POLYRUB COOPER STANDARD FTS PRIVATE LIMITED,BANDRA vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 13(1)(2), MUMBAI

Per Saktijit Dey, Vice President:

Captioned cross appeals arise out of order dated 12.1.2026 of National

Faceless Appeal Centre [NFAC], Delhi, pertaining to Assessment Year 2016-17.

the solitary issue arising in the appeals relates to addition of share premium under

section 56(2)(viib) of the Income-tax Act, 1961 [in short, “the Act”].

engaged in the manufacturing, trading, buying, selling, importing and exporting

of PVC, plastic extruded products and other allied materials and primarily used in

auto ancillary industries. The products manufactured by the assessee are generally

supplied to original equipment manufacturers (OEMs), such as General Motors,

Honda Motor, etc. For the year under dispute, the assessee filed its return of

income on 14.10.2016, declaring loss of Rs.1,48,96,117/- under the normal

provisions and book profit of Rs.9,92,284/- under section 115JB of the Act. The

return of income filed by the assessee was selected for scrutiny. In course of

assessment proceedings, the Assessing Officer noticed that in the year under

consideration, the assessee had issued/ sold 6,80,000 equity shares having face

value of Rs.10/- each to M/s Polyrub Extrusions (I) Pvt. Ltd., which is an Indian

group entity, for consideration of Rs.15,62,98,000/- at a premium of Rs.229.83

per share. Further, the assessee had sold 4,20,000 equity shares having face value

3 ITA Nos. 2571 & 3676/Mum/2026 Polyrub Cooper Standard FTS Pvt. Ltd.

of Rs.10/- to M/s Coper Standard Automotive Inc., a non-resident group company,

for consideration of Rs.10,64,70,000/-. Since, the provisions of section 56(2)(viib)

of the Act are not applicable in respect of shares sold to the foreign entity, the

Assessing Officer proceeded to examine the fair market value (FMV) of the shares

sold to M/s Polyrub Extrusions (I) Pvt. Ltd. in terms of section 56(2)(viib) of the

Act. In this context, the Assessing Officer called upon the assessee to justify the

valuation of the shares. In response to the query raised by the Assessing Officer,

the assessee furnished the valuation report of a Chartered Accountant in terms of

Rule 11UA determining FMV under discounted cash flow (DCF) method of each

share at Rs.239.85 per share. It was submitted by the assessee that the valuation

had been done on the basis of projected figures, keeping in view the future growth

in sales. When the Assessing Officer pointed out the wide variation between the

projected figures and actual sales, the assessee submitted that the projected figures

were based on letter of intent/purchase orders placed by General Motors, which

subsequently did not materialize due to closure of business by General Motors,

impacting the projected figures. However, the assessee submitted that in

subsequent years, sales have gradually picked up and has almost touched the

projected figures. The Assessing Officer, however, was not convinced with the

submissions of the assessee. He objected that the valuation done by the valuer by

adopting DCF method was unrealistic and flawed. He observed, while

undertaking the valuation, the valuer has failed to conduct adequate study and

4 ITA Nos. 2571 & 3676/Mum/2026 Polyrub Cooper Standard FTS Pvt. Ltd.

proper research for valuation of shares. He observed, the key areas requiring

consideration are past performance, growth, prospects, earning capacity,

expansion, etc. Whereas, the valuer has merely adopted the values provided by

the management, thereby ignoring past performance, as reflected in the financials

of the assessee. The Assessing Officer observed that the surplus funds available

in the year under consideration were only on account of the share premium

received. He further observed that the actual cash flow of the assessee was much

less. Further, the actual profit of the assessee did not match the projected figures.

Thus, he concluded that the DCF method was not appropriate for valuing the

shares. Having held so, he opined that the FMV of the shares was Rs. 9.17 per

share. Accordingly, he held that share premium paid to Rs.15,62,98,000/- was

totally unjustified and, hence, he proceeded to add the amount under section

56(2)(viib) of the Act.

While examining the issue in the context of the facts and materials on record,

learned first appellate authority found that variation between the actual and

projected profit could be due to substantial fall in sales to General Motors as

General Motors has shut down its Indian unit. He observed that, though this fact

was brought to the notice of the Assessing Officer, however, he did not accept it.

Thus, keeping in view the aforesaid facts, learned first appellate authority

observed that the observation of the Assessing Officer that projected sales were

5 ITA Nos. 2571 & 3676/Mum/2026 Polyrub Cooper Standard FTS Pvt. Ltd.

based merely on assumptions do not appear to be completely correct, as the facts

and figures submitted by the assessee, based on which projection under DCF

method was made, are believable. However, he observed that this may not be the

exclusive reason for the wide variation between the actual and projected profit.

He observed that sales from GM Motors had declined miserably upon its

shutdown in 2007. However, the gradual fall had started in earlier years. He

observed that when the valuation was carried out at the time of issue of shares in

2015, the growth rate from the previous year was already negative. Even, the

assessee had not submitted any credible evidence regarding the future expansion

or growth plan at the time of valuation that could have contributed to an increase

in future sales. Referring to another valuation report furnished by the assessee,

prepared by RBI-registered Category 1 Merchant Banker, Keynote Financial

Services Ltd., learned first appellate authority observed that though the valuation

report was based on the information provided by the company's management and

public sources in the same industry and segment note, as per page 9 of the said

report, the historical financial data had been accepted without verification as a

proper representation of its recent condition. Thus, he observed that there could

be doubts regarding the accuracy and completeness of the valuation. Therefore,

the valuation arrived at under the DCF method cannot be accepted. Though,

according to learned first appellate authority, the Assessing Officer cannot

question valuation under the DCF method, as in terms of Rule 11UA, the method

6 ITA Nos. 2571 & 3676/Mum/2026 Polyrub Cooper Standard FTS Pvt. Ltd.

of valuation has to be adopted at the option of the assessee. In this context, he

referred to various judicial precedents. Thus, ultimately, he held that the

Assessing Officer cannot change the method of valuation from DCF to Net Asset

Value (NAV). Having held so, he disagreed with the value of shares determined

in the valuation report after analyzing the performance of Auto Industries and its

growth rate. Therefore, ultimately, he held that the value of share premium can be

reasonably be fixed at Rs.137.91 per share. Accordingly, he restricted the addition

to Rs. 6,25,90,200/-.

assessment proceedings, the assessee, in addition to the valuation report, had

furnished various other contemporaneous evidence to demonstrate the fairness of

valuation of shares. He submitted that in course of proceedings before the first

appellate authority, the assessee had brought on record more evidences to justify

the valuation of shares. He submitted that DCF method is one of the recognized

methods of valuation of shares and, in terms with Rule 11UA, the Assessing

Officer can value the shares by applying the DCF method. He submitted that the

valuer had determined the value of shares by considering the growth rate and

future increase in projected sale figures. He submitted that, due to unforeseen

circumstances, the actual sales and profit reduced from the projected figures, as

7 ITA Nos. 2571 & 3676/Mum/2026 Polyrub Cooper Standard FTS Pvt. Ltd.

one of the major consumers of assessee shut down its business in India, gradually

impacting assessee's sales.

sales to GM Motors came down substantially. He submitted that the projected

figures for making valuation under the DCF method were not merely on

presumption, but based on letters of intent/purchase orders placed by General

Motors. Finally, the learned counsel submitted that the shares had been sold to the

holding company and another group entity, which wanted to infuse funds into the

assessee for the purpose of acquiring another company. Thus, he submitted that

the transaction had commercial substance and, therefore, provisions of section

56(2)(viib) will not apply. To support his contention, learned counsel relied upon

the following decisions:

(i) PCCIT vs. A.H. Multisoft (P) Limited [2025] 175 Taxman 46 (Delhi). (ii) HRI Healthcare Pvt. Ltd. vs. ACIT, ITA No. 2437/Mum/2019, order dated 11/07/2023.

observation of the Assessing Officer, submitted that finding wide variation

between the actual profit and projected figures, the Assessing Officer had rejected

the valuation report furnished by the assessee. He submitted, even under the DCF

method, there should be close proximity between the actual profits and the

projected figures. Whereas, in the present case, the actual profit is wide off the

8 ITA Nos. 2571 & 3676/Mum/2026 Polyrub Cooper Standard FTS Pvt. Ltd.

mark compared to the projected profit. He submitted that, in view of such wide

variation, the valuation under the DCF method was not acceptable.

Edition, 2027. Further, he submitted that the valuer had determined the value of

shares merely based on DCF method, relying on the data supplied by the assessee,

without any evidence for verifying the correctness of the data supplied by the

assessee. He submitted, the DCF method can be rejected and the NAV method

can be followed. He submitted, without properly appreciating the reasoning of the

Assessing Officer, the first appellate authority has determined the FMV of the

share premium on a purely estimate basis, which is unacceptable. Thus, he

submitted, the first appellate authority was not justified in granting partial relief

to the assessee and the addition made by the Assessing Officer should be restored.

upon and perused the materials placed on record. Undisputedly, the assessee had

issued sold shares to a group entity and has received share premium, which is the

subject matter of addition in the present appeals. The facts on record reveal that

shares having face value of Rs. 10/- each were sold at a premium of Rs.239.85 per

share. To support the value of shares at the time of sale, the assessee had furnished

a valuation report of a Chartered Accountant, who determined the FMV at

Rs.239.85 per share as per DCF method. The Assessing Officer has held that the

financial position and net worth of the company does not justify any premium

9 ITA Nos. 2571 & 3676/Mum/2026 Polyrub Cooper Standard FTS Pvt. Ltd.

over the face value, hence, he added back the entire premium amount received by

the assessee. However, learned First Appellate Authority granted partial relief by

determining the FMV of the shares at Rs.137.91 per share, thereby, partially

reducing the addition to Rs.6,25,19,200/-.

that if a company, in which the public are not substantially interested, receives

any consideration for issue of shares exceeding the face value of such shares, and

the aggregate consideration for such shares exceeds the FMV, the excess shall be

treated as income. However, Explanation to Section 56(2)(viib) provides the

mode and manner of determination of the fair market value of shares. As per

Explanation (a)(i), the FMV can be determined in accordance with the method

prescribed under the statute. The methods for determining the FMV of quoted and

unquoted shares have been provided under Rule 11UA of the Rules. A reading of

the said Rule clarifies that the assessee can, at its option, adopt one of the methods

provided under Rule 11UA for determining the FMV of the shares. One of the

methods prescribed under Rule 11UA is the DCF method. Admittedly, the

assessee had furnished a valuation report of a Chartered Accountant to support

the FMV of the shares sold, at the assessment stage. Even, a second valuation

report of a merchant banker was furnished to support the value. Thus, the value

of the shares sold by the assessee has been determined in compliance with Section

56(2)(viib) read with Rule 11UA. Whereas, a careful reading of the assessment

10 ITA Nos. 2571 & 3676/Mum/2026 Polyrub Cooper Standard FTS Pvt. Ltd.

order reveals that while the assessee has furnished a valuation report to support

the FMV of the shares, the Assessing Officer has not undertaken any such exercise

of valuation through an expert. The Assessing Officer has himself undertaken the

exercise of finding out the correctness of the valuation report furnished by the

assessee and concluded that the valuation report cannot be accepted as it suffers

from various deficiencies. It is fairly well settled that valuation of an asset requires

expertise and, hence, has to be done by a professional who has acquired expertise

in the field. Therefore, before rejecting the valuation report of an expert, the

Assessing Officer should have obtained the opinion of another expert valuer to

find out whether the valuation report furnished by the assessee was correct or not.

Instead of doing so, the Assessing Officer, not being an expert in the field has

undertaken the exercise of determining the FMV of the shares himself. Therefore,

learned First Appellate Authority has rightly observed that since Rule 11UA

provides an option to the assessee to choose the method of valuation, the

Assessing Officer cannot tinker with such method and change the method of

valuation from DCF to NAV. However, in our view, learned First Appellate

Authority fell into the same error as that of the Assessing Officer while

determining the value of the shares at Rs. 137.91 per share. A reading of paragraph

5.1.7 of the order of the First Appellate Authority reveals that, based on some past

performance, review report of the Auto Component Manufacturers Association of

11 ITA Nos. 2571 & 3676/Mum/2026 Polyrub Cooper Standard FTS Pvt. Ltd.

India and the growth of the industry recorded therein, he determined the value of

the shares.

Auto Component Manufacturers Association may or may not provide the correct

indicia to determine the value. The value determined by the valuer in the valuation

report furnished by the assessee proceeded on DCF method by taking note of the

projected profits in future years.

record that the projected figures do not match the actual profit earned by the

assessee in the future years. However, the assessee has explained the reasons for

such difference. It is the case of the assessee that the projected figures were based

on the letters of intent/purchase orders of General Motors India, which was the

prime customer of the assessee and accounted for major part of sales of the

assessee. It is a fact on record that due to the closure of GM Motor India’s

business, sales substantially reduced, though the assessee continued to register

profits, which also showed an incremental increase in subsequent years. In fact,

the First Appellate Authority, after examining the materials on record has partially

accepted assessee’s claim that the variation between the actual profit and the

projected figures as per the DCF method was on account of substantial reduction

in sales to GM Motors India. Thus, assessee’s explanation regarding the variation

between the projected profit and the actual profit is credible. In any case of the

12 ITA Nos. 2571 & 3676/Mum/2026 Polyrub Cooper Standard FTS Pvt. Ltd.

matter, the shares have been sold at premium to a closely linked company having

common shareholders/promoters. The assessee has explained before the

Departmental Authorities as also before us that since funds were required to

acquire another company, the group companies came forward to help the assessee

in acquiring the company by infusing funds through acquisition of shares with

premium. Thus, in our view, there cannot be any ulterior motive in charging share

premium, as it is a transaction between closely linked entities. The judicial

precedents relied upon by the learned counsel for the assessee support its view.

Thus, on an overall consideration of facts and materials on record, we hold that

the addition sustained by learned First Appellate Authority deserves to be deleted.

Accordingly, we direct the Assessing Officer to delete the addition made under

Section 56(2)(viib) of the Act. The decision taken by us in the foregoing

paragraphs disposes of both the appeals.

dismissed.

Order pronounced in the open court on 14/10/2026.

Sd/- Sd/-

(Girish Agrawal) (Saktijit Dey) Accountant Member Vice President

Mumbai; Dated : 14/10/2026 Aks/-

13 ITA Nos. 2571 & 3676/Mum/2026 Polyrub Cooper Standard FTS Pvt. Ltd.

Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. The CIT(A) 4. CIT - concerned 5. DR, ITAT, Mumbai 6. Guard File BY ORDER, ABHINAV ANANT Digitally signed by ABHINAV ANANT GAVANDE GAVANDE Date: 2026.10.22 15:24:42 +05'30' (Dy./Asstt. Registrar) ITAT, Mumbai