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Facts
The assessee company issued shares at a premium and obtained a valuation report using the Discounted Cash Flow (DCF) method. The Assessing Officer (AO) rejected this valuation, citing a lack of basis, and instead applied the Net Asset Value (NAV) method, resulting in an addition to the assessee's income.
Held
The Tribunal held that the Assessing Officer does not have the jurisdiction to substitute the valuation method chosen by the assessee. While the AO can scrutinize the valuation report, they cannot impose a different method of valuation than the one opted for by the assessee.
Key Issues
Whether the AO is justified in rejecting the assessee's chosen valuation method (DCF) and applying an alternative method (NAV) for determining the fair market value of shares.
Sections Cited
56(2)(vii), 56(2)(viib), Rule 11UA
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Income Tax Appellate Tribunal, Hyderabad ‘A Bench, Hyderabad
Before: SHRI VIJAY PAL RAO & SHRI MADHUSUDAN SAWDIA
आयकर अपील�य अ�धकरण, हैदराबाद पीठ IN THE INCOME TAX APPELLATE TRIBUNAL Hyderabad ‘A’ Bench, Hyderabad BEFORE SHRI VIJAY PAL RAO, VICE PRESIDENT AND SHRI MADHUSUDAN SAWDIA, ACCOUNTANT MEMBER आ.अपी.सं /ITA.No.1686/Hyd/2025 Assessment Year 2017-2018 Ascentech Engineering The DCIT, Circle-1(1), Solutions Private Limited, vs. Hyderabad - 500 051. Hyderabad. Telangana. Telangana. PAN AAKCA9922C (Applicant) (Respondent) िनधा�रती �ारा/Assessee by : MS Sree Lekha, Advocate राज� व �ारा/Revenue by : Sri Mathivanan S A, Sr. AR सुनवाई की तारीख/Date of hearing: 04.03.2026 घोषणा की तारीख/Pronouncement: 06.03.2026 आदेश/ORDER PER VIJAY PAL RAO, VICE PRESIDENT :
This appeal has been by the Assessee against the Order dated 05.09.2025 of the learned CIT(A)-National Faceless Appeal Centre [in short “NFAC], Delhi, for the assessment year 2017-2018.
2 ITA.No.1686/Hyd./2025 2. The solitary issue arises in this appeal of the assessee is whether in the facts and circumstances of the case the learned CIT(A) is justified in upholding the addition made by the Assessing Officer u/sec.56(2)(vii) read with Rule 11UA of I.T. Rules, 1962 by rejecting the valuation determined based on Discounted Cash Flow [in short “DCF”] method and substituted by applying the Net Asset Method [in short “NAV”].
3. The learned Authorised Representative of the Assessee has submitted that the assessee has issued the shares during the year under consideration having face value of Rs.10/- @ Rs.70/- per unquoted equity share with a premium of Rs.60/- per share. The learned Authorised Representative of the Assessee has referred to the valuation report placed at page nos.70 to 74 of the paper book and submitted that the valuer has determined the value of the share by selecting the DCF method and the calculation is given in the annexure to the valuation report placed at page no.71 of the paper book. The Assessing Officer did not accept the valuation of the assessee and proceeded to determine the 3 ITA.No.1686/Hyd./2025 fair market value of the shares of the assessee by adopting the NAV and thereby, made the disallowance of the entire premium of Rs.45 lakhs while passing the impugned order. The learned Authorised Representative of the Assessee has submitted that it is well settled law as laid down by the Hon’ble High Courts as well as various Benches of this Tribunal the Assessing Officer has no jurisdiction to substitute the method of valuation as selected and chosen by the assessee. She has relied upon the following Judgments:
(i) Judgment of Hon’ble Delhi High Court in the case of Agra Portfolio Pvt. Ltd., vs. PCIT-1 & Anr. ITA.No.1385/2018 dated 04.04.2024; (ii) Judgment of Hon’ble Delhi High Court in the case of Pr. CIT-2 vs. M/s. Cinestaan Entertainment Pvt. Ltd., ITA.No.1007/2019 & CM Appeal No.54134/2019 dated 01.03.2021; (iii) Judgment of Hon’ble Bombay High Court in the case of Vodafone M-Pesa Ltd. Vs. Pr. CIT [2018] 92 taxmann.com 73 (Bom.);
4 ITA.No.1686/Hyd./2025 (iv) Order of ITAT, Hyderabad in the case of Grene Robotics (India) Private Limited vs. ITO, Ward-2(2) ITA.No.152/Huyd./2024 dated 02.01.2025; (v) Order of ITAT, Hyderabad in the case of Dhola Infra Projects Limited vs. ACIT in ITA.No.800/ Hyd./2024, dated 17.10.2024; (vi) Order of ITAT, Ahmedabad in the case of DCIT, Circle-3(1)(1), Ahmedabad vs. M/s. Phenix Procon Pvt. Ltd., ITA.No.1032/Ahd./2019 dated 25.01.2024; (vii) Order of ITAT, Hyderabad in the case of JCIT vs. M/s. MLR Auto Limited ITA.No.115/Hyd./2021 dated 28.12.2023; (viii) Order of ITAT, Bangalore in the case of Innoviti Payment Solutions (P.) Ltd. vs. ITO, Ward-3(1)(1), Bengaluru [2019] 175 ITD 10 (Bangalore-Trib.); (ix) Order of ITAT, Delhi in the case of Cinestaan Entertainment (P.) Ltd. vs. ITO, Ward-6(2), New Delhi [2019] 106 taxmann.com 300 (Delhi-Trib.);
5 ITA.No.1686/Hyd./2025 (x) Order of ITAT, Jaipur in the case of Rameshwaram Strong Glass (P.) Ltd. vs. ITO, Ward-2(1), Ajmer [2018] 96 taxmann.com 542 (Jaipur-Trib.);
On the other hand, the learned DR has submitted that the Assessing Officer has given the basis of rejection of the valuation as no basis is given in the valuation report for determining the valuation of the share @ Rs.70/- per share. Therefore, the Assessing Officer has applied the NAV method for determining the fair market value of the shares as on the date of issuance of the shares by the assessee which arrived at Rs.10/-. Hence, the entire premium of Rs.60/- per share was found to be the excess price over and above the fair market value of the share. He has relied upon the Orders of the authorities below.
We have considered the rival submissions as well as relevant material on record. The Assessing Officer has made the addition of Rs.45 lakhs u/sec.56(2)(viib) of the Act in Para nos.1 to 3 of the Order as under:
6 ITA.No.1686/Hyd./2025
7 ITA.No.1686/Hyd./2025 5.1. Thus, the Assessing Officer has recorded in the assessment order that the assessee has filed the valuation report including the annexure to the certificate. However, the Assessing Officer was not satisfied with the valuation claimed by the assessee and rejected the valuation on the ground as no methodology is followed and relied upon. It is clear from the said annexure and valuation report that the valuer has adopted the DCF method as per the annexure to the valuation placed at Page no.71 of the paper book as under:
8 ITA.No.1686/Hyd./2025 5.2. Thus, the valuation was determined by the valuer on the basis of the DCF. There is no quarrel that the Assessing Officer has the power and jurisdiction to reject the valuation of the assessee however, as per the provisions of sec.56(2)(viib) read with Explanation-2 and Rule 11UA of I.T. Rules, 1962, the option is given to the assessee to select a method as prescribed under the Rules for determination of the market value in accordance with the said method. Further, it is also contemplated in the provisions of sec.56(2)(viib) read with Explanation-2 and Rule 11UA(2) of I.T. Rules, 1962 that the valuation determined by the assessee as well as the NAV whichever is higher has to be considered for the purpose 0f fair market value of the shares as on the date of issuance. This issue has been considered and decided in the various decisions relied upon by the learned Authorised Representative of the Assessee. Further this Tribunal in a recent decision dated 11.02.2026 in the case of Diabetomics Medical Private Limited, Hyderabad vs. The ACIT, Circle-8(1), Hyderabad in ITA.Nos.2147, 2148 and 9 ITA.No.1686/Hyd./2025 2149/Hyd./2025 has again considered this issue in Para nos.11 to 12.5 as under:
“11. As regards the first issue relating to the jurisdiction and power of the Assessing Officer to substitute the method of valuation as chosen by the assessee is concerned, the fair market value of the share shall be the value as determined in accordance with such method as may be prescribed or as the fair market value of the shares as may be substantiated by the Company to the satisfaction of the Assessing Officer based on the value on the date of issue of shares of its asset whichever is higher. The fair market value of the shares to be determined as per the method prescribed in Explanation-2 Clause-(viib) of sub-sec.(2) of sec.56 read with Rule 11UA of I.T. Rules, 1962. For ready reference, the Explanation to Clause-(viib) and Rule-11UA(2)(a) and (b) are quoted 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, 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:
Provided that this clause shall not apply where the consideration for issue of shares is received- (i) by a venture capital undertaking from a venture capital company or a venture capital fund for a specified fund]; or (ii) by a company from a class or classes of persons as may be notified" by the Central Government in this behalf:
10 ITA.No.1686/Hyd./2025 Provided further that where the provisions of this clause have not been applied to a company on account of fulfilment of conditions specified in the notification issued under clause (ii) of the first proviso and such company fails to comply with any of those conditions, then, any consideration received for issue of share that exceeds the fair market value of such share shall be deemed to be the income of that company chargeable to income-tax for the previous year in which such failure has taken place and, it shall also be deemed that the company has under reported the said income in consequence of the misreporting referred to in sub- section (8) and sub-section (9) of section 270A for the said previous year.] Provided also that the provisions of this clause shall not apply on or after the 1st day of April, 2025.] 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 be 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, licences, franchises or any other business or commercial rights of similar nature, whichever is higher; [aa] “specified fund” means a fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which has been granted a certificate of registration as a Category I or a Category II Alternative Investment Fund and is regulated under the Securities and Exchange Board of India (Alternative Investment
11 ITA.No.1686/Hyd./2025 Funds) Regulations, 2012 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992) for regulated under the "[Inter-national Financial Services Centre Authority (Fund Management) Regulations, 2022 made under the] International Financial Services Centres Authority Act, 2019 (50 of 2019)]; “Rule-11UA(2)
[(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 (1) 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) x (PV), (PE) 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;
12 ITA.No.1686/Hyd./2025 (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 or an accountant as per the Discounted Free Cash Flow method; [I.- Determination of value of assets and apportionment of income in certain cases.”
12. As it is clear from the Explanation to sec.56(2)(viib) that the fair market value of shares shall be determined in accordance with such method as prescribed. Rule-11UA(2)(b) of I.T. Rules 1962 prescribes the method for fair market value of CCPS as in the case in hand. Thus, the rule provides the determination of the fair market value in accordance with the methods enumerated in sub- clause (a) or (b) of sub-sec.(2) of Rule-11UA of I.T. Rules, 1962 at the option of the assessee. Thus, the option is given to the assessee
13 ITA.No.1686/Hyd./2025 to choose the method for determination of valuation, and no option or choice is given to the Assessing Officer to substitute or adopt any other method than the chosen by the assessee. Sec.56(2)(viib) read with Rule-11UA(2) makes it clear that the fair market value of the shares determined as per the prescribed method or as per the NAV whichever is higher shall be considered. There is no quarrel that the Assessing Officer has the power and jurisdiction to reject the valuation so determined by the assessee and proceed to determine the fair market value of the shares correctly if the valuation of the assessee is not found proper and correct. However, determining the fair market value by the Assessing Officer does not give him a choice to change method of valuation. In otherwords, the Assessing Officer can reject the valuation but has no jurisdiction to reject the method of valuation. The Hon’ble Madras High Court in the case of CIT vs. VVA Hotels (P.) Ltd. (supra) has held in Paras-8 to 14 as under: “8. On going through the figures of excess projection of sales, as mentioned by the Assessing Officer in a tabulated form in paragraph 4.2 of the assessment order, we find that the excess projection for 2013-14 was 10%, for 2014-15-4%, for 2015-16-8% and for 2016-17-18%. Therefore, the finding recorded by the CIT(A) that difference was marginal is found to be correct, though it may be stated that the difference of 18% for assessment year 2016-17 may be little on the higher side, but still unless and until there was material available with the Assessing Officer to pin down the assessee on the ground of fraud or misuse of the provisions of law, the adoption of the DCF method cannot be held to be wholly illegal. Further, the CIT(A) rightly took note of the nature of business, which was done by the assessee company and the vagaries of business atmosphere in the country in general and in Chennai in particular. Thus, on facts, the CIT(A) found that the assessee 14 ITA.No.1686/Hyd./2025 company has not abused the privilege of choosing the DCF method for arriving at the value of the shares instead of NAV method.
The Revenue contended before the Tribunal that the CIT(A) ignored the huge variation in value of shares to the extent of ten times between value adopted by the assessee company as against its actual value of underlying assets, the CIT(A) erred in ignoring the finding of the Assessing Officer that there is no basis for the discount factor adopted by the assessee company as at 16%. The assessee contended before the Tribunal that they had adopted the DCF method as available under Rule IIUA of the Rules for arriving at the value of the shares allotted and the share premium received whereas, the Assessing Officer adopted the NAV method and re-valued the land owned by the assessee company for the purpose of determining the share value of the premium thereof.
It was submitted that when the assessee has adopted a particular method of valuation as provided under the Act and Rules and in the absence of any material that such method was adopted to defraud the Revenue, merely because the Assessing Officer is of the view that NAV method alone has to be adopted is not a ground to reject the DCF method. The Tribunal upon consideration of the facts pointed out that the assessee has adopted the method of valuation as stipulated under Rule 11UA of the Rules and this accepted method of valuation does provide for estimation. Noting that the Assessing Officer had discarded the DCF method adopted by the assessee on the ground that the actual revenue varied from the projected revenue for four years, the Tribunal rightly noted that the projected value is an estimate and the variation in the estimate is marginal. Therefore, the Tribunal came to the conclusion that there was no material to hold that the assessee's projected sales revenues are fabricated or manipulated.
15 ITA.No.1686/Hyd./2025 11. Furthermore, it was pointed out that the Assessing Officer did not point out any flaw in the method of calculation of the value of shares by adopting the DCF method but, out rightly rejected the same, which should not have been done. The Revenue by relying upon the decision of the Division Bench of this Court in CIT v. Vouni Estates (P) Ltd. [2019] 107 taxmann.com 15/264 Taxman 310, submitted that the matter may be remanded to the Assessing Officer for fresh consideration to determine the fair market value of the shares in question as required in Explanation to Section 56 of the Act.
We find, in the said judgment, the matter was remanded to the Assessing Officer for fresh consideration on a concession extended by the assessee by submitting that they will seek necessary clarification from the Central Board of Direct Taxes and they may be permitted to do so while the matter could be remanded back to the assessing authority. Therefore, a direction issued based on the concession extended by the assessee cannot be relied upon by the Revenue as a precedent.
Thus, we find that both the CIT(A) and the Tribunal, on careful appreciation of the facts and circumstances, have granted relief to the assessee and we find there is no question of law, much less substantial question of law arise for consideration in this appeal.
Accordingly, the appeal filed by the Revenue is dismissed on the ground that there is no substantial question of law arise for consideration. No costs.”
12.1. Thus, the Hon’ble Madras High Court has held that the option to choose the method provided under Clause-(a) or (b) is available with the assessee for determining the fair market value. DCF is one of the methods prescribed under the provisions of sec.56(2)(viib) read with Rule-11UA of I.T. Rules, 1962. The 16 ITA.No.1686/Hyd./2025 Assessing Officer cannot reject the method selected by the assessee for valuation of the shares. However, the Assessing Officer can scrutinize the contents or working of the method adopted by the assessee so as to find out the fair valuation. In case the Assessing Officer is not satisfied with the working of the assessee, then the Assessing Officer may do fresh valuation or get fresh valuation from an Independent Valuer, but such fresh valuation can only be done as per the method adopted by the assessee. Accordingly, in the case in hand, adopting a different method, i.e., NAV by the Assessing Officer instead of DCF method of valuation as chosen by the assessee is a clear breach of jurisdiction and power on the part of the Assessing Officer which is not permissible. Even otherwise, the Assessing Officer cannot question the valuation as determined on the basis of prescribed method being DCF without pinpointing any specific inaccuracies or shortcomings. 12.2. Further, the Coordinate Bench of ITAT, Bangalore in the case of Pisces EServices (P.) Ltd. vs. DCIT [2024] 165 taxman.com 840 (Bangalore-Trib.) on identical facts has been held in Paras- 20.2 to 20.4 as under: “20.2. From the perusal of the above rule, it is transpired that option to choose the method provided under clause (a) or clause (b) is available with assessee. Admittedly, the method adopted by the assessee i.e. DCF method for determining fair market value was one of the methods prescribed under the provisions of section 56(2)(viib) read with income tax rule 11UA of Income Tax Rule. The AO cannot interfere in the method selected for the valuation of the shares. However, the AO can scrutinize the contents or working of the method adopted by the assessee so as to find out the fair valuation. In case, the AO is not satisfied with the working of the assessee, then the AG may draw fresh valuation or 17 ITA.No.1686/Hyd./2025 get fresh valuation report from independent valuer, but such fresh valuation can only be done as per the method adopted by the assessee as in the present case assessee adopted DCF method. As such the AO cannot change the method from DCF to NAV method. In holding so, we draw support and guidance from the judgment of Hon'ble Bombay High Court in the case of Vodafone M-Pesa Ltd. v. Pr. CIT [2018] 92 taxmann.com 73/256 Taxman 240 (Bombay), where it was held as under: 9. We note that, the Commissioner of Income-Tax in the impugned order dated 23 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 opted for by the Assessee. If Mr. Mohanty is correct in his submission that a part of demand arising out of the assessment order dated 21 December, 2017 would on adoption of DCF Method will be sustained in part, the same is without working out the figures. This was an exercise which ought to have been done by the Assessing Officer and that has not been done by him. In fact, he has completely disregarded the DCF Method for arriving at the 18 ITA.No.1686/Hyd./2025 fair market value. Therefore, the demand in the facts need to be stayed." 20.3 We also draw support and guidance from the order this Tribunal in case of Innoviti Payment Solutions (P.) Ltd. v. ITO [2019] 102 taxmann.com 59/175 ITD 10 (Bangalore-Trib), the relevant observation of the coordinate bench reads as under: 14. In nutshell, our conclusions are as under- 1) The AO can scrutinize the valuation report and the if the AO is not satisfied with the explanation of the assessee, he has to record the reasons and basis for not accepting the valuation report submitted by the assessee and only thereafter, he can go for own valuation or to obtain the fresh valuation report from an independent valuer and confront the same to the assessee. But the basis has to be DCF method and he cannot change the method of valuation which has been opted by the assessee. 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. 3) 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. 20.4. Thus, we are of the view that the AO has exceeded his jurisdiction by rejecting the method adopted by the assessee and brought
19 ITA.No.1686/Hyd./2025 another method for valuing the shares of the company. In view of the above we hold that the action of the AO by substituting the method for the valuation of shares which was subsequently upheld by the learned CIT(A) is contrary to the provisions of law and therefore the same is not sustainable.”
12.3. Similarly, the Hon’ble Delhi High Court in the case of Agra Portfolio (P.) Ltd. vs. PCIT [2024] 464 ITR 348 (Del.) the Hon’ble High Court has held in Paras-15 to 22 as under: “15. 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)
20 ITA.No.1686/Hyd./2025 “18. 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 along with 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.
We have heard rival submissions on the issue in dispute and perused the material on record. We find that computation of LTCG on the transfer of undertaking as the slump sale consists of two 21 ITA.No.1686/Hyd./2025 components. 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 the slump sale. In the case of the assessee, the AO has taken FMV at Rs. 7,20,32,509/- which was worked out by the valuer following the PECV method, whereas the assessee has followed average value of PECV method as well as NAV method to justify the sale consideration actually received. We are of the opinion that Id Assessing Officer has not carried out valuation by an independent valuer and merely chosen a part of the valuation report submitted by the assessee. Therefore, we restore back the issue to the AO for 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."
19. Proceeding along similar lines, the Hyderabad Bench of the ITAT in Jt. CIT(OSD) v. MLR. Auto Ltd. [IT Appeal No. 115 (Hyd) of 2021, dated 28-12-2023) had held as follows:-
"17.1. The conjoint reading of Section 56(2)(viib) and Rule 11U and 11UA makes it abundantly clear that in case assessee exercised his option for determination of the fair market value of the shares and exercise then such decision of the assessee shall be final and binding on the assessing officer. The option was given by the Act to the assessee either to apply the DCF method or net asset valuation method, this option is not available to the assessing officer. Rule 11UA provides the method of determining the FMV of a property other than the immovable property. Rule 11UA(2) reproduced hereinabove provides the method of providing the FMV of unquoted shares to be determined at the option of the assessee.
17.2. Once the assessee applied particular method of valuation, (in the present case DCF method), then it is the duty of the Assessing 22 ITA.No.1686/Hyd./2025 Officer / learned CIT(A) to scrutinize the valuation report within the four corners or parameters laid down while making the valuation report under DCF method only. It is not permissible for the Assessing Officer to reject the method opted by the assessee and apply a different method of valuation and the Assessing Officer can definitely reject the valuation report but not the method. In case, the AO rejected the valuation report, then the AO has to carry out a fresh valuation report by applying the same valuation method and determine the fair market value of the unquoted shares.
Therefore, in our view, the Assessing Officer was incorrect in concluding that the DCF method is "quite unrealistic and inapplicable" to the terms of the Income Tax Act. On the contrary, the DCF method is quite applicable and was required to be applied by the Assessing Officer to determine the FMV of the unquoted shares...
A more detailed discussion on the issue which confronts us in this appeal is found in the judgment rendered by the Mumbai Bench of the ITAT in Dy. CIT v. Credtalpha Alternative Investment Advisors (P.) Ltd. [2022] 134 taxmann.com 223/193 ITD 502/ [2022] 94 ITR (Trib) 596 and the relevant parts whereof are reproduced hereunder- "15. Thus, the fair market value of the share shall be higher of the value as determined in accordance with the provisions of rule 11 UA or any other method, which can be substantiated by the assessee before the Assessing Officer. For the purpose of determining "fair market value of unquoted shares provisions of rule 11 UA (2) applies which gives an option to the assessee to either value the shares as per prescribed formula given in clause (a) or clause (b) which provides for the determination of the fair market value based on discounted cash flow method as valued by a merchant banker or a chartered accountant (till 24th of May 2018). In the present case the assessee has valued the shares according to one of 23 ITA.No.1686/Hyd./2025 the "options" available to assessee by adopting discounted cash low method. Therefore, such an option given to the assessee cannot be withdrawn or taken away by the learned Assessing Officer by adopting different method of valuation ie, net asset value method. The method of valuation is always the option of the assessee. The learned Assessing Officer is authorised to examine whether assessee has adopted one of the available options properly or not. In the present case, the learned Assessing Officer has thrust upon the assessee, net asset value method rejecting discounted cash flow method for only reason that there is a deviation in the actual figures from the projected figures. It is an established fact that discounted cash flow method is always based on future projections adopting certain parameters such as expected generation of cash flow, the discounted rate of return and cost of capital. In hindsight, on availability of the actual figures, if the future projections are not met, it cannot be said that the projections were wrong. To prove that the projections were unreliable, the learned Assessing Officer must examine how the valuation has been done. In a case future cash flow projections do not meet the actual figures, rejection of discounted cash flow method is not proper. If projected future cash flow and actual result matches, such situation would always be rare. For projecting the future cash flow certain assumptions are required to be made, there needs to be tested and then such exemptions becomes the base of estimation of such projected future cash flows. If there are no assumptions, there cannot be an estimate of future projected cash flows and then discounted cash flow method becomes redundant. For exercise of valuation, assumption made by the valuer and information available at the time of the valuation date are relevant. As the exercise of valuation must be viewed as on the date of the valuation looking forward and cannot be reviewed in retrospect. Further, the valuation is always made based on review of historical data and projected financial information
24 ITA.No.1686/Hyd./2025 provided by the management. Further report of expert will always include limitation and responsibilities but that does not make his report incorrect. Of course, if there are errors in the working of projected cash flow, estimating the projected revenue and projected expenditure as well as in adoption of cost of equity and discount factor, the learned Assessing Officer is within his right to correct it after questioning the same to the assessee. The learned Assessing Officer can also question the basic assumptions made by the valuer. If they are unreasonable or not based on historical data coupled with the management expectation, the learned Assessing Officer has every right to question it and adjust the valuation so derived at. However, if he does not find any error in those workings, he could not have rejected the same. Further the reason given by the learned Assessing Officer that the net asset value method and the discounted cash flow method for valuation of the shares of the company gives a wide variation between them, we do not find any reason to find fault with the assessee in such cases. Both these methods have different approaches and methodologies therefore there are bound to be differences, but it does not give any authority to the learned Assessing Officer to pick and choose one of the method and make the addition. It is the assessee who has to exercise one of the options available under the provisions of the law for valuing the shares. The learned Assessing Officer needs to examine that method. Naturally, if the discounted cash flow method and net asset value method gives the same result, where would have been the need to prescribe the two methods in the law. In view of above facts, we do not find any infirmity in the order of the learned Commissioner of Income-tax (Appeals) in deleting the addition of Rs. 69,000,000 made by the learned Assessing Officer u/s 56 (2) (viib) of the Act. Accordingly, ground Nos. 3 and 4 of the appeal of the learned Assessing Officer are dismissed."
25 ITA.No.1686/Hyd./2025 21. We deem it apposite to lastly take note of the following pertinent observations as appearing in a decision rendered by the ITAT Bench at Bangalore in Taaq Music (P) Ltd. v. ITO [2020] SCC OnLine ITAT 9482:- "11. The law provides that, the fair market value may be determined with such method as may be prescribed or the fair market value can be determined to the satisfaction of the Assessing Officer. The provision provides an Assessee two choices of adopting either NAV method or DCF method. If the Assessee determines the fair market value in a method as prescribed the Assessing Officer does not have a choice to dispute the justification. The methods of valuation are prescribed in Rule 11UA(2) of the Rules. The provisions of Rule 11UA(2)(b) of the Rules provides that, the Assessee can adopt the fair market value as per the above two methods i.e., either DCF method or fair market value of the unquoted equity shares determined by a merchant banker. The choice of method is that of the Assessee. The Tribunal has followed the judgment of Hon'ble Bombay High Court rendered in the case of Vodafone M-Pesa Ltd. v. Pr. CIT (supra) and has taken the view that the AO can scrutinize the valuation report and he can determine a fresh valuation either by himself or by calling a determination from an independent valuer to confront the Assessee but the basis has to be DCF method and he cannot change the method of valuation which has been opted by the Assessee. The decision of ITAT, Delhi in the case of Agro Portfolio Ltd. 171 ITD 74 has also been considered by the ITAT, Bangalore in the case of VBHC Value Homes Pvt. Ltd. (supra).
12. In view of the above legal position, we are of view that the issue with regard to valuation has to be decided afresh by the AO on the lines indicated in the decision of ITAT, Bangalore in the case of VBHC Value Homes Pvt. Ltd., v. ITO (supra) ie., (i) the AO can scrutinize the valuation report and he can determine a fresh valuation either by himself or by calling a determination from an independent valuer to confront 26 ITA.No.1686/Hyd./2025 the assessee but the basis has to be DCF method and he cannot change the method of valuation which has been opted by the assessee. (ii) 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. 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. The order of Id. CIT(A) is accordingly set aside and this issue is remanded to the AO for decision afresh, after due opportunity of hearing to the Assessee."
Accordingly, and for all the aforesaid reasons, we allow the instant appeal and set aside the order of the ITAT dated 16 May 2018. The Questions of Law as framed, namely, Question A and C are answered in the negative and in favor of the appellant assessee. In light of the answers rendered in respect of the aforenoted two questions, the additional questions which are framed would not merit an independent examination. The matter shall in consequence stand remitted to the AO which shall undertake an exercise of valuation afresh in accordance with the DCF method.”
12.4. Thus, the Hon’ble High Court has held that the Assessing Officer is not empowered to independently evaluate the value of the unquoted equity shares by adopting a valuation method other than the one chosen by the assessee. A similar view has been taken by the Hon’ble Gujarat High Court in the case of Akash Ceramics (P.) Ltd. vs. ITO [2024] 168 taxmann.com 407 (Gujarat). Even the Assessing Officer in the remand report 27 ITA.No.1686/Hyd./2025 dated 30.09.2025 has accepted the DCF method as appropriate for fair market value as under: “Introduction: 1. M/s Diabetomics Medical Private Limited, a closely held company, incorporated on 16.06.2015 with the objective of manufacturing and commercialization of medical diagnostic products relating to Diabetes and pregnancy for early diagnosis of Pre-eclampsia, Geostational Diabetes, Point-of-care test for Auto Immune Diabetes, non-invasive saliva-based test for Type Il diabetes. The said diagnostic products are first of its kind not only in India but also in the world.
The projections by the management regarding the future cash flows factored in the benefits, which the company would derive from technology involved i.e. technology transfer from US company, Innovative product, vast experience and reputation of the promoter in developing vaccines and innovative products in addition to the expected earnings / growth potential. Accordingly, the underlying projections were made on such reasonable assumptions as reflected in the Annexure to the Valuation Report and the preference shares were issued at a Premium of Rs. 710 per share. Further, while making the projections of future cash flows under DCF method, all standard methods were applied, for instance Terminal value is calculated adopting perpetual growth model.
While issuing the CCPS to third party as well as promoters, the appellant had valued CCPS as per the Discounted Cash Flow ('DCF') method based on aforesaid business plan of manufacture and commercialization of novel medical diagnostic products relating to diabetes and pregnancy and the same was duly certified by a Chartered Accountant as being the most appropriate method for valuing a newly started company as it has very little or no capital base.
28 ITA.No.1686/Hyd./2025 A) Basis for valuation: The assessee has submitted the data used by the assessee company M/s Diabetomics Medical Private Limited (DMPL) for projections of its sales that it is going to make to the foreign company M/s Diabetomics Inc. USA. The company M/s Diabetomics Inc. USA has given the projections of the product it is going to purchase from the assessee in the coming years from FY 2017-18 to FY 2021-22. The projections given by the management regarding the future cash flows were done by factoring the benefits which the company would derive from technology transfer by the US company. This data was arrived after taking into consideration of various demand factors and the drug required for meeting this demand in the open market. This estimation was used to arrive at the expected purchases that is going to be made by the foreign company M/s Diabetomics Inc. USA from the assessee company M/s DMPL. The submissions given by the assessee are perused. It is noticed that the assessee has used the DCF method to calculate the share value of the company. The entire calculations of the DCF workings have been perused. It is noticed that the assessee company M/s DMPL was going to produce a unique product and the patented technology was only available with the foreign company M/s Diabetomics Inc. USA. As the drug was unique, the market projections were done as per the estimated requirements. The workings which were used to arrive the share value as per DCF method has been certified by the Chartered Accountant. B) Difference between ITR Data and Projections: It is noticed that there is a huge difference between the ITR data of revenue and the projections. The assessee in its submissions stated that the product could not take off as planned and it faced a lot of problems in the take off process of the project. The assessee further stated that it faced problems due to COVID pandaemic because of which the 29 ITA.No.1686/Hyd./2025 differences arised between the projections and the actual data filed in ITR. The reply of the assessee along with documentary evidences submitted during the course of the remand proceedings by the assessee is attached herewith for your kind perusal. In view of the above, the Ld. CIT(A) may take the decision on the issues based on the merits of the case.”
12.5. Accordingly, in the facts and circumstances of the case, the addition made by the Assessing Officer by adopting NAV method as against the DCF method chosen by the assessee for determination of the fair market value of the unquoted equity shares/CCPS is beyond the jurisdiction of the Assessing Officer and therefore, the same is not sustainable and liable to be deleted.”
5.3. Accordingly, in view of the various decisions as relied upon by the learned Authorised Representative of the Assessee and also considered by this Tribunal in the earlier decision in the case of Diabetomics Medical Private Limited, Hyderabad vs. ACIT, Circle-8(1), Hyderabad (supra), we hold that the addition made by the Assessing Officer by adopting the NAV method as against the DCF method chosen by the assessee for determination of the fair market value of the unquoted equity shares is beyond the jurisdiction of the 30 ITA.No.1686/Hyd./2025 Assessing Officer and therefore, the same is not sustainable and liable to be deleted. We Order accordingly.
In the result, appeal of the Assessee is allowed.
Order pronounced in the open Court on 06.03.2026.