INCOME TAX OFFICER, NEW DELHI vs. NINE PLUS INFTRASTRUCTURE PRIVATE LIMITED, GURGAON

5.0 We have heard rival submissions in the light of material available on records. The principal controversy seminal to the matter is regarding the action of the Ld.AO in invoking provisions of section 56 (2)(viib) and making the impugned addition by rejecting the valuation report produced by the assessee. It is pertinent to note that the appellant assessee had adopted the DCF method prescribed in Rule 11UA, whereas the Ld.AO proceeded to make the valuation by substituting the valuation of shares by adopting fair market value(FMV). The question that thus arises is whether the Ld.AO is entitled to do the same or not. The Ld.CIT(A) has accorded relief to the assessee while observing as under:

…..;3.9 From the above, it is evident that Rule 11UA(2) prescribes twomethods– BookValue method and DCF method. However, the said rule also provides that themethod to be adopted is le ft to the choice of the assessee. The appellant haschosen to the 2nd option i.e the fair market value of the unquoted equity sharesdetermined by a merchant banker or an accountant as per the Discounted FreeCash Flow method. It is seen that Page 3 of 10 the AO has not doubted the genuineness ofthe said investments by M/s Gallop Infrastructure Limited. Even in the remandreport, the AO has submitted that the transaction appears genuine. M/s GallopInfrastructure Limited is carrying on business of real estate development and hasdeveloped various projects including SEZ's as is evident from the website of thesaid company. The funds received from M/s Gallop Infrastructure Limited onaccount of share capital / premium has been utilized to acquire property fromgroup company of the said shareholder namely M/s NG Realty Pvt. Limited. Theissue price of shares was determined as per Clause (b) to Rule 11UA(2) whichprovides the appellant to get valuation report from the merchant banker or anaccountant by using DCF Method. The Fair Market Value has to be determinedby an Accountant or merchant banker. Moreover, the market value of the assetsowned by the assessee as on 01.12.2014 i.e. before the date of issue of sharesas valued by government registered valuer is approx.. 4358 lacs against the totalno. of shares existing on that date being 21.6 lacs hence, FMV of each share('4358/21.6 = 201.75 ) which is more than the value at which the shares wereallotted to 'Gallops Infrastructure Ltd. 3.10 Majority of the immovable properties held by the appellant were purchased byit as agricultural lands 6-7 years back when its price was very low. Thereafter, theappellant got the use of the said agricultural lands converted to residential use byobtaining necessary approvals from appropriate government authorities andbecause of the same, its market value is likely to increased many folds ascompared to its book value. The AO can refuse the method of valuation afterproving that the methodology resorted by the assessee is incorrect or not as perthe standards laid down. The courts have held this view as is evident from thefollowing observations of Hon’ble jurisdictional High Court of Delhi in Pr .Commissioner of Income Tax Vs. M/s Cinestaan Entertainment Pvt. Ltd. in ITA1007/2019 dated 01.03.2021. The Hon’ble High Court upheld the finding of theITAT which was as under:- “33. Section 56(2) (viib) is a deeming provision and one cannot expand the meaning of scopeof any word while interpreting such deeming provision. If the statute provides that the valuationhas to be done as per the prescribed method and if one of the prescribed methods has beenadopted by the assessee, then Assessing Officer has to accept the same and in case he is notsatisfied, then we do not we find any express provision under the Act or rules, where AssessingOfficer can adopt his own valuation in DCF method or get it valued by some different Valuer.There has to be some enabling provision under the Rule or the Act where Assessing Officer hasbeen given a power to tinker with the valuation report obtained by an independent valuer as perthe qualification given in the Rule 11U. Here, in this case, Assessing Officer has tinkered with DCF methodology and rejected by comparing the Page 4 of 10 projections with actual figures. The Rulesprovide for two valuation methodologies, one is assets based NAV method which is based onactual numbers as per latest audited financials of the assessee company. Whereas in a DCFmethod, the value is based on estimated future projection. These projections are based onvarious factors and projections made by the management and the Valuer, like growth of thecompany, economic/market conditions, business conditions, expected demand and supply, costof capital and host of other factors. These factors are considered based on some reasonableapproach and they cannot be evaluated purely based on arithmetical precision as value is alwaysworked out based on approximation and catena of underline facts and assumptions.Nevertheless, at the time when valuation is made, it is based on reflections of the potential valueof business at that particular time and also keeping in mind underline factors that may changeover the period of time and thus, the value which is relevant today may not be relevant aftercertain period of time. Precisely, these factors have been judicially appreciated in variousjudgments some of which have been relied upon by the ld. Counsel, for instance: i) Securities &Exchange Board of India & Ors [2015 ABR 291 (Bombay HC)] 48.6 Thirdly, it isa well settled position of law with regard to the valuation that valuation is not and exact scienceand can never be done with arithmetic precision. The attempt on the part of SEBI to challenge the valuation which is but its very nature based on projections by applying what is essentially ahindsight view that the performance did not match the projection is unknown to the law onvaluations. Valuation being an exercise required to be conducted at a particular point of time hasof necessity to be carried out on the basis of whatever information is available on the date of thevaluation and a projection of future revenue that valuer may fairly make on the basis of suchinformation." ii) Rameshwaram Strong Glass Pvt. Ltd. v. ITO [2018-TIOL- 1358-ITAT- J aipur) "4.5.2. Beforeexamining the fairness or reasonableness of valuation report submitted by the assessee we haveto bear in mind the DCF Method and is essentially based on the projections (estimates) only andhence these projections cannot be compared with the actuals to expect the same figures as wereprojected. The valuer has to make forecast on the basis of some material but to estimate theexact figure is beyond its control. At the time of making a valuation for the purpose ofdetermination of the fair market value, the past history may or may not be available in a givencase and therefore, the other relevant factors may be considered. The projections are affected byvarious factors hence in the case of company where there is no commencement of production orof the business, does not mean that its share cannot command any premium. For such cases, the concept of start- Page 5 of 10 up is a good example and as submitted the income-tax Act also recognized andencouraging the start-ups. iii) DQ(International) Ltd. vs. ACIT (ITA 151/Hyd/2015) "

34. The aforesaid ratios clearly endorsed our view as above. In any case, if law provides theassessee to get the valuation done from a prescribed expert as per the prescribed method, thenthe same cannot be rejected because neither the Assessing Officer nor the assessee have beenrecognized as expert under the law.” 3.11 The Hon’ble High Courtheld as under:- “13. From the aforesaid extract of the impugned order, it becomes clear that thelearned ITAT has followed the dicta of the Hon'ble Supreme Court in matters relating tothe commercial prudence of an assessee relating to valuation of an asset. The lawrequires determination of fair market values as per prescribed methodology. TheAppellant-Revenue had the option to conduct its own valuation and determine FMV onthe basis of either the DCF or NAV Method. The Respondent-Assessee being a start-upcompany adopted DCF method to value its shares. This was carried out on the basis ofinformation and material available on the date of valuation and projection of futurerevenue. There is no dispute that methodology adopted by the Respondent-Assesseehas been done applying a recognized and accepted method. Since the performance didnot match the projections, Revenue sought to challenge the valuation, on that footing.This approach lacks material foundation and is irrational since the valuation isintrinsically based on projections which can be affected by various factors. We cannotlose sight of the fact that the valuer makes forecast or approximation, based on potentialvalue of business. However, the underline facts and assumptions can undergo changeover a period of time. The Courts have repeatedly held that valuation is not an exactscience, and therefore cannot be done with arithmetic precision. It is a technical andcomplex problem which can be appropriately left to the consideration and wisdom ofexperts in the field of accountancy, having regard to the imponderables which enter theprocess of valuation of shares. The Appellant-Revenue is unable to demonstrate that themethodology adopted by the Respondent-Assessee is not correct. The AO has simplyrejected the valuation of the Respondent-Assessee and failed to provide any alternatefair value of shares. Furthermore, as noted in the impugned order and as also pointedout by Mr. Vohra, the shares in the present scenario have not been subscribed to by anysister concern or Page 6 of 10 closely related person, but by outside investors. Indeed, if they haveseen certain potential and accepted this valuation, then Appellant-Revenue cannotquestion their wisdom. The valuation is a question of fact which would depend uponappreciation of material or evidence. The methodology adopted by the Respondent-Assessee, accepted by the learned ITAT, is a conclusion of fact drawn on the basis ofmaterial and facts available. The test laid down by the Courts for interfering with thefindings of a valuer is not satisfied in the present case, as the Respondent-Assesseeadopted a recognized method of valuation and Appellant-Revenue is unable to show thatthe assessee adopted a demonstrably wrong approach, or that the method of valuationwas made on a wholly erroneous basis, or that it committed a mistake which goes to theroot of the valuation process.” 3.12 In view of the above discussion and respectfully following the decision of thejurisdictional High Court, I am of the considered view that the valuation was madeby the government approved Valuer on the basis of information and materialavailable on the date of valuation and projection of future revenue following arecognized and accepted method. The fact that the performance in subsequentyears did not match the projections as laid down by Courts lacks materialfoundation and is irrational since the valuation is intrinsically based on projectionswhich can be affected by various factors as highlighted by the appellant. Theappellant has got the valuation done from a prescribed expert as per theprescribed method, and therefore the AO was wrong in rejecting the samewithout providing any alternate fair value of shares. The addition made of Rs. 2,27,50,000 u/s 56(2)(viib) of the Act is not sustainable and is directed to bedeleted. The appeal on Ground Nos 1 and 2 are thus treated as allowed….”

5.0 We have also noted that the Hon’ble Delhi High Court in the case of Agra Portfolio Pvt Ltd dated 04.04.2024 as at 464 ITR 348 observed as under:-

“….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

Page 7 of 10 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).

6.0 The mute point that has been decided by the Hon’ble Delhi High Court in its decisions supra as well as that of ITAT Bangalore is that the assessee enjoys to have the choice of completing the valuation of shares by using DCF or the NAV method. The assessing officer does not has the option to dispute such exercise of choice by the assessee. In the present case, the assessee had adopted the DCF method. As mandated by Hon’ble Delhi High Court in the case of Agra Portfolio supra, the Ld.AO cannot change the valuation method opted by the assessee. Accordingly in respectful compliance to the decision of Hon’ble Delhi High Court in the case of Agra Portfolio supra, the order of lower authorities is set aside and the matter is remanded to the Ld.AO for de novo assessment after due opportunity of being heard to the assessee. The assessee shall comply with the statutory notices issued by the Revenue and be entitled to produce all the evidences and details etc before the Ld.AO for determination of valuation of shares. Accordingly, all the grounds of appeal raised by the assessee are allowed for statistical purposes.

7.0 In the result, the appeal of the assessee is allowed for statistical purposes. Page 9 of 10

Order pronounced in open court on 19.09.2025.