expenses debited to P&L A/c for earning exempt income as per schedule BP of ITR is significantly lower as compared to investments made to earn exempt income; - Introduction of large capital NBFC/Investment Companies. - Low income in comparison to high loans/advances/ Investment in shares appearing in balance sheet.
During the year under appeal, assessee company issued 9,40,000 equity shares having face value of Rs. 10/- each at a premium of Rs. 490/- per share and received Rs. 94,00,000/- as share capital and Rs. 46,06,00,000/- as share premium. The value of per equity share was valued at Rs. 500.74 by following DCF method in terms of the report of Merchant banker dt. 02.11.2018. While valuing the share, the explanation (a)(i) of section 56(2)(viib) was applied according to which the value has to be determined as per Rule 11UA of the Income Tax Rules, 1962 which provide the choosing of method at the option of the assessee. Further said explanation provides that value should be determined as per Rule 11UA or the value as determined by the assessee based on the date of issue of shares, whichever is more. However, the value as per DCF method was adopted by the Assessee. The AO has discarded the valuation report of the assessee for the reason that the same was ITO vs Highrise Securities & Trading Pvt.Ltd. made after the issue of shares on 02.11.2018 and thus is not acceptable. Thereafter the AO discussed the financials of the assessee and held the share premium received as excess share premium charged which is taxable u/s 56(2)(viib) of the Act and assessed the same under the head “Income from Other Sources” and addition of Rs. 46,06,00,000/- was made.
3. Against this order, an appeal was filed before the Ld. CIT(A) wherein assessee filed fresh valuation report of the Merchant banker dt. 02.02.2017 as additional evidence under Rules 46A of the Income Tax Rules, 1962. Since the same was crucial to decide the issue, ld. CIT(A) after obtaining the remand report from AO, had admitted the same and after considering the facts and the valuation report, had deleted the additions.
Aggrieved by the said order, the revenue is in appeal before the Tribunal wherein following grounds of appeal are taken by the revenue:- 1. “Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred, in deleting the addition of Rs. 460600000/- made by AO u/s 56(2)(viib) of the Act, on account of rejecting the valuation as per rule 11UA of the Act, of the assessee company under DCF?
2. Whether CIT(A) was justified in facts and circumstances in case allowing the appeal of assessee ignoring the facts that merchant banker's report was only on basis of Direct Cash Flow (DCF) method and only depending on data supplied by assessee.
3. That the department craves to add or amend the grounds of appeal before Hon'ble ITAT is finally heard or disposed off.”
ITO vs Highrise Securities & Trading Pvt.Ltd. 5. Since both the effective grounds of appeal of the revenue are related to single issue of deletion of addition of Rs. 46,06,00,000/- thus, the same are taken together for consideration.
6. Before us, the ld. CIT-DR vehemently supported the order of the AO and submits that the assessee filed the valuation report before the AO dt. 2.11.2018 which was related to the period after the issue of shares. He further submits that projections made in the valuation report for computation of value of shares as per DCF method are not matching with the actual financials of the assessee. It is further submitted by ld. CIT DR that assessee has not started its business properly thus charging of such a high premium is not acceptable. He further submits that from the perusal of the financials filed by the assessee for the A.Ys. 2016-17, 2017-18 and 2018-19, it is noticed that the assessee has shown total income of Rs. NIL, Rs.2130/- and Loss of Rs.50,70,398/- respectively and no basis was given for the discount rate. As per ld. CIT DR, under DCF method for valuation of shares, the analysts requires to understand the business and make probing questions regarding the fundamentals of the business that drive value and sustainability of the cash flows projections given by the management. As per ld. CIT DR, the valuation report in the present case is not supported by any such exercise or calculations and based on baseless projections. It is further argued by ld. CIT DR that in subsequent years there is huge difference between the assumption of income/ operating expenses as per valuation report and actual income/operating expenses declared by the assessee company in the return of income filed for the respective A.Ys. Thus, ITO vs Highrise Securities & Trading Pvt.Ltd. the valuation report dt. 02.02.2017 submitted before the ld. CIT(A) seems to be fabricated and after considering all the points of report, the AO in remand report observed that it was not acceptable. Ld. DR thus prayed that the action of the AO is based on the correct appreciation of the financials of the assessee company and thus the additions made by the AO towards excess share premium deserve to be restored. Alternatively, it is requested by ld. CIT DR to remand the matter to the file of AO for fresh verification of the facts of the case.
7. Per contra, the ld. AR submits that the assessee has followed the due procedure as prescribed in section 56(2)(viib) of the Act according to which the fair market value of the shares was determined by following the method prescribed i.e. the DCF method. He further submits that section 56(2)(viib) of the Act provides that addition could only be made where the consideration was received in excess of fair market value of such shares. The fair market value of the shares is to be determined in terms of Rule 11UA(2) where the fair market value of unquoted equity shares is to be determined in the manner provided however, the choice of method of valuation is at the option of the assessee. As per rule 11UA(2)(a), the valuation can be done on the basis of book value or as per 11UA(2)(b), the fair market value of unquoted equity shares determined by a merchant banker or Accountant as per the discounted free cash flow method (DCF method). The assessee had opted the DCF method for determination of fair market value of shares and submitted the report of the merchant banker. Ld. AR further submits that the choice of method for valuation of unquoted equity shares is at the ITO vs Highrise Securities & Trading Pvt.Ltd. option of the assessee therefore, the AO cannot tinkered with the same. He further submits that the AO has not referred the matter for valuation from the person specified under the Rule 11UA in this regard and disbelieved the valuation report on assumptions and presumptions. Ld. AR placed reliance on the judgement of Hon’ble Jurisdictional High Court in the case of PCIT Vs. Cinestaan Entertainment Pvt. Ltd. in reported in 433 ITR 82. Further reliance is placed on the following case laws of the coordinate benches of Tribunal: - DCIT Vs. Hometrail Buildtech Pvt. Ltd. 204 ITD 154 (Delhi ITAT) - Thinkstations Learning P. Ltd. Vs. ITO 203 ITD 384 (ITAT Delhi) - PCIT vs Waterline Hotels (P.) Ltd. [2025] 172 taxmann.com 820 (Karnataka) - PNP Maritime Services (P.) Ltd. vs DCIT [2023] 157 taxmann.com 517 (Mumbai-Trib.) - PRL Developers (P.) Ltd. vs ACIT [2024] 164 taxmann.com 328 (Mumbai-Trib.) - Rameshwaram Strong Glass (P.) Ltd.vs ITO [2018] 96 taxmann.com 542 (Jaipur-Trib.) - DQ Entertainment (International) Ltd. Hyderabad vs ACIT [ITA No.151/Hyd/2015] - DCIT vs M/s. Ozoneland Agro Pvt.Ltd. in - Mediplus Health Services (P.) Ltd. vs ITO [2016] 68 taxmann.com 29 (Hyderabad-Trib.)
ITO vs Highrise Securities & Trading Pvt.Ltd. 8. Ld. AR thus prayed for the confirmation of the order of the ld. CIT(A) who deleted the addition after appreciating the above stated facts and further by following the judgement of coordinate bench of ITAT in the case of Thinkstations Learning (P) Ltd. Vs. ACIT in wherein the hon’ble bench has followed the decision of jurisdictional high court in the case of Cinestaan Entertainment Pvt.Ltd. (supra). He Prayed accordingly.
We have heard the rival submission and perused the material available on record. In the instant case, the assessee company had issued 9,40,000 equity shares at a premium of Rs. 490/- each which were valued at Rs. 500.74 per share under DCF method by the merchant banker. For the purpose of determination of the fair market value, the assessee has followed the DCF method and obtained a report of merchant banker as provided in rule 11UA(2)(c) of the Income Tax Rules, 1962 who had valued the shares as at 02.02.2017. As per Rule 11UA(2) as existed in that year, the determination of the fair market value of unquoted equity shares could be made by following any of the two method i.e. NAV Method or DCF method and it at the option of the assessee to choose any of the method. As it is at the option of the assessee to get the valuation done of unquoted shares for the purpose of section 56(2)(viib) of the Act by using any of the method as specified in clause (a) or clause (b) of Rule 11UA(2) of Income Tax Rules, the AO has no power to change the method once adopted by the assessee. In other words, once the assessee has opted one of the prescribed methods of valuation of unquoted equity shares, AO has no right to change the same. In this ITO vs Highrise Securities & Trading Pvt.Ltd. regard, the Hon’ble Jurisdictional High Court in the case of Cinestaan Entertainment Pvt. Ltd. (supra) has held as under:
“From the aforesaid extract of the impugned order, it becomes clear that the learned ITAT has followed the dicta of the Hon'ble Supreme Court in matters relating to the commercial prudence of an assessee relating to valuation of an asset. The law requires determination of fair market values as per prescribed methodology. The Appellant- Revenue had the option to conduct its own valuation and determine FMV on the basis of either the DCF or NAV Method. The Respondent-Assessee being a start-up company adopted DCF method to value its shares. This was carried out on the basis of information and material available on the date of valuation and projection of future revenue. There is no dispute that methodology adopted by the Respondent-Assessee has been done applying a recognized and accepted method. Since the performance did not match the projections, Revenue sought to challenge the valuation, on that footing. This approach lacks material foundation and is irrational since the valuation is intrinsically based on projections which can be affected by various factors. We cannot lose sight of the fact that the valuer makes forecast or approximation, based on potential value of business. However, the underline facts and assumptions can undergo change over a period of time. The Courts have repeatedly held that valuation is not an exact science, and therefore cannot be done with arithmetic precision. It is a technical and complex problem which can be appropriately left to the consideration and wisdom of experts in the field of accountancy, having regard to the imponderables which enter the process of valuation of shares. The Appellant-Revenue is unable to demonstrate that the methodology adopted by the Respondent- Assessee is not correct. The AO has simply rejected the valuation of the Respondent-Assessee and failed to provide any alternate fair value of shares. Furthermore, as noted in the impugned order and as also pointed out by Mr. Vohra, the shares in the present scenario have not been subscribed to by any sister concern or closely related person, but by outside investors. Indeed, if they have seen certain potential and accepted this valuation, then Appellant-Revenue cannot question their wisdom. The valuation is a question of fact which would depend upon appreciation of material or evidence. The methodology adopted by the Respondent-Assessee, accepted by the learned ITAT, is a conclusion of fact drawn on the basis of material and facts available. The test laid down by the Courts for interfering with the findings of a valuer is not satisfied in the present case, as the Respondent-Assessee adopted a recognized method of valuation ITO vs Highrise Securities & Trading Pvt.Ltd. and Appellant-Revenue is unable to show that the assessee adopted a demonstrably wrong approach, or that the method of valuation was made on a wholly erroneous basis, or that it committed a mistake which goes to the root of the valuation process.
In view of the foregoing, we find that the question of law urged by the Appellant-Revenue is purely based on facts and does not call for our consideration as a question of law.”
In the instant case while rejecting the valuation report submitted by the assessee, the AO has not brought on record any alternate report of fair market value of shares from the person authorized under rule 11UA(2) and simply rejected the valuation report submitted by the assessee. In the remand report submitted during the appellate proceedings, ld. AO alleged that the projections taken by the merchant banker are far from the real financials of the assessee, and thus should not be considered and the report submitted by the assessee was held as after thought.
The Hon’ble Himachal Pradesh High court in the case of I.A. Hydro-energy Pvt. Ltd. reported in 163 taxmann.com 408 has held as under: “Section 56 of the Income-tax Act, 1961, read with rule 11UA of Income Tax Rules, 1962 – Income from other sources – Chargeable as (share premium, valuation of shares) – Assessment Year 2018-19 – Whether Assessing Officer has no jurisdiction to substitute NAV method of assessing valuation of shares, once assessee has exercised option of a DCF valuation method as per rule 11UA(2) – Held, yes [para 19] [in favour of assessee].”
Similar view is expressed by the Hon’ble Madras High Court in the case VVA Hotels Pvt. Ltd. reported in 122 taxmann.com 106 (Madras) and by Co-ordinate Bench of ITAT, Delhi in the case of DCIT Vs. Hometrail Buildtech Pvt. Ltd. reported in 155 ITO vs Highrise Securities & Trading Pvt.Ltd. taxmann.com 178 and in the case of Intelligrape Software Pvt. Ltd. Vs. ITO in ITA No. 3925/Del./2018.
13. The ld. CIT(A) while allowing the appeal of the assessee, duly considered the defects pointed out by the AO in the valuation report submitted by the assessee during remand proceedings. The ld. CIT(A) further considered the judgements of the Co-ordinate bench and the Hon’ble Jurisdictional High Court in the case of Cinestaan Entertainment Pvt.Ltd. (supra) and deleted the additions by accepting the valuation report of merchant banker filed by the assessee. The final conclusion arrived at by the ld. CIT(A) in para 9 of the order is as under:
9. “To sum-up, the conclusions that are drawn after the exhaustive discussion in the preceding paras are as under:- a. The appellant has adopted a prescribed method of valuation for arriving at the fair market value of shares as per DCF method by a Merchant Banker. b. Jurisdictional Tribunals / courts have held that the AO cannot tinker with the DCF methodology by comparing projections with actual figures. c. Courts have held that challenging the valuation lacks material foundation and is irrational since the valuation is intrinsically based on projections which can be affected by various factors. d. The valuer makes forecast on approximation based on the potential value of the business. The Ld. AO is unable to demonstrate that the methodology adopted by the appellant is not correct. e. The law requires the determination of fair market value as per prescribed methodology which the appellant has done. AO’s contention that the appellant failed to justify the value of share premium since future projections of the report do not match with the present financials is irrelevant. f. In conclusion, it is held that the ratio of decisions relied upon by the appellant as well as the recent Delhi Tribunal decision in M/s. Thinkstations Learning (P) Ltd. squarely applies to the facts ITO vs Highrise Securities & Trading Pvt.Ltd. of the appellant’s case. Since the lower authorities are bound by the judicial precedents laid down by the Jurisdiction Tribunals/ High Courts it is held that the AO erred in discarding the DCF method of valuation of shares adopted by the appellant. The AO is directed to delete the addition of Rs.46,06,00,000/- and thereby grant relief to the appellant.”
14. Before us, revenue has failed to controvert the findings of ld. CIT(A) by bringing on record any contrary material and mainly placed reliance on the remand report of the AO filed before the ld. CIT(A). Under these circumstances and keeping in mind the report of the merchant banker submitted by the assessee wherein the valuation was done as per DCF method prescribed under the Income Tax Rules and also considering the fact that as per rule 11UA(2) option for selection of method for valuation is of the assessee who had exercised the same by selecting one of the prescribed methods, we find no error in the order of ld. CIT(A) deleting the addition.
Regarding request of the revenue for remand the matter to the file of AO, we find that the AO was provided sufficient opportunity by ld. CIT(A) wherein the ld. CIT(A) sought remand report from the AO on the admissibility of the additional evidences and also sought comments on the revised valuation report filed by the assessee alongwith detailed written submission. The AO had filed remand report dt. 18.09.2023 which is reproduced in para 6 of the appellate order. A perusal of which we find that AO has considered and commented on every aspect of the valuation report and after considering the same, ld. CIT(A) admitted the additional evidences and deleted the additions. Under these circumstances, we find no merits in this prayer of the revenue.
ITO vs Highrise Securities & Trading Pvt.Ltd. 16. In view of above discussion, we uphold the order of ld. CIT(A) wherein the ld. CIT(A) has followed the judgement of hon’ble jurisdictional high court in the case of Cinestaan Entertainment Pvt.Ltd. (supra) and various orders of Co-ordinate Delhi benches of Tribunal directly on the issue in hand. Accordingly, both the grounds of appeal of the revenue are dismissed.
In the result, appeal of the revenue is dismissed. Order pronounced in open court on 20.08.2025.