K. G. FINVEST PRIVATE LIMITED,EAST DELHI vs. CENTRAL CIRCLE 29, DELHI, NEW DELHI

Aggrieved by the order of Ld. CIT(A), assessee is in appeal before the Tribunal by taking following grounds of appeal:- 1. “The Ld. CIT (A) has erred on facts and in law in confirming the addition u/s 56(2) (viib) of the Income Tax Act, 1961 amounting to Rs. 37,77,06,000/- made by the Assessing Officer in the impugned assessment order u/s 143(3) of the Income Tax Act, 1961.

The Ld. CIT(A) has erred on facts and in law in confirming the impugned order dated 29.12.2017 which was abated in view of proviso to section 153A of the Act.

The Ld. CIT(A) has erred on facts and in law in passing the order in gross violation of principles of natural justice without giving any opportunity of being heard.

The above grounds of appeal are without prejudice to each other and the appellant craves for liberty to add fresh ground(s) of appeal and also to amend, alter, modify any of the ground(s) of appeal.”

Before us, Ld.AR for the assessee submits that assessee is a NBFC and making all compliances with RBI. During the previous year relevant to the year under appeal it has issued 84000 equity shares at a total value of INR 500/- per share including premium of INR 490/- per share. Ld.AR submits that the valuation of shares is duly supported by the report of an independent valuer as authorized under the Act being a merchant banker who has submitted its report dated 13.01.2015, copy of the said report was filed before the AO during the assessment proceedings. Ld.AR submits that the valuer has done the valuation in accordance with the provision of Rule 11UA(2) of Income Tax Rules, 1962 (“the Rules”) where two methods are prescribed for valuation of unquoted equity shares namely, (i) Net Asset Value Mehtod (NAV method) & (ii) Discounted Free cash Flow Method (DCF method). The assessee has opted for DCF method for valuation of its share as provided in clause (b) of Rule 11UA(2) of the Rules and determined the fair market value of INR 500/- per share as per the report of merchant banker under DCF method. Ld.AR further submits that the valuer has worked out the value per share at INR 508.46 as against which the AO has made the valuation by taking NAV method and worked out the value per share at INR 50.35 per share and hold that the differential amount of INR 449.65 per share is the income of the assessee. Ld.AR submits that AO has invoked the provision of section 56(2)(viib) of the Act which is reproduced as under:-

Ld.AR drew our attention to the Explanation to clause (viib) of sub-section 56(2) of the Act according to which the market value of the unquoted equity shares shall be the value as determined in accordance with such method as may be prescribed or as may be substituted by the company to the satisfaction of the AO based on the value on the date of issue of shares including of its asset, intangible assets being goodwill, know-how, patents, copyrights, trademarks, licenses, franchise or any other business or commercial right of similar nature “whichever is higher”. Ld.AR submits that as could be seen that assessee has valued its share by following DCF method which is one of the method prescribed under Rule 11UA and the valuation was done by the AO as per NAV method. However, the value worked out by the assessee as per prescribed method is higher than the value worked out by AO as per NAV method, therefore, the price derived by the assessee should be accepted as the market value of shares for issue of shares in terms of the Explanation to section 56(2)(viib) of the Act.

Ld.AR further submits that the Hon’ble Jurisdictional High Court in the case of PCIT vs Cinestaan Entertainment Pvt. Ltd. in has accepted the valuation done by DCF method.

On the other hand, Ld. CIT DR for the Revenue vehemently supported the orders of the lower authorities and submits that the valuation was done by the merchant banker as per DCF method on the basis of information supplied by the management of assessee company and submits that the said report is merely the projections and are far from the realities. Ld. CIT DR submits that Ld. CIT(A) has considered the provision of section 56(2)(viib) of the Act r.w.Rule 11UA of the Rules while confirming the addition. He submits that AO has rejected the valuation made by the assessee under DCF method after detailed examination of financial projections where the average annual growth rate of 25-30% was taken which is significantly higher than the assessee’s historical growth of 5-7% and inconsistent with prevailing industry norms for entities of similar size and operational history. Ld. CIT Dr further submits that assessee has failed to substantiate the valuation report filed by it to the satisfaction of the AO and therefore, the AO has re-computed the valuation as per NAV method and accordingly, the value per share worked out at INR 50.35 per share which deserves to be accepted. He prayed accordingly.

Heard the contentions of both parties and perused the material available on record. In the instant case, the valuation of the equity share issued by the assessee was done by the assessee by following DCF method as provided in Rule 11UA of the Rules, whereas AO has taken NAV method for computing fair market value of shares issued by the assessee. AS per Explanation to section 56(2)(viib) of the Act, fair market value of the shares is defined which reads as under:- 56 (1)…………….. (2) (viib) …… (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 he 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, licenses, franchises or my other business or commercial rights of similar nature, whichever is higher; 11. From the above, it is evident that the fair market value is to be taken either of the two “whichever is higher”. In the instant case, the assessee has valued its share at INR 500/- including premium of INR 490/- as per DCF method whereas AO has valued the same as per NAV method at INR 50.35 per share including the premium of INR 40.35 per share. However, the valuation done by the assessee is higher which is to be taken as fair market value of shares in terms of Explanation to clause (viib) to sub-section (2) to section 56 of the Act. This provision has wrongly been considered by the lower authorities where the lower valuer of the shares determined by the AO is taken as the fair market value as against the higher value has to be taken as provided under the Act. The entire addition made by the Ao is liable to be deleted on this score only.

Regarding the allegations of the lower authorities for discarding the valuation report of the assessee, one of the reasons given is that the assessee’s valuer has taken all the presumptions on the higher side is also not correct. Any company which is issuing the shares would like to value its share at maximum possible valuation taking best of the business scenario. It is up to the investor whether he/she would like to purchase these shares at this valuation based on his/her perception/market wisdom on future growth of the company. Therefore, this allegation is not sustainable. Another reason is that the report of the valuer is not independent and it relies on the data provided by the Management. In our opinion there is nothing wrong in this approach. The main job of the valuer is to arrive at the possible Fair Market Value of the share on a particular date on the basis of the data provided by the client and available in the public/various websites. However, this data should be supported by the authentic documents like Audit reports, Balance sheets, etc. Valuer cannot take the role of the Investigator. It is also a general practice that whether it is a valuer/auditor/deed writer/etc., they write a Disclaimer Clause. This does not mean they have not done their job properly. AO has also not doubted the genuineness of the source of investment. He has accepted that source of investment of both the investors is through explained sources.

Further sub-Rule (2) of Rule 11UA of the Rules provides two methods for valuation of unquoted equity shares namely (i) NAV method and (ii) DCF method and it is at the choice of the assessee to opt any of the methods prescribed under Rule 11UA(2) of the Rules and the AO cannot tinkered into the method of valuation adopted by the assessee. Now the moot question is why the Act has provided two methods of valuation i.e. DCF and NAV and option to choose one of the method is given to the assessee and not to the Department. The main reason behind it is that only the businessmen know which method suits his business. The NAV method does not take into account the intangible aspects of the market like i. competition whether market is competitive or monopolistic. ii. technology which company is using. iii. quality of management iv. Government policies V. locational advantages vi. capital intensiveness vii demand and supply viii kind of investments made by the company i.e. FDs, equities, etc.

Therefore, it may not give the correct value of the shares. In that case, an assessee may consider DCF method which takes all these aspects into account. Practically, an assessee get valuation done by both the methods and adopt the higher value which is quite logical. On the other hand, AO tries to adopt that method which gives lower valuation. To address this conflict of interest, the Act has clearly provided that it is the option of the assessee to adopt one of the method. Normally AO is not expected to reject that method of valuation until and unless there is something patently wrong with that method. In the present case though AO has tried to find the errors in valuation method but none of the error qualifies the test laid down by the Hon'ble High Court of Delhi in the case of PCIT vs Cinestaan Entertainment Pvt. Ltd. (supra) which are as under:-

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.

The Co-ordinate Bench of ITAT, Jaipur Bench in the case of Rameshwaram Strong Glass (P). Ltd. vs ITO [2018] 96 taxmann.com 542 (Jaipur-Trib.) has occasion to examined this issue and held that the change the method adopted by the assessee is beyond the power of revenue authorities. The relevant observations of the coordinate bench are as under: 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] 16. 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:

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 coordinate bench of ITAT, Delhi in the case of DCIT Vs. Hometrail Buildtech Pvt. Ltd. reported in 155 taxmann.com 178 and in the case of Intelligrape Software Pvt. Ltd. Vs. ITO in ITA No. 3925/Del./2018.

In view of the above and by respectfully following the judgement of Hon’ble jurisdictional High Court and other hon’ble high courts and coordinate benches of Tribunal, we are of the considered view that the assessee has valued its shares on the basis of one of the methods prescribed under the Act and the AO has no power to reject the same. Accordingly, we delete the addition made in this regard. The Grounds of appeal Nos. 1 & 2 raised by the assessee are allowed.

Ground of appeal Nos. 3 & 4 raised by the assessee are with respect to the passing of the order u/s 143(3) though proceedings u/s 153C were initiated therefore the assessee requested that the proceedings so completed u/s 143(3) stood abated.

In the result, the appeal of the assessee is partly allowed. Order pronounced in the open Court on 29.01.2026.