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Facts
The assessee company issued shares at a significant premium. The Assessing Officer (AO) disallowed the premium by treating the excess amount over the fair market value (FMV) as income under Section 56(2)(viib) of the Income-tax Act, rejecting the assessee's Discounted Free Cash Flow (DCF) valuation report and opting for the Net Asset Value (NAV) method. The CIT(A) upheld the AO's decision.
Held
The Tribunal ruled that the AO could not substitute the DCF valuation method chosen by the assessee with an alternate methodology. The DCF valuation was found to be based on valid assumptions and reasonable parameters, and even an NAV calculation using market value of land parcels would yield a higher FMV than that computed by the AO.
Key Issues
Whether the Assessing Officer was justified in rejecting the assessee's DCF valuation and substituting it with the NAV method for determining the fair market value of shares under Section 56(2)(viib) of the Income-tax Act.
Sections Cited
56(2)(viib), 143(2), 142(1), 11UA
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Income Tax Appellate Tribunal, “A” BENCH, KOLKATA
Before: SHRI RAJESH KUMAR, AM & SHRI PRADIP KUMAR CHOUBEY, JM
This is an appeal preferred by the assessee against the order of the National Faceless Appeal Centre, Delhi (hereinafter referred to as the “Ld. CIT(A)”] dated 15.10.2025 for the AY 2015-16.
The only issue raised in the various grounds of appeal is against the confirmation of addition of Rs.10,21,00,000/- by the ld. CIT (A) as made by the ld. AO u/s 56(2)(viib) of the Act in respect of excess share premium received over the fair market value of shares issued during the year.
The ld. CIT (A) confirmed the addition in the appellate proceedings. The ld. CIT(A) is noted to have inter alia called for the details of the relevant information provided by the assessee to the valuer along with
After hearing the rival submissions and perusing the material placed on record, it is seen that the assessee company was formed to conduct the business of real estate. The assessee company was jointly promoted by three groups, viz. Infinity group, Adventz group and Urban Infra group to undertake the business of development of real estate at Vrindavan, Mathura. From the financials of the assessee, it is revealed that the assessee through its wholly owned subsidiaries had acquired large parcels of land and thereafter the assessee had entered into development agreements with the subsidiaries, pursuant to which, it had obtained development rights over the said land parcels. The details placed in the paper book shows that, the assessee through its subsidiaries had acquired 104.79 acres of land and subsequently the assessee had sought amalgamation of the land parcels and prepared a term sheet plan titled ‘Mayavan’. It is observed that, the project plan was sanctioned by the local authorities on 25.04.2014 and thereafter the assessee had obtained construction loan from Axis Bank on 26.03.2015. It is seen from the sanction letter that the Phase 1 of the project was expected to have total outlay of Rs.175.77 crores and the expected completion of the project was 31.03.2019. The construction loan is found to have been secured by creating a charge on land parcels to the extent of 7.87 acres. In order to meet the working capital requirements, the existing promoter viz. Adventz group through its 5.1. Before examining the veracity of the valuation report, it is relevant to first take note of the provisions contained in Section 56(2)(viib) and the relevant Rule 11UA which reads as under:
Section 56(2)(viib): “56 (2) In particular, and without prejudice to the generality of the provisions of sub- section (1), the following incomes, shall be chargeable to income-tax under the head "Income from other sources", namely :— …. (viib) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person, 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: …. 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 (i) Rugby Regency (P.) Ltd. [2024] 160 taxmann.com 1056 (Delhi - Trib.) (ii) ITO vs. Solitaire BTN Solar (P.) Ltd.[2024] 164 taxmann.com 170 (Delhi - Trib.)
5.4. We also note that the provisions of Section 56(2)(viib) would come into play where the issue price is higher than the FMV and therefore, where the issue price is equal to or lower, the said provision will have no implication. The valuation method is set out in sub-clauses (i) and (ii) of Explanation to Section 56(2)(viib) read along with Rule 11UA(2)(A)(a) & (b) of IT Rules, 1962. It is well settled law that the assessee enjoys the discretion to adopt any of the valuation methodology as prescribed, for which, it has to obtain any valuation report from an independent Chartered Accountant. Though the Revenue is at liberty to scrutinize the valuation report and determine the valuation by himself or from an independent valuer, but he cannot change the method of valuation which has been obtained by the assessee. In this regard, we refer to the decision of the Hon’ble Bombay High Court in the case of Vodafone M Pessa vs. PCIT (256 taxman 240), wherein it was held as under:
9. We note that, the Commissioner of Income-Tax in the impugned order dated 23rd February, 2018 does not deal with the primary grievance of the petitioner. This, even after he concedes with the method of valuation namely, NAV Method or the DCF Method to determine the fair market value of shares has to be done/adopted at the Assessee's option. Nevertheless, he does not deal with the change in the method of valuation by the Assessing Officer which has resulted in the demand. There is certainly no immunity from scrutiny of the valuation report submitted by the Assessee. Therefore, the Assessing Officer is undoubtedly entitled to scrutinise the valuation report and determine a fresh valuation either by himself or by calling for a final determination from an independent valuer to confront the petitioner. However, the basis has to be the DCF Method and it is not open to him to change the method of valuation which has been “4.5.2 Before examining the fairness or reasonableness of valuation report submitted by the assessee, we have to bear in mind that the DCF Method, and is essentially based on the projections (estimations) only and hence these projection cannot be compared with the actuals to expect the same figures as were projected. The valuer has to make forecast on the basis of some material but to estimate the exact figures is beyond its control. At the time of making a valuation for the purpose of determination of the fair market value, the past history may or may not be available in a given case and therefore, the other relevant factors may be considered. The projections are affected by various factors hence in the case of company where, there is no commencement of production or of the business, does not mean that its share cannot command any premium.
5.6. The coordinate Bench of Bangalore in the case of Innoviti Payment Solutions Pvt. Ltd. Vs ITO[2019] 102taxmann.com59 (Bangalore – Trib.) has observed as follows:
14. In nutshell , our conclusions are as under:- (1) …. (2) For scrutinizing the valuation report, the facts and data available on the date of valuation only has to be considered and actual result of future cannot be a basis to decide about reliability of the projections.
5.7. The coordinate Bench of Delhi in the case of India Today Online (P.) Ltd. v. ITO [2019] 104 taxmann.com 385 (Delhi - Trib.) held the following:
“31. …..DCF method is a recognised method where future projections of various factors by applying hindsight view and it cannot be matched with actual performance, and what Ld. CIT (A) is trying to do is to evaluate from the actual to show that the Company was running into losses, therefore, DCF is not correct. Valuation under DCF is not exact science and can never be done with arithmetic precision, hence the valuation by a Valuer has to be accepted unless, specific discrepancy in the figures and factors taken are found. Then AO or CIT(A) may refer to the a Valuer to examine the same.” 5.8. In view of the above decisions, we are of the view that the projected figures considered at the time of valuation cannot be compared with the actual results to question the reliability of the projections and therefore, this particular line of reasoning set out by 5.9. We observe that lower authorities have laid much emphasis on the actual results reported by the assessee in the subsequent years. It was observed by them that, no revenues or costs were recognized in the financials and therefore according to them, no actual construction activity had taken place, which contradicted the assumptions made in the DCF valuation report. The ld. AR, on the other hand, brought to our notice that, the assessee was following the completed contract method and therefore, the recognition of revenues and costs were postponed until the project was actually completed. He invited our attention to Note Nos. 16, 21 and 26 of the Financial Statements and showed that, the assessee had reported Construction WIP of Rs. 51.06 crores and Advance from customers towards villas / plots stood at Rs. 11.58 crores in the year ended 31st March, 2015. The ld. AR further explained that, due to external unavoidable circumstances, including delay in obtaining approval /clearances, COVID scenario, market dynamics etc., the project got delayed and therefore, no revenues / costs were recognized during the period reviewed by the lower authorities. He further showed us that, post COVID, the project has since been halted due to commercial reasons. Having considered these facts and circumstances, we find that the assessee had demonstrated that construction had commenced, advances were received from customers at the time when valuation was undertaken and therefore only because later on the project got delayed / postponed cannot be the reason to disbelieve the DCF projections. Secondly, we find that the lower authorities had erred in observing that, the assessee was unable to adduce any evidence
5.10. The ld. DR before us had relied upon the observations of the ld. AO doubting the veracity of the report sans any external market research. We are unable to countenance this proposition on the given facts before us, because the assessee was a private limited company whose data is not available in public domain and having regard to its nature of business, the valuer had rightly relied on the details provided by the assessee, viz. land area, sanction plan, prevailing circle rate, cost of debt, project life, etc. We also note that, the assessee had also shown to the lower authorities that, even if the net asset value is to be considered, then also, the premium charged upon issuance of shares could not be alleged to be excessive. The ld. AR took us through the details of land parcels held by the assessee along with its subsidiaries and the corresponding circle rates as prevailing FY 2014- 15. It is seen that the prevailing circle value of land parcels alone in FY 2014-15 was Rs.126.87 crores, which is higher than the enterprise value of Rs. 105.74 crores estimated under the DCF method. We thus find that, if the NAV method is applied in the true sense, by adopting the market value of the land parcels as prevailing during FY 2014-15, then the NAV per share would work out to Rs. 310/-, which is higher than the issue price of Rs. 189.40/share. It is observed that, though this contemporaneous fact was brought on record by the assessee before both the lower authorities, none of them dealt with the same, and rather ignored it by arbitrarily taking the book value of land of Rs.33.66 crores as the fair market value for estimating the FMV of the shares. Such action of the lower authorities is held to be unjustified.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 10.02.2026.