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Facts
The assessee received share premium of Rs. 3,99,20,000/- for issuing 8000 equity shares. The Assessing Officer (AO) re-opened the assessment based on information of high-risk transaction. The assessee submitted a valuation report using the Discounted Cash Flow (DCF) method, which valued shares at Rs. 5,017/-. The AO rejected this valuation and determined the fair market value (FMV) at Rs. 10/- per share using the Net Asset Value (NAV) method.
Held
The Tribunal held that the valuation report submitted by the assessee was defective as it was not prepared in accordance with the guidelines of the Institute of Chartered Accountants of India (ICAI) and relied on unverified data provided by the management. The AO was justified in rejecting the DCF method and adopting the NAV method to determine the FMV of shares.
Key Issues
Whether the valuation of shares and the resultant share premium received by the assessee are acceptable based on the valuation report, or if the Assessing Officer's rejection of the valuation and determination of FMV using an alternative method is justified.
Sections Cited
147, 250, 144B, 148, 143(3), 143(2), 56(2)(viib), 11UA
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Income Tax Appellate Tribunal, RAJKOT BENCH, RAJKOT
Before: DR. ARJUN LAL SAINI & SHRI DINESH MOHAN SINHA
सुनवाई क� तार�ख /Date of Hearing : 17/07/2025 घोषणा क� तार�ख /Date of Pronouncement : 07/10/2025 ORDER Per, Dr. Arjun Lal Saini, Accountant Member: Captioned appeal filed by the assessee, pertaining to Assessment Year (AY) 2015-16, is directed against the order passed by the Learned Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre, Delhi[in short ‘Ld.CIT(A)/NFAC’], under section 250 of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’), dated 03.06.2024, which in turn arises out of an assessment order passed by the Assessing Officer u/s 147 r.w.s. 144B of the Act.
The Grounds of appeal, raised by the assessee, are as follows:
(AY : 2015-16) 2 1.The Ld. CIT(A) erred in confirming reopening of assessment u/s 147 of the Act, as valid. 2.The Ld. CIT(A) erred in confirming addition of Rs. 3,99,20,000/- made u/s 56(2)(vii)(b) of the Act, being share premium received on issue of shares. The addition made kindly be deleted.
At the outset, learned Counsel for the assessee, informs the Bench that assessee does not wish to press ground No. 1 raised by it, therefore, we dismiss ground No.1, raised by the assessee, as not pressed.
The relevant material facts, as culled out from the material on record, are as follows. The assessee has filed return of income for assessment year (A.Y.) 2015-16, on 13.09.2015, declaring total income at nil and current year loss at Rs.2,26,57,224/-.The assessee`s case was selected for scrutiny through the CASS system and assessment u/s 143(3) of the Income Tax Act, 1961 was completed on 27.12.2017 accepting the total income. Thereafter, information was received by the Department in the category of High Risk Transaction on INSIGHT portal of the department that the assesse has received share premium of Rs. 3,99,20,000/-. Hence, after recording reasons of reopening and obtaining prior approval from the competent authority, the case was re-opened u/s 147 of the Income Tax Act. Accordingly, notice u/s 148 of the Act, was issued on 31.03.2021. The Assessee submitted its Return of income on 02.04.2021. Notice u/s143(2) of the Income Tax was issued to the assessee on 04.05.2021. The reasons of reopening was also supplied to the assessee. The Assessee submitted its objection vide letter dated 13.05.2021. The objection of the assesse was disposed of by passing a speaking order, by the assessing officer.
During the reassessment proceedings, it was noticed by the assessing officer that the assessee has issued 8000 share, whose face value is Rs. 10 and at a premium of Rs.4990/-, thus the assessee during the period has received (AY : 2015-16) 3 Rs.80,000/-, as value of share and share premium of Rs. 3,99,20,000/-. Therefore, assessee was required to justify the valuation of share, as per provisions of Income Tax Act, 1961. Therefore, the assessing officer issued a show cause notice to the assessee, to explain the valuation and share premium received by it.
In response to the notice of the assessing officer, the assessee submitted the details of share issued and valuation report. The relevant portion of the same is as follows:
The assessee submitted before the assessing officer that during the relevant previous year, 8000 equity shares having face value of Rs. 10 each was issued at a premium of Rs. 4990 per share. The details of share allotment were furnished. The entire amount of share capital and share premium of Rs. 4,00,00,000/-, was received during the relevant previous year. As regards valuation of shares, it was submitted that assessee-company had valued shares following DCF (AY : 2015-16) 4 (Discounted Free Cash Flow) Method. The valuation report was obtained from a qualified Chartered Accountant, other than statutory auditor of the company. The copy of valuation report was submitted before the assessing officer, by the assessee. No dividend was declared for the relevant previous year as also in earlier years. The assessee submitted the valuation report, which is reproduced below:
(AY : 2015-16) 5 8. However, the assessing officer rejected the above valuation report of the assessee- company and the explanations submitted by the assessee- company, by observing the following: (i) On going through the valuation report it was noticed by the assessing officer that the valuer in the valuation report stated that they estimate cash flow, which will grow by 10% in the first two years, and then 7% in the following three. Thereafter, long term Growth Rate will be 5%. The estimated cost of equity capital @14%. The terminal value, or long term valuation the company's growth approaches is calculated using the Gordon Growth Model. However, in the assessee’s case, the valuer has not submitted the basis of the estimation on the basis of which it estimates that the growth will be 10% in first two year, 7% following 3 year and 5% after that. It is only mentioned that the terminal value is calculated using the Gordon Growth model. However, Gordon Growth Model also require some inputs on the basis of which gave terminal value. In the present case, valuer has not submitted the detailed calculation in this regard. Ongoing through the above, it is very clear that the valuer only depends on the information provided by the assessee. The company only incorporated on 12.06.2013, that is, in the preceding year only. The company has no such assets, not declared any future projects and also not declared any dividend earlier. However, the assessee values the share at a premium of Rs. 4,990/-. It is clear from the facts that the valuer to the satisfaction of the management company without any independent verification of the fact and projection given to him. Thus the report submitted by the assessee as valuation report wherein the fair market value of the share is shown as Rs.5017/- was not accepted by the assessing officer. (ii) As per the "Technical guide on share valuation” published by the Institute of Chartered Accountants of India, the discounted cash flow method is discussed (AY : 2015-16) 6 from Page 5 to page no. 11, wherein the three key pre-requisites (viz. cash flow projections, discount rate and terminal value) are discussed. For proper and scientific valuation of shares, the following factors are to be considered as per the recommendations of the "Technical guide on share valuation issued ICAI: (a)Cash Flow Projections: (i)Cash Flow projections should reasonably capture the growth prospects and earnings capability of a company. The earning margins of a company should be determined based on its past performance. (ii)Discontinuation of a part of the business, expansion programmes. (iii)Cyclical fluctuations, if any, should be factored in. (iv)Effects of change in the policy of the company should be taken into account (v)Capital expenditure in projections (vi)Working capital requirement (vii)Income Tax outflow. (b)Discount Rate Appropriate rate to discount future cash flows should be determined. (c )Terminal Value Terminal value should be determined However, none of the above factors were considered by the valuer in his report. Thus, it is imperative that the valuer should study and research and make an educated valuation of the shares. The key areas that require considerable attention are past performance growth prospects, earnings capacity, expansion etc. However, in the instant case the valuer has merely adopted the values provided by the management clearly ignoring the other factors.
(AY : 2015-16) 7 (iii) Further, ongoing through the projection for the period 2015 to 2018 provided by the assessee to the valuer for valuation and the actual financial for the Financial year 2015-16 to 2019-20, it was noticed by the assessing officer that the actual figure achieved by the company and the projections given by the assessee has no matching. It is acceptable that projections are not science and there may be some variations but if the variation is between 5 to 10% may be acceptable. But there is a big mismatch between fair market value of the share and share issue price during the period, the valuer used for Discounted Cash Flow System. Therefore, the projections are inflated such as the assessee company inflow the money required by them in the garb of share premium. (iv) The valuer has stated that it had adopted Gordon Growth Model for terminal value, however model has certain limitation. It lies in its assumption of constant growth in dividends per share. It is very rare for companies to show constant growth in their dividends due to business cycles and unexpected financial difficulties or successes. Another issue occurs with the relationship between the discount factor and the growth rate used in the model. If the required rate of return is less than the growth rate of dividends per share, the result is a negative value, rendering the model worthless. Therefore, it is clear that the same method is not a very dependable model. In the present case, the valuer prepares the share after obtaining data from management without any basis. (v) Further, the one of the reason behind the introduction of the Section 56(2)(viib) of the Act is to curb the introduction of the black money in the garb of Share premium. Therefore, the exorbitant price of fair market value of the share as mentioned in the valuation report, in the satisfaction of the management of the assessee- company, is not acceptable.
(AY : 2015-16) 8 (vi) The report submitted by the assessee is a very summarised report and does not contain the budgeted revenues and cost. The assessee has not provided any evidence to prove the correctness of the result of Discounted cash flow method adopted by the assessee and also no evidence to substantiate basis of projections in cash flow system.Hon'ble Delhi ITAT in case of Agro Portfolio (P) Ltd v. Income Tax Officer, Ward 1 (4). New Delhi (171 ITD 74) upheld the action of AO of rejecting the valuation report as it was found that Merchant banker had solely relied upon an assumed data without independent verification or truthfulness and completeness of information. Further, no evidence to substantiate basis of projections in cash flow was provided by assessee .Whether since without any evidence, correctness of result of Discounted Cash Flow method could not be verified, it would serve no purpose even if matter was referred to Department's Valuation Officer. In view of above, Hon`ble ITAT held that Assessing Officer was justified in rejecting DCF method and to determine FMV of shares. Thus for the reasons as stated above and discussed at length, the valuation report dated 01.02.2015 valuing the value of shares and the submission of the assessee vide its letter dated 19.02.2022 was rejected by the assessing officer.
Then after, assessing officer determined the fair market value of the shares of the assessee- company under Rule 11UA of the Rules. The assessing officer noticed that in the assessee`s case, the assessee has not submitted any data/financial on the date of issuing the share, during the current period. Therefore, the valuation of the share of per unit (NAV) is computed on the basis of financials, as on 31.03.2014, that is, last financial available before the share issue date. In terms of provisions of section 56(2)(viib) of the Income Tax Act, 1961, the fair market value of the share of the assessee -company under Rule 11UA of the Income Tax Rules, 1962 was determined as under:
Therefore, the assessing officer determined above, the fair market value of the shares, under rule 11UA, and worked out at Rs. 10/- per share, inclusive of share premium, whereas the assessee had worked out the value at Rs.5000/- per share. Thus, the valuation of the share by assessee is excess by Rs.4990/- per share, which is considered as excessive in terms of provisions of section 56(2)(viib) of the Income Tax Act, 1961. Therefore, the difference between the fair market value and share premium worked out to Rs.3,99,20,000/- (8000X 4990) and the same was to be added back to the total income of the assessee for the concerned period invoking the provision of Section 56(2)(viib) of the Income Tax Act, 1961.
Thereafter, again A Show-Cause notice (SCN) was issued by the assessing officer to the assessee on 27.03.2022. The Draft Assessment Order (DAO)
(AY : 2015-16) 10 proposing to make addition of the above-mentioned amount to the total income of the assessee was also issued along with the show cause notice. In response to the above show cause notice, the assessee made submission on 29.03.2022.
However, the assessing officer rejected the contention of the assessee on account of the following reasons: (i) Assessee contended that the company has bright future hence Chartered Accountant had worked out the value of shares following Discounted Cash Flow method, however the same is not reflected in the future assessment year for which assessee has made projections in the DCF method. The Assessee contended that it can opted any of the methods of valuations are given under the 11UA of the Income Tax Rules, 1962 and it opted the DCF method. The contention of the assesse has been considered but the growth approaches taken while valuing the share using DCF method is nowhere the actual figure. In the Draft assessment order, it was clearly mentioned that the valuer has not submitted the basis of the estimation on the basis of which it estimates that the growth will be 10% in first two year, 7% following 3 year and 5% after that. It is only mentioned that the terminal value is calculated using the Gordon Growth model. However, Gordon Growth Model also require some inputs on the basis of which gave terminal value. In the present case, valuer has not submitted the detailed calculation in this regard. The exorbitant value of share computed by the valuer without any basis/process is not acceptable. (ii) Assessee stated that the very purpose of certification of DCF valuation by a merchant bank or Chartered Accountant is to ensure that the valuation is fair and reasonable. In the draft assessment order issued along with the show cause notice, the variation done by the assessee has been clearly pointed out and the reason for rejection of the valuation has been also discussed. It was also (AY : 2015-16) 11 mentioned that for proper and scientific valuation of shares, which factors are to be considered as per the recommendations of the Technical guide on share valuation issued by ICAI, valuer is required to arrive at the value of a share after study and research. The key areas that require considerable attention are past performance growth prospects earnings, capacity, expansion etc. However, in the instant case the valuer has merely adopted the values provided by the management clearly ignoring the other factors. In absence of fair and reasonable value of the share, the valuation has been done on the basis of other method prescribed in Rules 11UA of Income Tax Rules 1962 after obtaining the value available on records/balance sheet of the assesse. (iii) In this regard, assesse relied on various judicial precedents. On going through the same it was noticed that some of the case pertains to start up. In the present case assesse is not a start-up company. It is settled principle of law that the in income tax proceedings, each case has to be examined in its own facts and circumstances. In the present case, assesse has made valuation through DCF method however, ongoing through the same, it was found that the valuer has not valued the share as per the guidelines issued by the ICAI, but valued the share on the basis of information available. Thus, the very basis of the reasonable valuation of share defeated in the present case. (iv) Assessee relied on the CBDT instruction no. F No 173/14/2018-ITA.I wherein it was stated that the provisions of section 56(2)(vii)(b) of the Act shall not be applicable in case of Start-ups. Assessee in its submission in many place discussed about the start-up company. The said notification clearly stated that "Start Up" companies which fall within the definition given in Notification of DIPP, Ministry Of Commerce & Industry, in GSR 501(E) dated 23.05.2017 however in the present case, assesse has not submitted any documents to substantiate that the assessee- company comes under the said definition.
(AY : 2015-16) 12 However, in the present case it is clear from the fact that assessee is not a start- up company. (v) 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. (vi) Assessee contended that section 56(2)(vii)(b) of the Act is not applicable to genuine business transaction. In this regard, as per the provisions of Income Tax Act. 1961 56(2)(vii)(b) reads as under: “(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” As per the Act there is no mention regarding bonafide business transaction. In the present case, assessee- company has taken share premium on the basis of valuation report which is not as per the guidelines issued by the ICAI but on the basis of some arbitrary projections, and projections have not been achieved by the assessee. In this regard, assessee relied on various judicial precedents. In this regard, it is to be stated that the provisions of section 56(2)(vii) (b) of the Act was introduced in the Finance Act, 2013 w.e.f. A.Y. 2014-15. However, ongoing through the judicial precedents cited by the assesse, it is noticed that except 2 judgment, others are prior to the introduction of the provision of Section 56(2)(vii)(b) of the Income Tax Act, 1961 and in other two cases facts of the case is different.
(AY : 2015-16) 13 (vii) Assessee contended that the profitability was predicted based on the similar nature units viz. Balaji Wafers Private Limited. The contention of the assessee- company is not acceptable, there is lot of company in the market who are dealing with the similar nature of products, many of them has not even miniscule transactions as assesse has predicted in its first year of business. Further, assessee stated that it has property at Plot No. G/510 GIDC Metoda which has been valued at Rs.724 Lakhs, however value as stated by the assessee is not reflected against the plot in the balance sheet of the assessee as on 31.03.2014 and 31.03.2015. The Assessee further stated that the reason for not matching the data of the projections with the actual is that no one can predict the future and there can never be perfect match of future data. It is acceptable that projections are not science and there may be some variations but if the variation is between 5 to 10% may be acceptable. But there is a big mismatch between fair market value of the share and share issue price during the period the valuer used for Discounted Cash Flow System. Therefore, the projections are inflated such as the assessee- company inflow the money required by them in the garb of share premium (viii). The assessing officer relied on the decision of Delhi bench of ITAT in the case of Agro Portfolio P Ltd (2018) (94 taxmann.com 112) ITA No.- 2189/Del/2018 dated 16.05 2018, which is reproduced below: "For all these reasons, we are of the considered opinion that there has not been any possibility of verifying the correctness or otherwise of the data supplied by the assessee to the merchant banker, in the absence of which the correctness of the result of DCF method cannot be verified. This left no option to the AO but to reject the DCF method and to go by NAV method to determine the FMV of the shares Without such evidence, it serves no purpose even if the matter is referred to the Department's Valuation Officer We therefore do not find any illegality or irregularity in the approach of conclusions are by the authorities below. While confirming the same, we dismissed the appeal as devoid of merits.”
(ix). The assessing officer also relied on the judgement of Kerala High Court in the case of SUNRISE ACADEMY OF MEDICAL SPECIALITIES (INDIA)
(AY : 2015-16) 14 PRIVATE LIMITED vs. ITO (WA.No. 1297 of 2018 IN WPC: 3485/2018) dated 12.07.2018 wherein following was observed: "Any premium received by a Company on sale of shares, in excess of its face value, if the Company is not one in which the public has substantial interest, would be treated as income from other sources, as seen from Section 56(2) (viib) of the Act, which we do not think can be controlled by the provisions of Section 68 of the Act Section 68 on the other hand, as substituted with the provisos, treats any credit in the books of accounts, even by way of allotment of shares; for which no satisfactory explanation is offered. to be liable to income-tax. Clause (viib) of Section 56(2) is triggered at the stage of computation of income itself when the share application money received, from a resident, by a Company, in which the public are not substantially interested, is above the face value. Then the aggregate consideration received for the shares as exceeds the fair market value will be included as income from other sources. However, when the resident investor is not able to explain the nature and source for the credit seen in the books of accounts of the Company or the explanation offered is not satisfactory then the entire credit would be charged to income tax for that previous year. That is the entire amounts credited in the books of accounts, styled as. for allotment of shares or application money, including the fair market value determined will be charged to tax. However if an explanation is offered and if it is satisfactory in the case of a Company in which the public are not substantially interested, then the charge to tax will only be to that portion exceeding the fair market value determined, which anyway has to occur under Section 56(2)(viib)”.
Based on the above facts and discussion, and after considering the submissions of the assessee, the assessing officer held that the difference between the fair market value and share premium worked out to Rs.3,99,20,000/- (8000X 4990) should be added back to the total income of the assessee for the concerned period, invoking the provision of Section 56(2)(viib) of the Income Tax Act, 1961. Accordingly, addition of Rs.3,99,20,000/-, was made in the hands of the assessee.
14.Aggrieved by the order of the assessing officer, the assessee carried the matter in appeal before the ld.CIT(A), who has confirmed the addition made by the assessing officer. The ld.CIT(A), had just narrated the findings of the assessing officer and had confirmed the action of the assessing officer, therefore, assessee is in further appeal before us.
(AY : 2015-16) 15 15. Learned Counsel for the assessee, argued that the valuation of shares and share premium, done by the Chartered Accountant is as per the Rules prescribed, under Rule 11UA(2)(b) of the Income tax Rules. The Ld. Counsel also explained that up to 24-05-2018, a Chartered Accountant was authorized to give certificate for valuation of shares, by using the discounting cash flow method and after 24-05-2018, Merchandise Bankers were authorized to give certificate for valuation of shares. The Ld. Counsel submitted that the Financial Year ended 31-03-2015, the Chartered Accountant had given the DCF certificate, discounted cash flow method certificate on 01-02-2015 for valuation of share and share premium. Therefore, the valuation report given the Chartered Accountant should be accepted by the assessing officer. The Ld. Counsel also took us through the assessment order, vide page No. 4, wherein the calculation of the discounted cash flow is reproduced by the assessing officer. After going through the certificate, the Ld. Counsel explained that the methodology adopted by the Chartered Accountant is correct. However, learned Counsel admitted that the Chartered Accountant had failed to explain the terminal value of Rs. 25,59,15,917/-. The Ld. Counsel submitted that certificate given by the Chartered Accountant, should be accepted and no addition should be made in the hands of the assessee, for that learned Counsel relied on the following judgements: (i) M/s Cinestaan Entertainment Pvt Ltd, order dated 01.03.2021 (ii)M/s phenix Procon Pvt Ltd, order dated 25.01.2024 (iii)M/s Rameshwaram S Glass (p) Ltd, ITA No.884/JP/2016.
On the other hand, the ld.CIT-DR for the revenue explained that the valuation report of the Chartered Accountant had been given under Rule 11UA(2)(b) of the Rules, however, the Chartered Accountant has not adopted any base for estimation mentioned in the certificate, that is while making the estimation, no any base has been adopted by the Chartered Accountant, therefore, the valuation report is defective. The bank rate prevailing in that (AY : 2015-16) 16 period, and risk involved in that period, and industry risk should be taken into account by the Chartered Accountant. The Chartered Accountant has also failed to make estimation for terminal value of Rs.25,59,15,917/-. What is the basis for method of valuation was not given by the Chartered Accountant in his report. The Chartered Accountant has given report based only the information submitted by the assessee, therefore, Chartered Accountant did not use any data except the data supplied to him by the assessee- company. The Chartered Accountant should have taken into account, the industry norms in general and the same industry growth norms and the Industry data, in which the assessee is doing business. However, no any input has been taken by the Chartered Accountant from his side, while making estimation.
The Ld D.R. also pointed out that no doubt the Institute of Chartered Accountants of India has issued guidance note on this issue and the Chartered Accountant, while giving such certificate, should follow guidance note of the ICAI. However, the Chartered Accountant has failed to do so. The Ld. D.R. further pointed out that no basis of cash flow was taken and for estimation there may be variation up to 5 to 10%. However, the variation in the assessee’s case is more than 10%. If the premium has been decided so much by the Chartered Accountant, then it has to be seen whether the assessee declared any dividend or not. However, the assessee- company never declared dividend from assessment year 2015-16 to assessment year 2024-25 (till date). The data obtained from the management has been used by the Chartered Accountant, while giving the certificate, and no any data and like industry data, risk involved, capital expenditure in future and cash flow projections have been used. The Ld. D.R. also pointed out that assessee does not fall in the category of initial start- up. The company has started its activities first and then after the valuation was given. Therefore the judgment relied on by the Ld. Counsel for the assessee are (AY : 2015-16) 17 not applicable to the facts of the assessee`s case. Therefore, valuation report prepared by the Chartered Accountant does not have any base as the the Chartered Accountant used reverse engineering data and terminal value has not been explained by the Chartered Accountant, in the certificate given by him. Therefore, order passed by the assessing officer rightly states that if the certificate given by the Chartered Accountant does not explain terminal value, and it is not in accordance with the guidance note issued by the ICAI, then under these facts and circumstances, the judgment of the Hon’ble Delhi High Court in the case of M/s Cinestaan Entertainment Pvt. Ltd, & CM APPL 54134/2029 does not apply to the assessee’s case under consideration. In the said judgment the Hon’ble High Court stated that the Revenue had the option to do its own valuation and determine the fair market value on the basis of either the DCF method or under NAV as per Rule 11UA of the Rules. Therefore assessing officer has adopted the same method since the assessee is not start up company and the judgment delivered by the Hon’ble Delhi High Court pertains to outside investors. However assessee’s case is that it is a private limited company, therefore, inside investors are involved, that is family members are the investors in the assessee -company. Therefore judgment cited by the ld. Counsel for the assessee is distinguishable on facts. Therefore, learned DR for the revenue submitted that the order passed by the assessing officer may be upheld.
We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials brought on record. We note that since the Chartered Accountant has given the defective certificate/ wrong certificate, as it is not in accordance with the guidance note issued by the ICAI. The Chartered (AY : 2015-16) 18 Accountant did not give any finding about terminal value of Rs.25,59,15,917/- and the assumptions behind the terminal value has not been mentioned. Therefore, judgements relied on by the learned Counsel for the assessee, based on the certificate of the Chartered Accountant are not applicable and these judgments do not provide any assistance to the assessee, as the base/ foundation which is the certificate given by the Chartered Accountant is defective than on such defective certificate, the case law relied on by the learned Counsel for the assessee are not applicable, as the foundation is weak, ( certificate given by the chartered accountant is defective/wrong) then the super structure is also going to be weak.Once the foundation fails, the superstructure also fails that is, the addition also is to be made in the hands of the assessee. In this regard, we rely on the legal maxim “Sublato fundamento cadit opus” (meaning thereby that foundation being removed, structure /work falls). Hence the initial action of the assessee ( certificate of CA) itself is not in consonance with law, then all the subsequent and consequential proceedings would fall through for the reason that illegality strikes at the root of the order, and hence, the findings of the assessing officer should be upheld.
We note that in the certificate provided by the Chartered Accountant, the projections used in the DCF valuation were based solely on information provided by the management without independent verification by Charted Accountant. The valuer relied on optimistic growth rates without substantiating the basis for these projections. The growth rates assumed (10% for the first two years, 7% for the next three years, and 5% thereafter) were not supported by historical data or industry standards. The company was newly established with no substantial track record to justify such optimistic projections. There is mismatch with actual performance. There was a significant discrepancy between the projected financials and the actual performance of the company in (AY : 2015-16) 19 subsequent years. This indicated that the projections were overly optimistic and unrealistic. No dividend has been paid by the company since 2015 to 2024, that is, till date.
Technical Guide on Share Valuation, has not been considered by the Chartered Accountant. The AO referred to the "Technical Guide on Share Valuation" published by the Institute of Chartered Accountants of India (ICAI), which outlines the key factors to be considered for a proper and scientific valuation of shares. The appellant's valuation report did not adhere to these guidelines, particularly in the areas of cash flow projections, discount rate, and terminal value. Therefore, adoption of NAV Method by assessing officer, in these circumstances, is fair. In the absence of a credible DCF valuation, the AO adopted the Net Asset Value (NAV) method to determine the fair market value of the shares. The NAV method is a simpler and more straightforward approach that calculates the value of the company's shares based on its net assets (total assets minus total liabilities). The AO computed the FMV of the shares as Rs. 10 per share using the NAV method. This was significantly lower than the Rs. 5,000 per share determined by the appellant using the DCF method. Judicial Support for NAV Method, has been demonstrated by the assessing officer. The AO referred to judicial precedents supporting the rejection of the DCF method in cases where the projections were unverified or unrealistic. Notably, the AO cited the decision in Agro Portfolio (P) Ltd. vs. ITO (supra), where the ITAT upheld the AO's rejection of the DCF method due to the lack of verifiable data and substituted it with the NAV method. Therefore, we note that above findings of the learned CIT(A) is based on factual position. Therefore, none of the case law cited by the learned Counsel for the assessee would assist the assessee, as the certificate given by the Chartered Accountant is itself wrong and defective, as noted above.
(AY : 2015-16) 20 21. At the cost of repetition, we state that the certificate given by the Chartered Accountant does not contain the following important cash flow projections, and other important financial information which are given below: (i)Cash Flow projections should reasonably capture the growth prospects and earnings capability of a company. The earning margins of a company should be determined based on its past performance. (ii)Discontinuation of a part of the business, expansion programmes. (iii)Cyclical fluctuations, if any, should be factored in. (iv)Effects of change in the policy of the company should be taken into account. (v)Capital expenditure in projections. (vi)Working capital requirement. (vii)Income Tax outflow. (viii)Discount Rate .Appropriate rate to discount future cash flows should be determined. (ix) )Terminal Value Rs. 25,59,15,917/- should be determined as per the guideline provided by the guidance note issued by the ICAI.
However, none of the above factors were considered by the valuer in his report. Thus, it is imperative that the valuer should study and research and make an educated valuation of the shares. The key areas that require considerable attention are past performance growth prospects, earnings capacity, expansion etc. However, in the instant case the valuer has merely adopted the values provided by the management clearly ignoring the other factors. In the present case, assessee- company has taken share premium on the basis of valuation report which is not as per the guidelines issued by the ICAI but on the basis of some arbitrary projections, and projections have not been achieved by the assessee. Besides, assessee, under consideration is not a start-up company. Based on the above factual position, this appeal deserve to be dismissed by upholding the order passed by the CIT(A). The conclusions arrived at by the (AY : 2015-16) 21 CIT(A) are, correct and admit no interference by us. We, approve and confirm the order of the CIT(A), and dismiss the appeal of the assessee.
In the result, appeal of the assessee is dismissed.
Order is pronounced in the open court on 07/10/2025
Sd/- Sd/- (DINESH MOHAN SINHA) (DR.ARJUN LAL SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER राजकोट /Rajkot (True Copy) िदनांक/ Date: 07/10/2025 आदेश क� �ितिलिप अ�ेिषत/ Copy of the order forwarded to : अपीलाथ�/ The Appellant ��यथ�/ The Respondent आयकर आयु�/ CIT आयकर आयु�(अपील)/ The CIT(A)/(NFAC), Delhi. िवभागीय �ितिनिध, आयकर अपीलीय आिधकरण, राजकोट/ DR, ITAT, RAJKOT गाड�फाईल/ Guard File By order/आदेशसे ,