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Facts
The assessee company issued equity shares at a premium. The Assessing Officer (AO) added the premium amount to the assessee's income under Section 56(2)(viib) of the Income-tax Act, 1961, by disregarding the Discounted Cash Flow (DCF) method adopted by the assessee and applying the Net Asset Value (NAV) method. The CIT(A) upheld the AO's action.
Held
The Tribunal held that Rule 11UA(2) of the Income Tax Rules gives the assessee the option to choose the valuation method (DCF or NAV). The AO cannot impose a different method. Therefore, the addition made by the AO and confirmed by the CIT(A) was unjustified.
Key Issues
Whether the Assessing Officer was justified in rejecting the assessee's chosen method of valuation (DCF) for determining the fair market value of shares and applying an alternative method (NAV)?
Sections Cited
56(2)(viib), 143(3), 11UA(2), 50B(3), 43
AI-generated summary — verify with the full judgment below
Before: SHRI NARENDER KUMAR CHOUDHRY, JUDICIAL & SMT. RENU JAUHRI
(निर्धारण वर्ा / Assessment Year: 2017-18) Ideaforge Technology v/s. Assistant Commissioner Ltd. बिधम of Income Tax, Circle EL-146, TTC Industrial 15(2)(1), Mumbai Area, Electronic Zone, Room NO. 357, 3rd Floor, MIDC, Mahape, Navi Aayakar Bhavan, Maharshi Mumbai Karve Road, Mumbai 400020 स्थधयी लेखध सं./जीआइआर सं./PAN/GIR No: AABCI6495B Appellant/अपीलधथी .. Respondent/प्रनिवधदी निर्धाररिी की ओर से /Assessee by: Shri Subodh Ratnaparkhi Shri. Leyaqat Ali Aafaqui (SR DR) रधजस्व की ओर से /Revenue by: सुिवधई की िधरीख / Date of Hearing 22.08.2025 घोर्णध की िधरीख/Date of Pronouncement 26.09.2025 आदेश / O R D E R PER RENU JAUHRI [A.M.] :- This appeal is filed by the assessee against the order of the National Faceless Appeal Centre (NFAC), Delhi [CIT(A)] dated 11.12.2024, passed u/s. 250 of the Income-tax Act, 1961 [hereinafter referred to as “Act”] for Assessment Year [A.Y.] 2017-18.
The assessee has raised the following grounds of appeal: “On the facts and in law,
1. The Hon. CIT(A) erred in upholding the action of the Id AO in making addition of Rs. 6,60,02,100/- by relying upon the provisions of section 56(2)(viib) of the IT Act, 1961 on the ground that the consideration received by the appellant for issue of Ay 2017-18 Ideaforge Technology Ltd. unquoted shares exceeded the fair market value of such shares, disregarding the valuation as per Discounted Cash Flow (DCF) Method adopted by the appellant by relying upon Rule 11UA(2)(b) but instead applying Net Asset Value (NAV) method, which being not justified, the addition of Rs.6,60,02,100/- may kindly be deleted.
2. The Hon. CIT(A) erred in in upholding the action of the Id AO in making addition of Rs. 6,60,02,100/- under s. 56(2)(viib) of the IT Act, 1961, not appreciating that as per section 56(2)(viib) r.w. Rule 11UA(2)(b), the choice of adopting a valuation method lies with the assessee and not with the Id AO and therefore the addition of Rs.6,60,02,100/- made by the Id AO by replacing the validly adopted method of valuation, is unjustified and may kindly be deleted. 3.The appellant craves leave to add, alter, amend and/or vary the above grounds of appeal at any time before the decision of the appeal.”
Brief facts of the case are that the return of income for A.Y. 2017- 18 was filed by the assessee on 29.03.2019 declaring total income of Rs.4,45,96,930/-. In the assessment order passed u/s 143(3), ld. AO made an addition of Rs.6,60,02,100/- u/s. 56(2)(viIb) of the Act, holding that the 4700 equity shares issued by the assessee to third party share holders @ Rs. 16491/- have been over valued by a sum of Rs.14043.90 (per share), thereby resulting in addition of Rs. 6,60,02,100/- (4700 shares x Rs. 14043.90). The difference in premium value during the year is as per the chart below:
Name Date of No of Shares of Share Total F Premiu Total allotment share premium face V m s (in Rs.) value OPG 05.04,20 2,062 3,39,83,8 20,62 3,40,04,4 10 16,481 16,49 Securities 16 22 0 42 1 Pvt. Ltd. VikasMal 0504.201 2,638 4,34,76,87 26,38 4,35,03,25 10 16,481 16,49 u 6 8 0 8 1 A&E 25.06.201 2,00 1,97,80,00 20,00 1,98,00,0 10 9,890 9,900 Investmen 6 0 0 0 00 ts LLC Trifecta 21,12,201 1 18,236 10 18,246 10 18,236 18,24 6 6
Against the order of Ld. Assessing Officer, the assessee preferred an appeal before ld. CIT(A) who has upheld the addition vide order dated Ay 2017-18 Ideaforge Technology Ltd. 11.12.2024. aggrieved with the order of ld. CIT(A), the assessee has filed appeal before the Tribunal.
4. Before us, Ld. AR has argued that the assessee in the year under consideration was a private limited company engaged in the business of manufacture and sale of Drones [Unmanned Aerial Vehicle - (UAV)]. The assessee company was established in 2007 by promoters who were graduates from IIT, Bombay and inoculated at IIT Bombay. It is a global technology leader in the Vertical Take-off and Landing (VTOL), Micro and Mini Unmanned Aerial Vehicle (UAV) space. The assessee’s clients include Defence and Internal Security agencies, as well as Government bodies which procure and deploy UAVs in their operations. The assessee company has technically collaborated with DRDO to create NETRA, an air borne early warning system. The appellant has introduced UAVs in the industrial segment also, delivering drone-based solutions for industries involved in agriculture, mining, energy, environment and other sectors. It is a vertically integrated company, which is equipped with inhouse research and development, manufacturing, software, services and training operations. During the year, it required to raise capital for expansion and diversification of its business and hence decided to issue equity shares. The assessee had option under Rule 11UA to choose the method of valuation. Since it is a highly technical company. Discounted Free Cash Flow Method (DCF) was considered more suitable. However, Ld. AO rejected the assessee’s computation and applied the NAV method on the ground that basis of valuation adopted by Ay 2017-18 Ideaforge Technology Ltd.
the assessee is not scientific and not based on past performance and the date used in computation of DCF is far from reality.
5. With regard to the issue under consideration, the assessee has made the written submissions, relevant portion of which is reproduced below:
”3. During the year under appeal, the appellant for raising capital required for expansion and diversification of its business decided to issue equity shares under private placement. With this in mind, the appellant company appointed M/s GHG & Co. Chartered Accountants for determining the valuation of shares. The appellant company based on the valuation provided by the cited Chartered Accountant firm issued equity shares at premium to resident Indian entities as given hereunder.
Name of the Date of No. of Shares Share face Total Amount FV per Premium Total Allottee allotment equity premium (in value share per share value of shares Rs) allotment per share OPG Securities 05.04.2016 2,062 3,39,83,822/- 20,620 3,40,04,442/- 10 16,481/- 16,491/- Pvt. Ltd. Vikas Malu 05.04.2016 2,638 4,34,76,878/- 26,380 4,35,03,258/- 10 16,481/- 16,491/- Total 4,700
The issue of above 4700 equity shares allotted to resident Indian entities at premium of Rs. 16481/- per share is the matter under dispute before your honours.
In the year under appeal, the appellant has also allotted equity shares (as tabulated below) to venture capital fund/venture capital company. The said transaction stands excluded from application of section 56(2)(viib) as per first proviso to the said section. Accordingly, no addition is made on allotment of the equity shares to the undermentioned entities. Name of the Date of No. of Shares premium Share Total Amount FV per Premium Total value Allottee allotment equity (in Rs) face share per share of allotment shares value per share A&E 25.06.2016 2,000 1,97,80,000/- 20,000 1,98,00,000/- 10 9,890/- 9,900/- Investments LLC Trifecta 21,12,2016 1 18,236/- 10 18,246/- 10 18,236/- 18,246/- Venture Debt Fund-II Total 2001
The ld AO however relied upon the above referred transaction of allotment of equity shares to venture capital funds/companies (which transaction is outside the purview of application of section 56(2)(viib)) to dispute the FMV of allotment of 4700 equity shares to resident-shareholders. Thus, issue of shares not covered by section 56(2)(viib) is the basis for denial of valuation of 4700 equity shares of Rs. 16,491/- per share. This the appellant submits is not justified.
6. The appellant explained to the lower authorities that the issue of 4700 equity shares during the year was based on accountants report, considering the projected future income as per DCF method. The appellant company submitted detailed explanation alongwith documentary evidences before Id.AO. The Id.AO failed to appreciate that valuation for issue of shares was based as per Rule 11UA(2) of the Income Tax Rules, 1962, which provides an option to the assessee to determine the FMV of the shares as per either NAV method or DCF method.
Ay 2017-18 Ideaforge Technology Ltd. In the matter of variation in FMV of equity shares issued during the year, it was explained that while issuing shares at FMV of 16491/- per share, the appellant was confident of securing contracts primarily from Indian Army for Infantry use for about 2100 UAV's and expected contract from DRDU for 9000 Target Drones. Both these opportunities had target period of upto 10 years supply. The valuation by accountant takes into consideration the revenue from these projected sales. Subsequently, as these orders did not materialize, the next round of placement was done at FMV of 9900 per share. Thereafter, due to requirement of Drones for Smart city projects Defence requirements due to URI attack in Sept. 2016 and revision of FDI limits, the revised projections determined FMV of 18246/- per share. A SEBI registered category 1 Merchant Banker M/s. Corporate Capital Ventures vide report dated 05.09.2019 determined FMV of equity share as on 30.06.2019 at Rs. 18,484/-. Thus, the valuation of shares is done as per DCF method in a fair and transparent manner by authority specified under Rule 11UA. 7.Unfortunately, the Id.AO did not accept the appellant's explanation submitted alongwith plethora of documentary evidences and made the cited addition of Rs.6,60,02,100/- u/s. 56(2)(viib) of the IT Act, 1961, replacing the DCF method of valuation adopted by the appellant by NAV method and determining the value of such equity share at Rs. 2447.10 per share (Pg no. 07 of the asst. order). In the process, the Id.AO ignored the detailed explanation supported by documentary evidences tendered justifying the FMV of Rs. 16,534/- for the issue of 4700 equity shares in April 16 based on Dec 15 report of the Chartered Accountant (Valuation report at pg no. 73 to 78 of paperbook). The Id.AO failed to appreciate that future projected profits are always based on the market conditions and opportunities at the given point of time, depending on external forces. In projecting the future cash flows, certain assumptions are required to be made, these need to be tested and then such assumptions become the base of estimation of projected future cash flows. If there are no assumptions, there cannot be an estimate of future projected cash flows and then DCF method becomes redundant. It was pointed out that the exercise of valuation must be viewed as on the date of the valuation looking forward and cannot be reviewed in retrospect. It is further pointed out that valuation is always based on review of historical data and projected financial information provided by the management. The report of expert will always include limitation and responsibilities but that does not make the report incorrect. The appellant has no control, if the government postponed the awarding of contract or if DRDO decides to manufacture autopilots on their own, negatively affecting the appellants future projections. Moreover, the fact that the valuation in between the two transactions (Dec'2015 valuation and April 2016 valuation) is dipping is a validation of the thorough nature of the evaluation done by the valuer before finalizing the projections and also the transparency with which the appellant company's management has represented the facts to the valuer. 8.It is also to be noted that the appellant company had raised share capital on the basis of FMV determined by DCF method which stood accepted by the department in scrutiny assessments done u/s. 143(3) for AY 2014-15 and AY 2015-16. The appellant company had issued shares to the parties during the earlier asst. years as under. Assessment Year Name of the Investor Issue price Per Share Rs. (including premium) 2015-16 CIIE 4,325 Ay 2017-18 Ideaforge Technology Ltd. 2015-16 Grow India Capital Pvt. 8,663 Ltd. 2015-16 Anuraag Shah 8,642 2015-16 Charulata Chah 8,642 2015-16 Ramesh Shah 8,642 2016-17 Ganapathy Subrimanium 8,696 2016-17 Infina Finance Private 8,656 Limited 2016-17 Ajay Doshi 12,887 2016-17 Growth Securities Pvt. 12,887 Ltd. 2016-17 Nirmal Commodities 12,887 Broker Pvt. Ltd. 2016-17 Piyush Maheshwari 12,887 2016-17 Puneet Maheshwari 12,887 2016-17 Nambirajan Seshadri 12,887 2016-17 Richa Garg 12,887 It is thus to be appreciated that the department has accepted FMV of share in A.Y 2016-17 at Rs. 12,887/- but adopts FMV at Rs. 2447.10 in AY 2017-18. Copies of assessment order dt. 29.12.2016 and 12.12.2017 for AY 2014-15 and AY 2015-16 respectively are enclosed at page nos 217 to 221 of the paperbook. 9.The ld.AO/Hon. CIT(A) failed to appreciate that as the appellant had determined FMV in accordance with rule 11UA(2)(b), no amount was required to be taxed as income from other sources under section 56(2) (viib). The Id.AO ignored the mandate of Sec. 56(2)(viib) of the IT Act, 1961 and erroneously held that market value of shares was required to be determined as per rule 11UA(1)(c)(b) (Para 9/page no. 6 of asst order) thereby incorrectly computing the fair market value of shares, as per NAV method at Rs. 2447 10 per share. Thus, the Id.AO has brought to tax a sum of Rs.14043.90 (Rs.16491/- minus Rs.2447 10/-) per share as income of assessee u/s 56(2)(viib). This has resulted in addition of Rs.6,60,02,100/- in the hands of the appellant company. 10.It is humbly pointed out that as per rule 11UA(2), it is the prerogative of assessee to determine fair market value of shares by adopting one method out of the two prescribed methods i.e Discounted Cash Flow (DCF) method or Net Asset Value (NAV) method and that revenue authorities cannot impose upon the assessee a particular method for determining fair market value of shares. In the instant case, the appellant has valued the shares according to one of the 'options' available to it by adopting DCF method. The valuation is supported by report from the "accountant" as prescribed. It is accordingly submitted that such an option given to the assessee cannot be withdrawn by the Id.AO by imposing different method of valuation. It is reiterated that the method of valuation to be selected is always at the option of the assessee. [Pl. see rule 11UA(2)]. 11.In support of the proposition that the Id AO is not empowered to discard the DCF method of valuation adopted by the appellant and impose value as per NAV, reliance is placed upon the under mentioned decisions. (1) Vodafone M-Pesa Ltd.-vs-Pr. CIT, 92 taxmann.com 73 (Bombay) [2018] (ii) Agra Portfolio (P) Ltd.-vs-Pr.CIT, 161 taxmann.com 303 (Delhi) [2024] (iii) Pr.CIT-vs-1.A. Hydro Energy (P.) Ltd., 163 taxmann.com 408 (Himachal Pradesh) [2024] ( iv) Pr. CIT-vs-Waterline Hotels Pvt Ltd., 172 taxmann.com 820 ( Karnataka) [2025] Ay 2017-18 Ideaforge Technology Ltd. (v) DCIT-vs-Credtalpha Alternative Investment Advisors (P.) Ltd. 134 taxmann.com 223 (Mumbai -Trib.) (2022) (vi) Vodafone M-Pesa Ltd.-vs-DCIT, 181 ITD 242 (Mumbai - Trib.) [2020] ( (viii) Cinestaan Entertainment (P.) Ltd.-VS-ITO, 106 taxmann.com 300 (Delhi-Trib.) [2019] vii) PRL Developers (P) Ltd.-vs-ACIT, 164 taxmann.com 328 (Mumbai-Trib.) [2024] (ix) Movefast Automobiles (P.) Ltd.-vs-ITO, 152 taxmann.com 532 (Delhi- Trib.)[2023]”
Ld. DR on the other hand, strongly relied on the orders of the lower authorities and argued that the valuation method adopted by the assessee has rightly been rejected by the ld. AO as it is not based on sound reasoning and uses distorted figures for profitability and projected cash flow. Accordingly, the valuation method adopted by the ld. AO at NAV deserves to be upheld.
We have considered the rival submissions and perused the material on record. It is pertinent to refer to the relevant provisions regarding valuation of shares as per rule 11UA(2) which are reproduced below: Section 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)(PE)| x (PV) 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 Ay 2017-18 Ideaforge Technology Ltd. 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.”
In view of the above provisions, it is clear that it is the option of the assessee to choose the method of valuation. Accordingly, the valuation of the shares by the assessee as explained in the written submission reproduced hereinbefore, is found to be justified and as per the provisions of law. We have also perused the judicial pronouncements relied upon by Ld. AR on this issue. He has placed reliance on various decisions of different Hon’ble High Courts as well as the co-ordinate Benches wherein this issue stands decided in favour of the assessee. Specifically, on identical facts and circumstances, the co-ordinate Bench in the case of DCIT Vs. Credtalpha Alternative Investment Advisors (P.) Ltd. 134 taxmann.com 223(Mum-Trib)[2022] have held as under: “14. As is manifest from the above, the explanation placed in clause (viib) postulates that the FMV of shares as may be prescribed or as may 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; Ay 2017-18 Ideaforge Technology Ltd. (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 Ay 2017-18 Ideaforge Technology Ltd.
(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 to be price it would fetch if sold which (e) the market value of exchange shall be estimated to it if 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, Ay 2017-18 Ideaforge Technology Ltd. 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.]"
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.
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.
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. Ltd. (supra)
Ay 2017-18 Ideaforge Technology Ltd.
We note that the view as taken by the Bombay High Court in the aforenoted judgment appears to have been consistently followed by Tribunals of different regions as would be evident from the discussion which ensues. We, in this regard, firstly take into consideration the judgment rendered by the Mumbai Bench of the ITAT in Dy CIT v. Sodexo Facilities Management Services India (P) Ltd. [IT Appeal No. 2945 (Mum.) of 2022, dated 25-5-2023] where it was held as under:- "18. On the other hand, Ld. Counsel for the assessee submitted that the AO has not accepted the method of valuation which was furnished by the assessee. The valuer computed the FMV by averaging the valuation as per PECV method as well as net asset value method. He submitted that when the legislation has conferred an option on the assessee to choose a particular 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 fin that computation of LTCG on the transfer of undertaking as the slump sale consists of two component= 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 th slump sale. In the case of the assessee, the AO has taken FMV at Rs. 7,20,32,509/- which was work out by the valuer following the PECV method, whereas the assessee has followed average value of PEC method as well as NAV method to justify the sale consideration actually received. We are of the opined that Id Assessing Officer has not carried out valuation by an independent value and merely chosen a pa of the valuation report submitted by the assessee. Therefore, we restore back the issue to the AO f 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."”
Accordingly, in view of facts discussed hereinbefore and the judicial pronouncements, we are of the considered opinion that the addition made by the ld. AO and confirmed by the Ld. CIT(A) is unjustified as the assessee had rightly exercised his option to choose the method of valuation under Rule 11UA(2) and ld. AO could not have altered the same. Accordingly, the addition Ay 2017-18 Ideaforge Technology Ltd. of Rs. 6,60,02,100/- u/s. 56(2) (viib) made on account of excess share premium received is hereby deleted.
As a result, the appeal of the assessee is allowed.
Order pronounced in the open court on 26.09.2025